PROSPECTUS AVION GROUP HF

Private Offering and Listing on ICEX

December 2005

CONTENTS:

1. Statements...... 4

1.1 Issuer’s Statement...... 4 1.2 Manager’s Statement...... 4 1.3 Auditor’s Statements...... 4

2. Notice to Investors...... 6

3. General Information...... 8

4. History, Share Capital and Shareholders..... 14

4.1 Avion Group ...... 14 4.2 Share Capital...... 17 4.3 Shareholders...... 18 4.4 Dividends...... 20

5. Organisation, Subsidiaries, ManagEment and Personnel...... 21

5.1 Organisation...... 21 5.2 Avion Group’s Subsidiaries...... 21 5.3 Shares in Other Companies...... 23 5.4 Administration...... 24 5.5 Corporate Governance...... 24 5.6 Board of Directors, CEOs, Managing Directors and Auditors...... 25 5.7 Personnel...... 30 5.8 IT...... 31

6. Activities and Market Environment...... 32

6.1 Company Structure ...... 32 6.2 Avion Group Activities ...... 32 6.3 Aviation Services...... 34 6.4 Charter and Leisure...... 38 6.5 Shipping and Logistics...... 42

 7. Risk Factors...... 49

7.1 General Risk Related to Equities...... 49 7.2 Financial and Operational Risk...... 50 7.3 Market Risk...... 55 7.4 Other Risk Factors...... 59

8. Outlook and Future Vision...... 63

8.1 Operating Outlook...... 63 8.2 Future Vision...... 64

9. Pro Forma Accounts...... 66

10. Financial Performance...... 68

10.1 Interim Financial Statements as at 30 September 2005...... 68 10.2 Annual Financial Statements Avion Group 2004 and 2003...... 75 10.3 Annual Financial Statements hf. 2004 and 2003...... 80 10.4 Annual Financial Statements Excel Airways Group Plc 2004 and 2003...... 85 10.5 Annual Financial Statements Eimskip 2004 and 2003...... 88

Appendices...... 93

Articles of association Avion Group-Interim accounts 30 September 2005 Glossary of terms

 1. Statements

1.1 Issuer’s Statement The Board of Directors of Avion Group hf., ID No. 660288-1049, Hlíðarsmári 3, Kópavogur, , hereby declares that to the best of our knowledge the information in this Prospectus both accords fully with facts and that no important items have been omitted which could affect evaluation of the Issuer or its shares.

Kópavogur, Iceland, 16 December 2005, For and on behalf of the Board of Directors,

Magnús Þorsteinsson, ID No. 061261-5409, Chairman of the Board, Avion Group hf.

1.2 Manager’s Statement Landsbanki Íslands hf., Corporate Finance, ID No. 540291-2259, Hafnarstræti 5, Reykjavík, Iceland, hereby declares that in preparing this Prospectus it has gathered the data which in its estimation was necessary to provide a true and fair picture of Avion Group hf. and its shares. To the best of our knowledge no important items have been omitted which could effect the evaluation of the Issuer or shares for which listing is sought.

Reykjavík, Iceland, 16 December 2005,

Bjarni Þórður Bjarnason, ID No. 110469-5869, Head of Corporate Finance Landsbanki Íslands hf.

1.3 Auditor’s Statements KPMG Endurskoðun hf., ID. No. 590975-0449, Borgartún 27, Reykjavík, Iceland, has reviewed the nine month interim accounts for Avion Group hf. We conducted our review in accordance with the International Standard on Review Engagements. Based on our review, nothing has come to our attention that causes us to believe that the nine month interim financial information does not give a true and fair view of the financial position of the company as at 30 September 2005, and the financial performance and cash flows for the interim period then ended.

Furthermore KPMG Endurskoðun hf. has audited the annual accounts of Avion Group hf. and Flugfélagið Atlanta hf. for the years 2003 and 2004. We hereby confirm that in our opinion the annual accounts of the companies for the years 2003 and 2004 give a true and fair view of the financial position of Avion Group hf. and Flugfélagið Atlanta hf. for the years ended 31 December and the results of their operation and cash flows for the years then ended in accordance with law and generally accepted accounting principles in Iceland. We confirm that the financial information in this Prospectus

 regarding the aforementioned accounts for Avion Group hf. and Flugfélagið Atlanta hf. are consistent with the abovementioned accounts.

Reykjavík, Iceland, 16 December 2005 For and on behalf of KPMG Endurskoðun hf.

Alexander G. Eðvardsson, ID No. 300957-4399, Chartered Accountant

KPMG Endurskoðun hf., ID. No. 590975-0449, Borgartún 27, Reykjavík, Iceland, has audited the annual accounts of Eimskipafélag Íslands ehf. for the years 2003 and 2004. We hereby confirm that in our opinion the annual accounts of the company for the years 2003 and 2004 give a true and fair view of the financial position of Eimskipafélag Íslands ehf. for the years ended 31 December and the results of its operation and cash flows for the years then ended in accordance with law and generally accepted accounting principles in Iceland.

We confirm that the information in this prospectus regarding the abovementioned accounts for Eimskipafélag Íslands ehf. are consistent with these abovementioned accounts.

Reykjavík, Iceland, 16 December 2005 For and on behalf of KPMG Endurskoðun hf.

Sæmundur Valdimarsson, ID No. 070263-4409, Chartered Accountant

BDO Stoy Hayward LLP of Emerald House, East Street, Epsom, Surrey, KT17 1HS has issued audit reports on the financial statements of Excel Airways Group plc for the year ended 31 October 2004 and the year ended 31 October 2003. The reports were issued on 18 March 2005 and 13 January 2004 respectively. The reports stated that we carried out our audits in accordance with Auditing Standards issued by the Auditing Practices Board in the United Kingdom and that, in our opinion, the financial statements gave a true and fair view of the state of affairs of the Excel Airways Group plc as at 31 October 2004 and 31 October 2003 respectively and of the profit of the Excel Airways Group plc for the periods then ended, and were properly prepared in accordance with the UK Companies Act 1985. We however draw your attention to the fact that we have not undertaken any audit work on the financial results and state of affairs of the Excel Airways Group plc for the year ended 31 October 2004 or the year ended 31 October 2003 subsequent to the dates of our audit reports.

Epsom, United Kingdom, 16 December 2005, BDO Stoy Hayward LLP

Chartered Accountants and Registered Auditors  2. Notice to Investors

This Prospectus has been prepared by Landsbanki Íslands hf., Corporate Finance, in collaboration with the Board of Directors, Management and Auditors of Avion Group hf. This Prospectus concerns the offering of new shares in Avion Group hf. and primary listing of the entire issued share capital of Avion Group hf. on the Main List of the Icelandic Stock Exchange (ICEX).

The offering of new shares in Avion Group hf. and primary listing on the Main List of ICEX will proceed in accordance with Act No. 34/1998, on Activities of Stock Exchanges and Regulated OTC markets, Act No. 33/2003, on Securities Transactions and ICEX’s Rules for Issuers of securities listed on ICEX. ICEX has reviewed and approved this Prospectus before its publication.

This Prospectus is only distributed in Iceland and is published in English.

New shares in Avion Group hf. with the value of ISK 6,000 million will be offered to institutional investors at a share price range of ISK 34.3 – 38.3. The expected number of shares offered is 156,657,963 – 174,927,114 shares. The minimum subscription amount for an institutional investor is ISK 5,000,000 at market value. The final offering price will be determined by book-building. The listing of Avion Group hf. shares on ICEX is intended to take place no later than 20 January 2006.

The Board of ICEX has approved the listing of the entire issued share capital of Avion Group hf. on ICEX’s Main List. The Board of ICEX has granted Avion Group hf. a temporary exemption from ICEX’s requirements on ownership distribution and minimum number of shareholders until Straumur-Burðarás fjárfestingabanki hf. has paid its shareholders dividends in the form of shares in Avion Group hf. Information on ICEX’s temporary exemption and the dividend payment of Straumur Burðarás fjárfestingabanki hf. can be found in chapter 4.3 of this Prospectus. Furthermore, the Board of ICEX has granted Avion Group hf. an exemption from providing audited accounts for three complete years, covering all the principal aspects of operations pursued by the company. Instead Avion Group hf. provides accounts for the first nine months of 2005 and for the years 2004 and 2003 covering all the principal aspects of operations pursued by the company. The exemption was granted due to the fact that accounts for some of Avion Group’s subsidiaries are not comparable between the years 2002 and 2003, due to several changes in operations and structure of the accounts.

Avion Group hf. is in the process of changing its financial year from the calendar year to 1 November to 31 October. As a result the financial year 2005 will include only 10 months of operations since it will end 31 October 2005. Avion Group hf. will publish its annual accounts for year 2005 by 31 January 2006 at the latest.

Share trading is by its nature a risk investment based on expectations of future profits. This Prospectus should not be considered in any way an assurance of operational results or return on financial investment on behalf of Avion Group hf. or Landsbanki Íslands hf., Corporate Finance. Investors are advised to study the contents of this Prospectus, along with its Appendices as well as to carry out their own investigations and calculations.

 Avion Group hf. has been growing at a fast rate recently and operates in fluctuating and relatively high risk markets. The returns of companies that operate in such an environment are far more volatile than those of companies with less rapid growth and in more stable markets. Investors must base their decisions regarding investment in Avion Group hf. shares on their own observations and analysis of the information provided in this Prospectus. Investors are advised to review their legal status, including taxation issues that may relate to their trading of Avion Group hf. shares. Investors are particularly advised to study carefully chapter 7 of this Prospectus, which addresses risk factors.

Information provided in this Prospectus is based on facts that are current at the date of publication. These facts may change from the time of publication to the time of listing on ICEX and investors are advised to take notice of all public information issued by or relating to Avion Group hf.

Should new information emerge that could affect the evaluation of Avion Group hf. and its shares from the time of publication of this Prospectus to the time of listing of Avion Group hf. on ICEX, Avion Group hf. will notify ICEX and publish an annex to this Prospectus. The offering price in the offering of new shares is not known at the date of publication of this Prospectus. A public announcement will be made on ICEX with information on the offering price on 21 December 2005.

It is important to note that Landsbanki Íslands hf. (Landsbanki), the Manager of the offering and listing of the shares in Avion Group hf. on ICEX, is one of Avion Group hf.’s principal commercial banks and therefore a significant lender and pledgee to Avion Group. The proceeds of the share offering will be used to pay long-term loans with Landsbanki. Landsbanki does not own shares in Avion Group hf. at the time of publication of this Prospectus.

All legislation referred to in this Prospectus is Icelandic unless otherwise stated.

In this Prospectus the terms “Issuer”, “Avion Group”, “Avion”, “the Company” and “the Group” refer to Avion Group hf. The terms “ Icelandic”, “Air Atlanta”, “Atlanta” and “AAI” refer to Flugfélagið Atlanta ehf. d.b.a . The terms “Excel” and “Excel Airways” refer to Excel Airways Group plc. The terms “Landsbanki” and “the bank” refer to the Manager of the offering and listing of Avion Group hf. shares on ICEX, Landsbanki Íslands hf., unless these terms can be interpreted otherwise based on wording or context.

 3. General Information

Publisher Avion Group hf., ID No. 660288-1049, Hlíðarsmári 3, Kópavogur, Iceland, tel. +354 515 7700, website: www.aviongroup.is.

Registration Avion Group hf. is incorporated in Iceland and has acquired all necessary operating licenses for its activities. The Company operates in Iceland according to Act No. 2/1995, on Limited Liability Companies.

Operation According to Article 3 of the Articles of Association for Avion Group hf., the purpose of Avion Group hf. is operations, ownership and investments in companies engaged in transportation operations and other related businesses.

Manager of offering and listing of shares on ICEX Landsbanki Íslands hf., Corporate Finance, ID No. 540291-2259, Hafnarstræti 5, Reykjavík, Iceland, tel. +354 410 4000, website: www.landsbanki.is.

Total Share Capital The total share capital of Avion Group hf. is ISK 1,532,502,529, all paid for. Each share has a nominal value of 1 (one) Icelandic Króna (ISK).

Authorisation for share capital increase According to Article 4, of Avion Group’s Articles of Association, the Board of Directors is authorised to increase the Company’s share capital by up to ISK 467,497,471 all in one or in phases, by means of subscription to new shares so that the total share capital will be up to ISK 2,000,000,000. The Company’s Board of Directors shall determine the nominal value of new shares, offering rate and terms of payment in accordance with chapter V of the Act on Public Limited Liability Companies no. 2/1995 (The Companies Act). Shareholders have waived their pre-emptive rights to subscribe to the new shares in accordance with provision of Art. 34 of the Companies Act no. 2/1995. The new shares shall confer rights as from the right of registration of the share capital increase. The Board of Directors may decide that payment for the new shares is made, partly or fully, in a form other than cash. The authorisation to the Company’s Board of Directors to increase the share capital in accordance with this paragraph will be cancelled as of 28 December 2009 to the extent that it has not been used.

Own Shares Avion Group hf. is authorised to acquire and accept as security own shares pursuant to Article 8 of the Company’s Articles of Association and in conformity with the provisions of chapter VIII of the Companies Act. At the time of issue of this Prospectus Avion Group hf. does not hold its own shares.

 Dividends According to Article 9 of Avion´s Articles of Association, dividends shall be paid to those who are registered owners of shares in the Company’s register of shares at the end of the day when the general meeting is held, unless the Company has received a notification that the dividend has been assigned with assignment of shares.

Rights Avion Group hf.’s share capital is divided into an equal number of shares amounting to one Icelandic Króna (ISK) each. Each Icelandic Krona carries one vote as per Article 4 in Avion’s Articles of Association. No special rights are conferred on any shares in the Company and shareholders will not be made subject to redemption of their shares as per Article 7 of Avion’s Articles of Association. Shareholders have voting rights at shareholders’ meetings, the right to dividends according to decisions of general meetings, the pre-emptive right to purchase all new issues of share capital in accordance with their proportional share in the share capital of the Company and a share of the Company’s share capital in the event of liquidation of the Company in proportion with their holdings in the Company’s assets. The pre-emptive right is transferable. No restrictions are imposed in the disposal of shares in the Company. There are no special provisions regarding the expiry of the rights to dividends that have not been claimed, but such rights expire in four years according to Article 4, of Act No. 14/1905, on the Expiry of Debts and other Obligations.

Transfer of ownership No restrictions are placed on the treatment of Avion Group hf. shares. Shares can be sold and pledged unless otherwise provided for by law. Current laws apply to the transfer of shares in Avion.

Changes in ownership of shares, irrespective of whether these occur through sale, gift, inheritance, administration of estate or attachment, shall at all times be notified to the Company’s office as soon as these occur and the register of shares shall then be amended in conformity therewith. A person acquiring shares in the Company cannot exercise the rights conferred on a shareholder unless his name has been recorded in the register of shares or he has given notice and provided evidence of his ownership of the shares.

Once shareholders have paid for their shares in Avion Group hf., electronic shares will be issued from the Icelandic Securities Depository (Verðbréfaskráning Íslands hf.), whereby ownership rights are registered, giving the shareholders full rights according to the Company’s Articles of Association. Listing of Avion Group hf. shares at the Icelandic Securities Depository is considered a satisfactory register of shares and Avion Group hf. shall consider the register of shares sufficient proof of ownership rights. Bonus share certificates, meeting invitations and all notifications shall be sent to the party who is at each given time registered owner of the share concerned in the Company’s register of shares. Avion Group hf. assumes no responsibility for payments or notices being lost owing to failure to notify the Company of changes in ownership or address.

In order to access electronic shares at the Icelandic Securities Depository, shareholders need to hold an electronic account at a member Account Institution of the Securities Depository, and this institution must act as custodian of the shares. The account will hold all shareholdings and business transactions of the shareholder.  Rights to electronic shares must be registered at the Icelandic Securities Depository in order to legally protect against seizures and contract provisions. Commercial papers for registered rights of electronic shares cannot be issued or endorsed, and any such transactions shall be rendered null and void. Registration of electronic shares at the Icelandic Securities Depository, following the Icelandic Securities Depository’s final entry, gives owners legal authority over the rights to which they are registered owners, should rights be incompatible. Priority over shares will be determined by the time at which the Accounts Institution’s registration request reached the Icelandic Securities Depository.

Market making Avion Group has made an agreement with Landsbanki regarding market making for the issued shares of Avion. The purpose of the agreement is to improve liquidity and to enhance transparent price formation in the company’s shares on ICEX.

As a market maker, Landsbanki is obligated to submit in its proprietary account daily bid and ask orders for shares in Avion for a minimum of 250,000 shares at a price determined by Landsbanki. The maximum bid/ask spread may not exceed 1.5%. New orders shall be placed within 15 minutes in succession to prior orders getting filled. Under the agreement, Landsbanki is obligated to provide liquidity for up to 2.5 million shares.

Taxation The shares of Avion Group hf. are subject to taxes according to laws in effect at any given time. Avion Group hf. shares are subject to stamp duty and Avion Group hf. pays stamp duty upon their issue. Stamp duty has been paid on all shares already issued by Avion Group hf.

Avion Group hf. must withhold tax for dividend payments to shareholders, according to Article 3, paragraph 2 of Act No. 94/1996, on Capital Gains Tax.

Profit from sale of shares in Avion Group hf. is taxable in Iceland. Non-resident shareholders are advised to determine whether a double taxation agreement is in place between Iceland and the country of residence of the shareholder in question and if so, which country has the right of taxation.

Share Offering

Listing of shares on ICEX

The Board of Directors of Avion Group hf. decided in their meeting on 16 April 2004 to apply for listing of the entire share capital of Avion Group hf. on the Main List of ICEX. The objectives of the listing are to increase liquidity of the shares, reach a broader range of investors and to get better price information on the shares. Avion Group hf. has made no decisions regarding listing on stock exchanges other than ICEX.

The Board of ICEX has agreed to list the entire share capital of Avion Group hf. on the ICEX Main List. The ticker symbol for Avion Group hf. shares in the ICEX trading system will be “AVION”. ICEX has determined the size of the trading lot, or minimum 10 number of shares required for price formation on ICEX to be 2,000 shares. The date of listing will be published in the ICEX news system after the offering of new shares in Avion Group hf. and will be no later than 20 January 2006.

Avion Group hf. shares are issued electronically by the Icelandic Securities Depository. Avion Group hf. distinction at the Icelandic Securities Depository is “Avion” and ISIN No. is IS0000011039.

Underwriting The offer is underwritten in full by the Manager of the offering and listing.

Offered amount and price range New shares in Avion Group hf. with the market value of ISK 6,000 million will be offered to institutional investors at a share price range of ISK 34.3 – 38.3. The expected number of shares offered is ISK 156,657,963 – 174,927,114. The minimum subscription amount for an institutional investor is ISK 5,000,000 at market value. The final offering price will be determined by book-building. If institutional investors subscribe for the total amount of the offering of new shares, the total number of shares in Avion Group hf. after the offering will be between 1,689,160,492 and 1,707,429,643 shares.

Purpose of the offering of new shares The objectives of Avion Group hf. in offering new shares in Avion Group hf. are to provide the basis for future growth, broaden the shareholder group and attract new shareholders who are willing and able to participate in further growth and development of Avion Group hf.

Book-building period The book-building period will be from 9:00-16:00 GMT 22 December 2005, during which time indicative offers will be solicited from institutional investors. After the book is closed no more indicative offers will be accepted. During the book-building period the Manager introduces the offer to probable investors and investigates their interest in participating in the offer within the published price range. Interested investors can contact Landsbanki - Corporate Finance, Hafnarstræti 5, Reykjavík, Iceland, tel. +354 410 4000, to present their indicative offer. The format of the indicative offer is not standardised.

Avion Group hf. reserves every right to consider or to disregard indicative offers fully or partly in the book-building period, without any specific explanation or notification thereof.

Final share price On 22 December 2005, after the book is closed, the Board of Avion Group hf. will decide on the final share price for the offering, having consulted the Manager of the offering. The Board’s decision will be based on the outcome of the book-building procedure and on a general evaluation of market conditions. The final offering price will be announced in ICEX’s news system before 10:00 GMT on 23 December 2005.

11 Subscriptions

Subscriptions will be allocated to parties who have given indicative offers in the book-building process and who have not been rejected by the Issuer. The Manager of the offering will notify parties of their allocation before 12:00 GMT on 23 December 2005.

Subscriptions shall be delivered to the Manager after the allocation of the subscription amount and no later than 16:00 GMT on 23 December 2005. Subscriptions are to be delivered in an envelope marked “Avion Group hf., share offering” to the front desk of Landsbanki Íslands hf. – Corporate Finance, Hafnarstræti 5, 3rd. floor, 150 Reykjavík, Iceland. Subscriptions by fax must be sent to Landsbanki – Corporate Finance, +354 410 3007 and verification of the fax transmission received from Landsbanki- Corporate Finance before the subscription deadline. The original subscription should then be mailed as indicated in the foregoing.

All binding subscriptions shall be made on subscription forms that the Manager of the offering will have delivered or e-mailed to the parties concerned. The Issuer reserves the right to demand whatever payment security it considers adequate from share subscribers.

A subscription agreement has been reached when the Issuer has accepted valid subscription forms. Participants in the offering will be informed by e-mail no later than 20:00 GMT 23 December 2005 whether their subscription has been accepted and on what terms. The Issuer reserves the right to reject subscriptions fully or partly, if investors do not subscribe to the amount they have been allocated. The outcome from the offer will be announced in ICEX’s news system.

Payments Investors participating in the offer must pay according to the subscription agreement no later than 17 January 2006. Payment-instructions will be sent to subscribers no later than 20:00 GMT 23 December 2005. If payment is not received on the due date it may be collected in a manner provided for by Icelandic law. The Issuer also reserves the right to cancel unilaterally unpaid subscriptions on the due date instead of collecting the debt and to reallocate the subscription at the Issuer’s discretion.

Share delivery New shares will be issued electronically no later than one day after one-quarter of the offering’s total market value has been paid. The issue date should be no later than 19 January 2006. One trading day after the shares have been issued electronically and Landsbanki has received payment for the shares, shares will be delivered to investors’ accounts at the Icelandic Securities Depository.

Cash flow and cost The amount raised by Avion Group from the offering will be ISK 6,000 million. The estimated cash flow to Avion Group, less of cost of the share offering is approximately ISK 5,500 million.

12 Information

This Prospectus and its appendices referred to can be obtained from the Manager of the offering and listing and the Issuer:

Landsbanki Íslands hf., Corporate Finance, Hafnarstræti 5, Reykjavík, Iceland, website: www.landsbanki.is.

Avion Group hf., Hlíðasmári 3, Kópavogur, Iceland, website: www.aviongroup.is.

13 4. History, Share Capital and Shareholders

4.1 Avion Group Avion Group, an investment company headquartered in Iceland, commenced business as Avion Group on 1 January 2005. In order to minimize transactions when forming the Group, the legal entity of Flugfélagið Atlanta hf. d.b.a Air Atlanta Icelandic (ID. No. 660288-1049) changed its name to Avion Group hf. on 1 January 2005. At that time Air Atlanta Icelandic had already acquired 71.4% shares in Excel Airways Group, all shares in Íslandsflug, all shares in Avia Technical Services and 90.1% shares in Suðurflug. In 2005, all assets and liabilities related to the flight operation of Air Atlanta Icelandic were sold to the legal entity Íslandsflug hf. (ID. No. 650387-1639) and the name of Íslandsflug was changed to Flugfélagið Atlanta hf. d.b.a Air Atlanta Icelandic.

Avion Group acquired Eimskip in June 2005 and following that the Company was reorganised into three divisions: Aviation Services, Charter and Leisure and Shipping and Logistics.

4.1.1 Aviation Services Division The Aviation Services division is comprised of ACMI provider Air Atlanta Icelandic, maintenance and engineering services provider Avia Technical Services (ATS), Avion Aircraft Trading and airport handling provider SouthAir.

Air Atlanta Icelandic was founded in 1986 and has been providing ACMI and aircraft charter services to over 140 and tour operators during its 19 years of operation. In the early years, Air Atlanta Icelandic wet leased -320 aircraft to among others, Airways, Finnish tour operator Hasse and for Hajj flights flying Muslims on their pilgrimages to Mecca in Saudi-Arabia, a prominent feature over the years. In 1989 Air Atlanta Icelandic first supplied aircraft for cargo operations, providing -200C aircraft to . Following a contract with Cargo AG in 1990, which was to last ten years, a second was added to the fleet in 1992.

During the 1990’s, Air Atlanta Icelandic expanded its fleet with its developing customer base. The first wide-bodied aircraft was acquired in 1991, a Lockheed Tristar L1011, followed by the narrow-bodied Boeing 737-200 and wide-bodied - 100 aircraft. A Boeing 747SP that was configured with first class accommodation only and a conference room on the main deck was added to the fleet in 1997. The majority of aircraft at this time were supplied to customers inclusive of crews, full maintenance and flight operational support. Air Atlanta Icelandic engaged in new contracts with UK airlines such as Britannia Airways, , Airtours and as well as other national carriers such as Avianca, , Saudi Arabian Airlines and . In addition to supplying aircraft for operators with a shortage of passenger and cargo capacity, Air Atlanta Icelandic supplied aircraft for the United Nations peacekeeping forces in Yugoslavia as well as to sports teams, multi-national companies and musicians.

In 2000, Air Atlanta Icelandic sold its last Boeing 737 and brought three Boeing 747- 300’s into service, thereby changing its fleet to all wide-body aircraft. Within a year, 14 Air Atlanta Icelandic retired its last Lockheed Tristar 1011 and became an all- Boeing aircraft provider. In 2004 the first Boeing 747-400 was taken into service.

In the fall of 2004, Air Atlanta Icelandic acquired all shares in Íslandsflug, which was founded in 1991. Íslandsflug originally started as a domestic airline operating smaller aircraft like Twin Otters, Beechcraft 99 and other commuter types. In 1994, Íslandsflug started to fly internationally with a Metro Fairchild III. The aircraft was operated in co- operation with DHL between Reykjavík and East Midland Airport in the UK. In 1997, the first jet was introduced to the fleet, a Boeing 737-200 QC. The aircraft operated with cargo during nights in co-operation with DHL and with charter passengers from Iceland during daytime. Since 2000, Íslandsflug has been steadily growing and shifting emphasis from domestic operation to international ACMI operation. Íslandsflug sold its domestic operation to in 2004 in order to focus on ACMI, operating a fleet of 18 aircraft that consisting of A310F, Airbus A300F, Boeing 737-300QC, Boeing 737-300 and Boeing 737-400.

At the end of 2004, it was decided that the operation of Air Atlanta Icelandic and Íslandsflug would be combined under the legal entity of Íslandsflug, which name was then changed to Air Atlanta Icelandic. The process of putting together the operations of the two companies started in January 2005 and the company operated on two Aircraft Operating Certificates (AOC) until August 2005, when the Icelandic Civil Aviation Authorities approved one AOC for Air Atlanta Icelandic. Subsequent to this transaction, Air Atlanta Icelandic has become the world market leader in ACMI, operating passenger and cargo aircraft.

Avia Technical Services (ATS) was formed to be the parent company for the maintenance division of the Group, consisting of Aviaservices, a component overhaul and repair services provider in the UK, and Air Atlanta Aero Engineering (former Shannon MRO), a provider of heavy maintenance services in Ireland. In February 2004, Air Atlanta Aero Engineering was acquired by Air Atlanta Icelandic from UPS International. Shannon MRO was established in 1962 to facilitate transatlantic transit maintenance.

In August 2005, ATS acquired a 70% interest in Technical and Logistics Services a company that offers maintenance management, inventory management, training and consultancy to the aviation industry.

4.1.2 Charter and Leisure Division The Charter and Leisure Division is comprised of Excel Airways Group and Travel City Holdings.

Excel Aviation was founded in 1999 with the objective of providing aircraft seats to independent tour operators (ITOs) that did not have an in-house airline and no longer wished to offer seats in bulk to competitors. Libra Holidays Group (LHG), a significant ITO at the time invested in Excel Aviation and became a founding shareholder along with directors Philip Wyatt and Steven Tomlinson. LHG subsequently became the holding company of Excel Aviation.

To expand the business of Excel Aviation, LHG acquired control of Sabre Airways together with its existing take-off and landing slots at Gatwick. After a name change to Excel Airways, the company was re-branded in 2001.

15 Freedom Flights, a seat-only operator selling seats on primarily leisure destination routes, became a wholly owned subsidiary of Excel Aviation in October 2002. Historically, Freedom Flights had been a joint venture between Excel Aviation and Club Travel 2000 Group.

In november 2002, following a group restructuring, Excel Airways Group was listed on the Alternative Investment Market of the Stock Exchange. In March 2004, Air Atlanta Icelandic acquired 40.5% of the issued ordinary share capital of Excel Airways Group and later the same year acquired a further 30.9%. Excel Airways Group was de-listed from AIM in December 2004. Currently Avion Group owns 99.9% shares in Excel Airways Group.

Excel Holidays was launched in November 2004, offering a full range of holidays, car hire and other extras in conjunction with the Excel flight programme and scheduled flights of other carriers under the brands of Aspire Holidays and Excel Holidays.

Avion Group acquired the Really Great Holiday Company (trading as Travel City) in June 2005. Travel City together with Excel Airways Group forms the 8th largest travel group in the UK, licensed by the UK Civil Aviation Authority.

Since the first Excel branded flight in May 2001, Excel Airways has experienced substantial growth in passenger numbers and in combination with Travel City it provides services to European, Middle-Eastern, Asian and North American leisure destinations from twelve different airports in the UK.

At the World Travel Awards in , Excel Airways won the “World’s Leading Charter Airline for 2004” award and in September 2005 the Daily Telegraph readers voted Excel Airways “Best Charter Airline” for the second year running.

4.1.3 Shipping and Logistics Division The Shipping and Logistics Division is comprised of Eimskip, the leading Icelandic maritime transportation and logistics company.

Eimskip was founded in 1914 with almost 15,000 founder shareholders in response to an urgent need to improve Iceland’s connections with the outside world. Eimskip’s first vessel, Gullfoss, put into port in Reykjavík for the first time on 15 April 1915.

Over the ensuing years, Eimskip renewed its fleet and constructed new warehousing facilities in Reykjavík, greatly improving its freight reception capacity. In 1948-49, Eimskip took three vessels into service that were equipped for transport of frozen fish which was becoming the country’s most valuable export. The purchase of a large new transport vessel from the US in 1948 opened up new possibilities for transport between Iceland and North America.

The 1960s and 1970s were a period of expansion and high investment for Eimskip. The fleet was renewed, modern warehousing facilities constructed and operations restructured to take advantage of transport technology. Eimskip acquisition in 1974, of seven transport vessels, five of them Danish sister vessels, was the largest single fleet expansion ever.

Between 1979 and 1989 Eimskip renewed its fleet once more to increase its operating efficiency, reducing the number of vessels it owned from 24 to 13, while at 16 the same time expanding their capacity. The volume of cargo transported during the same period grew by 70% from 560,000 tonnes to 950,000 tonnes.

During the 1980’s and 1990’s, major changes took place in Eimskip’s operations with the transition from a traditional shipping company to a comprehensive transport operation. Assisted by the container revolution, RORO vessels and by the development of information and communications technology, the first specially designed container vessels were taken into service at this time. In June 1992 Eimskip was listed on ICEX’s Main List.

From 1996 onwards, Eimskip invested heavily in fisheries, making the greatest share of its investments in this sector. Following the full acquisition of Útgerðarfélag Akureyringa hf., Skagstrendingur hf. and Haraldur Böðvarsson hf., Eimskip established its subsidiary Brim hf. as its fisheries operation. In January 2004, Brim was sold, ending Eimskip’s involvement in fisheries enterprises. Eimskip was restructured at this time, resulting in its transport operations being separated from its investment subsidiary, Burðarás hf., which had been established in 1989. Burðarás hf. became the entity listed on ICEX’s Main List and Eimskip’s parent company. Burðarás sold Eimskip to Avion Group in May 2005.

More recently, Eimskip has steadily expanded its operations abroad, strengthened by a service network of offices in , North America, South America, Asia and China. Its transport and cold-storage facilities have been extended in the last two years with the acquisition of CTG in Norway, Faroe Ship in the Faroe Islands and a purchase right of all shares in the land transportation company P/F Heri Thomsen in the Faroe Islands. Eimskip Reefer Logistics, a global freight forwarding enterprise was also founded recently.

In May 2005, an agreement was concluded for the sale of Eimskip to Avion Group and the Shipping and Logistics Division of Avion Group was formed.

4.2 Share Capital The total share capital of Avion Group is 1,532,502,529 shares at the time of publication of this Prospectus. All shares have been paid up.

4.2.1 Development of share capital

Development of Avion Group hf.* share capital 2002-2005

Date note on Share Changes change in accumulated no. of shares no. of shares 1. 1. 2002 Share balance - beginning of year 2002 13,005,882 1. 11. 2002 Sold to shareholders 7,297,148 20,303,030 18. 12. 2003 Sold to shareholders 448,226,970 468,530,000 29. 12. 2004 Payment for shares in Íslandsflug 151,996,433 620,526,433 17. 6. 2005 Payment for shares in Excel and Eimskip 871,064,792 1,491,591,225 16. 11. 2005 Payment for shares in Excel 27,899,899 1,519,491,124 7. 12. 2005 Sold to former shareholders in Travel City Holdings 13,011,405 1,532,502,529

Total Shares 1,532,502,529

* Avion Group hf. and its predecessor Air Atlanta Icelandic

17 Avion Group’s share capital has been increased on four occasions within the last twelve months. The first increase of 151,996,433 shares on 29 December 2004 was to finance the purchase of shares in Íslandsflug hf. The second increase of 871,064,792 shares in total on 17 June 2005 was threefold in purpose. Firstly, 276,623,120 new shares were issued to finance the purchase of shares in Eimskip. Secondly, 220,801,550 new shares were issued in exchange for shares in Excel Airways Group plc. Thirdly, 373,640,122 new shares were issued and sold to shareholders in Avion Group. The third share capital increase was on 16 November 2005 when 27,899,899 new shares were issued in exchange for shares in Excel Airways Group plc. The fourth share capital increase was on 7 December 2005 when 13,011,405 new shares were issued in relation to the acquisition of Travel City Holdings.

4.2.2 Authorisation to issue new shares and purchase own shares According to Article 4, of Avion Group’s Articles of Association, the Board of Directors is authorised to increase the Company’s share capital by up to ISK 467,497,471 all in one or in phases, by means of subscription to new shares so that the total share capital will be up to ISK 2,000,000,000. The Company’s Board of Directors shall determine the nominal value of new shares, offering rate and terms of payment in accordance with chapter V of the Act on Public Limited Liability Companies no. 2/1995 (The Companies Act). Shareholders have waived their pre-emptive rights to subscribe to the new shares in accordance with provision of Art. 34 of the Companies Act no. 2/1995. The new shares shall confer rights as from the right of registration of the share capital increase. The Board of Directors may decide that payment for the new shares is made, partly or fully, in a form other than cash. The authorization to the Company’s Board of Directors to increase the share capital in accordance with this paragraph will be cancelled as of 28 December 2009 to the extent that it has not been used.

Avion Group hf. is authorized to acquire and accept as security own shares pursuant to Article 8 of the Company’s Articles of Association and in conformity with the provisions of chapter VIII of the Companies Act. At the time of issue of this Prospectus Avion Group hf. does not hold its own shares.

The Board of Avion Group decided in their meeting on 23 November 2005 to give each employee of the Group ISK 50,000 in share capital at market value based on the first registered share value of Avion Group when the shares start to trade on ICEX. Total employees are approximately 4,500 so the total market value of the gift is ISK 225 million. In the same meeting a decision was made regarding option agreement with key management. The agreements have not been finalised yet. The total number of shares that will be issured because of the gift to employees and share option agreements will be up to 100 million shares.

4.3 Shareholders At the time of publication of this Prospectus, Avion Group has 21 shareholders. The ten largest shareholders own 1,433,078,754 shares in the Group, or 93.51% of the total share capital.

18 Avion Group is not aware of lock-up agreements between shareholders or agreements concerning the exercise of votes.

Avion´s Ten Largest shareholders 16 December 2005

Name No. of shares Share Frontline Holding S.A. 622,725,097 40.63% Straumur-Burðarás fjárfestingabanki hf. 276,623,120 18.05% Pilot Investors Ltd. 187,324,139 12.22% Basalt Investments Ltd. 60,799,118 3.97% Philip Wyatt 60,798,573 3.97% Craqueville Inc. 52,715,572 3.44% Topos Holding S.A. 50,788,949 3.31% Arngrímur Jóhannsson 50,000,000 3.26% Fidecs Trust Company 38,711,249 2.53% Blue Sky Transport S.A. 32,592,937 2.13% Ten largest shareholders 1,433,078,754 93.51% 11 other shareholders 99,423,775 6.49% Total Shares 1,532,502,529 100.00%

At the time of listing, Avion Group will not meet ICEX’s requirements on ownership distribution and minimum number of shareholders. The Board of ICEX has granted Avion Group a temporary exemption from this requirement due to provisions in an agreement between Straumur-Burðarás Investment Bank and Avion Group. According to that agreement the Board of Directors of Straumur-Burðarás is obligated to propose to a shareholders’ meeting of Straumur-Burðarás that Straumur- Burðarás’ shares in Avion Group, equivalent to the market value of ISK 5 billion, will be allocated as dividend to Straumur-Burðarás’s shareholders, on the condition that Avion Group’s shares have been listed on ICEX before 31 January 2006. It should be noted that the dividend payment is subject to the approval of Straumur – Burðarás shareholders meeting. At the time of issue of this Prospectus the number of shareholders in Straumur-Burðarás exceeds 22,000. The following pro-forma shareholder list shows a projection of Avion Group’s largest shareholders after listing on ICEX and after the dividend payment by Straumur-Burðarás.

Pro-forma shareholders list-after share offering and dividend payment in Straumur-Burðarás (based on the median number of shares offered

No. of shares after no. of shares after the Offering Share offering and Dividends Share Frontline Holding S.A. 622,725,097 37.34% 622,725,097 37.34% Straumur Burðarás hf. 246,480,844 14.78% 108,649,629 6.51% Pilot Investors Ltd. 187,324,139 11.23% 187,324,139 11.23% Arngrímur Jóhannsson 50,000,000 3.00% 50,000,000 3.00% Basalt Investments Ltd. 60,799,118 3.65% 60,799,118 3.65% Philip Wyatt 60,798,573 3.65% 60,798,573 3.65% Craqueville Inc. 52,715,572 3.16% 52,715,572 3.16% Topos Holding S.A. 50,788,949 3.05% 50,788,949 3.05% Fidecs Trust Company 38,711,249 2.32% 38,711,249 2.32% Blue Sky Transport S.A. 32,592,937 1.95% 32,592,937 1.95% Other Shareholders 99,423,775 5.96% 99,423,775 5.96% New shares (median number) 165,397,459 9.92% 165,397,459 9.92% 22,000 new shareholders Straumur-Burðarás 137,831,215 8.26% Total Shares 1,667,757,712 100.00% 1,667,757,712 100.00% Shares owned by general shareholders 264,795,884 15.88% 511,276,728 30.66%

19 After the offering of Avion Group’s shares on ICEX and the dividend payment in Straumur-Burðarás hf. at least 30% of the share capital in Avion Group will be held by at least 22,000 general investors, thereby fulfilling the listing requirements of ICEX.

4.3.1 Largest Shareholders Frontline Holding S.A. is fully owned by Avion’s Executive Chairman, Magnús Þorsteinsson. All of Magnús’ shares in Avion Group are in Frontline Holding S.A. Pilot Investors Ltd. is owned by Lakehouse Management AG in Switzerland, which to the knowledge of Avion, is owned by a group of investors, not financially related to Avion, the Company’s management or other shareholders in Avion. Basalt Investment Ltd. is owned by Miguel Goldner (76%), Phil Wyatt, CEO of Excel Airways Group (12%) and Eamonn Mullaney, Executive Chairman of Excel Airways Group (12%). Arngrímur Jóhannsson is a member of the Board of Directors of Avion Group. Craqueville Inc. is a financially related party to Gunnar M. Bjorg, member of the Board of Directors of Avion Group. Fidecs Trust Company is an employment benefit trust. Steven Tomlinsson, COO of Excel Airways Group and Eamonn Mullaney, Executive Chairman of Excel Airways Group are among the beneficiaries of the trust. Topos Holding is a financially related party to both Baldur Guðnason, CEO of Eimskip and Steingrímur Pétursson, VP of Finance in Avion Group.

4.4 Dividends Avion Group and its predecessor Air Atlanta Icelandic did not pay dividends for the years 2002, 2003 and 2004. Avion Group intends to pay dividends to its shareholders. The decision regarding dividend payments and the amount of dividend to be paid is taken by the Annual General Meeting (AGM) and will be based on the Company’s financial position.

20 5. Organisation, Subsidiaries, ManagEment and Personnel

5.1 Organisation Avion Group is an investment company controlling an international network of air and sea transportation companies providing a broad spectrum of services. The Group’s activities are carried out by its three main businesses: Aviation Services, Charter and Leisure, and Shipping and Logistics. The main roles of the Company are managing investments and financial performance and supporting operations of the Group’s subsidiaries.

5.2 Avion Group’s Subsidiaries Avion Group has eight subsidiaries. These subsidiaries own a further 85 subsidiaries. Avion’s Aviation Services division is represented by Air Atlanta Icelandic, Avion Aircraft Trading, Suðurflug and Avia Technical Services and their seven subsidiaries. Charter and Leisure is represented by Excel Airways Group and Travel City Holdings and their 23 subsidiaries. The Shipping and Logistics division is represented by Eimskipafélag Íslands ehf. and its 55 subsidiaries.

Avion Group´s Subsidiaries

Name country Operation ownership

Avion Aircraft Trading hf. Iceland Aircraft Trading Activities 100% Flugfélagið Atlanta ehf. (Air Atlanta Icelandic) Iceland ACMI airline 100% Air Atlanta Germany GmbH Germany Service company 100% Air Atlanta UK plc. UK Dormant 100% Suðurflug hf. Iceland Handling company 90.1% Avia Technical Services Ltd. UK Holding company 100% Avia Services Ltd. England Maintenance provider 100% Air Atlanta Aero Engineering Ltd. Ireland Maintenance provider 100% Air Atlanta Properties Ltd. Ireland Property holdings 100% Technical and Logistics Services Ltd. UK Maintenance provider 70.0% Excel Airways Group plc. UK Holding company 99.9% Excel Airways Ltd. UK Charter passenger airline 100% Excel Aviation Ltd. UK Air travel seat brokering and chartering 100% Freedom Flights Ltd. UK Charter aircraft seat brokering 100% Freedom Flights (Aviation) Ltd. UK Trade license transport provider 100% Excel Holidays Ltd. UK Tour operator 100% Excel Flights Ltd. UK Trade licence transport provider 100% Explorer House Ltd. UK Property holdings 100% Ltd. UK ACMI airline 100% Travel City Holdings plc. UK Tour operator Eimskipafélag Íslands ehf. Iceland Shipping and logistics 100% Eimskip USA Inc. USA Shipping business 100% Eimskip UK Ltd. UK Shipping business 100% Faroe Skip P/F Faroe Islands Shipping business 100% Eimskip Transport GmbH Germany Forwarding business 100% Vöruhótelið ehf. Iceland Warehouse operation 100% TVG Zimsen hf. Iceland Forwarding operations 100% Norðurfrakt ehf. Iceland Trucking operations 70.0% Alli Geira hf. Iceland Trucking operations 51.4% Skipaafgreiðsla Suðurnesja hf. Iceland Trucking operations 100% Eimskip Nederland BV Netherlands Holding company 100% Emex Airways FZE UAE Dormant 100% 21 Subsidiaries are companies controlled by the parent company, Avion Group. The parent company is deemed to control these companies when it can directly or indirectly control their financial or operating strategy for the purpose of making a profit on their operations. In assessing control, consideration is given to possible voting rights that can be exercised or converted. The financial statements of subsidiaries are included in the Company’s consolidated financial statements from the time it acquires control until its control ceases.

Avion Group’s subsidiaries that comprise more than 10% of the Company’s equity, or contribute 10% or more of its operating performance, based on the interim financial statements of 30 September 2005 are: Flugfélagið Atlanta ehf. (Air Atlanta Icelandic), Excel Airways Group plc and Eimskipafélag Íslands ehf.

5.2.1 Flugfélagið Atlanta ehf. Flugfélagið Atlanta ehf. d.b.a Air Atlanta Air Atlanta Icelandic ehf. Icelandic is an ACMI airline that offers tailor- Address Hlíðasmári 3, Kópavogur, Iceland made solutions to other carriers, both in the ID No. 650387-1639 passenger and cargo industries. Air Atlanta Share capital, 30 September 2005 USD 7.3 m Icelandic is the world’s largest ACMI operator, Other equity, 30 September 2005 USD 3.2 m providing aircraft leasing services to other Net income, 30 September 2005 USD 2.9 m Holding, 30 September 2005 100% airlines needing spare capacity on an ACMI Book value, 30 September 2005 USD 23.6 m basis.

All shares in Air Atlanta Icelandic are paid up. Air Atlanta Icelandic engages in transactions both with Avion Group and other companies in the Group. This does not include any unusual businesses transactions. There are no mutual liabilities between the companies. Flugfélagið Atlanta ehf. did not pay dividends for 2004.

5.2.2 Excel Airways Group plc.

Excel Airways Group plc. Excel is a holding company. The core business of its subsidiaries is aviation and leisure Address UK services. Excel is one of the major scheduled Share capital, 30 September 2005 USD 4.0 m charter passenger airlines in the UK and it Other equity, 30 September 2005 USD 54.8 m provides mainly short-haul services to leisure Net income, 30 September 2005 USD 26.6 m destinations. Holding, 30 September 2005 99.9% Book value, 30 September 2005 USD 223.4 m All shares in Excel are paid up. Excel engages in transactions both with Avion Group and other companies in the Group. This does not include any unusual businesses transactions or loan agreement. Excel Airways Group did not pay dividends for 2004.

22 5.2.3 Eimskipafélag Íslands ehf. Eimskip offers transport and logistics Eimskipafélag Íslands ehf. solutions as well as temperature- controlled food storage. Its service Address Korngarðar 2, Reykjavík, Iceland network consists of 55 operational ID No. 461202-3220 bases in Europe, North America, Share capital, 30 September 2005 USD 58.8 m Other equity, 30 September 2005 USD 61.3 m South America and Asia. Eimskip Net income, 30 September 2005 USD 13.9 m operates 25 cargo vessels and 15 Holding, 30 September 2005 100% cold-storage facilities in Europe, Book value, 30 September 2005 USD 377.6 m North America and Asia, in addition to a range of subsidiaries and partnerships.

All shares in Eimskip are paid up. Eimskip engages in transactions both with Avion Group and other companies in the Group. This does not include any unusual businesses or transactions. Eimskip did not pay dividends for 2004.

5.3 Shares in Other Companies

5.3.1 Investments in associates Associates are companies in which Avion has made a long-term investment and in which it owns a considerable share, although no more than 50%. Holdings in associates are recognised in accordance with Avion’s share in their equity capital and its share in their profit and loss in the same manner.

Associates 30 September 2005

Company Country ownership Book value Harbor Grace CS Inc Canada 25% 638 Euro Container Line AS Norway 50% 0 Dissaco GSS Airfreight NV Holland 25% 12 Traxx Intercontinental BV Holland 20% 82 Kirkenes Agency AS Norway 50% 42 774 All amounts in thousands of USD

5.3.2 Available for sale investments

Avion Group’s investments in other companies amounted to USD 2.8 million at the end of September 2005, including the 19% stake in the US charter carrier, TEM Enterprises d.b.a Casino Express Airlines in Nevada. These investments are in the form of equity securities, which present the Group with an opportunity for return through dividend income and trading gains.

In October 2005 Eimskip bought a 10% stake in the seafood exporting company Icelandic Group hf. for USD 14.4 million. Co-operation between the two companies is expected to create opportunities in the international arena for both companies.

23 5.4 Administration

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5.5 Corporate Governance Avion Group is controlled by shareholders’ meetings. Final authority in all company dealings, within the limits set by the Groups Articles of Association and national law rests with the duly constituted shareholders’ meeting.

Avion Group has adopted and follows corporate governance guidelines that have taken into consideration the corporate governance guidelines introduced by The Chamber of Commerce, the Confederation of Icelandic Employers and the Icelandic Stock Exchange (Guidelines).

The management structure of Avion is the Board of Directors, the CEOs and the Executive Board.

The Board of Directors is responsible for the business affairs of the Company in accordance with Icelandic law and the Company’s Articles of Association. The Company is currently controlled by a five member Board of Directors. The Annual General Meeting of shareholders elects the members of the Board of Directors of the Company in accordance with the Company’s Articles of Association and the Company Act no. 2/1995. When a new Board is elected, it determines whether an elected Director is “independent” as that term is defined in the Guidelines. If a majority of the elected Directors are not independent, the finding will be stated in the annual report, together with an explanation.

The Board of Directors is responsible for protecting the interests of all shareholders, with due consideration for all other stakeholders, and it performs a supervisory role. The Board undertakes a review of the Company’s affairs and sees to it that the 24 Company’s organisation and activities are at all times in correct and proper order. The Board hires the CEOs of the Company and determines their salaries and benefits. The CEOs deal with the day-to-day operations of the Company and shall in these matters follow the Board’s policy and instructions.

The Chairman of Avion appoints members of the Executive Board. The Executive Board follows the policy and directions of the Board of Directors in the management of the Company. The current Executive Board consists of the following persons: Executive Chairman of Avion Group, appointed Vice Presidents in Avion Group, CEO and/or COO of Air Atlanta Icelandic, CEO and/or COO of Excel Airways Group, CEO and/or CFO of Eimskip. The Executive Board meets at least six times a year and has the right to invite any employee in its operating subsidiaries to its meetings. The Executive Board meetings are held in person, except in circumstances where this is not possible, in which cases meetings may be held by electronic communication or telephone as appropriate.

5.6 Board of Directors, CEOs, Managing Directors and Auditors

5.6.1 Board Executive Chairman Magnús Þorsteinsson, ID No. 061261-5409, Eyrarlandsvegur 22, , Iceland. Executive Chairman. Magnús is an entrepreneur and investor with significant interest in aviation and financial services. He began his investment activities in Russia, where he was the co-founder of the Bravo brewery in St. Petersburg. After nearly ten years of expansion, Bravo was sold to Heineken NV. whereby Magnús acquired a 51% stake in Air Atlanta Icelandic in 2002.

Magnús did not receive remuneration from Avion Group for the first nine months of 2005. As of 1 October 2005 until the next Annual General Meeting he will receive ISK 650,000 per month for his services as Executive Chairman of the Board of Directors. He does not own stock options in Avion Group.

Magnús Þorsteinsson and financially related parties own 622,725,097 shares in Avion Group at the time of publication of this Prospectus.

Directors At the Avion Group shareholders’ meeting held on 6 December 2005, it was decided that the remuneration for each member of the Board of Directors should be ISK 120,000 per month, commencing 1 January 2006 until the next Annual General Meeting. Prior to 1 January 2006 members of the Board of Directors have not received salaries for their Board membership, with the exception of the Executive Chairman. No loans, guarantees or extraordinary transactions are in force between the Company and members of its Board of Directors.

Arngrímur Jóhannsson, ID No. 070440-2669, Leirutangi 6, Mosfellsbær, Iceland. Co-founder and former CEO of Air Atlanta Icelandic. Arngrímur has significant interest in aviation and is a true pioneer in the field, having trained as a pilot and an air navigator. He has been awarded numerous awards for his flying endeavours including the Icelandic Order of the Falcon, and he is a Fellow of the Royal 25 Aeronautical Society. Arngrímur has been a Board member of Air Atlanta Icelandic since its inception and also serves as a Board member of Avion Group’s subsidiaries, Avia Technical Services.

Arngrímur’s total remuneration for the first nine months of 2005 was USD 226,000, all paid in pension payments. He does not own stock options in Avion Group.

Arngrímur and financially related parties own 50,000,000 shares in Avion Group at the time of publication of this Prospectus.

Gunnar M. Bjorg, ID No. 280639-2069, . Gunnar has had a lifetime career in commercial aviation. He left Iceland as a young man to train as an aircraft technician in Norway and the before returning to work with Loftleider in Iceland and Luxembourg as a Flight Engineer in the Operations Department. He was a member of the Icelandic team that established and built , rising within that company to become Senior Vice President for Maintenance and Engineering. He served as a Member of the Board from 1981 to 1985. He established his own aviation investment, leasing and trading enterprise (Alize Worldwide Limited) in 1981 and remains Chairman of that group. He has global experience of the industry and is widely known within it.

Gunnar M. Bjorg did not receive any remuneration from Avion Group for the first nine months of 2005. He does not own stock options in Avion Group.

Gunnar M. Bjorg and financially related parties own 52,715,572 shares in Avion Group at the time of publication of this Prospectus.

Eggert Magnússon, ID No. 200247-3299, Kringlan 59, Reykjavík, Iceland. Eggert has been involved in business all of his professional life having been the former owner and CEO of import and export food manufacturing companies, Frón and Esja. As an entirely independent director, Eggert makes a valued contribution to the Board of Avion Group in-line with the requirements of the Group’s corporate governance. Eggert has been a prominent member of international football for some years and is currently serving on the Executive Committee of the European Football Association (UEFA) and has been a member of various committees within both UEFA and the International Federation of Football Associations (FIFA) for the last 15 years. He has been the President of the Football Association of Iceland for the last 17 years. He also serves as a Board member of Straumur-Burðarás.

Eggert Magnússon did not receive any remuneration from Avion Group for the first nine months of 2005. He does not own stock options in Avion Group.

Eggert Magnússon and financially related parties own 7,500,000 shares in Avion Group at the time of publication of this Prospectus.

Eamonn Mullaney, (aged 64), UK. Eamonn is currently the Chairman of the Board of Directors of Excel Airways Group. Eamonn has been involved in the airline industry for over 40 years. Initially a management trainee with , he subsequently went on to hold a number of senior management positions within plc (both UK 26 and overseas), including General Manager of UK Sales, Managing Director of British Airtours and Managing Director and founder of Caledonian Airways. Latterly Eamonn was an executive Board member and co-founder of Inspirations Group plc., Chairman of Caledonian Airways Ltd. and Chairman and non-executive board member of Sabre Airways until it was acquired by LHG in 2000.

Eamonn Mullaney received remuneration of GBP 154,590 from Avion Group for the first nine months of 2005 for his services as Executive Chairman of Excel Airways Group. He does not own stock options in Avion Group.

Eamonn owns 12% in Basalt Investments Ltd and he is among the benficiaries of Fidecs Trust Company.

5.6.2 Chief Executive Officers of Subsidiaries No loans, guarantees or extraordinary transactions are in force between the Group and its subsidiaries Chief Executive Officers. The Chief Executive Officers of the Group’s subsidiaries do not own stock options in Avion Group at the time of publication of this Prospectus. Avion Group is in the process of offering share option agreements to those individuals, as discussed in chapter 5.6.4.

Hafþór Hafsteinsson, Chief Executive Officer - Air Atlanta Icelandic ID No. 030166-3109, Skrúðás 9, Garðabær, Iceland. Hafþór Hafsteinsson is CEO of Air Atlanta Icelandic. He joined Air Atlanta Icelandic in 1991 as Station Manager in Africa and later Asia and then served as a pilot on Boeing 737s and Lockheed L1011s together with his duties as Vice President of Flight Operations until 1998, when he was appointed Vice President of Sales and Marketing. He was appointed CEO in 2001. He took a leading role in the growth of Air Atlanta Icelandic from a fleet of two aircraft when he joined in 1991 to a fleet of over 60 aircraft today. He is currently a Board member of Air Atlanta Icelandic in addition to being a Board member of Avia Technical Services, Excel Airways Group, Travel City Holdings and Eimskip.

Total remuneration for the first nine months of 2005 to Hafþór Hafsteinsson was ISK 23,202,355. Hafþór Hafsteinsson and financially related parties own 28,768,160 shares in Avion Group at the time of publication of this Prospectus.

Baldur Guðnason, Chief Executive Officer – Eimskip ID No. 220166-4229, Bakkavör 10, Seltjarnarnes, Iceland. Baldur Guðnason is CEO of Eimskip. He has served as Chief Executive Officer of Eimskip since 2004. Previously, from 2001 to 2004, Baldur operated his own business, the chemicals company Sjöfn and was Vice President of Samskip from 1987 to 2000. Baldur graduated with an MBA from Reykjavík University in 2002.

The total remuneration for the first nine months of 2005 to Baldur Guðnason was ISK 33,216,231. Baldur Guðnason and financially related parties own 50,788,949 shares in Avion Group at the time of publication of this Prospectus.

27 Philip Wyatt, Chief Executive Officer - Excel Airways Group (aged 42), UK. Philip Wyatt is the CEO of Avion Group’s subsidiary Excel Airways Group. He co- founded Excel Aviation along with Steven Tomlinson in 1999. He commenced his career over 20 years ago with Monarch Airlines Limited where he reached the position of Commercial Sales Executive. He held a number of management positions with Owners Abroad Aviation Limited and was a founding member of Goldcrest Aviation Limited before being appointed Commercial Director in 1991. In 1993, when Goldcrest Aviation was acquired by Inspirations Group plc., he was appointed to the main board of Inspirations Group, made Managing Director of Goldcrest Aviation and a Director of Caledonian Airways plc.

Total remuneration for the first nine months of 2005 to Philip Wyatt was GBP 195,938. Philip Wyatt and financially related parties own 60,798,573 shares in Avion Group at the time of publication of this Prospectus. Philip owns 12% in Basalt Investments Limited.

5.6.3 Key Management No loans, guarantees or extraordinary transactions are in force between the Group and its key management, as defined in this Prospectus. The key mangement of the Group do not own stock options in Avion Group at the time of publication of this Prospectus. Avion Group is in the process of offering share option agreements to those individuals, as discussed in chapter 5.6.4.

Hannes Hilmarsson, Chief Operating Officer - Air Atlanta Icelandic ID No. 101164-4549, Steinás 16, Garðabær, Iceland. Hannes Hilmarsson joined Avion Group as Vice President of Corporate Strategy in March 2004. He was appointed Chief Operating Officer and Vice President Finance of Air Atlanta Icelandic in November 2005. He has over 15 years experience in the travel and aviation industries, having been employed by and its subsidiaries since 1989. Hannes was marketing and sales Manager for Icelandair N-America from 1994 to 1998, General Manager for Icelandair UK 1998-2000 and Icelandair Scandinavia 2001-2003. Hannes obtained a Cand.Oecon degree from the University of Iceland in 1989.

Magnús Stephensen, Vice President, Business Development and Corporate Com- munications – Avion Group ID No. 200972-3099, Smáraflöt 43, Garðabær, Iceland. Magnús Stephensen joined Avion Group in February 2004 and has since been involved in the development of the overall organic and external business strategy of the Group. Having spent several years with DHL Worldwide Express, Transworld Systems and the Dunn Group, Magnús joined Icelandair in 1998. Magnús was Manager of Marketing for Icelandair USA 1998-2003 and Director of Global Market Planning 2003-2004. Magnús has a BA degree in International Affairs and Economics from the University of Colorado.

28 Stefán Magnússon, Executive Vice President, Finance – Eimskip ID No. 180569-4649, Vesturás 12, Reykjavík , Iceland. Stefán Magnússon joined Eimskip as Senior Director of Financial Control in February 2002 and later became Executive Vice President of Finance. Stefán earned a Cand.Merc. degree from Business School in 1997 and obtained a Cand.Oecon degree from the University of Iceland in 1993. Stefán was Financial Manager for Thorsbrunnur Inc. during the years 2000-2002 and Manager of Financial Management of Iceland Post Ltd. from 1998-2000. He was employed by Búnaðarbankinn 1998 and worked as a tax inspector for the local Internal Revenue Tax Office in Reykjavík, Iceland 1993-1995.

Steingrímur Pétursson, Vice President, Finance – Avion Group ID No. 160872-5439, Háhlíð 14, Akureyri, Iceland. Steingrímur Pétursson has served as Vice President of Finance of Avion Group since June 2005. Previously Steingrímur operated his own business, the Chemicals company Sjöfn, from 2001 to 2004,,was CEO of Sandblástur og Málmhúðun hf. from 1999 to 2001 and worked for KPMG in Akureyri, Iceland 1995 – 1999. Steingrímur graduated with a BS from the University of Iceland in 2001 and with a diploma in Business and Administration from Akureyri University in 1994.

Steven Tomlinson, Chief Operating Officer - Excel Airways Group (aged 46), UK. Steven Tomlinson began his career in 1979 with British Airways and went on to hold the positions of Charter/Concord Sales Manager of British Airways and British Airtours Limited and Sales Manager of Caledonian Airways Ltd and British Airways plc. Subsequently, he held the position of Sales Manager of Air 2000 Ltd. from 1994 until 1999, when he joined Excel Aviation as Managing Director (having co-founded the company with Philip Wyatt), he was Sales Director of Goldcrest Aviation Limited and a sales director of Caledonian Airways Limited.

Remuneration, shareholdings and stock options of the Key Management of Avion Group The total remuneration to the Key management of Avion Group amounted to ISK 77 million for the first nine months of 2005. The Key management and parties financially related to them do not own stock options in Avion Group.

At the time of publication of this Prospectus the Key Management of Avion Group and parties financially related to them own 83,407,236 shares in Avion Group.

5.6.4 Stock Option Plans The Board of Directors, in their meeting, on 22 August 2005, authorised the Chairman of the Board to sign option agreements with members of the management of Avion Group. The total number of shares issued because of these option agreements can be up to 70 million shares in Avion Group. The options will be earned in 36 months and for the management to fully earn their options they have to be employed by Avion Group for at least 36 months. The options will include milestones regarding the market capitalisation of Avion Group within the 36 month period. The option

29 agreements with the management have not been finalised and signed at the time of publication of this Prospectus. Further information will be published in ICEX’s news system when the agreements have been finalised.

5.6.5 Auditors KMPG Endurskoðun hf., ID No. 590975-0449, Borgartúni 27, Reykjavík, Iceland, and on their behalf Alexander G. Eðvardsson, Id. No. 300957-4399, Vesturfold 17, Reykjavík, Iceland, is the Group’s Auditor.

Remuneration to Avion Group’s auditors amounted to a total of USD 525,570 for the first nine months of 2005 including USD 188,714 for accounting services and 336,856 for consulting services.

5.7 Personnel Avion offers career opportunities via its member companies in many communities and is committed to providing a working environment where everyone feels valued, respected and able to contribute to the business as well as employing a workforce that reflects the diversity of its customers and potential customers. In order to achieve Avion’s operational objectives and meet the expectations of its customers, the Group needs to attract the best employees. Avion Group, via its subsidiaries offers a dynamic environment in growing companies for people who enjoy the challenge of competing in a global market and want to be a part of a winning team.

As a responsible group of companies, Avion Group offers equal opportunities regardless of gender, marital status, race, colour, ethnicity, nationality, sexual orientation, religion or disability. A policy of providing equal opportunity and valuing diversity also helps Avion Group to understand and best respond to the needs of its customers and to attract and retain talented staff.

Avion Group believes that diversity is a corporate strength. Throughout the group Avion has recruited locally and employs individuals of nearly 40 different nationalities speaking over 30 languages.

Avion Group considers it as a responsibility to ensure that employees have favourable conditions of work, free from discrimination and harassment in respect of gender, disability, age or sexual orientation.

Avion Group, via its member companies, has always provided opportunities for its people to develop their potential. Formal training and personal development opportunities vary from company to company, matching the needs of the individual companies.

Personnel Pro-forma At the end of September 2005, the total number of Avion Group’s employees was 2005/9 2004 2003 4,284. Following is pro-forma information Aviation Services 1,431 1,452 1,324 on the number of employees for the three Charter and leisure 1,593 1,043 810 Shipping and logistics 1,260 1,090 1,017 operational divisions of Avion Group at year-end year 2003 and 2004. 4,284 3,585 3,151

30 5.8 IT IT strategy and issues are co-ordinated at the Group level. The Group’s IT team consists of IT managers from all operational divisions, who meet monthly with the objective of aligning IT systems within the group and work on common policies and processes. Avion Group is in the process of revising its IT security and disaster recovery plans and has contracted IBM consulting services to provide the needed expertise for this.

Air Atlanta Icelandic’s IT department supports over 25 operational sites around the world that are connected into Air Atlanta Icelandic headquarters. The IT operation is centred on three key business support systems: Finance (Navison), Flight Operations (Sabre - RM Rocade) and Maintenance (TRAX) along with standard systems such as e-mail, intranet and desktop support. IT outsourcing is used to manage cost and capacity within the IT department. Outsourcing partners are carefully selected with security and in-depth technical ability in mind. In order to ensure strong vendor support and availability of expertise to support the current business model, Air Atlanta Icelandic uses IT systems from established vendors such as Microsoft, Sabre and Oracle.

The IT operation of Excel Airways Group is centred around four key business support systems: Finance (Great Plains), Flight Operation (Acrobat), Commercial Planning / Sales and Budgeting (EBACS/EAS), Seat Sales and e-commerce (Taurus/Web Sites) along with standard systems such as e-mail, intranet and desktop support. The IT department supports seven operational sites in the UK that are linked into Excel Airways Group headquarters. Excel has put extensive effort into the development of specialized IT systems and integration with key systems such as Finance and Flight Operation. The use of systems developed in-house and extensive integration is delivering an efficient business process that supports the current business well.

New IT systems have been implemented recently in Eimskip, with a focus on coordinating and simplifying procedures and tariffs as well as providing a common logistics platform, and thereby a common logistics solution for the Group. Implementation began in autumn 2004 with harmonisation of the systems to ensure that all branches operate with the same system and database, as well as being connected to a joint tariff system. This new IT system means that it is now much easier and quicker to provide information on prices and the status of shipments as well as to enable customers to order, price and then monitor the status of their shipments on the Internet. Eimskip is currently finalising the implementation of this new system, which when finished will give a total overview of the logistics and shipping value chain and will streamline the main processes. This new system is connected into a business warehouse that will open up the possibility of having a better view of both operational cost and revenue, analysed by individual customer, branch office and ship.

31 6. Activities and Market Environment

6.1 Company Structure Avion Group is an investment company, focused on global air, land and sea transportation solutions worldwide. Avion Group consists of three business divisions: Aviation Services, Charter and Leisure, and Shipping and Logistics. Aviation Services is represented by Air Atlanta Icelandic, Avia Technical Services, Avion Aircraft Trading and SouthAir. Charter and Leisure is represented by Excel Airways Group and Travel City Holdings. The Shipping and Logistics division is represented by Eimskip.

The operational structure of Avion Group is as follows: I]ZdeZgVi^dcVahigjXijgZd[6k^dc

AVION GROUP

SHIPPING & AVIATION CHARTER & LOGISTICS SERVICES LEISURE

6.2 Avion Group Activities Avion Group´s strategy is to invest in, develop and build up profitable companies. Core to this strategy is the development of profitable ACMI, leisure and charter operations and shipping and logistics activities by identifying investments that are complementary to the value chain. As the subsidiaries in all three divisions become integrated and supported within the Group, synergies are realised in areas such as joint purchasing, fuel and insurance as well as in functions such as marketing, IT and finance. As a subsidiary develops within its division, further opportunities are identified to complement, extend and enhance the value chain. Avion Group uses the skills of its management team to improve the performance of its underlying businesses through organic and acquisition-led growth, and to implement corporate strategy that maximises shareholders’ returns.

On 3 November 2004 Avion Group (then Air Atlanta Icelandic) made an unconditional mandatory cash offer for the whole of the issued share capital of Excel Airways Group plc not already owned by Avion Group or its subsidiaries. The offering rate was 105 pence per share. After the closing of the offer, on 24 November 2004, Avion Group and persons acting in concert with the Company held 76.9% of the total shareholding in Excel Airways Group. Subsequent of the closing of the offer, on 22 December 2004, trading of Excel Airways Group plc shares was cancelled on AIM.

The following table shows the Group’s investments in related companies in 2005 and for the past three years.

Overview of Avion´s investments in related companies 2002-2005

Company Country Share Purchase financing year price (USD) Travel City Holdings plc. UK 100% 42,127,669 Loan capital 2005 Eimskipafélag Íslands ehf. Iceland 100% 360,044,111 Loan/ New shares 2005 Casino Express Airlines Inc. USA 19% Confidential New shares 2005 Excel Airways Group plc. UK 28% 53,214,581 New shares 2005 Excel Airways Group plc. UK 72% 142,571,664 Loan capital 2004 Air Atlanta Icelandic ehf. Iceland 100% 13,870,080 New shares 2004 32 Major developments in Avion and its subsidiaries since 1 January 2005 have been as follows:

■ Avia Technical Services (ATS) was formed to be the parent company for the maintenance division of the Group. ATS acquired Air Atlanta Aero Engineering in beginning of 2005 and the ownership of Aviaservices was also transferred to ATS. This transformation has placed more strategic emphasis on the Group’s maintenance activities with the objective of servicing group requirements as well as becoming a strong third-party service provider.

■ Acquisition of Eimskip to transform the Group into a leading air and sea transport solution provider. This acquisition extends the Group’s capability into transportation services for frozen and chilled commodities, coldstore services in key locations and reefer forwarding services with worldwide distribution.

■ Acquisition of Travel City Holdings plc. (Really Great Holiday Company), which operates leading brand Travel City Direct, amongst others. Travel City is a British tour operator focusing on the US market. This acquisition has provided greater critical mass in the Charter and Leisure division with improved synergies and better aircraft utilisation through deployment of the Group’s aircraft fleet.

■ Acquisition of a 19% interest in charter airline TEM Enterprises d.b.a Casino Express to develop a partnership and improve aircraft fleet utilisation for charter projects within the USA. Other shareholders in Casino Express are Mercur Investments with a 30% share and the management of Casino Express with a 51% share. Mercur Investments is a holding company controlled by Magnús Þorsteinsson, Avion Group’s Executive Chairman.

■ Acquisition of a 70% interest in Technical and Logistics Services Ltd., to add maintenance management, inventory management, training and consultancy services capabilities to ATS. The combined strengths of each business enable the Group to respond rapidly to the growing demands of the aviation industry for technical and logistics services supported by the latest information systems. ATS has a call option for the remaining shares in Technical and Logistics Services Ltd.

■ Agreement to purchase four Freighter aircraft and purchase rights for further four Boeing 777F’s to be operated by the Group´s aviation services company, Air Atlanta Icelandic, as part of its fleet renewal plan. As the largest and most capable twin-engine freighter with outstanding capability and efficiency in terms of low fuel consumption, maintenance and operating costs, the Boeing 777 Freighter will provide a new dimension to the Group’s ability to serve its customers. The new aircraft will also provide a good complement to the 747 Freighters that many customers already operate. The first 777 Freighter is scheduled for delivery in February 2009.

■ Purchase of three Airbus A300-600 passenger aircraft that will be converted into freighters. The conversion will be undertaken by Elbe Flugzeugwerke GmbH. The Airbus A300-600 aircraft are capable of flying 4,000 kilometres with capacity to carry up to 50 tonnes of freight.

33 6.3 Aviation Services

The main operation of Aviation Services is provided by the Aircraft, Crew, Maintenance, Insurance (ACMI) or wetleasing operator Air Atlanta Icelandic and maintenance and engineering operator Avia Technical Services (ATS). The newly founded Avion Aircraft Trading (to be merged into Avion Group in 2006) and the airport handling provider SouthAir also are a part of Aviation Services.

Air Atlanta Icelandic - Aircraft fleet 6.3.1 ACMI Air Atlanta Icelandic provides reliable, Type Passenger cargo fast and comprehensive ACMI services to Boeing 737-300 narrow-body – 4 the air passenger and cargo markets in Boeing 737-400 narrow-body 6 – Boeing 747-200 wide-body 2 13 Europe, Africa, Asia and the Middle East. Boeing 747-300 wide-body 6 – Air Atlanta Icelandic currently operates a Boeing 747-400 wide-body 3 – fleet of 42 aircraft comprising 22 cargo and Boeing 767-300 wide-body 2 – Airbus 300-600 wide-body – 4 20 passenger aircraft. The fleet consists of Airbus 310-300 wide-body 1 1 36 Boeing aircraft and 6 that are Total no. of aircraft 20 22 available on a lease basis.

Air Atlanta Icelandic has approximately 1,500 employees and contractors at peak times. Flight deck and cabin crew form the largest group of employees, with engineers and operations experts making up the majority of ground staff. Administration is kept as efficient as possible at headquarters in Iceland. Air Atlanta Icelandic has developed a core of experienced people who can act flexibly and quickly set up an operation at short notice anywhere in the world. Air Atlanta Icelandic’s employees are required to work within the airline customer’s working environment and national culture, adapting procedures and techniques to the customer’s needs.

Air Atlanta Icelandic has been successful in developing long-term relationships with its customers and many have chosen to renew their contracts year after year. Major cargo customers include, among others: Malaysian Cargo, , Cathay Pacific, Cargolux, Etihad, Air Hong Kong, Channel Express and Air France. Major passenger customers include Iberia, Cubana, Channel Express, Excel Airways, Avijet and Blueline. Typically Air Atlanta Icelandic supplies ACMI services.

Aircraft. Air Atlanta Icelandic has obtained its fleet of aircraft either by purchase, finance lease with an option to buy, or operating lease. Air Atlanta Icelandic’s ability to obtain aircraft at favourable rates is a competitive advantage. For years, Air Atlanta Icelandic has obtained aircraft in the secondary market and therefore possesses a working knowledge of this market, the key players and the pricing structures.

Crew. It is important for ACMI operators to provide a quality, behind-the-scenes service that does not diminish the consumers´ perception of the customer’s brand. Air Atlanta Icelandic provides flight crews that include trained pilots and cabin personnel who usually dress in the customer’s uniforms. Air Atlanta Icelandic has access to a pool of talented, experienced, non-union airline crews and pilots, many of whom have worked on a project basis for Air Atlanta Icelandic for a number of years.

Maintenance. Wet leasing of aircraft requires an in-depth understanding of the maintenance needs of different aircraft and their operations scheduling. Internal planning, operating know-how and experience are critical to streamlining maintenance operations. There are different levels of maintenance, and operators 34 must decide which types of maintenance will be performed in-house and which types will be outsourced.

Insurance. The ability to provide insurance at attractive rates is a function of the ACMI operators’ safety record. Air Atlanta Icelandic procures its insurance from Lloyds of London and is able to obtain favourable rates due to its safety record and long- term relationships with insurers. Air Atlanta Icelandic provides its customers with all elements of insurance, except the largest insurance component, passenger liability, which normally the responsibility of the customer.

Air Atlanta Icelandic typically offers clients a bundled service at a flat rate based on block hours flown (the hours that elapse from the moment the chocks are removed from the wheels of the aircraft until they are next returned to the wheels) or on a flat monthly fee. Air Atlanta Icelandic believes its value-added is derived from its ability to deliver all elements of a contract in a reliable and cost-effective manner. Aircraft can be painted in any livery, crews can operate in any uniform and cabins can be configured to anything from full economy to completely first class.

ACMI services continue to gain acceptance as air carriers seek to outsource a portion of their operations in order to control high cost structures, add operational flexibility, and focus resources on their core competencies of sales and marketing. The total size of the ACMI market is not easily quantified, since market data are not officially available. Also, there is a grey area between a pure ‘dry lease’ (i.e., leasing only the aircraft) and a pure ‘wet lease’ that can be difficult to categorise. However, certain characteristics within the ACMI market make it economically logical for scheduled and charter airlines and tour operators to use ACMI services. Some of the main drivers for increased utilisation of ACMI services are outlined below:

Peak demand. The scheduled airline industry is highly seasonal. As pressure for financial efficiency increases, the outsourcing of capacity in peak seasons becomes more feasible. During peak demand, airlines and tour operators often need extra capacity for a limited time.

Yearly assignments for a limited time. Many customers are in need of ACMI services during specific periods every year. Accordingly, ACMI operators provide repeat service for certain customers year after year.

Unusual circumstances. An airline may have a few routes that do not fit well with its aircraft fleet. Instead of acquiring suitable aircraft with trained crews and full maintenance services, the airline may find it more economical to outsource the operation of these flights.

New routes. When experimenting with a new route, an airline may find it feasible to start by outsourcing the aircraft operations, thus allowing the airline to minimise its investment until the new route has proven profitable.

Ad-hoc assignments. When an airline has an aircraft out of service and does not have a replacement aircraft available, ACMI provides a flexible, short-term solution.

Economics and flexibility. Many major airlines have changed their priorities in response to their need for flexibility and for a clear focus on core competencies. Airlines are increasingly defining their core competencies as being sales and marketing, resulting in recourse to more outsourced services. High fixed costs make 35 it more difficult for airlines to react to market fluctuations. ACMI enables airlines to reduce fixed operating costs and capital expenditure and increase flexibility.

Competitive position The ACMI market can be divided into four segments based on aircraft size (wide- body vs. narrow body) and aircraft load (passenger and cargo). The table below describes the characteristics and major players in each segment. ACMI contracts for passenger flights can be separated into three key categories:

Wide-body aircraft narrow-body aircraft

Attribute Passenger cargo Passenger cargo

Competitors Few Few Many Many Entry barriers High High Medium Low Major players Air Atlanta Air Atlanta None None Growth Yes Yes Yes Yes Seasonality Yes Yes Yes No Contract length Medium Long Short Med/Long Margin Med/High High Low Medium

1. Scheduled Airlines. As defined by Air Atlanta Icelandic, a long-term assignment with a scheduled airline customer can either be a contract for continuous operation over a period longer than six months or a contract for a short-term service to be performed annually over a number of years. In general, long-term contracts are obtained as a result of one or more successful short- term contracts.

2. Hajj. The Hajj market is stable. The infrastructure in Saudi Arabia limits the number of pilgrims that Saudi Arabia can accept and therefore, the Saudi government places a quota on how many pilgrims each Muslim country can send to Mecca. Currently, the demand for ACMI services to operate Hajj flights is high.

3. Charter. Some of the leading tour operators currently own their own airline. These captive airlines generally only serve their parent company. ACMI represents an attractive alternative to tour operators that do not possess their own capacity and cannot meet growing demand.

The cargo ACMI customer base is similar to the passenger ACMI customer base; however the cargo ACMI market typically includes longer-term contracts relative to passenger ACMI. Cargo ACMI customers are primarily scheduled airlines. The cargo business volume peaks in opposite quarters to the passenger business volume (i.e. the second and fourth quarters for cargo, as opposed to first and third quarters for passengers).

Air Atlanta Icelandic is one of the world’s largest ACMI companies, considering its number of aircraft. The size of the ACMI market is unknown, whereas many of the ACMI airline are operating under the customer flightnumber and therefore not discernible. Boeing estimates the size of the ACMI market to be approximately 8% of the total cargo market.

36 A few players dominate the ACMI market for wide body aircraft. Atlas Air, Corsair, Evergreen, Airstream and World Airways are Air Atlanta Icelandic’s main competitors. The narrow body segment is much more competitive with many small players competing for market share primarily on the basis of price, whereas Astraeus, Futura, LTE, Spanair and Volare are Air Atlanta’s competitors.

The complementary seasonal pattern of cargo and passenger air transportation provides a further competitive advantage to Air Atlanta Icelandic. By operating both cargo and passenger aircraft, Air Atlanta Icelandic can use their manpower more effectively through the transfer of personnel from passenger to cargo aircraft (and vice versa) during seasonal lows.

New entrants to the wide-body market are few except for scheduled airlines attempting to temporarily utilise excess capacity. Due to cost sensitivity, ACMI operators need to be cost efficient in order to succeed. Good reputation, strong brand name and suitable aircraft enable ACMI operators to sell at a higher margin that can make the difference in a cost driven market.

Air Atlanta Icelandic has established a strong presence in its core market segment, which translates into brand recognition among its customers. Air Atlanta Icelandic has relatively easy access to quality aircraft, and has good relations with many of the leading air leasing companies. Its solid reputation for supplying quality services is built on extensive experience acquired throughout many years in the airline industry.

Market outlook In recent years, passenger and cargo traffic have been showing improving trends both in volume and in profitability. The year 2004 marked a period of recovery for the industry with a clear firming of operating lease rentals, despite the fact that fuel prices remained a significant drag on airline profits. Over the long term, the bulk of air traffic growth will be a function of economic growth.

Since 1990, traffic carried by ACMI wide-bodied carriers has grown by 18% per annum and ACMI carriers will continue to be required to assist traditional carriers in meeting overall demand for cargo and passenger aircraft. According to forecasts by Boeing and Airbus, world passenger traffic will more than double over the next 20 years, with estimated annual passenger growth up by 4.8%.

The Boeing Company also forecasts '%NZVgh;dgZXVhi/Higdc\Adc\"IZgb

The airframe maintenance division of ATS is provided by Air Atlanta Aero Engineering, based at Shannon Airport, Ireland. It provides a comprehensive range of heavy maintenance to Avion Group and third parties. Air Atlanta Aero Engineering is approved by the Federal Aviation Administration (FAA) and the European Aviation Safety Agency (EASA) to perform C and D checks on B737, B757, B767, and B727 aircraft.

The component repair and overhaul division of ATS is provided by Aviaservices, located at Kent International Airport in Manston. Its facility is strategically located in close proximity to the major London airports and to the cross-channel ports.

Technical and Logistics Services is a part of ATS’s value-added division. It offers a range of complementary technical and logistics management services to the aviation industry, providing its customers with cost-effective and efficient solutions.

6.4 Charter and Leisure The Charter and Leisure division is provided by Excel Airways Group (Excel) and the newly acquired Travel City Holdings (Travel City). The Charter and Leisure division is divided into two operational divisions, the Airline and Aviation division and Tour Operating division. Excel Airways Group is registered and headquartered in the UK with approximately 1,600 employees in its operations.

The Airline division consists of Excel Airways, Air Atlanta Europe and Excel Aviation. The Tour operating division consists of Travel City, Freedom Flights and Excel Holidays. Air Atlanta Europe and Travel City are in the process of being merged into Excel Airways Group.

Excel Airways is a leading UK charter airline Excel Airways Group - Aircraft fleet providing services to 47 charter destinations Type Passenger in Europe, the Middle East, Asia and North Boeing 737-800 narrow-body 8 America from 12 airports in the UK. Excel Boeing 767-300 wide-body 3 Airways currently operates a core fleet of Boeing 767-200 wide-body 2 8 Boeing 737-800s, 3 Boeing 767-300s, 2 Boeing 757-200 narrow-body 4 Boeing 767-200s and 4 Boeing 757-200s with Total no. of aircraft 17 additional aircraft leased on an ACMI basis during the peak summer months to meet seasonal demand. In summer 2005, the fleet increased to 26 aircraft.

Capacity is utilised through Excel Aviation and Freedom Flights as well as through Excel’s website XL.com direct to consumers.

38 Excel Aviation provides seat capacity, in bulk, to independent tour operators (ITOs) and long-standing broking clients, including some of the largest holiday companies in the UK. Approximately three million passengers will have flown with Excel Airways during 2005.

Freedom Flights is a “seat only” operator selling seats on charter aircraft, generally through UK travel agents. It is the largest charter seat broker in the UK and the majority of its seats sold are on Excel Airways.

The tour operating division of Excel Airways Group is comprised of four brands, Travel City Direct, Excel Holidays, XL.com and Aspire Holidays.

Travel City Direct is the UK’s largest independent direct booking Florida specialist offering Boeing 747 charter flights to Sanford, Florida from the UK. In 2005 over 200,000 UK travellers will be travelling with Travel City Direct mainly to Florida, but also to destinations in the Mediterranean and Canary Islands. Aspire offers tailor- made holidays to the most stylish locations across the globe.

XL.com was launched in January 2005 and sells seats and holidays on Excel and other airlines. The site is designed for simplicity for customers to view and book flights and holidays online. XL.com has established itself strongly in the marketplace behind longer established competitors such as Monarch Airlines. Continued investment in marketing and support is being provided to ensure further growth in market share in the UK and against other holiday and travel providers. Up to 30,000 customers visit XL.com daily.

Competitive position Excel Airways has a larger aircraft fleet than its direct competitors, Astraeus and Monarch, with 26 aircraft flying 42 routes during the summer 2005 season compared to 21 aircraft flying for Monarch to 58 destinations and 11 aircraft flying to 60 destinations for Astraeus.

The Internet has made pricing more transparent, encouraging the customer to shop around for the best deals. Travel purchasing online is driven by convenience and price. Excel Airways Group is positioned to benefit from this trend in online bookings through XL.com and Excel Holidays.

Brand awareness is a key differentiator for success in the online travel market. Excel Airways has raised brand awareness by promoting XL.com as a new entrant into the online travel market.

Mergers and acquisitions in the travel sector have recently been concentrated in the online sector, driven by a need to build brand and scale rapidly. Corporate activity is being driven by the market need for self-packaging holidays and the move away from integrated operators, reinforcing Excel Airways’ online and seat business model.

Currently, Excel Airways Group together with Travel City constitute the 8th largest bonded travel provider in the UK and the 10th largest charter airline in the world. Excel Airways was voted the best charter airline in the UK and the best charter airline in the world in both 2004 and 2005.

39 Leisure and Charter industry Airlines operating in the UK passenger market fall into the following broad categories:

■ Charter airlines ■ No frills scheduled airlines ■ Full-service scheduled airlines

Excel Airways Group believes that growth in the travel sector reflects a general trend towards greater emphasis on and participation in leisure pursuits and a corresponding demand for cost-effective access to discretionary travel to facilitate this trend.

Both UK-related and global air travel have expanded over the past 20 years, driven by economic growth, falling real prices of air travel and an increase in both international business activity and leisure time. An exception to this trend occurred in 1991, when fears of incidents related to the Gulf War led to a temporary downturn in activity across the world. Following the terrorist attacks in September 2001, a number of airlines announced new plans or accelerated existing plans for business cutbacks, route withdrawals and fleet reductions, and some have become insolvent. One of the consequences of these reductions was an increased availability of take-off and landing slots, cheaper aircraft leasing costs and a larger pool of pilots and ground crew.

Generally, tour operators produce package holidays distributed through their own and other travel agencies on various sales commission deals. The creation of any package holiday involves the constraints of long-term hotel capacity contracts, overseas representatives and tour staff. Excel’s management believes that consumers are demanding increasing flexibility and often wish to purchase traditional components separately rather than as part of a more restrictive package holiday. Today’s leisure travellers are becoming increasingly less reliant on the provision of a total holiday package. Mass travel means that consumers now feel comfortable about by-passing the middleman, buying flights from one company and hotels from another or even directly from the hotel itself.

Another development is the Internet. Passengers can compare prices and availability and shop around far more easily, thanks to easier access to travel information and the availability of on-line booking. Excel Airways Group management considers that this, potentially, puts much more pressure on retail travel agents in the UK. Travel agencies are being by-passed by some ”no frills” airlines that direct bookings to their own web sites, thus cutting out commission to intermediaries. On-line purchases continue to grow significantly compared with those made through traditional travel agents. These new distribution channels are expected to grow significantly in the future in line with increasing discretionary spending power and the demographic growth of computer-literate consumers.

Avion Group’s charter and leisure services provide chartered airline and seat broking services. The charter services are highly flexible in terms of capacity 2004 saw only 36% seat supply provided by own aircraft with the remaining 64% provided via seasonal lease. The bulk of the capacity is sold via the Group’s extensive distribution network taking maximum potential benefit from the advance of the new distribution channels described above.

40 Market outlook Leisure airline travel is closely linked to economic conditions and in particular, personal disposable income. Growth in the UK outbound leisure market has continued since 11 September 2001. Overseas holidays increased from 36.7 million to 43.4 million between 2000 and 2004, a compound annual growth rate (CAGR) of 4.3%. According to Mintel, this is expected to increase further from 43.4 million to 56.8 million between 2004 and 2009, with a CAGR of 5.5%.

The growth in “no-frill” carriers that largely compete with traditional flag carriers has stimulated overall market demand by offering new travel options. While this trend has limited growth in the leisure charter sector, passenger numbers carried by charter operators have been maintained. The impact of this limitation on growth has been felt primarily in traditional short-haul destinations. However, Excel’s focus on medium-haul destinations such as Greece and Turkey has limited its exposure.

Overseas holiday market growth has also been driven by an increase in international flights from regional airports. Excel has benefited from this trend and has extended its operations so that it serves seven of the top ten UK regional airports. Excel’s strategy is to drive growth by adding new departure points at key UK regional airports.

The “seats only” market is expected to grow as the trend for self-packaging continues, moving away from traditional package holidays provided by the integrated operators.

One of the drivers of growth in overseas holidays is the availability of new destinations within the short/medium-haul sector. Excel is operating to some new destinations that are growing and this offers additional opportunities for the future.

The market within Europe is increasingly seeing segmentation of route networks, such as the split of business and leisure routes as well as routes that feed main city hubs versus routes that by-pass them. For example, routes continue to be launched, linking medium-sized business markets, with low-cost airlines concentrating either on high frequency, large volume markets or lower frequency leisure routes. The mainline fleets of network carriers are increasingly being concentrated on linking their major hubs, hence offering routes into their long-haul networks.

Northern European cities also have a substantial “charter” segment flying to Mediterranean resorts. However, in recent years competition has intensified between traditional charter airlines and low cost carriers that have launched many routes to popular holiday destinations. The major tour companies have reacted by offering some scheduled capacity themselves, either setting up their own low-cost airlines or operating regularly timed flights themselves.

Much of this increased choice has been linked to Internet usage for price comparison and flight booking. Low-cost airlines typically are receiving over 85% of their bookings online, and many of their passengers to leisure destinations are also booking accommodation and car hire over the Internet, instead of a full package via a travel agent.

Increased competition has undoubtedly boosted demand, both through lower fares as well as increased opportunity for travel. 41 6.5 Shipping and Logistics

The Eimskip group of companies form Avion´s operations that are focused on shipping, logistic and supply chain management. Eimskip has developed from a shipping line into a comprehensive transportation and logistics solutions provider with a specialisation in temperature-controlled food storage. The services provided include the management and implementation of all transportation logistics and door-to-door services. Eimskip’s main transportation services include ocean transport to and from Iceland, domestic transportation within Iceland and freight forwarding between foreign ports. The services offered extend to inventory and distribution services, delivery, air freight, customs documentation, agency services, customs warehousing, loading and landing of fishing vessels and passenger transport.

Eimskip´s fleet Eimskip’s service network consists of 55 offices in Europe, North and South America Type Capacity no. of (GRT) Ships and Asia, approximately 25 cargo vessels Container vessels 5500-14700 7 and 15 cold-storage facilities in Europe, Bulk carriers 1000-2000 2 North America and Asia, in addition to a LCL/multi-purpose vessels 1200-2500 3 range of subsidiaries and partners. Eimskip Reefer vessels 1000-2500 13 employs approximately 1,300 people. Total 25

The Eimskip fleet is capable of transporting over 108,000 tonnes of freight, together with 170 trucks for land-based deliveries. Reefer (refrigerated) containers are a pre-requisite for the cold storage facilities and are transported on specially adapted and built refrigerated container ships. The majority of vessels in the fleet handle bulk and palletised cargo. as demonstrated in the table above.

Eimskip is comprised of three profit units: Eimskip Shipping and Logistics, Eimskip Domestic and Eimskip International. The businesses are very closely linked with the logistics activities supporting all three operating units.

Eimskip Shipping and Logistics Eimskip Shipping and Logistics handles large cargo transportation, Eimskip’s scheduled sailings for Iceland’s national imports and exports and logistics services. The cargo shipping transportation forms the basis of Eimskip’s activities and offers all required services to importers and exporters. Utilising both its proprietary transportation network and networks of associated partners, Eimskip offers varied cost-efficient shipping solutions that are tailored to the needs of both individual and corporate clients.

Although Eimskip’s principal emphasis has traditionally been on scheduled services to and from Iceland, Eimskip is also active in other areas. Eimskip is the leader in scheduled vessel services, with a market share of around 60% of transported tonnes of sea freight to and from Iceland. The strategic bias has been to maintain this strong position in scheduled transports, while at the same time substantially increasing large cargo transport, overland

42 transport, warehousing, air freight, landing services for trawlers and fishing vessels and general freight forwarding abroad.

Eimskip Domestic Eimskip Domestic provides mainly domestic supply chain management solution and is responsible for goods distribution and inventory management in Iceland. Scheduled trucking services, Eimskip’s container trucking network, the Warehouse centre and many service points throughout Iceland now form one integrated overland transportation system offering importers and exporters, individuals and corporate customers, daily scheduled and dependable distribution services in all areas of Iceland. Eimskip Domestic specialises in refrigerated and frozen transport for seafood and other food producers in Iceland. This supply chain management system means that Eimskip is the largest logistics service provider in Iceland. Following on from this strong position in the domestic transportation market Eimskip has also successfully developed a similar supply chain management system solution in the Faroe Islands.

Eimskip offers total services to importers and exporters, utilising both its proprietary transportation as well as those of associated and partner companies. Eimskip is the leading transportation services provider for scheduled groupage services, part-load and full-truck-load transportation in Iceland. Eimskip’s domestic transport network transports over 800,000 tonnes per year in and around Iceland.

The Warehouse centre is a logistical distribution centre that provides a wide range of services to customers, including receiving, storing, delivery registration, and distribution of goods. Stocks can be stored in either customs-cleared areas, bonded areas or as a Free Zone area. The Warehouse centre also offers more specialized services such as labelling and re-labelling, packing and repacking, assembling and testing of products and inventory management consulting services. The Warehouse centre can store up to 25,000 pallets and has over 20,000 storage shelves for smaller quantities of goods.

Eimskip International Eimskip International provides international transportation and cold storage services (mainly supporting the seafood sector), as well as supporting Eimskip’s scheduled shipping services. International transportation is the leading growth area in Eimskip’s operations and in-line with the growth strategy, these international activities have undergone recent expansion via the acquisition of foreign companies and the strategic establishment of offices globally.

Logistics are a vital part of the international network, including forwarding and warehouse management services. The objective is to provide customers with services that encompass as much of the value chain as possible and that assist in managing product flow from origin to delivery. Eimskip’s services are integrated so as to offer a “one-stop” transportation solutions facility, including air freight, ocean transport, courier services, customs documentation, warehousing and inventory control, distribution, IT solutions and various other value-added services. This enables customers to increase the cost-efficiency and flexibility of their own operations while leaving them free to concentrate on their core activities.

43 Eimskip has been very active in building up its reefer services to develop a strong system on a worldwide scale. Many of Eimskip´s customers in the seafood sector based around the North Atlantic have expanded their operations. Fishing takes place in distant waters and fish processing has partly been transferred to low-cost areas whereas seafood trading is now truly international. Following these developments, Eimskip provides its clients with a comprehensive international transportation and logistics services solution in the most active areas, including the Far East. These services are provided by a network of offices and coldstores in various parts of the world and are co-ordinated by Eimskip’s subsidiary, Eimskip Reefer Logistics BV., in Rotterdam.

Eimskip’s aim is to be the leading player in transportation services for frozen and chilled commodities with the best transportation systems solution in the North Atlantic, both in containers and reefer vessels. The development of cold-storage services and facilities is therefore an important component in achieving this aim.

Recent developments As mentioned earlier, the expansion of Eimskip´s international activities has been rapid over the recent past. The most noteworthy highlights are detailed below:

■ Eimskip Netherlands, a subsidiary of Eimskip, acquired the Norwegian Coldstore and Transport Group AS (CTG) in April 2004. CTG operates a network of cold stores along the Norwegian coast and a fleet of 10-12 vessels.

■ Eimskip–CTG in Norway received a new reefer vessel, Svartfoss, in November 2005, which was the first construction reefer vessel this size (2,500 gross tonnes) constructed in the world since 1990. Three additional reefer vessels are being built currently and these new reefer vessels will add substantially to Eimskip– CTG’s capacity. The first of these three vessels will be joining the fleet in June 2006 and the other two in 2007. Currently CTG has a market share of around 15% in reefer logistics in Norway.

■ Eimskip Reefer Logistics BV. (ERL) was established in August 2004. ERL is the umbrella for the international reefer services and is responsible for coordination between the various offices offering these reefer services.

■ Eimskip China in Qingdao was established in November 2004. Eimskip China is a marketing and operations office mainly engaged in receiving and shipping temperature-controlled cargo. As such it is a very important link in the ERL network.

■ Acquisition of Faroe Ship AS in November in 2004. Faroe Ship AS is the leading shipping company in the Faroe Islands and various operational synergies expected from this acquisition. Work here has already begun with the coordination of the sailing schedules and the integration of the offices in Denmark.

■ The purchase rights of all shares in the land transportation company P/F Heri Thomsen in the Faroe Islands. In the beginning of 2006 95% of the purchase right will be excercised and the rest in 2007 and 2008.

44 ■ Eimskip purchased 49% of the share capital of Halship Inc in Canada, July 2005. Eimskip has the option to acquired 2% of the share capital. The option expires on 30 June 2006. Halship runs a container feeder service between Canada and the US, which connects with the regular Eimskip services and creates other opportunities for growth in the area. ■ Eimskip Seattle was established in March 2005. This office is strategically located on the Pacific coast, in order to serve the important seafood sector in the Seattle and Alaska area.

■ Eimskip Spain was established in September 2005 with an office located in Vigo, which is the main fishing port in Spain and one of the main trading points for seafood in Europe.

Eimskip is planning to set up additional office in Dalian, China, before year end 2005. Also an office in St. Petersburg, Russia, is in preparation and a feasibility study is underway for building a coldstore in St. Petersburg. Further activities and projects are also under evaluation in Seattle and Alaska.

Competitive position Eimskip is well positioned to exploit the strong trade volumes in its home markets of the North Atlantic. Eimskip now transports close to two million tonnes worldwide, of which 1.4 million tonnes is within Europe. Eimskip is also actively participating in the strong trade between China, the Far East and Europe through its NVOCC (Non Vessel Operating Common Carrier) and forwarding services. Eimskip moves 245 thousand tonnes between Europe and Asia and continued fast growth is expected in this area. The various value-added services provided by Eimskip will help to enhance the revenue generated from its freight services.

Eimskip has approximately 60% market share in liner import/export to and from Iceland and the Faroe Islands, but Eimskip took the leading position in the Faroe Islands market through acquisitions of Faroe Ship and Heri Thomsen. The exported goods are mainly frozen, salted and fresh fish along with aluminium. The imported goods are basically everything else, from cars and machinery to fruits and vegetables. The main competitors in importing and exporting to and from Iceland are Samskip and Atlantsskip.

Newfoundland, Canada, Greenland and northern Norway are also a part of the North Atlantic market. While there are many players competing for a market share and the exact market size is unidentifed, it is clear that with its strong integral production system and well suitable own vessels along with 90 years of experience and the capacity to expand with its customers into other areas of transportation and logistics, Eimskip has a market leading position in the North Atlantic market.

Eimskip’s production system in the North Atlantic market consists i.e. of Eimskip Refeer Logistics Bv that offers freight-forwarding services for frozen and chilled seafood products worldwide. The estimated volume for Eimskip Reefer Logistics in 2006 is 35,000 TEU outside Eimskip’s liner system. Eimskip is also a 50% owner in the Canadian shipping company Halship. Halship operates one 518 TEU vessel, which sails between Halifax and Boston as well as between Newfoundland and Boston. This ownership allows Eimskip to offer weekly sailings between Canada and the US, whereas sailings were previously on a fortnightly basis. Eimskip’s operation in Norway will be merged under the name Eimskip-CTG in the beginning of 2006. Eimskip- 45 CTG has 12-14 refeer vessels in sailings in the North Atlantic and the Baltic Sea. Then Eimskip owns 50% share in Euro Container Line which operates 3 container vessels between west coast of Norway and Germany.

Globally Eimskip provides world wide door-to-door transportation services of containerised and LCL (less than container load).

Eimskip has a 30% market share of all domestic transportation, logistics and deliveries requirements. Many small players compete in the domestic transportation market but the major players are Eimskip and Samskip. The same applies to the warehousing, but there are fewer direct competitors. Nevertheless, the challenge is that many customers own their own small warehouses. In both these areas, because the entry barriers are low, current market share is only preserved by offering clients the most cost-efficient and best service available. There are many customers of varying sizes in domestic transportation but in warehousing there are few customers and they are large. Domestic transportation moves 800 thousand tonnes annually. Warehousing handles 1.2 million pallets. The total size of these markets is not fully known but Eimskip’s market share is estimated at approximately 30%.

In reefer logistics, Eimskip has few competitors because of the high tech vessels and storage needed for a holistic network. Major players beside Eimskip are Mærsk and other deep sea lines. Growth in that market is expected to remain high.

Eimskip has many small customers. It relies heavily on fish through its reefer logistics division and is subject to the seasonal nature of the fishing industry. The average contract length in the reefer logistics division is one to three years. Reefer logistics moves two million tonnes per year and the storage capacity is 275,000 tonnes.

Shipping and Logistics Industry The transportation, supply chain and logistics industry is global, holding a unique position because by its very nature, it makes globalisation possible. The industry is highly fragmented and is made up of many companies that supply the systems and software, run the warehouses, provide the consulting and operate the aircraft, ships, trucks and trains that move raw materials, finished goods, packages, documents and people around the world.

The rapid adoption of outsourcing has led many companies that find transportation to be vital to their business to turn to logistics services providers for all their transportation requirements, including warehousing and distribution services. The sectors of transport, logistics services and supply chain management are permanently intertwined.

The key drivers for growth in the global shipping and logistics industry are macro- economic demand, which generates volumes, and the supply of ships, which dictates the pricing structure. Currency fluctuations also tend to have an effect on the flow of goods, which has a knock-on effect on a more local basis. Finally, the oil price will tend to impact profitability and margins.

Developments in the transport market are therefore closely connected to general economic developments. The transport industry is enjoying growing interest from

46 customers as they recognise that transport is a very important competitive factor, both in terms of the price and the level of service they can pass on to their own clients.

Outsourcing, globalisation of trade, including the fact that manufacturers increasingly consider Europe as one market, one-stop shopping and information technology developments are all important factors in the development of the transportation market. An important prerequisite for the growth in outsourcing is the rapid development of information technology. This enables handling and management of large volumes of information when a company’s production is to be coordinated with a third-party transport and logistics provider. Intense competition in the transport industry, combined with internationalisation of trade and industry, including the centralisation of production units and distribution centres, creates a need for improved efficiency in the transport industry. In addition, customer requirements regarding precision and flexibility are growing. Therefore it is expected that process automation and extensive use of information technology will contribute to the ongoing automation of transport industry activities. This automation process is expected to encourage the groupage segment even further.

Market Outlook Shipping is a global industry and its prospects are closely tied to the level of economic activity in the world. A higher level of industrial activity generally leads to higher demand for industrial raw materials. This in turn boosts imports and exports. The shipping market is cyclical in nature and freight rates generally tend to be highly volatile.

Freight rates and earnings of the shipping companies are primarily a function of demand and supply in the markets. While demand drivers are a function of growth in world trade and trade patterns the supply drivers are a function of new ship building orders as well as retirement existing tonnage.

Strong trade volumes are expected on North American, Far Eastern and Australasian routes over the coming year and the continued strength and expansion in the Indian and Chinese economies are contributing to robust growth in shipping and trade. However, due to competition from the low-cost carriers in the Far East, rates are not expected to rise in the meantime. Freight rates are actually expected to begin to ease in a year or so, as shipbuilders deliver a record number of new ships and congestion at major harbours around the world decreases. The increase in capacity is expected to surge in the second half of 2007 when a significant number of new ships will be delivered to their owners. Based on the global order book as at 1 November 2005 for container vessels, the world fleet capacity will grow 13% in 2005, rising to a 15.5% growth in 2006, according to BRS-Alphaliner, outpacing growth in global trade.

Thus, while near-term prospects remain positive, in the longer term the shipping industry must prepare itself for a softening in growth rates in the longer term as more new vessels come into service. This softening of growth, together with high fuel cost and rising interest rates will all have a knock-on effect on the operating margins in shipping and logistics industries in the future.

47 Market conditions for reefer vessels are likely to remain strong in the next couple of years, given the combination of continuing underlying demand growth for refrigerated products, most notably in Russia and East Asia, and static reefer fleet capacity. However, the longer-term trends toward containerisation will resume, as new and ever larger containerships with ample reefer container capacity are added to the containership fleet.

The reefer industry has undergone significant and increasing transformation during the past two decades. This change has been precipitated in large part by growing competition from containerships and the breakdown of distinctions between east- west and north-south trades.

48 7. Risk Factors

Investment in equities involves risk. Avion Group operates in markets where many factors can affect the Company’s operations and activities. No guarantee can be provided that an investment in the Company’s shares will be profitable. The information provided in this Prospectus is by no means exhaustive with regard to the risks involved in an investment in Avion Group’s shares. Investors are advised to make their own independent examination of the risk factors, especially those listed below and other that may apply specifically to their investment in Avion Group and to seek advice if necessary.

7.1 General Risk Related to Equities Investors must keep in mind that shares are subordinated claims on the assets of companies. This means that in the event of the Company’s liquidation, the shareholders will receive what is left after all other claims have been met.

Equities are generally a riskier investment than bonds. In particular, share prices fluctuate more than bond prices. Investors should bear in mind that even though equities can provide a good return in general, there is always a risk that an investment in the shares of individual companies will decline in value. It is therefore recommended that investors in shares pay close attention to diversifying their risk.

The financial and equity markets are subject to the business environment created by the public authorities. Major changes in the regulatory framework set by public authorities for financial and equity markets can have a negative impact and create market instability. This risk is considered minimal in Iceland, since there is general consensus on key values and the structure of the market economy.

Liquidity risk is defined as the risk that arises from how easy or difficult it is to sell an asset as close to its real value as possible. The measurement of this risk is the spread between bid and ask prices on the market. The risk is both dependent upon the amount, i.e. if the market will not absorb at full price the quantity an investor wishes to sell, and the price, since trading a large quantity of the same sort of shares can have a substantial impact on their price formation. Investors should note that there is a considerable liquidity risk on the Icelandic Stock Market.

The Board of ICEX has granted Avion Group hf. a temporary exemption from ICEX’s requirements on ownership distribution and minimum number of shareholders at the time of listing on ICEX’s Main list. At the time of listing less than 25% of the total share capital in Avion Group will be held by fewer than 300 general investors. This will affect the liquidity of Avion Group’s shares on ICEX. The liquidity risk of shares in Avion Group hf. should be reduced considerably when Straumur-Burðarás will have paid its shareholders dividends in the form of shares in Avion Group at the market value of ISK 5 billion, as stipulated in an agreement between Avion Group hf. and Straumur-Burðarás at the time that Avion Group hf. acquired shares in Eimskipafélag Íslands ehf. At the time of issue of this Prospectus the number of shareholders in Straumur-Burðarás exceeds 22,000.

It is possible that the Company will consider increasing its share capital further in the future in order to finance the Company’s continuing growth. If new shares are issued in the Company, then the shareholding of those who already hold shares in the Company will be reduced proportionally, unless they themselves acquire the new 49 shares in proportion to their existing holdings. Therefore, shareholders may face an increase in risk relating to the dilution of their shares. Furthermore, investors must take into account that the structure of shareholder ownership can be a risk factor. For instance a lack of leading investors or large concentrations of ownership are examples of circumstances that can have negative effects. Investors should therefore be aware of the fact that ownership of the Company can change very quickly and without any notice. The largest shareholder will own approximately 37% of the total shares in Avion Group after the share offering based on the median number of offered shares.

7.2 Financial and Operational Risk

7.2.1 Financial Risk The principal objective of the Group’s risk management is to reduce financial risk in the Group and to increase its financial stability. Exposure to fuel prices, currency and interest rate risk and liquidity risk arises in the normal course of the Group’s business. The Group has established formal risk management policies and guidelines that are approved by the Board of Directors to manage such risks. When deemed appropriate, risk exposures to fluctuations in fuel prices, foreign exchange rates and interest rates are reduced by the use of derivative financial instruments used in line with the Group´s documented risk management policies and strategy.

Fuel Price Risk It is impossible to predict the future availability or price of fuel. Political disruptions in oil producing countries, changes in government policy concerning fuel production, transportation or marketing, changes in fuel production capacity, environmental concerns and other unpredictable events may result in future fuel supply shortages and price increases.

Because fuel is one of the Group’s most significant operating costs, the Group has a significant exposure to fluctuations in the price of crude oil and oil products. The Group hedges partly or in full its fuel exposure mainly by entering into swaps and forward contracts to hedge its fuel purchases and reduce the impact of sudden changes in market prices. Fuel costs accounted for 13% of Avion´s total expenditure in the first nine months of 2005.

Under its ACMI contracts (Aircraft, Crew, Maintenance, Insurance), Avion is not responsible for the aircraft’s fuel cost. Therefore any fluctuations in fuel prices will not have a direct impact on the profitability of Avion’s ACMI contracts. However, significant increases in fuel prices in the long run may affect which types of aircraft and engines are economical or profitable for certain flight routes. This in turn may affect how a customer would select among different ACMI providers that offer different aircraft and engine types. A lasting increase in fuel prices could therefore make certain aircraft and engine types unprofitable.

Currency Risk Exposure to foreign exchange rates arises from a mismatch in currencies between the Group’s income and costs. The Group differentiates between currency risk from operations and currency risk from investments. The Group’s currency risks are primarily related to USD, GBP, ISK and EUR, though transactions also occur in a number of other currencies. Whenever possible, internal hedging principles 50 (matching of foreign currency in- and outflows) are applied. The Group then hedges its net transaction exposure externally in the foreign exchange markets. The Group >ciZgZhiWZVg^c\ YZWiWnXjggZcXn uses forward exchange contracts and currency options to hedge and therefore limit other its foreign currency risk. .

JPY GBP At the end of September 2005, the Group’s interest-bearing debt was USD 588 * (( CHF million, including 109 million in current maturities. The accompanying pie chart gives , a breakdown of interest-bearing debt by currency at the end of September 2005.

EUR The largest part of Avion Groups income in the first nine months of 2005 was in GBP &) and USD. Breakdown of revenue by currency for the first nine months of 2005 can be USD found in the accompanying pie chart. ('

Interest rate Risk The Group’s interest rate risk exposure arises from its debt and lease liabilities, which GZkZcjZWnXjggZcXn (%HZeiZbWZg'%%* are mainly denominated in USD and GBP. The Group aims to limit its interest rate risk other EUR and to achieve optimal ratios regarding fixed to floating interest rate exposure and ' + the duration of interest-bearing liabilities. Avion’s operational results and financial USD condition can be affected by fluctuations in the general level of interest rates. (%

Liquidity Risk Corporate treasury is responsible for the Group’s liquidity management and funding. ISK GBP The Group aims to maintain sufficient reserves of cash and cash equivalents in order ) *- to meet its liquidity requirements.

7.2.2 Investment activities The Group is of the opinion that it does not have to apply for a qualification as an investment fund pursuant to Act no. 30/2003. Should the Group be deemed to become subject to the aforementioned Act that might have a material affect on the Group’s operations.

7.2.3 Internal controls The vast growths of the Company, numerous acquisitions and reorganisation of the subsidiaries have put a strain on the internal controls of Avion Group. The Company is dependent on having sufficient internal controls in place and the Company is of the opinion that it does have such internal controls in place. However, should they be proven to be insufficient, they might impact the Company unfavourably. As the Company’s balance sheet and its scope of operation grows, the need for sound internal controls will grow even further.

7.2.4 Volatile income The operating income of the Group can be volatile and is affected by considerable seasonality. This among other things may cause revenues to fall below expectations for certain periods and possibly have a negative effect on the share price of the Group. The operational results for Avion Group in the financial year 2006 are expected to be positive. For the first two quarters of the financial year (November- April) the Group’s operational results are expected to be negative, while the third and fourth quarters are expected to be positive. The principal factor behind the seasonality of the Group’s operational results is that in the Charter and Leisure Division demand for air travel is much higher in the summer (May-October), due 51 to vacation travel, than in the winter (November-April). For the first quarter of the financial year (November-January) the demand for Shipping and Logistic services is lower than in the last three quarters of the year (Februar-October). The seasonality in Aviation Services is characterised by high passenger demand in the summer (May- October), high cargo demand during the winter (October – December), and the Hajj operation in December - February. Future emphasis on cargo is expected to reduce the seasonality in the Aviation Services. Labour actions, weather, terrorism activities, fear of war and other factors can also affect the seasonal pattern of Avion Group.

The sectors of aviation and shipping are both heavily competitive. Pricing decisions depend very much on the competitors and in some markets pricing is also dependent on available alternative ways to travel and carry cargo. As well as lowering costs, Internet sales have increased the price transparency in the markets, especially for airfares, which has in turn led to more intense competition.

Future growth could be hampered by an economic downturn, causing problems specific to the aviation or shipping industry. It can also be hurt by competitor actions, terrorism or other violence or political disruption, shortages of key or specialised personnel, yields or load factors or changes in consumer and/or trade preferences. In addition, if Avion were perceived to be growing but not at a pace sufficiently in line with its plans or abilities, then the market price of its shares could be adversely affected.

7.2.5 Management and Personnel Risk Avion’s future success depends on its ability to identify, attract, hire, train, retain and motivate highly skilled personnel. Competition for personnel is intense and there can be no assurance that Avion will be successful in attracting and retaining sufficiently qualified personnel. Failure to do so could have a material adverse effect on Avion. In an effort to retain its key management, Avion Group is in the process of offering share option agreements to those individuals.

The Group is in the process of inserting a non-competition clause in all employee agreements with key management in order to limit the possible damage related to key management resignation. The clause prevents key management from working for the competition within 6-12 months after leaving Avion Group.

Avion has agreements with unions that cover approximately 50% of its peak season workforce; however the majority of project-based staff is non-unionized. Union agreements always pose some uncertainty to Avion. The workers are represented by several unions and each union has its own contract on salaries and benefits with the Company. Each contract is up for renegotiation every few years and each time. There is a risk that the parties will not find an agreement and that labour action such as a strike could seriously affect the Company and could even halt the operation of one or more of the Company’s subsidiaries. Strikes are usually extremely expensive, especially for the aviation and shipping industries, given the high fixed costs that are inherent in these businesses. Furthermore, strike, action by employee groups that the Company is dependent on but does not have on its own payroll, such as airport or harbour employees for example, could seriously disrupt the operations of the Company heavily.

As part of its ACMI contracts, Avion often provides services that would otherwise be handled by the client’s union employees. Although the Company continues to 52 service a growing number of airlines, there is a risk of unions pressuring airline clients to resist the use of ACMI services.

7.2.6 Taxation Risk The companies that comprise Avion Group pay taxes in various countries. Changes to taxation laws and regulations and interpretation thereof in the countries where the Group operates can thus influence its performance and sometimes create tax liabilities not expected in the onset. The Group has not applied for consolidated taxation in Iceland, but a decision has been made to do so for the fiscal year 2005. Tax planning policy for the consolidated group is in the making and until completed, each division is responsible for its own tax planning.

With regard to the assessment of the Icelandic Tax Authorities in February 2005, explanations were requested on certain issues relating to Avion Group’s operational cost. The Company’s tax return was amended before final assessment leading to minor changes to the income tax and net worth tax base. The same issue in the Company’s tax return for the fiscal year 2002 is still outstanding but is not expected to have material effect on the financial results of the Group.

In relation to payments paid to agencies or crew members that work on board aircraft registered in Iceland and in relation to leased aircraft from non-resident companies, there may be a different understanding between the Company and tax authorities, regarding how various financial issues should be treated from a tax perspective, such as withholding taxes.

According to the Icelandic Tax Act, Article 1 subparagraph 4, and Article 3 subparagraph 1, all employees, Icelandic residents for tax purposes as well as non- residents, that work on board aircraft registered in Iceland, are taxable in Iceland. Avion Group’s fleet of aircraft is mainly registered in Iceland.

Avion Group has hired employees from agencies to work on its fleet. The Company has not withheld taxes on payments paid to the agencies that have provided crews for the Company’s fleet. The issue relates to non-residents working outside Iceland as most of the Icelandic crew members have been hired directly as employees of the companies. The Company’s argument has been that the relevant crew members are in fact working on assignments outside Iceland and never come to Iceland or carry out any work in Iceland. This situation leads to a relative risk for Avion in relation to PAYE obligations and social security contribution.

7.2.7 Financing Risk In Avion Group’s financial statements for the first nine months of 2005, the balance sheet as of 30 September, 2005 is composed of 40% short-term liabilities, 31% long- term liabilities and 29% equity. The proceeds of the share offering will be used to lower long-term debt with Landsbanki. After the share offering the balance sheet is expected to be composed of 40% short-term liabilities, 25% long-term liabilities and 35% equity.

As of 30 September, 2005, Avion Group’s assets amounted to USD 578 million, including cash balances of USD 185 million. Arising from this profile and also because of the groups future capital commitments (see 7.2.9 below), continued access to the capital markets will be essential for Avion Group’s future financing plans. 53 7.2.8 Investment Risk Avion Group has grown through numerous strategic investments. The possibility always exists that investments will not prove to be as profitable as anticipated. The success of strategic investments depends on a number of factors, including the ability of the Group’s management to handle the integration of new subsidiaries, financing and the realisation of possible synergies. The failure of the Group to effectively manage these issues while at the same time maintaining adequate focus on its current operations could have a material effect on the Groups operations, profitability and share price.

7.2.9 Off-Balance Sheet Obligations and Guarantees In September 2005 Avion Group, through its subsidiary Avion Aircraft Trading, became the second launch customer with Boeing of the B777 freighter program by signing and confirming an order for 4 Boeing 777-200 long range freighters, for delivery in 2009. Subsequently at a Board Meeting on the 23 November 2005, the Board of Avion Group approved the exercise of an option to acquire an additional four Boing 777 freighter aircraft, two aircraft to be delivered in 2010 and two in 2011. The Company has finalised the purchase agreement with the aircraft manufacturer for the first four Boing 777 Aircraft to be delivered in 2009 and is in the process of finalising the purchase agreement for the second set of four Boing 777 Aircraft for delivery in 2010 and 2011.

In addition Avion Aircraft Trading has contracted to purchase three Airbus A300- 600 passenger aircraft, two of which are delivered in December 2005, with the third in 2006. The Company has contracted freighter conversion slots for these three aircraft in 2006-2007. The total value of the above aircraft related commitments exceeds USD 1,000 million.

In addition Excel Airways Group has signed a lease agreement for 8 years in respect of six new Boeing 737-800, of which two are due for delivery in spring 2006 and four in spring 2007.

In September 2005 Eimskip purchased the remaining 49% of the issued share capital in CTG in exchange for shares in Avion Group or cash payment. The choice whether to pay in shares or cash is at the discretion of Eimskip. The closing shall be before 30 April 2006.

In November, through Eimskip, Avion Group received a new reefer vessel, Svartfoss. Svartfoss is the first of four reefer vessels to be constructed and taken into operation by Eimskip in the near future. All four vessels being constructed for Eimskip will be delivered and in operation by April 2007. Total commitment due for these reefer vessel purchases amounts to USD 44 million.

Avion Group is a guarantor for a loan to Air Atlanta Icelandic, its fully owned subsidiary. The loan amounted to USD 24 million at the end of September 2005. Avion Group is also a guarantor for a loan to Air Atlanta Porperties Limted for up to GBP 5 million and a loan to Suðurflug of ISK 158 million.

Guarantees such as those mentioned above have been given for the purpose of securing the Company’s business interests. Should the relevant companies become unable to fulfil the respective obligations, the Company will need to abide by its obligations. 54 7.2.10 Litigation and Controversial issues Because of the size of the Company and the scope of its operations, it is involved in litigation from time to time, either as plaintiff or defendant. Several matters are currently being litigated on behalf of the Group. The Company has secured an opinion from the law firm that represents Avion Group stating that the law firm does not believe that the outcome of the current litigation will have an adverse material effect on the Group’s performance, financial position or the value of the Group’s shares. All the same, the Company would like to bring the complaints below to the attention of investors.

The Competition Authority ruled in 1999 that Avion Group’s subsidiary, Eimskip, had abused its dominant position by discriminating among its customers. As a result the Competition Authority imposed obligations on Eimskip to prepare its tender offers carefully and to ensure consistency in transport dues and tender offers to its customers, unless there are objective reasons justifying any anomalies, so that equality would not be compromised and the competitive standing of firms in the market would not be distorted.

There are two matters concerning Eimskip under review before the Competition Authority;

1. In August 2002 Eimskip’s biggest competitor, Samskip hf., lodged a complaint that Eimskip had violated Article 11 of the Icelandic Competition Act. Samskip hf. claims that the behaviour of Eimskip is in violation of the above-mentioned decision from 1999. The Competition Authority carried out an inspection at Eimskip’s headquarters in September 2002 and obtained documents and electronic data as part of a probe into the allegations. The case is still pending.

2. In 2002 Atlantsskip ehf. complained that Eimskip had abused its dominant position with predatory pricing and cross-subsidisation by using the profits it makes in one market, where it enjoys a monopoly, to support low prices in other markets where it faces competition. The case is still pending.

7.3 Market Risk The markets in which Avion operates are all highly competitive. A number of companies currently provide services similar to those Avion Group offers and competition may grow with the emergence of new competitors, thus affecting profitability in respective markets. New technologies may increase the competitive pressures on Avion by enabling Avion’s competitors to offer better quality services at lower cost. Any and all of these events could have a material adverse effect on Avion. There can be no assurance that Avion will be able to continue to compete successfully in the marketplace. The risks contemplated in the sub-chapters below can to some extent be transferred to the other sub-chapters as the case may be.

7.3.1 Aviation Services Competition among ACMI providers is intense in the market for narrow-body aircraft, but to a lesser degree for wide-body aircraft. The principal competitive factors in the passenger ACMI market are: price, flight range, number of seats, age and fuel efficiency of the aircraft and the price, flexibility, quality and reliability of the flight service. In the cargo market, the competitive factors are much the same,

55 although age is much less of an issue and the number of seats is replaced by cargo payload. Increased competition may result in lower operating margins and loss of market share.

Among other factors, seasonality has an impact on demand for air travel. In general, demand for air travel is higher in the summer season due to vacation travel, particularly in international markets. Demand for air travel is also affected by factors such as economic conditions, terrorist activity, new airline security directives, fare levels and weather conditions. In addition, demand for air travel at particular airlines may be affected from time to time by, among other things, actual or threatened disruptions to operations due to labour issues. A reduction in demand for air travel could materially affect the wet-leasing industry.

Avion has several ongoing contracts for ACMI projects that have been renewed year after year. There can be no assurance that Avion will be able to renew these contracts or obtain new favourable ACMI contracts. The failure to do so could have a material adverse effect on Avion. Avion’s ACMI customers are few and in the first nine months of 2005 Avion’s five largest ACMI customers accounted for about 67% of the Group’s total aviation income. This constitutes a risk for Avion should the Group lose one of its major ACMI customers.

Air Atlanta Icelandic implemented a new credit procedure last year. All customers are now required to pay a security deposit prior to contract start. Half the amount is due upon the completion of a letter of intent and the second half is due when the final contract is signed. In addition, one month is always paid in advance, according to a minimum flight-hour guarantee. Normally reconciliation is produced at the end of each month according to final flight-hours flown.

Avion’s ACMI performance in the future depends, in part, on whether scheduled airlines and charters continue to outsource a portion of their passenger and cargo flight services. If scheduled airlines and charters no longer believe that wet leasing in general, and Avion’s services in particular, are more cost-effective than operating these flight services with their own incremental capacity, then Avion’s business will suffer.

Avion uses Boeing and Airbus aircraft. Generally, having only a few aircraft suppliers makes the Company dependent on the said suppliers to a certain extent. Furthermore, the Company has acquired aircraft from Boeing that are to be delivered to the Company in the future. Should Boeing be unable, for whatever reason, to deliver the aircraft to the Company, it could materially impact the operating profits of the Company.

Some of the airports Avion uses impose various operating restrictions including curfews, limits on aircraft noise levels and runway restrictions. Such restrictions may limit Avion’s ability to operate older type of aircraft at these airports. In addition, there is no assurance that where such restrictions exist, they will not become more onerous or that airports that currently do not impose such restrictions may not implement some or all of these restrictions in the future.

In many of the countries in which Air Atlanta Icelandic operates, airport taxes are levied as a fixed tax on the sale of airline seats. Any future increase in taxes on seat sales by any government may have an adverse effect on Avion’s operations.

56 7.3.2 Charter and Leisure

Avion Group’s subsidiary, Excel Airways Group plc., operates in the competitive UK and continental European travel markets. The level of competition among airlines like Excel is high. Excel competes primarily on fare levels, frequency and reliability of service, brand recognition, passenger amenities and the availability and convenience of other passenger services. Some of the airlines with which Excel competes are larger and have greater name recognition and resources than Excel. There can be no assurance that Excel will continue to compete effectively against these airlines or any others, including any new entrants to the industry.

The airline industry is characterised by low profit margins and high fixed costs. The expenses of an aircraft flight do not vary significantly with the number of passengers carried and therefore a relatively small change in the number of passengers, in relevant markets, in pricing, in load factors or in traffic mix could have a disproportionate effect on operating results. In addition any other minor shortfall in expected revenue levels could have a material adverse effect on Excel’s financial performance. Excel has all of its fleet under operating lease, based on agreements of which duration averages approximately five years. Increase in leasing cost could have a disproportionate effect on operating results of Excel.

The majority of Excel’s passengers travel on holiday or for other non-business-related reasons. Because a substantial portion of such airline travel is discretionary, the airline industry tends to experience adverse financial results during economic downturns.

Excel’s business is subject to strong seasonal variations. Demand in Europe for charter airlines is substantially higher during the summer months, when many Europeans take holidays. As a result, Excel’s operating revenues are generally much lower in the first half of the financial year (November to April) than in the second half (May to October). Disruptions that affect utilisation, yields and load factors have a disproportionate effect on results if they occur in the second half of Excel’s financial year and could have a material adverse effect on Excel’s financial performance.

Excel’s business could be seriously and adversely affected if it were unable to conclude sub-leases of some of the aircraft in its core fleet during the first half of the financial year.

In order to grow Excel’s core fleet of aircraft and therefore rely less on sub-leases during the summer, Excel has entered into a strategic relationships with TEM Enterprises d.b.a Casino Express, a Nevad-based airline in the USA. By transferring part of Excel’s fleet during the winter, Excel can add aircraft to its core fleet of aircraft with a reduced exposure to the risk of operating them at a loss during the winter. When looking at the counter-cyclical nature of the travel season in the UK versus the USA, the dynamics of such a partnership are quite unique. Whereas the high season in the UK is the period between May and October, the high season for USA travellers is from December through April. This is expected to result in a higher utilisation of these aircraft

Excel’s aim is to maintain a high aircraft utilisation rate. High utilisation is achieved in part by reducing turnaround times at airports, flying for more hours per day and reducing the amount of time during which spare aircraft are available for backup. Delays can orginate in air traffic control, ground handling, air traffic or airport congestion, weather, acts of third parties upon which airlines rely, maintenance and technical issues and other factors. Significant delays in Excel’s provision of services, 57 especially if repeated on multiple occasions, could damage Excel’s reputation and adversely affect its business, financial condition and results of operations.

Excel has entered into agreements with third parties where it considers that such services can be more effectively provided externally. Excel attempts to obtain competitive rates for all such services by negotiating multi-year contracts at prices that are either fixed or subject to inflation-linked increases only. The loss of Excel’s third-party service contracts and inability to renew them or any inability to negotiate suitable new or replacement contracts could result in an adverse effect on Excel. Although Excel seeks to monitor the performance of third parties that provide it with maintenance and passenger and aircraft handling services, the efficiency, timeliness and quality of contract performance by third party providers are often beyond Excel’s control. Excel expects to be dependent on third-party arrangements for such services in the foreseeable future. In addition, to the extent that third-party suppliers are deemed to represent Excel, there can be no guarantee that their performance may not have an adverse effect on Excel’s brand.

A key factor in the Excel strategy is the ability to source summer-only additional capacity from third-party airlines. If Excel were unable to source capacity from its current or any alternative suppliers, Excel’s business could be seriously and adversely affected. In many of the countries in which Excel operates, airport taxes are levied as a fixed tax on the sale of airline seats. Any future increase in taxes on seat sales by any government may have an adverse effect on Excel’s operations.

7.3.3 Shipping and Logistics Eimskip defines the North Atlantic as its home market. Although it is the largest shipping and logistics company on the Icelandic market, it faces stiff competition from other companies both in Iceland and abroad.

There is always a possibility that new competitors, both in Iceland and abroad, will move into the market or that current competitors in the market will become more aggressive. Increased competition could result in both lower prices in the market and a lower margin for Eimskip. Eimskip has been a leader in scheduled transport services to and from Iceland and emphasises maintaining this strong position. Eimskip intends to accomplish this by improving its fleet, increasing the cost-efficiency of operations and providing over-all transport solutions.

Transport services in Eimskip’s home market have been changing and competition in scheduled transport both on land and at sea have increased. New competitors have entered the sea freight market and air cargo transport of both imports and exports has grown substantially. Eimskip’s transportation operations have also undergone substantial changes in recent years. In addition to ocean transport, Eimskip offers multimodal transport solutions in co-operation with its subsidiaries, both in Iceland and abroad, thus competing in a very broad market.

Eimskip utilises to its advantage its good transport system, organisation and knowledge of the market. As a leader in transport for the fisheries industry in Iceland, Eimskip has specialised in transport, storage and inventory control for fish and other frozen and chilled products. In transport services, as in many other sectors, there is a risk of other parties entering the market and offering limited services of specific types at a lower cost and lower level of service. Emphasis has been placed on maintaining Eimskip’s market position. 58 Eimskip has increasingly generated income abroad by building up transport services outside Iceland. To begin with, the main focus was on services for Icelandic customers, but in more recent years emphasis has been placed on increasing the independence of foreign subsidiaries and boosting their income from activities not connected with transport between Iceland and other countries. Turnover from foreign operations accounts for approximately 35% of Eimskip’s total turnover from transportation operations and in recent years has returned an acceptable margin.

The general economic situation primarily affects Eimskip’s transport volume. For example, decreased fish catches can have a material adverse affect on marine product exports from Iceland. The ISK exchange rate also has a major impact on import and export to and from Iceland.

7.4 Other Risk Factors Avion is exposed to numerous risks associated with international operations, namely political and economic instability and recessions and difficulties of administering foreign operations generally. The airline and shipping companies tend to experience greater profitability during times of economic prosperity. The Company is in the same way dependent on the state of the economy in the countries it operates in. All of these factors can have an effect on the operations of the Group.

7.4.1 Laws and Regulations Avion Group is an international company with operations all over the world. It must comply with the laws and regulations that apply to its activities in each location. Violations of laws and regulations, whether made knowingly or unwittingly, can result in a revocation of operating licences in the country in question and adversely affect the operation of Avion Group. Changes in legislation and regulations can have a substantial impact on the financial performance of Avion Group.

Airlines and shipping companies are subject to extensive regulatory and legal compliance requirements that result in significant costs. From time to time, regulatory authorities issue directives and other regulations relating to maintenance and operation of aircraft and ships that require significant expenditure. Some requirements cover, among other things, security measures, collision avoidance systems, airborne wind shear avoidance systems, noise abatement and other environmental concerns, commuter aircraft safety and increased inspections and maintenance procedures to be conducted on older aircraft. Compliance with these regulations requires continuous management effort and expenditure. In some instances, the cost of complying with these regulations can be substantial. In addition, new laws, regulations, taxes and airport rates and charges may be implemented that could significantly increase the cost of airline operations, reduce revenues and have an adverse effect on the Group’s industries.

In order for Excel Airways Limited (subsidiary of Excel Airways Group) and Air Atlanta Icelandic to maintain their Air Operators Certificate’s (AOC) they must be majority owned or controlled by nationals of EEA member states. The current ownership of Avion Group meets this requirement since the majority (over 50%) of the shareholders in Avion Group and the majority of its Board of Directors are nationals of EEA states. Should the ownership structure of Avion Group change such that the requirements of the Civil Aviation Authorities (CAA) in the UK and Iceland are not met, Avion Group would risk losing its AOCs which would have a material 59 adverse effect on the Group’s operations. The CAA monitors closely the finances of airlines and requests thorough regular updates on their financial performance. No guarantees can be given that the Company will maintain its status and maintain the aforementioned licenses in the future.

The aviation sector is subject to aviation agreements between countries and institutions within those countries, which every so often are up for renegotiation. Changes in aviation policies in those countries could result in termination of such agreements and adversely affect the Company’s operation or the operations of its customers. Also, other aspects of the Company’s business are subject to various regulations and the issue of public permits.

The Company’s shares are being listed on the Icelandic Stock Exchange. Therefore, the Company is subject to provisions in Icelandic securities regulation, such as the Icelandic Act on Securities Transactions no. 33/2003, governmental regulations and rules issued by ICEX. The Company wil attempt to adhere to the said provisions, while violations of any such provisions may have a financial impact on the Company. Any violations by the Company with respect to the said rules and regulations may also affect the Company’s reputation and consequently result in changes to the price of the Company’s shares. Serious breaches may result in ICEX delisting the Company’s securities.

7.4.2 Covenants and stipulations The Company is contractually bound by various agreements which include several covenants and stipulations. Should the Company, for some reason, become unable to continue to fulfil the said covenants and stipulations the counterparties may become entitled to rescind the agreements which might have severe consequences for the Company. Bearing this in mind, reorganisation as Avion Group and its subsidiaries have gone through in the past few years, may evoke stipulations such as in relation to change of control.

7.4.3 Terrorist attacks Avion Group’s activities are exposed to potentially significant losses in the event of terrorist attacks. Terrorist action, any major terrorist attack or the fear of one anywhere in the world could harm public confidence in the transportation industry and affect general political, economic or business conditions, in ways that could have a severe material adverse effect on the Group.

Consequences for Avion could for example include limitations on the scope of available insurance coverage, decreased demand for transportation, increased costs and related consequences as a result of heightened security measures, increases in the price of fuel, significant disruptions to the business of key airline suppliers and the return of protective regulation by governments of their home or in ways that help preserve those airlines but that also create market distortions that hamper the ability of other airlines to compete with those airlines on equal terms.

Airport and harbour security have been increased considerably in the last few years with added cost. The occurrence of terrorist attack or similar incidents, such as an outbreak of disease, could result in fear of travelling and therefore could have a serious impact on the Group’s industry and adversely affect the Company.

60 7.4.4 Insurance Avion’s operations are subject to all of the inherent risks associated with transportation, including accidents/incidents, environmental mishaps and mechanical failures. These occurrences can result in significant personal injury or loss of life, severe damage to or destruction of property and equipment and pollution or environmental damage. Moreover, litigation arising from any such occurrence may result in Avion being named as a defendant in lawsuits asserting large claims. Avion cannot assure investors that its insurance policies will cover Avion against any or all of these or other risks or if they do, that the insurance will be sufficient or effective under all circumstances or against all hazards to which Avion may be subject. In addition no assurance can be given that Avion will be able to continue to maintain these or other insurance policies.

Aviation insurances are purchased as one policy for all subsidiaries within the Group. Marsh insurance brokers in London handle the bulk of the aviation insurance coverage. Coverage includes Hull “All Risk” Including Spares and Equipment, Comprehensive Aviation Liability Insurance; Aircraft Hull War Risks, Third Party War Risks, Personal Accident and Illness, Loss of License, and Employer’s Liability in UK/ Ireland. The Heritage Group handles Deductible Coverage, Hull and War Total Loss only coverage, Personal Accident and Illness, Loss of License and Life Insurance. Sjóvá-Almennar tryggingar hf. handles Property Insurance, including housing, inventory and electronic coverage, Motor Liability and Hull coverage, PA and Illness, Commercial liability insurance (Iceland), Employer’s liability in Iceland, and Director’s and Officer’s Liability (the Group).

Generally, an aircraft owner is not liable for delivery delays that are due to delays in the refurbishment of the aircraft in accordance with delivery conditions set by end users, unless the owner has back-to-back penalty insurance. Avion does not have a separate insurance to cover such instances, due to extremely high premiums in such insurance policies and will occasionally absorb the additional expense of having to temporarily lease a substitute aircraft in place of the one being delayed.

The majority of shipping and logistics insurances policies are placed with brokers in Europe but part of the insurance coverage is taken locally by Tryggingamiðstöðin hf. Insurance coverage includes Hull and Machinery, Protection and Indemnity, Hull and Machinery War Risk, Fire and Auto Insurances and Personal Injury Insurance.

There are no major claims unsettled and no insurance events have occurred that are likely to change the premium terms.

Book values and insurance values of the Group’s aircraft fleet, vessels, containers and other transportation equipment and property and plant at the end of September 2005 are as follows:

Summary of property, aircraft, vessels and other equipment

30 September 2005 Book value Insurance value Property, plant and equipment 165,579 156,273 Vessels 107,445 131,489 Containers and other transportation equipment 37,785 40,820 Aircraft fleet 139,972 164,000 Total 450,781 492,762

All amounts in thousands USD 61 7.4.5 IT

The Company’s operation is spread over many countries. The Company’s communication, planning and revenue management systems are computer based and an increasing part of ticket sales takes place over the Internet. Therefore, IT is playing an ever greater role in the Company’s operation and those systems are vulnerable to disruptions that are beyond the Company’s control. Possible disruptions could for example result from viruses, equipment failure, power failure, hackers, natural disaster and human errors. The Company has taken measures to minimize the risk of failure to those systems, but there are no guarantees that those measures will sufficiently prevent disruptions of the Company’s IT systems.

Avion Group is in the process of reconstructing their IT related matters such as securing and protecting databases, websites, 3rd party rights and copyrights. Avion is also implementing new IT security and disaster recovery planning and has contracted IBM consulting for the project.

7.4.6 Trademarks Avion Group applied for registration for the trademark “Avion” in its major markets but was refused since the word “Avion” lacked the necessary characteristics. Avion Group has not decided whether to accept these results or appeal. The Group’s legal advisors are of the opinion that Avion Group does not have exclusive rights to use the word “Avion”. Companies in unrelated businesses could therefore use the name “Avion” in their business. However, if someone were to start using the name “Avion” as a brand name for products or services connected with transportation operations, it would be possible to file a complaint on the basis of the Competition Act, since the Group has gained market reputation under the name. However, no guarantees in this respect can be given.

Travel City Holding has been involved in a dispute with Travelocity.com LP “Travelocity” regarding its use of the “Travel City” logo with a solid circle between the two words on its web site and the livery of aircraft. Travel City has changed all its advertising, marketing and internal logos to remove the offending sun logo. There is still a residual risk that Travelocity may bring proceedings and claim damages if Travel City’s rebranding arrangements are delayed and final agreement with Travelocity is not reached.

Opposition has been filed in the UK and Europe by Exel Logistics against Excel’s trademark applications in the UK and Europe for the mark “EXCEL”. The opposition is with regard to the use of the “EXCEL” brand in relation to cargo services. There is a risk that Excel will be prevented from using the “EXCEL” brand in relation to cargo services. However, there is no indication that use of the “EXCEL” brand in relation to its core passenger service business is at risk.

7.4.7 Image and reputation Image and reputation are among Avion´s most valuable assets. Any damage to image or reputation may result in customers choosing to direct their business elsewhere which can have an extremely adverse effect on the Company’s performance and success. Wherever Avion and its subsidiaries are mentioned there is always the risk that the Company’s image or reputation may be damaged. Examples may be accidents, mistakes in business, violation of laws or regulations, bad decision making and poor service. 62 8. Outlook and Future Vision

8.1 Operating Outlook

Key issues in running a successful business are planning and budgeting. The management of each subsidiary in Avion Group is responsible for its budget which is then monitored at the Group level. For the next financial year, a detailed budget has been drawn up by each subsidiary as well as for the Group as a whole. Group and subsidiaries financial performances are compared to the budget each month and variations from the budget are analysed. This enables management to make the necessary adjustment and adapt the Group to economic and regulatory change.

Following is Avion’s budget for the first ten months of 2005. Even though the budgeting process is carefully planned budgets are based on a number of assumptions and estimates that are inherently subject to uncertainties and contingencies, many of which are beyond the control of the Company, and are subject to change based on many important factors. Actual results may differ materially from those budgeted.

According to Avion’s managements accounts for the first ten months of 2005, operating revenues are expected to be USD 1,350 -1,450 million, EBITDA USD 110- 115 million and EBIT USD 60 - 65 million.

The following issues are currently in process and are in line with the Company’s future vision:

■ Eimskip is in the process of negotiating a purchase of a 40% stake in Daalimpex BV., a coldstore complex in Holland. Daalimpex is the biggest cold-storage provider in Holland as well as being one of the largest in Europe, with a total capacity of 220,000 tonnes.

■ In September 2005, through its subsidiary Avion Aircraft Trading, Avion Group hf. became the second launch customer with Boeing of the B777 freighter program by signing and confirming an order of four Boeing 777-200 long range freighters, for delivery in 2009. Avion Group has purchase rights for four additional Boeing 777F’s on similar terms and conditions as the first four. In the event that the company exercises its purchase rights, due to be finalised prior to year end, two aircraft will be delivered in 2010 and two in 2011. The new cargo planes, which are the world’s largest and most capable twin-engine freighters, would be operated by Air Atlanta Icelandic.

■ Three reefer vessels are on order for Eimskip – CTG in Norway. When they are delivered, Eimskip – CTG’s capacity will have more than doubled. In addition, Eimskip – CTG has a purchase option on further four reefer vessels.

■ The Eimskip Warehouse centre (Vöruhótel) is due to be expanded. Currently, the company is discussing the scope and timing of such an expansion.

■ Avion Aircraft Trading has purchase rights for additional four Boeing 777F’s on similar terms and conditions as the first four. Should Avion Aircraft Trading exercise such purchase rights, due to be finalised prior to year-end, two aircraft will be delivered in 2010 and two in 2011.

63 8.2 Future Vision

Avion Group’s vision is to be a leading investment company focusing on air, land and sea transportation solutions worldwide. Avion Group’s primary objective is to maximise total shareholder returns through financial strength and management skills.

Avion Group’s strategy is to invest in and build up profitable companies, driven by organic growth and complementary acquisitions. The role of the Group is to parent the subsidiaries by servicing and providing the means for growth, directing strategy, as well as providing the usual financial services support of a corporate centre. In addition, it is Avion’s aim to improve the synergy among its subsidiaries by integrating the offering across its three main divisions, seeking out areas of cost economies.

Currently, Avion Group consists of three main divisions, each responsible for maximising the opportunities in different fields of transportation.

8.2.1 Aviation Services A world leader as a wide-body ACMI operator, Air Atlanta Icelandic has developed an attractive platform for future development. Air Atlanta Icelandic is pursuing a number of initiatives that it believes will allow it to generate profitable growth in the future. Air Atlanta Icelandic will seek to renew its fleet and improve fleet planning, review pricing strategies and pursue higher margin contracts, expand customer relationships and expand its presence in the cargo segment.

Air Atlanta Icelandic is in the midst of restructuring its fleet to reflect increased emphasis in the cargo sector, as well as to modernise and upgrade the fleet for improved customer service. The main focus for the Air Atlanta Icelandic fleet for the coming years will be on wide-body freighters. In this respect 35 freighters are planned to be in operation by 2009. Air Atlanta Icelandic will reduce and simplify its fleet to increase operational efficiency and transfer and/or phase out its fleet of 737s, 757s and 767s. In addition it will retire old inefficient aircraft.

Air Atlanta Icelandic will be converting seven passenger aircraft into cargo aircraft during the next two years. The plan is to convert passenger aircraft to cargo as follows: one Boeing 747-400 in 2005, one Boeing 747-400 in 2006, three Airbus A300-600s in 2006 and two Boeing 767-200s in 2007.

8.2.2 Charter and Leisure Excel Airways Group has created a unique business model that minimises exposure to seasonal fluctuations in passenger seat sales. Excel operates its fleet of aircraft as efficiently as possible by flexing total market capacity to demand. At present, the Charter and Leisure division is only operating in the UK market. Excel Airways expects to continue to grow in the UK as the market still offers significant opportunities. However, the future opportunity in Excel’s business model is that it can be extended to other countries with similar consumer behaviour seasonality. This includes, but is not limited to Continental Europe, Scandinavia, Eastern Europe and Asia.

64 Excel Aviation acts as a broker of seats on third-party airlines with bases in markets other than the UK. Excel Aviation’s brokerage unit enables the Group to grow the existing business by adding supplemental capacity to meet new demand without major operational investment.

The most important elements of Excel Airways Group strategy are the following:

■ Maintain or grow its position as a supplier of charter capacity to the tour operator market through its airline and aviation division.

■ Grow and develop in-house its distribution channels through its tour operating division and its acquisition of Travel City.

■ Extend Excel’s business model outside the UK and continue to develop it with counter cyclical markets.

■ Develop longhaul markets to meet growing winter demand, for example South Africa from winter 2006-2007.

■ Maximise the benefit of the global domain name XL.COM.

8.2.3 Shipping and Logistics Eimskip’s future aim is to consolidate its position as a transportation market leader offering one stop services solutions in the North Atlantic through a network that links key ports in Europe, on the US East Coast and in Canada. Eimskip also aims to be a key international player in temperature-controlled cargo and logistics.

The transformation of the Eimskip business model has been dynamic in recent years. Eimskip has evolved from a traditional shipping company to become a global transport solutions provider. Recently Eimskip has opened up offices in the US and China and made strategic investments in Canada, Norway and the Faroe Islands. Eimskip’s focus is on operating a service-oriented company that is responsive to market demands.

65 9. Pro Forma Accounts

Avion Group’s operations are organised into three divisions: Aviation Services, Charter and Leisure and Shipping and Logistics. The Aviation Services division includes Air Atlanta Icelandic, Suðurflug, Avia Technical Services and Avion Aircraft Trading. The Charter and Leisure division includes Excel Airways Group, Air Atlanta Europe and Travel City Holdings. The Shipping and Logistics services are provided by Eimskip.

Pro-forma Figures

2003 2004 2004/05 Avion Group hf. Nov–Oct Revenue ...... 1,111,597 1,499,685 1,829,982 Operating expenses ...... (1,058,648) (1,392,467) (1,710,152) EBITDA ...... 52,949 107,218 119,830 Depreciation/amortization ...... 30,875 47,622 73,053 EBIT ...... 22,074 59,596 46,776

Proportion of Revenue EBITDA ...... 4.8% 7.1% 6.5% EBIT ...... 2.0% 4.0% 2.6%

2003 2004 2004/05 Aviation Services Nov–Oct Revenue ...... 260,498 422,514 464,683 Operating expenses ...... (255,534) (379,605) (409,430) EBITDA ...... 4,964 42,909 55,253 Depreciation/amortization ...... 16,161 25,623 41,105 EBIT ...... (11,196) 17,286 14,148

Proportion of Revenue EBITDA ...... 1.9% 10.2% 11.9% EBIT ...... -4.3% 4.1% 3.0%

2003 2004 2004/05 Charter & Leisure Nov–Oct Revenue ...... 547,748 734,004 907,530 Operating expenses ...... (521,148) (706,398) (889,628) EBITDA ...... 26,600 27,606 17,902 Depreciation/amortization ...... 1,671 2,444 4,191 EBIT ...... 24,929 25,162 13,712

Proportion of Revenue EBITDA ...... 4.9% 3.8% 2.0% EBIT ...... 4.6% 3.4% 1.5%

2003 2004 2004/05 Shipping & Logistics Nov–Oct Revenue ...... 303,351 343,168 457,138 Operating expenses ...... (281,966) (306,465) (406,978) EBITDA ...... 21,385 36,703 50,160 Depreciation/amortization ...... 13,044 19,555 26,549 EBIT ...... 8,342 17,148 23,611

Proportion of Revenue EBITDA ...... 7.1% 10.7% 11.0% EBIT ...... 2.7% 5.0% 5.2%

All amounts in thousands of USD

66 The pro-forma tables above, prepared by Avion Group’s management, show the Avion Group’s total operational results and the Group’s results divided into the three operational divisions, for the 12 months trailing, from November 2004 to October 2005, and for the years 2004 and 2003.

For the period from November 2004 to October 2005 Avion’s total revenues were USD 1,830 million, after elimination of the internal trade. The majority of the internal trade is between the Aviation Services and Charter and Leisure Services and within those divisions. The following table has been prepared to give information on the total turnover of the Group for years 2003, 2004 and for 12 months from November 2004 to October 2005 if all the subsidiaries owned by the Group at 30 September 2005 had been part of the Group for the whole period.

67 10. Financial Performance

10.1 Interim Financial Statements as at 30 September 2005

Avion Group hf. (previously Flugfélagið Atlanta hf. (d/b/a Air Atlanta Icelandic) consists of six main subsidiaries, Excel Airways Group, Travel City Holding, Air Atlanta Icelandic, Eimskipafélag Íslands, Avia Technical Services and Avion Aircraft Trading.

10.1.1 Basis for preparation of accounts The consolidated interim financial statements for the period 1 January to 30 September 2005 are stated in thousands of USD. The Company’s interim financial statement includes the consolidated accounts for Avion Group hf. and its subsidiaries.

The preparation of Interim Financial Statements in conformity with IFRS (International Financial Reporting Standards) requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, which constitute the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The IFRS that will be effective or available for voluntary early adoption in the annual financial statements for the period ended 31 October 2005 are still subject to change and to the issue of additional interpretation and therefore cannot be determined with certainty. Accordingly, the accounting policies for that annual period that are relevant to this interim financial information will be determined only when the first IFRS financial statements are prepared as at 31 October 2005.

The interim statements of the Group as at 30 September 2005 include all the necessary information on the Company’s performance and financial position, but are not as comprehensive as is required for annual financial statements according to IFRS.

The Company’s auditors have reviewed the accompanying consolidated balance sheet of Avion Group hf. as at 30 September 2005 and the related consolidated interim statements of income, changes in equity and cash flows for the nine months then ended. This consolidated interim financial information is the responsibility of the Group’s management. The auditors’ responsibility is to issue a report on this interim financial information based on their review.

10.1.2 Changes to the Group since the beginning of 2005 The Group acquired control of Air Atlanta Europe at the beginning of 2005 when management and financial and operational responsibility were transferred to the Group. In accordance with IFRS 3 all of the operation of Air Atlanta Europe is included in the consolidated interim report from 1 January 2005.

During the period 1 January to 30 September 2005, the Group acquired 28.8% of the issued share capital of Excel Airways Group and at 30 September 2005 owned 99.9% 68 of issued share capital. In May 2005 Avion Group purchased all outstanding shares in Eimskipafelag Islands ehf. The Company is included in the consolidation from 1 June 2005.

In June 2005 the Group acquired all outstanding shares of Travel City Holding Plc. The company was included in the consolidation for 1 July 2005.

10.1.3 Income Statement 1 January-30 September 2005 Revenue is recognised in the income statement when service is provided to customers. Revenue also includes copromotion income where the Group records its share of the revenue but no related cost of sales. Revenue from ACMI sales is recognised on block hours flown for the customer. Revenue from flight and shipping operations is recognised when the transportation service is provided. Revenue from travel agencies is recognised when the service is provided. Other revenue is recognised on delivery to the customer, at which point the risk and reward of ownership pass to the customer. Payments received from customers in advance of performance of the Group’s obligations are included as deferred revenue and not recognised until the Group performs its obligations.

Operating revenue during the period 1 January to 30 September 2005 was USD 1,213 million, as compared to USD 331 million for the same period in 2004, which corresponds to an increase of USD 882 million. The increased revenue results from the inclusion of Excel Airways in the consolidation from 15 October 2004, Eimskip from June 2005 and Travel City Holdings from July 2005.

For the first nine months of 2005 Avion’s revenue and operating results are broken down into three divisions: ACMI, leisure and shipping.

Performance by Divisions 1.1 - 30.9 2005

ACMI leisure Shipping* eliminations consolidated Sales 440,081 948,249 155,047 350,049 1,193,328 Operating expenses (453,985) (917,160) (144,232) (350,049) (1,165,328) Operating result (13,904) 31,089 10,815 0 28,000 Operating result as ratio of sales -3.2% 3.3% 7.0% 2.3%

All amounts in thousands of USD *Eimskip is included in the consolidation from 1 June 2005

The accompanying table shows Avion Group’s net sales, with breakdown by company activity, i.e. ACMI, leisure, shipping and other revenue in 2005 and 2004.

Expenditure is recognised in respect Net sales and other income of goods and services received when 2005 2004 supplied in accordance with contractual 1.1- 30.9 1.1- 30.9 terms. Provision is made when an ACMI 26% 310,373 96% 318,635 obligation exists for a future liability Leisure 60% 730,381 - 0 in respect of a past event and where Shipping 13% 152,574 - 0 the amount of the obligation can be Other income 2% 19,939 4% 12,721 reliably estimated. Routine maintenance Total revenue 1,213,267 1,213,267 is recognised as incurred. Major All amounts in thousands of USD maintenance and overhaul costs are capitalised as a separate component of the cost of the aircraft and vessel fleet and depreciated on a systematic basis. 69 The operating expenses are comprised of the expenses concerning ACMI, leisure, shipping and other expenses. Operating expenses during the period 1 January to 30 September 2005 were USD 1,165 million, as compared to USD 313 million for the same period in 2004.

The operating profit for the first nine months of 2005 was USD 48 million, as compared to USD 18 million for the same period in 2004. Net earnings per share were USD 0.039 in 2004 compared to USD 0.040 in 2003. Earnings per share are the ratio between profit and the weighted average number of outstanding shares during the year and show the profit per share.

Net financial income for the period was USD 4.0 million. In the year 2005 Avion´s interest revenue amounts to USD 4.8 million, interest amounts to USD 17.3 million and exchange rate gains amount to USD 16.6 million. Finance cost were USD 17.4 million. For the same period in 2004, financial expenses were USD 5.9 million.

Income Statements – Avion Group hf.

2005 2004 1. 1. – 30. 9. 1. 1. – 30. 9. Operating revenue: Net sales ...... 1,193,328 318,635 Other income ...... 19,939 12,721 Total operating revenue 1,213,267 331,356

Operating expenses: ACMI ...... (324,277) (313,108) Leisure ...... (699,292) 0 Shipping ...... (141,759) 0 Total operating expenses (1,165,328) (313,108)

Operating profit ...... 47,939 18,248

Income from associates ...... 52 8,306 Financial income / (expenses) ...... 4,051 (5,915) Net financing income 4,103 2,391

Profit before taxes ...... 52,042 20,639

Income tax ...... (14,298) (415)

Net profit for the period ...... 37,744 20,224

Attributable to: Equity holders of the parent ...... 37,900 20,224 Minority interest ...... (156) 0 Net profit for the period ...... 37,744 20,224

Basic earnings per share (USD) ...... 0.039 0.040

All amounts in thousands of USD

The net profit for the period 1 January to 30 September 2005 was USD 37.7 million, compared to USD 20.2 million for the same period in 2004.

70 10.1.4 Balance Sheet 30 September 2005

Avion Group’s balance sheet has changed significantly following the merger with Íslandsflug hf. and recent acquisitions. Total assets at the end of September were USD 1,580 million, with an increase of USD 1,104 million from the beginning of the year 2005. The total assets are broken down into non-current assets and current assets.

Non-current assets at the end of September 2005 totalled USD 1,003 million, including goodwill at USD 477 million and property, aircraft, vessels and equipment at USD 451 million. At the beginning of the year 2005, non-current assets totalled USD 320 million.

Goodwill was USD 477.0 million at the end of September 2005 and had increased by USD 331.6 million. The increase of the goodwill is primarily from the acquisition of all shares in Eimskipafélag Íslands ehf., the 28.8% in Excel Airways Group plc and all outstanding shares of Travel City (Really Great Holiday Company).

Goodwill is allocated to cash-generating units and is no longer amortised but is tested annually for impairment. Impairment tests are conducted at least once a year on the intangible assets that are thought to have infinite lifetime. Impairment tests on capitalised goodwill were not conducted on 30 September 2005 as the goodwill relates to recently purchased subsidiaries. A limited review was performed by KPMG, which did not imply any impairment loss.

Items of property, aircraft, vessels and equipment owned by Avion are stated at cost less accumulated depreciation and impairment losses. Where parts of an item of property and equipment have different useful lives, the parts are accounted for as separate items. Leased assets for which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Property, aircraft, vessels and equipment were USD 450.8 million and the end of September 2005, included are rotable parts which are spare parts that can be reused after overhaul. Air Atlanta Icelandic keeps a track of these parts through a system called TRAX. The system TRAX doesn’t keep information regarding book value of the rotable parts, only average original purchase price, therefore is an uncertainty about the valuation of both rotable parts and inventory.

Deferred tax assets were USD 18 million at the end of September 2005, thereof Air Atlanta Europe USD 11 million. Air Atlanta Europe has not been profitable for the last years which raises questions regarding the value of that asset. Avion aims to using the carry-forward loss against Excel revenue.

The following summary shows book value and insurance value of property, aircraft, vessels and other equipment as at the end of September 2005.

Summary of property, aircraft, vessels and other equipment

30 September 2005 Book value Insurance value Property, plant and equipment 165,579 156,273 Vessels 107,445 131,489 Containers and other transportation equipment 37,785 40,820 Aircraft fleet 139,972 164,000 Total 450,781 492,762

All amounts in thousands USD

71 Total current assets were USD 577.7 million at end of September 2005 and have increased by USD 420.6 million from the beginning of the year 2005. Total current assets include trade receivables of USD 274.1 million, other receivables of USD 102.3 million and cash and cash equivalents of USD 184.9 million. Trade receivables and other receivables are stated at cost less impairment losses. Current maturities of notes and contracts are included among receivables. Trade receivables at the end of September 2005 were USD 274.1 million, compared to USD 69.8 million at the beginning of the year 2005. Allowance for doubtful accounts was USD 9.1 million at 30 September 2005. Other receivables were USD 102.3 million. At the beginning of the year 2005 other receivables totalled USD 17.6 million.

Cash and cash equivalents have increased from Interest bearing loans and borrowings USD 58.9 million at the beginning of the year to Currency ratio 30. 9. 2005 USD 184.9 million at the end of September 2005. GBP 33% 191.8 Cash and cash equivalents include bank balances USD 32% 190.4 and cash and short-term deposits held by the EUR 14% 79.9 Consolidation treasury function. CHF 7% 39.4 JPY 5% 30.3 NOK 2% 13.6 Total equity at the end of September 2005 was ISK 2% 10.8 USD 459 million. Total equity has increased Other currencies 5% 31.5 by USD 39 million since the beginning of the 587.7 year, when the Group’s equity was USD 67.1 Current maturities (108.5) million. The increase in equity is mainly from Loans from credit institutions 479.2 the issue of new shares in connection with the

All amounts in thousands of USD Group’s acquisition of the remaining shares of Excel Airways Group during the period and the purchase of all shares in Eimskip.

Total liabilities were USD 1,121.3 million at the end of September 2005 and have increased by USD 711.7 million from the beginning of the year 2005.

Total liabilities are broken down into non-current liabilities and current liabilities. Non-current liabilities totalled USD 490.8 million at the end of September 2005, including interest-bearing loans and borrowings of USD 479.2 million. The following table shows the breakdown of the non-current interest-bearing loans and borrowings as at the end of September 2005.

Eimskip, Avion’s subsidiary issued coupon bonds of ISK 3,000 million in November 2004. The bond issue was listed on ICEX 17 December 2004 and the due date is 1 November 2009. Because of the listing of the bonds Eimskip publishes its 6 and 12 month accounts in ICEX’s news system.

Current liabilities totalled USD 630.5 million at the end of September 2005, including interest-bearing loans and borrowings of USD 115.9 million. At the beginning of the year current liabilities amounted to USD 240 million. Included in current liabilities are trade payables amounting to USD 153.8 million at end of September 2005. Accounts payable which include Air Atlanta creditors have not been reconciliated on a regular basis, this will be remedied before the annual accounts 2005 (30 October 2005). It is a possibility that there are invoices which should be expensed in the annual accounts.

The equity ratio at the end of September 2005 was 29%, compared to 14% at the beginning of the year 2005.

72 Balance Sheet - Avion Group hf.

30. 9. 2005 30. 9. 2005 Assets Non-current assets: Goodwill ...... 477,099 145,445 Other intangible assets ...... 23,624 1,927 Property, aircraft, vessels and equipment ...... 450,781 149,806 Investments in associated companies ...... 774 0 Guarantee deposits ...... 23,677 12,190 Other investments ...... 8,614 657 Deferred tax assets ...... 18,022 9,572 1,002,591 319,597

Current assets: Inventories ...... 16,400 10,792 Trade receivables ...... 274,102 69,841 Other receivables ...... 102,316 17,574 Cash and cash equivalents ...... 184,858 58,861 577,676 157,068

Total Assets 1,580,267 476,665

Equity and liabilities Equity Issued capital ...... 22,746 8,628 Share premium ...... 364,258 27,874 Reserves ...... 10,723 2,273 Retained earnings ...... 56,565 18,821 Stockholders´ equity 454,292 57,596

Minority interest ...... 4,696 9,459 Total equity 458,988 67,055

Liabilities Non-current liabilities: Interest bearing loans and borrowings ...... 479,218 162,006 Guarantee deposits ...... 350 4,806 Employee benefits ...... 777 1,196 Deferred income tax liability ...... 10,469 1,552 490,814 169,560 Current liabilities: Interest bearing loans and borrowings ...... 115,879 80,378 Trade payables ...... 153,859 87,056 Other liabilities ...... 360,727 72,616 630,465 240,050

Total liabilities 1,121,279 409,610

Total stockholders´ equity and liabilities 1,580,267 476,665

All amounts in thousands of USD

10.1.5 Cash Flow 1 January - 30 September 2005 Working capital provided by operating activities was USD 34.8 million for the nine months ended 30 September 2005, compared to USD 23.7 million for the same period 2004. Changes in operating assets and liabilities absorbed USD 17.9 million, compared to an increase of USD 0.4 million for the same period of the previous year. Net cash provided by operating activities was USD 16.9 million at the end of September 2005 compared to USD 24.1 million at end of September 2004.

73 Net cash used in investing activities was USD 157.9 million at the end of September 2005, including an increase of USD 171.5 million in fixed and intangible assets. At the end of September 2004 the net cash used in investing activities USD 98.6 million.

Net cash provided in financing activities was USD 276.4 million at the end of September 2005. In the first nine months 2005, Avion issued new capital for USD 146.3 million and received proceeds of USD 237.4 million from long-term borrowings. At the end of September 2004, net cash provided in financing activities was USD 85.9 million.

Net change in cash and cash equivalents was USD 135.4 million at the end of September 2005, compared to USD 11.3 million in the same period of 2004. Cash and cash equivalents at the end of September 2005 totalled USD 184.9 million.

Cash Flow – Avion Group hf.

2005 2004 1. 1. – 30. 9. 1. 1. – 30. 9.

Cash flows from operating activities: Net earnings ...... 37,744 20,224 Adjustments to reconcile net profit to net cash provided by operating activities: Depreciation and impairment of fixed assets ...... 44,764 21,919 Amortization and impairment of intangible assets and goodwill ...... 1,399 (6,676) Currency fluctuation and indexation ...... (9,315) (13) Gain on sale of fixed assets ...... (19,939) (4,128) Other changes ...... (19,852) (7,639) Working capital provided by operating activities 34,801 23,687 Changes in operating assets and liabilities ...... (17,871) 382 Net cash provided by operating activities 16,930 24,069

Cash flows from investing activities: Increase in fixed and intangible assets ...... (171,535) (113,032) Proceeds from the sale of fixed assets and intangible assets ...... 54,888 14,553 Investments in subsidiaries net of cash acquired ...... (24,119) 146 Investments in financial assets ...... (5,472) 0 Proceeds from financial assets ...... 683 0 Change in guarantee deposits ...... (12,365) (301) Net cash used in investing activities (157,921) (98,634)

Cash flows from financing activities: Proceeds from new share capital issued ...... 146,263 0 Proceeds from long-term borrowings ...... 237,363 109,312 Payment of long-term debt ...... (91,854) (24,377) Bank loans increase, (decrease) ...... (15,928) 977 Change in guarantee deposits ...... 544 0 Net cash provided in financing activities 276,387 85,912

Net change in cash and cash equivalents ...... 135,396 11,347 Effects of foreign exchange adjustments ...... (9,295) (127) Cash and cash equivalents at the beginning of year . . . . 58,757 2,334

Cash at the end of the year ...... 184,858 13,554

All amounts in thousands of USD

74 Subsequent events Air Atlanta Icelandic’s equity was negative 30 June 2005 and therefore Avion Group hf. increased the share capital in Air Atlanta Icelandic by USD 50 million in November 2005. This additional share capital is a requirement from the Icelandic Civil Aviation for the operation of the two joint operation Certificates previously operated as Flugfelagið Atlanta d.b.a Air Atlanta Icelandic and . The capital injection has been paid in full with a long-term loan from Landsbankinn.

10.2 Annual Financial Statements Avion Group 2004 and 2003

The financial statements for the years 2004 and 2003 of Avion Group hf. (previously Air Atlanta Icelandic) have been prepared in accordance with the Icelandic Financial Statements Act and the regulation on the presentation and content of financial statements and consolidated financial statements.

In July 2004 Avion acquired all outstanding shares in Íslandsflug hf. (now Flugfélagið Atlanta hf. d/b/a Air Atlanta Icelandic) and from that time Íslandsflug has been included in Avion’s consolidated financial statements.

Avion acquired control of Excel Airways Group Plc. on 15 October 2004 and from that time Excel Airways Group has been included in the consolidated financial statements. An initial purchase of 40.5% was made in March 2004 and from that time Excel was accounted for as an associate. Suðurflug was not included in the consolidation for the year 2003, as the intention was to sell the subsidiary. With changes in Avion the structure of Avion Suðurflug was included in the Avion Group consolidation for the year 2004. Avion’s ownership was 72% in Excel Airways Group, 90% in Suðurflug and 100% in Íslandsflug hf. (now Flugfélagið Atlanta ehf. d.b.a Air Atlanta Icelandic).

10.2.1 Income Statements Avion’s net profit was USD 13.3 million in 2004, compared to a net loss of USD 14.1 million in 2003. Net earnings per share were USD 1.79 in 2004 compared to USD -32.56 in 2003. Earnings per share are the ratio between profit and the weighted average number of outstanding shares during the year and show the profit per share.

Total operating revenue was USD 492.5 million in 2004, compared to USD 228.3 million in 2003. Operating expenses were USD 495.6 million in 2004, compared to USD 241.3 million in 2003. The loss before financial items was USD 3.1 million in 2004, compared to the loss of USD 13 million in 2003 thereof 15.8 million written off in accounts receivables.

75 Income Statement – Avion Group hf. (prev. Air Atlanta Icelandic)

2004 2003 1. 1. – 31. 12. 1.1. – 31. 12. Operating revenue: Sale ...... 479,211 226,665 Other income ...... 13,267 1,602 492,478 228,268

Operating expenses: Cost of materials ...... 247,429 117,916 Cost of services ...... 62,709 21,319 Personnel expenses ...... 99,115 69,374 Depreciation and amortization ...... 33,133 15,925 Other operating expenses ...... 53,198 16,765 495,583 241,298

Result before financial items ...... (3,105) (13,030)

Net financing costs ...... (9,642) (2,367) Effects of subsidiaries and associates ...... 18,071 (897)

Profit/loss from opertions ...... 5,324 (16,294)

Income tax ...... 5,350 2,192

Minority interest ...... 2,648 0

Net profit (loss) ...... 13,322 (14,102)

Net earnings per share (USD) 1.79 -32.56

All amounts in thousands of USD

10.2.2 Balance sheet Total assets were USD 479.3 million at year-end 2004, compared to USD 120.9 million at year-end 2003, showing an increase of USD 358.4 million during 2004. Fixed assets were USD 322.2 million at year-end 2004, compared to USD 68.1 million at the year- end 2003. Current assets were USD 157 million at year-end 2004, as compared with USD 52.7 million at year-end 2003.

Total liabilities were USD 417.3 million at year-end 2004, including long-term liabilities at USD 153.4 million, current liabilities at USD 251.5 million and subordinated loan of USD 12.4 million. At year-end 2003 total liabilities were USD 97.3 million. Total equity at year-end 2004 was USD 62 million. Total equity was USD 23.6 million at year-end 2003.

76 Balance Sheet – Avion Group hf. (Prev. Air Atlanta Icelandic)

31. 12. 2004 31. 12. 2003 Assets Fixed assets: Intangible assets: Goodwill ...... 134,727 0 Other intangible assets ...... 10,845 2,447 145,572 2,447 Property and equipment: Property plant and equipment 37,580 2,440 Aircraft ...... 117,251 55,447 154,831 57,887 Investments: Investment in subsidiaries ...... 0 256 Investment in other companies ...... 242 26 Long term deposits ...... 12,190 5,082 Bonds receivable ...... 415 37 Deferred tax asset ...... 8,986 2,407 21,833 7,808 Fixed assets 322,236 68,142 Current assets: Inventories ...... 10,792 6,223 Receivables: Accounts receivable ...... 70,030 32,159 Other receivables ...... 17,386 11,989 87,416 44,148

Bank deposits 58,861 2,349 Current assets 157,068 52,720

Total assets 479,304 120,862

Stockholders´ equity and liabilities

Equity: Capital stock ...... 8,628 6,273 Share premium ...... 28,365 17,300 Translation reserve ...... 2,274 0 Retain earnings ...... 13,322 0 Stockholders´ equity 52,590 23,573

Minority interest ...... 9,459 0 Total equity 62,049 23,573

Subordinated loan: Subordinated loan ...... 12,358 0

Long-term liabilities: Long-term notes ...... 147,957 19,849 Long-term deposits ...... 5,401 1,762 153,358 21,611 Current liabilities: Accounts payable ...... 87,055 49,343 Current maturities of long-term debt ...... 78,839 10,890 Other liabilities and prepaid income ...... 85,647 15,445 251,540 75,678

Total liabilities 417,256 97,288

Total equity and liabilities 479,304 120,862

All amounts in thousands of USD

77 10.2.3 Cash flow

Working capital provided by operating activities was USD 8.9 million for the year 2004, compared to working capital used in operating activities of USD 0.5 million for the year 2003. Operating assets and liabilities absorbed USD 8.4 million in 2004, as compared to an increase of USD 3.3 million for the year 2003. Net cash provided by operating activities was USD 0.5 million at year-end 2004 compared to USD 2.7 million at year-end 2003.

Net cash used in investing activities was USD 111.0 million for the year 2004, including an increase in investment in property and equipment of USD 94.9 million. In 2003 the net cash used in investing activities was USD 14.6 million.

Net cash flow from financing activities was USD 163.2 million 2004, including proceeds from long-term borrowings of USD 213.5 million. In 2003 the net cash provided in financing activities was USD 11.3 million.

During the year 2004, net cash and cash equivalents increased by USD 52.8 million, compared to a decrease of USD 0.5 million in 2003. Cash at the end of 2004 was USD 58.9 million.

78 Cash Flow – Avion Group hf. (PREV. Air Atlanta Icelandic)

2004 2003 1. 1. – 31. 12. 1. 1. – 31. 12. Cash flows from operating activities: Net profit (loss) ...... 13,322 (14,103) Adjustment to reconcile net profit to net cash provided by (used in) operating activities: Depreciation and amortization ...... 33,133 15,925 Currency adjustment on long-term debt ...... 856 49 Minority interest ...... (2,648) 0 Effects of subsidiaries and associates ...... (18,071) 897 Gain on sale of fixed assets ...... (11,205) (1,120) Change in provision ...... 121 0 Deferred tax ...... (6,580) (2,192) Working capital provided by (used in) operations 8,929 (544)

Changes in operating assets and liabilities: Inventories, increase ...... (1,910) (1,236) Current receivables, increase ...... (1,920) (3,399) Current liabilities (decrease) increase ...... (4,553) 7,919 Changes in operating assets and liabilities (8,382) 3,284

Net cash provided by operating activities 546 2,740

Cash flows from investing activities: Investment in property and equipment ...... (94,939) (19,639) Proceeds from the sale of fixed assets ...... 36,300 1,768 Investment in subsidiaries and other companies net of cash acquired ...... (44,566) 0 Proceeds from sale of investments ...... 157 1,800 Changes in deposits ...... (7,935) 1,454 Investing activities (110,983) (14,618)

Cash flows from financing activities: Paid in capital ...... 0 3,000 Treasury shares purchased ...... (1,456) (1,000) Proceeds from long-term borrowings ...... 213,510 44,233 Payment of long-term liabilities ...... (42,999) (34,884) Change in bank borrowings ...... (5,846) 0 Financing activities 163,208 11,349

Increase (decrease) in cash ...... 52,771 (529) Cash at beginning of year ...... 2,349 2,878 Effects of foreign exchange adjustments ...... 3,740 0 Cash at year-end ...... 58,861 2,349

All amounts in thousands of USD

79 10.3 Annual Financial Statements Íslandsflug hf. 2004 and 2003

The financial statements for the year 2004 and 2003 for Íslandsflug hf. (now Flugfélagið Atlanta ehf. d.b.a Air Atlanta Icelandic) are prepared on a USD historical cost basis. In July 2004 Avion Group hf. purchased all outstanding shares in Íslandsflug hf. and from that time Íslandsflug hf. became the subsidiary of Avion Group hf. and was included in Avion’s consolidated financial statements.

10.3.1 Income Statements Air Atlanta Icelandic’s net profit in 2004 was USD 2.8 million, compared to USD 1.7 million in 2003. Net earnings per share in 2004 was USD 0.008 and in 2003 USD 0.005. Calculation of net earnings per share has been adjusted for the average number of issued or repurchased share capital.

Air Atlanta Icelandic’s operating revenue was USD 134.2 million in 2004, compared to USD 86.6 million in 2003. The increase in revenue is mainly from the operation of the two new Boeing 737, that Air Atlanta purchased in 2004. Operating expenses were USD 130.8 million in 2004, compared to USD 83.0 million in 2003. Operating profit before financial items 2004 was USD 3.4 million, compared to USD 3.6 million in 2003.

Income Statement – air atlantA icelandic (prev. íslandsflug hf.)

2004 2003 1. 1. – 31. 12. 1. 1. – 31. 12. Operating revenue: Transport revenue, foreign ...... 38,301 19,324 Transport revenue, domestic ...... 3,756 4,799 Aircraft lease ...... 90,737 61,697 Other revenue ...... 1,358 803 134,151 86,623

Operating expenses: Aircraft and crew lease ...... 40,658 28,618 Maintenance ...... 28,146 19,868 Salaries and salary-related expenses ...... 14,047 11,697 Aircraft services and traffic handling ...... 15,777 6,101 Fuel cost ...... 11,421 4,190 Other expenses ...... 17,104 10,762 Depreciation ...... 3,614 1,796 130,767 83,032

Operating profit excluding financial income and (expenses) 3,384 3,591

Financial income and (expenses): Interest earned ...... 45 24 Interest expenses and indexation ...... (1,240) (816) Currency fluctuations ...... (214) (1,127) (1,410) (1,918)

Net earnings before income tax ...... 1,974 1,672 Income tax ...... 827 0

Net profit ...... 2,801 1,672

Net earnings per share (USD) ...... 0.61 0.35

All amounts in thousands of USD

80 10.3.2 Balance Sheet

Air Atlanta Icelandic’s total assets were USD 51.6 million at year-end 2004, compared to USD 27.6 million at year-end 2003. The increase during 2004 was USD 24.0 million. Fixed assets were USD 37.3 million at year-end 2004, compared to USD 20.8 million at year-end 2003. During the year 2004 Air Atlanta purchased three Boeing 737 aircraft for a total of 23.8 million but one of these arircraft was sold for USD 7.0 million later the same year. Current assets were USD 14.3 million at year-end 2004, compared to USD 6.8 million at year-end 2003.

Air Atlanta Icelandic’s total liabilities and provisions were USD 47.2 million at year-end 2004, including long-term liabilities at USD 22 million and current liabilities at USD 24.6 million. At year-end 2003, total liabilities and provisions were USD 25.1 million. Total equity at year-end 2004 was USD 4.4 million, compared to USD 2.6 million at year-end 2003.

81 Balance Sheet – air atlantA icelandic (prev. íslandsflug hf.)

31. 12. 2004 31. 12. 2003 Fixed assets: Intangible assets: Deferred charges ...... 295 0 Property and equipment: Aircraft and flight equipment ...... 27,833 15,704 Buildings ...... 240 264 Machinery and equipment ...... 563 322 28,636 16,290 Engine hours ...... 2,927 1,742 31,563 18,033

Investments: Investment in other companies ...... 208 21 Guarantee deposits ...... 4,006 2,754 Bonds ...... 406 0 Deferred tax asset ...... 827 0 5,447 2,775

Fixed assets 37,305 20,807

Current assets: Spare parts ...... 647 757 Receivables: Accounts receivable ...... 9,973 5,368 Other receivables ...... 783 482 Prepaid expenses ...... 5 1

Cash and bank deposits ...... 2,845 230

Current assets 14,253 6,838

Total assets 51,558 27,646

Stockholders´ equity and liabilities

Stockholders´ equity: Capital stock ...... 4,584 4,775 Statutory reserve ...... 0 67 Accumulated deficit ...... (220) (2,274) Stockholders´ equity 4,364 2,569

Provisions: Maintenance reserves ...... 639 1,150

Long-term liabilities: Long-term notes ...... 21,973 8,639

Current liabilities: Accounts payable ...... 14,798 10,012 Current maturities of long-term debt ...... 2,895 2,111 Accrued expenses ...... 6,890 3,165 24,582 15,288

Total liabilities and provisions 47,194 25,077

Total stockholders´ equity and liabilities 51,558 27,646

All amounts in thousands of USD

82 10.3.3 Cash flow

Working capital provided by operating activities was USD 6.6 million for the year 2004, compared to USD 5.2 million in 2003. Change in operating assets and liabilities was an increase of USD 2.5 million in 2004, compared to USD 1.1 million in 2003. Net cash provided by operating activities was USD 9.1 million in 2004, compared to USD 6.3 million 2003.

Investing activities were USD 19.6 million in 2004, compared to USD 2.9 million 2003.

Net cash flow from financing activities was USD 13.1 million in 2004, including proceeds from long-term borrowings of USD 18.1 million. In 2003 the net cash flow to financing activities was USD 3.4 million.

Cash at year-end 2004 was USD 2.8 million, which represents an increase of USD 2.6 million over the year 2004.

83 Cash Flow – air atlantA icelandic (prev. íslandsflug hf.)

2004 2003 1. 1. – 31. 12. 1. 1. – 31. 12. Cash flows from operating activities: Net profit for the year ...... 2,801 1,672 Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation ...... 3,614 1,796 Currency fluctuation on long-term debt and notes receivable ...... (64) (79) Engine hours expenses and changes in maintenance reserves ...... 2,109 2,150 Write-off on investments in other companies ...... 0 24 Income tax ...... (827) 0 Gain on sale of fixed assets ...... (1,013) (374) Working capital provided by operations 6,619 5,189

Changes in operating assets and liabilities: Spare parts, decrease (increase) ...... 110 (347) Receivable, increase ...... (4,910) (1,907) Current liabilities, increase ...... 7,324 3,361 Changes in operating assets and liabilities 2,524 1,107

Net cash provided by operating activities 9,143 6,297

Cash flows from investing activities: Investment in intangible assets ...... (345) 0 Investment in property and equipment ...... (24,255) (2,953) Proceeds from the sale of fixed assets ...... 9,310 1,474 Engine hours, increase ...... (2,568) (138) Investment in other companies ...... (143) (13) Guarantee deposits, increase ...... (1,246) (1,255) Bonds, increase ...... (351) 0 Investing activities (19,598) (2,886)

Cash flows from (to) financing activities: Investment in treasury stock ...... (1,006) 0 Proceeds from long-term borrowings ...... 18,079 9,115 Payment of long-term loans ...... (4,002) (2,564) Purchase lessor agreement, decrease ...... 0 (9,933) Financing activities 13,071 (3,381)

Increase in cash ...... 2,615 29 Cash at beginning of the year ...... 230 201 Cash at the end of the year ...... 2,845 230

All amounts in thousands of USD

84 10.4 Annual Financial Statements Excel Airways Group Plc 2004 and 2003

The principal activity of Excel Airways Group plc and its subsidiary companies is that of a charter airline and seat broker, operating flights mainly for UK tour operators. Excel Airways Group also charters aircraft for servicing travel agents´ and tour operators’ flight requirements and sub-leases aircraft to overseas airlines during the winter. Excel also operates a tour operating company.

The financial calendar of Excel is 1 November to 31 October. The financial statements have been prepared under the historical cost convention and are in accordance with applicable accounting standards.

The consolidated financial statements incorporate the results of Excel Airways Group plc and all of its subsidiary undertakings as at 31 October 2004 using the acquisition or merger method of accounting as required. Where the acquisition method is used, the results of subsidiary undertakings are included from the date of acquisition.

In October 2004 Avion increased its share in Excel Airways Group by acquiring 71.5% of the issued share capital of Excel Airways Group and from that time Excel Airways Group was included in Avion’s consolidated financial statements.

10.4.1 Income Statements Excel’s profit was GBP 9.5 million in 2004, compared to GBP 9.3 million in 2003. Net earnings per share were GBP 1.99 in 2004 and GBP 1.94 in 2003. Calculation of net earnings/loss per GBP 1 nominal value has been adjusted to take into consideration the nominal value of share capital.

Excel’s turnover was GBP 319.2 million in 2004, compared to GBP 247.3 million in 2003. Turnover in respect of airline seat sales represents gross sales, net of any value added tax, on contracts where any group company acts as principal and represents net margins on contracts where any group company acts as a payment collecting broker. Cost of sales was GBP 277 million in 2004, compared to GBP 219 million in 2003. Gross profit 2004 was GBP 42.2 million compared to GBP 28.4 million for the year 2003. Operating profit for the year 2004 was GBP 19.9 million, compared to GBP 12.9 million at year-end 2003. Profit on ordinary activities before taxation was GBP 20.9 million, compared to GBP 13.4 million in 2003. Profit on ordinary activities before taxation as a ratio of turnover was 7% in 2004 and 5% in 2003.

85 Income Statement - Excel Airways Group plc

1. 11. 2003 1. 11. 2002 – 31. 10. 2004 – 31. 10. 2003

Turnover ...... 319,218 247,312 Cost of sales ...... (277,001) (218,956) Gross profit ...... 42,217 28,356

Distribution costs ...... (9,881) (6,530) Administration expenses ...... (12,413) (8,887)

Operating profit before goodwill amortisation ...... 19,969 12,986 Goodwill amortisation ...... (46) (47)

Operating profit ...... 19,923 12,939

Interest receivable and similar income ...... 1,252 492 Interest payable and similar charges ...... (223) (59) Profit on ordinary activities before taxation ...... 20,952 13,372 Taxation on profit on ordinary activities ...... (6,388) (4,083) Profit on ordinary activities after taxation ...... 14,564 9,289

Dividends ...... (4,992) - Retained profit for the financial year ...... 9,572 9,289

Net earnings per share of GBP 1 ...... 1.98 1.94

All amounts in thousands of GBP

10.4.2 Balance Sheet Excel’s total assets were GBP 71.4 million at 31 October 2004, compared to GBP 48.8 million at 31 October 2003. The increase between 1 November 2003 and 31 October 2004 was GBP 22.5 million. Fixed assets were GBP 8.6 million at 31 October 2004, compared to GBP 4.3 million at 31 October 2003. Current assets were GBP 62.8 million at 31 October 2004, compared to GBP 44.5 million at 31 October 2003.

Excel’s total liabilities and provisions were GBP 49.2 million at 31 October 2004, including long-term liabilities of GBP 2.9 million and current liabilities of GBP 46 million. At 31 October 2003 the total liabilities and provisions were GBP 33.7 million. Total equity at 31 October 2004 was GBP 22.2 million, compared to GBP 15.1 million at 31 October 2003.

86 Balance Sheet - Excel Airways Group Plc

31. 10. 2004 31. 10. 2003 Assets Fixed assets: Intangible assets ...... 344 390 Deferred charges ...... 8,228 3,950 8,572 4,340 Current assets: Stocks ...... 341 150 Debtors - due within one year ...... 13,657 23,543 Other debtors ...... 1,845 4,059 Cash at bank and in hand ...... 46,945 16,740 62,788 44,492

Total assets 71,360 48,832

Stockholders´ equity and Liabilities

Stockholders´ equity: Called up share capital ...... 4,800 4,800 Employees´ benefit trust reserve ...... (2,460) - Merger reserve ...... 1,275 1,275 Profit and loss account ...... 18,591 9,019 Stockholders´ funds - equity 22,206 15,094

Provision for liabilities and charges ...... 304 818

Long-term liabilities: Long-term notes ...... 2,857 1,188

Current liabilities: Short-term notes ...... 45,993 31,732 Total liabilities and provisions ...... 49,154 33,738

Total stockholders´ equity and liabilities 71,360 48,832

All amounts in thousands of GBP

10.4.3 Cash flow Net cash inflow from operating activities was GBP 44.8 million at 31 October 2004, compared to net cash outflow of GBP 2.3 million at 31 October 2003. A return on investment and servicing of finance was GBP 1 million at 31 October 2004 and GBP 0.4 million 31 October 2003. Capital expenditure and financial investment was GBP 9.6 million at 31 October 2004 and GBP 0.9 million at 31 October 2003.

Cash at the end of October 2004 was GBP 41 million, representing an increase of GBP 25.5 million over the financial year 2004.

87 Cash Flow – Excel Airways Plc

1. 11. 2003 1. 11. 2002 – 31. 10. 2004 – 31. 10. 2003 Reconciliation of operating profit to net cash inflow/(outflow) from operating activities: Operating profit ...... 19,923 12,939 Difference between net earnings and cash from operations: Amortisation of goodwill ...... 46 47 Depreciation ...... 880 587 Increase in stocks ...... (191) - Decrease/(increase) in debtors ...... 15,946 (13,875) Increase/(decrease) in creditors ...... 8,950 (2,655) (Decrease)/increase in provisions ...... (679) 679 (Profit)/loss on disposal of fixed assets ...... (98) 2 Net cash inflow/(outflow) from operating activities 44,777 (2,276)

Return on investment and servicing of finance: Interest received ...... 1,252 492 Interest paid ...... (213) (47) Interest on finance leases ...... (10) (12) Return on investment and servicing of finance 1,029 433

Taxation ...... (5,717) (694)

Capital expenditure and financial investment: Purchase of tangible fixed assets ...... (5,140) (927) Payment in respect of shares transferred to employees´ benefit trust ...... (2,460) - Increase in bank deposits in respect of letters of credit . . . (2,058) - Proceeds from sales of fixed assets ...... 98 - Capital expenditure and financial investment (9,560) (927)

Equity dividends paid ...... (4,992) - Movement in net cash in the year ...... 25,537 (3,472) Cash at the beginning of the period ...... 15,483 18,955

Cash at the end of period ...... 41,002 15,483

All amounts in thousands of GBP

10.5 Annual Financial Statements Eimskip 2004 and 2003

Financial Statements of Eimskipafélag Íslands ehf. include the Consolidated Financial Statements of the Company and its subsidiaries. The Financial Statements are prepared in accordance with the Financial Statements Act and Regulation on the Presentation and the Contents of Financial Statements and Consolidated Financial Statements. The same accounting principles apply as during the previous year. The Financial Statements are prepared in Icelandic currency in ISK.

The operations of the majority of foreign subsidiaries are separated from the operations of the parent company. In accordance, assets and liabilities including goodwill of the subsidiaries are translated to ISK at the year end exchange rate. Income and expenses of the subsidiaries are translated into ISK at the average exchange rate.

88 10.5.1 Income Statements

Transportation income consists of vessel, stevedoring, forwarding and pre- and on- carriage revenues, such as freight transportation, ground transportation and other service revenues. Income of vessels is recognised based on the status of the voyage at year end. Vessel revenues and expenses generated by voyages taking place at year-end are thus divided between the respective years. Operating revenue was ISK 24,063 million in 2004 compared to ISK 23,284 million in 2003, representing an increase of ISK 779 million year-on-year. Operating profit excluding financial income and expenses was ISK 1,202 million, compared to ISK 640 million 2003, representing a year-on-year increase of 88%. Net income for the year 2004 amounts to ISK 990.7 million compared to ISK 536.3 for the year 2003.

Net earnings per share of ISK 1 were 0.3 in 2004 and 0.22 in 2003. Earnings per share are the ratio between profit and the weighted average number of outstanding shares during the year and show the profit per share.

Income Statement - Eimskipafélag íslands ehf.

2004 2003 1. 1. – 31. 12. 1. 1. – 31. 12. Operating revenue: Transportation ...... 23,511,165 22,998,529 Other operating income ...... 552,086 285,477 24,063,251 23,284,006 Operating expenses: Transportation ...... 19,724,083 19,875,391 Marketing and administration ...... 1,765,507 1,767,156 Depreciation ...... 1,371,238 1,001,173 22,860,828 22,643,720

Operating profit excluding financial income and expenses . 1,202,423 640,286

Financial income and expenses ...... 60,895 11,088

Pre-tax profit ...... 1,263,318 651,374

Income tax ...... (255,363) (113,411)

Net earnings before minority interest ...... 1,007,955 537,963 Minority interest in subsidiaries ...... (17,284) (1,696)

Net earnings ...... 990,671 536,267

Net earnings per share of ISK 1 ...... 0.30 0.22

All amounts are in thousands of ISK

89 10.5.2 Balance Sheet

Eimskip´s total assets were ISK 20,944 million at year-end 2004, compared to ISK 13,644 million at year-end 2003. The increase during 2004 was ISK 7,300 million or 54%. Fixed assets were ISK 12,590 million at year-end 2004, including buildings and land at ISK 5,867 million and vessels at ISK 3,884 million. At year-end 2003 fixed assets were ISK 6,126 million. Eimskip’s investments at year-end 2004 were ISK 586.7 million but at year-end 2003 investments amounted to ISK 617 million. Current assets were ISK 6,697 million at year-end 2004, including accounts receivable at ISK 4,146 million. At year-end 2003 current assets were ISK 6,875 million.

Eimskip´s total liabilities were ISK 14,088 million at year-end 2004, including long- term debt at ISK 9,191 million. At year-end 2003 total liabilities were ISK 9,946 million. Total equity at year-end 2004 was ISK 6,584 million, compared to ISK 3,642 million at year-end 2003.

90 Balance Sheet - Eimskipafélag íslands ehf.

31. 12. 2004 31. 12. 2003 Assets Intangible assets: Goodwill ...... 1,069,669 25,497 1,069,669 25,497

Fixed assets: Buildings and land ...... 5,867,095 1,495,993 Vessels ...... 3,884,064 2,519,728 Equipment ...... 2,838,805 2,110,116 12,589,964 6,125,837

Investments: Shares in associated companies ...... 61,888 58,115 Shares in other companies ...... 54,578 37,764 Long-term notes ...... 420,100 495,684 Deferred tax asset ...... 50,102 25,756 586,668 617,319

Current assets: Inventories ...... 214,279 221,332 Receivables: Accounts receivable ...... 4,145,875 3,569,582 Notes receivable and bonds ...... 323,120 349,469 Receivable from associated companies ...... 49,950 313,105 Sundry expenses ...... 614,733 521,382

Cash and cash equivalents ...... 1,349,361 1,900,230 6,697,318 6,875,100

Assets total 20,943,619 13,643,753

Equity and Liabilities Stockholders´ equity: Capital stock ...... 3,697,407 2,400,000 Contributed capital in excess of par ...... 1,373,249 609,305 Retained earnings ...... 1,526,938 536,267 Translation reserve ...... (13,704) 96,504 6,583,890 3,642,076

Minority interest in stockholders’ equity of subsidiaries 272,049 56,139

Provisions: Deferred income tax liability ...... 114,922 32,411 114,922 32,411 Long-term debt: Bonds ...... 3,283,083 238,385 Credit institutions ...... 5,908,109 1,250,580 Loans from parent company and other group companies . . . . . 0 3,853,498 9,191,192 5,342,463

Current liabilities: Credit institutions ...... 283,940 7,133 Accounts payable ...... 2,001,796 2,345,085 Current maturities of long-term debt ...... 689,447 695,375 Taxes for the year ...... 207,566 73,252 Accrued liabilities and expenses ...... 1,598,817 1,449,819 4,781,566 4,570,664

Total liabilities and provisions total 14,087,680 9,945,538

Stockholders´ equity, minority interest and liabilities, total 20,943,619 13,643,753

All amounts are in thousands of ISK

91 10.5.3 Cash flow

Net cash provided by operating activities was ISK 1,652 million during the year 2004, compared to net cash provided by operating activities at ISK 1,861 million in 2003. Net cash used in investing activities was ISK 4,302 million in 2004 compared to net cash used in investing activities at ISK 491 million in 2003. Net cash flows provided by financing activities in 2004 were ISK 2,140 million, compared to net cash used in financing activities at ISK 311 million in 2003.

Cash at year-end 2004 was ISK 1,349 million, representing a decrease of ISK 551 million over the financial year 2004.

Cash Flow - Eimskipafélag íslands ehf.

2004 2003 1. 1. – 31. 12. 1. 1. – 31. 12. Cash flows from operating activities: Net earnings ...... 990,671 536,267 Difference between net earnings and cash from operations: Capital gain from sale of assets and disposal of shares in other companies ...... (144,005) (81,950) Interest in associated companies ...... (3,671) 27,560 Depreciation ...... 1,371,238 1,001,173 Currency fluctuation and indexation ...... (401,184) (166,386) Deferred income tax liability, change ...... 55,113 19,925 Minority interest in subsidiaries ...... 17,284 1,696 Working capital provided by operating activities 1,885,446 1,338,285

Changes in current assets and liabilities ...... (233,343) 522,308

Cash provided by operating activities 1,652,103 1,860,593

Cash flows from investing activities: Investments in fixed assets ...... (2,883,380) (995,613) Proceeds from the sale of fixed assets ...... 478,687 395,786 Investments in shares in other companies less acquired cash and cash equivalents ...... (2,104,950) (26,073) Proceeds from sale of shares in other companies ...... 35,209 57,009 Short-term loans, change ...... 172,162 78,373

Net cash (used in) provided by investing activities (4,302,272) (490,518)

Cash flows from financing activities: Long-term debt proceeds ...... 8,534,755 44,977 Long-term debt repaid ...... (6,712,262) (250,511) Short-term borrowing, change ...... 317,368 (105,233)

Net cash provided by (used in) financing activities 2,139,861 (310,767)

Foreign exchange translation adjustment on cash in foreign subsidiaries ...... (40,561) 4,338 Increase (decrease) in cash and cash equivalents . . . . . (550,869) 1,063,646 Cash and cash equivalents at beginning of the year . . . . 1,900,230 836,584 Cash and cash equivalents at the end of the year . . . . . 1,349,361 1,900,230

All amounts are in thousands of ISK

92 Appendices

1. Articles of Association 2. Avion Group – Interim Accounts 30 September 2005 3. Glossary of terms

93

Avion Group hf.

ARTICLES OF ASSOCIATION

Section 1 The Company’s Name, Domicile and Object

Art. 1 The Company is a Public Limited Liability Company and its name is Avion Group hf.

Art. 2 The Company’s domicile and venue is in Reykjavik. The Company’s address is at Hlidasmari 3, 201 Kopavogur.

Art. 3 The Company’s object is operations, ownership and investments in Companies engaged in transportation operations and other related businesses.

Section II The Company’s Share Capital

Art. 4 The Company’s share capital amounts to 1.532.502.529 (one billion five hundred and thirty two million, five hundred and two thousand five hundred and twenty nine kronur) and is divided into an equal number of shares amounting to one krona each. Each krona carries one vote.

The Company’s Board of Directors may increase the Company’s share capital by up to ISK 467.497.471 all in one or in phases, by means of subscription to new shares so 2 that the total share capital will be up to ISK 2,000,000,000. The Company’s Board of Directors shall determine the nominal value of new shares, offering rate and terms of payment in accordance with Chapter V of the Act on Public Limited Liability Companies no. 2/1995 (the Companies Act). Shareholders have waived their pre- emptive rights to subscribe to the new shares in accordance with the provision of Art. 34 of the Companies Act no. 2/1995. The new shares shall confer rights as from the date of registration of the share capital increase. The Board of Directors may decide that payment for the new shares is made, partly or fully, in a form other than cash. The authorization to the Company’s Board of Directors to increase the share capital in accordance with this paragraph will be cancelled as of 28 December 2009 to the extent that it has not been used.

A shareholders’ meeting alone may decide to reduce the share capital.

Art. 5 The Company’s Board of Directors may decide that the Company’s share certificates are issued electronically in accordance with the provisions of Act no. 131/1997 on the Electronic Registration of Title to Securities.

Art. 6 The Company’s Board of Directors shall keep a register of shares in a legal form.

Transcription from a Securities Depository concerning ownership of shares in the Company is to be considered a satisfactory basis for a register of shares and will grant all the rights stipulated by the Company’s Articles of Association.

The register of shares shall be kept in the Company’s office and all shareholders shall have access thereto and may inspect its content.

Art. 7 No special rights are conferred on any shares in the Company. Shareholders will not be made subjects to redemption of their shares.

3

Art. 8 The Company is authorized to acquire and accept as security own shares in conformity with the provisions of Chapter VIII of the Companies Act.

Art. 9 Shares in the Company may be sold and pledged, unless otherwise provided for by law.

Changes in ownership of shares, irrespective of whether these occur through sale, gift, inheritance, administration of estate or attachment, shall at all times be notified to the Company’s office as soon as these occur and the register of shares shall then be amended in conformity therewith.

A person acquiring shares in the Company cannot exercise the rights conferred on a shareholder unless his name has been recorded in the register of shares or he has given notice and provided evidence of his ownership of the shares.

For the Company the register of shares shall be considered to constitute fully valid evidence of ownership of shares in the Company and dividend at each given time as well as bonus share certificates, calls to meetings and all notifications shall be sent to the party who is at each given time the registered owner of the share concerned in the Company’s register of shares. Dividend shall be paid to those who are registered owners of shares in the Company’s register of shares at the end of the day when the general meeting is held, unless the Company has received a notification that the dividend has been assigned with assignment of shares. The Company assumes no responsibility for payments or notices being lost owing to failure to notify the Company of changes of ownership or address.

Art. 10 Each shareholder is under obligation, without specific commitment, to abide by the Articles of Association of the Company in their current form or as lawfully amended from time to time.

4

Shareholders shall not be liable for the commitments of the Company beyond their share in the Company.

Section III Shareholders’ Meetings

Art. 11 The supreme authority in all the affairs of the Company, within the limits established by its Articles of Association and statutory law, is in the hands of valid shareholders’ meetings.

The right to attend the Company’s shareholders’ meeting is held by shareholders, their representatives and advisors, the Company’s Auditor and the General Manager.

A shareholder may have an attorney attend a shareholders’ meeting on his behalf. An attorney shall submit a dated Power of Attorney in writing. Power of Attorney will never remain valid longer than for five years as of the date thereof. Power of Attorney may be withdrawn at any time.

A shareholder may attend a meeting together with an advisor. An advisor does not have the right to speak, submit proposal nor to vote at shareholders’ meetings.

The Company’s Auditor and General Manager have the right of speech and to submit proposals at shareholders’ meetings even though they are not shareholders.

The Company’s Board of Directors may invite experts to attend meetings in case their opinion or assistance is needed.

Art. 12 An Annual General Meeting shall be held before the end of May each year.

An Annual General Meeting shall be convened by means of an advertisement in a daily newspaper or in other verifiable manner. The agenda of the meeting shall be stated in the notice convening the meeting. In case a proposal for the alteration of the 5

Company’s Articles of Association is to be considered at the meeting all essential aspects of such a proposal is to be included in the notice.

A notice of an Annual General Meeting is to be given not later than a week and not earlier than four weeks before the meeting. An Annual General Meeting is valid if it is lawfully convened without regard of the number of attendants.

Art. 13 At an Annual General Meeting the following matters shall be taken for consideration: 1. The report by the Board of Directors on the activities of the Company during the preceding year of operation. 2. The Company’s annual accounts for the preceding year of operations and the Company’s Auditor’s report submitted for confirmation. 3. Decision concerning the allocation of the Company’s profit or the cover of losses of the fiscal year. 4. Decision concerning remuneration to members of the Board of Directors for the next year of operation and to the Auditor for the preceding year of operation. 5. Proposals for amendments of the Company’s Articles of Association, if received. 6. Election of the Board of Directors. 7. Election of an Auditor or an Auditing firm, cf. Art. 23. 8. Other matters.

In case shareholders holding a minimum of one third of the share capital so require in writing at an Annual General Meeting a decision on items 2 and 3 shall be postponed until an Extended Annual General Meeting which shall be held at the earliest one month and at the latest two months later. Further postponement cannot be required.

Art. 14 Further shareholders’ meetings shall be held when the Company’s Board of Directors deems necessary, according to a resolution of a meeting or if the elected Auditor or shareholders holding a minimum of one tenth of the share capital so require in writing, specifying the agenda, but the shareholders’ meeting shall then be convened 6 within fourteen days as of the time the request was received by the Board of Directors.

A notice of a shareholders’ meeting is to be given not later than a week and not earlier than four weeks before the meeting. Shareholders’ meetings shall be convened by means of an advertisement in a daily newspaper or in other verifiable manner. The validity of shareholders’ meetings other than Annual General Meetings shall be subject to the same rules as the validity of an Annual General Meeting, cf. Art. 12, para. 3.

Art. 15 Any shareholder shall be entitled to have a specific matter considered at a shareholders’ meeting if such shareholder submits a written requisition to this effect to the Company’s Board of Directors so sufficiently prior to the meeting that the business can be included in the agenda in accordance with the Articles of Association.

A notice of a meeting shall specify the matters to be considered at the shareholders’ meeting. Not later than a week before a shareholders’ meeting the agenda, complete wording of any resolutions proposed as well as annual accounts, the report by the Board of Director’s and the Auditor’s report, in case of an Annual General Meeting, shall be available for inspection by shareholders at the Company’s office.

Matters not included in the agenda of a shareholders’ meeting may only be determined by the Company in the meeting if all shareholders consent, but a resolution thereon may be made as guidance for the Company’s Board of Directors. Although a matter has not been included in the agenda a resolution may be passed to convene other shareholders’ meeting to deal with the matter, and, moreover, an Annual General Meeting may at all times decide on matters which are to be considered at such meeting according to the Articles of Association or statutory law.

Validly presented proposals for addition or amendment may be submitted at the meeting, even if such proposals have not been available for inspection by shareholders.

7

Art. 16 The Chairman of the Company’s Board of Directors will open shareholders’ meetings and conduct the election to the Chair. The Chairman of a meeting will conduct shareholders’ meetings and the election of a Secretary for a meeting. At the outset of the meeting the Chairman will ascertain as to whether it has been lawfully convened so that a meeting is valid and will declare as to whether this is so. He will conduct all debates and elections.

When a meeting has been opened a list of shareholders and shareholders’ attorneys attending a meeting shall be prepared in order to show how many shares and votes each of the attendants holds. This list shall be used until a shareholders’ meeting may amend it.

Art. 17 The Secretary of a meeting shall keep minutes of the meeting. Therein shall be recorded the decisions of a shareholders’ meeting along with the conclusions of elections. A list of present shareholders and their attorneys shall be entered into the minutes or shall be attached thereto. The minutes shall be read aloud prior to the end of a meeting and comments presented, if any, shall be entered therein. The Chairman and the Secretary of a meeting shall sign the minutes.

Not later than fourteen days after a shareholders’ meeting shareholders shall have access to the minutes or a certified transcription of the minutes at the Company’s office. The book containing the minutes shall be preserved in a secure manner.

The minutes shall constitute evidence of what has occurred at meetings.

Art. 18 At shareholders’ meetings each share of one krona (ISK) carries one vote.

At shareholders’ meetings matters shall be determined by majority of votes, unless otherwise provided for in the Articles of Association or by statutory law. In case of equality of votes, the results shall be determined by the drawing of lots. Voting shall be by ballot if any voting member of a meeting so requests. 8

The approval of all shareholders is required for the following purposes:- (a) To obligate shareholders to contribute funds or other elements for the Company’s needs beyond their prior obligations. (b) To obligate shareholders to be subject to redemption of their shares in part or in full, unless the Company is wound up or the share capital is lawfully reduced. (c) To limit the right of shareholders to dispose of their shares beyond what is provided for in Art. 9 of the Articles of Association. (d) To alter the object of the Company substantially. (e) To amend the provisions of the Articles of Association concerning special rights, the right to vote, in case preferred shares might be issued or concerning shareholders share in the Company or the relationship between shareholders.

Section IV The Company’s Board of Directors

Art. 19 The Company’s Board of Directors consist of a maximum of five and a minimum of three persons who shall be elected annually at an Annual General Meeting. No reserve member shall be appointed. The eligibility of Directors is subject to the Companies Act. Those making themselves available for the Company’s Board of Directors shall give notice thereof in writing to the Board of Directors no later than five weekdays before the beginning of the Annual General Meeting at which the election of a Board of Directors is on the agenda.

In case proposals are submitted for a larger number of persons than are to be elected multiplication elections shall be applied.

The Company’s Board of Directors elects a Chairman and allocates duties among themselves as is deemed necessary.

9

Art. 20 The Chairman shall convene Board meetings and preside at Board meetings. A meeting shall be held whenever the Chairman deems necessary. The Chairman shall also convene a meeting of the Board of Directors when requested by a Director or the General Manager. The presence of the majority of the Directors constitutes a quorum. Matters shall be determined by majority of votes. In case of equality of votes, the Chairman shall have the casting vote.

The Directors shall record the proceedings of meetings of the Board of Directors in a minute book to be signed by the Directors.

Art. 21 The supreme authority in all of the affairs of the Company between shareholders’ meetings is in the hands of the Board of Directors.

The Company’s Board of Directors shall recruit a General Manager and determine his terms of employment. The Company’s Board of Directors and General Manager jointly undertake the administration of the Company.

The Board of Directors alone may grant Power of Procuration for the Company.

Signatures of two Directors are binding upon the Company. In other respects the powers, responsibility and work of the Board of Directors shall be in accordance with statutory law and rules of procedure which the Board shall adopt.

Art. 22 The General Manager shall be in charge of the day-to-day management of the Company and shall in that capacity follow the directions and guidelines provided by the Company’s Board of Directors. The day-to-day management shall not include transactions which are unusual or of great significance. The General Manager may only undertake such transactions pursuant to a specific authorisation given by the Board of Directors, save where a resolution of the board of directors cannot be awaited without major inconvenience to the operations of the Company. In any such 10 case the Board of Directors shall be notified as soon as possible of the transaction which has been made.

The General Manager shall ensure that accounting and finances are in compliance with statutory law and good practice and that the asset management of the Company is carried out in a proper manner.

The General Manager shall hire Company employees. He shall also be the one to give employees notice of termination and deal with their terms of employment.

Section V Accounts and Audit

Art. 23 At an Annual General Meeting a Certified Public Accountant or an Auditing firm for the Company, shall be elected for a term of one year. The Auditor may not be elected from the group of Directors or employees. The qualification and eligibility of the Auditor is in other respects subject to statutory law.

Art. 24 The Company’s operational and fiscal year is from November 1st to October 31st.

The Company’s Board and General Manager shall prepare annual accounts for each fiscal year and these shall contain an income statement, balance sheet, statement of cash flow and explanatory notes.

The annual accounts shall be prepared in accordance with statutory law and generally accepted accounting principles, both as regards the assessment of the various items, organisation, itemisation, explanatory notes and titles of items.

Art. 25 The Auditor shall audit the Company’s annual accounts in conformity with generally accepted accounting principles and shall in that regard investigate the Company’s book-keeping documentation and other items which relate to its operation and status. 11

Upon completion of the Auditing the Auditor shall sign the annual accounts and the signature shall attach to the annual accounts as being his report.

Section VI Amendments to the Company’s Articles of Association

Art. 26 These Articles of Association may be amended at a valid Annual General Meeting or shareholders’ meeting by the votes of shareholders holding a minimum of two-thirds of the Company’s share capital represented at the meeting, unless otherwise provided for in the Company’s Articles of Association or by law.

Proposals for resolutions to amend the Articles shall be included in the notice of a meeting.

Section VII Winding up of the Company

Art. 27 Proposals relating to liquidation and winding up of the Company shall be subjects to the same rules as amendments to these Articles of Association. The same applies to any kind of merger with or take over by other Companies and to the sale of all its assets.

A decision on the winding up of the Company shall be taken by shareholders holding a minimum of two-thirds of shares the Company’s total share capital. A shareholders’ meeting having made a valid decision to wind up or divide the Company shall decide whether an Administrative Court or a winding up committee elected at a shareholders’ meeting shall manage the liquidation.

In case a shareholders’ meeting has made a decision to wind up the Company the Company Register shall forthwith be given notice of that decision.

12

Section VIII Other Provisions

Art. 28 Matters on which these Articles provide no directions shall be governed by the Companies Act and such provisions of other statutory law as may be applicable. These Articles were latest amended at a shareholders’ meeting held on 6 December 2005. Kópavogur 6 December 2005

Avion Group hf.

Interim Consolidated Financial Statements Nine Months Ended September 30, 2005 Contents

page Endorsement by the Board of Directors and the Executive Chairman ...... 3 Auditors' report ...... 5 Consolidated Income Statements ...... 6 Consolidated Balance Sheets ...... 7 Consolidated Statement of Cash flows ...... 9 Consolidated Changes in Equity ...... 10 Notes to the interim Financial Statments ...... 11

Avion Group hf. - F.S. period ended 30 September 2005 ______2 ______Endorsement by the Board of Directors and the Executive Chairman

The consolidated interim financial statements are stated in thousands of US Dollar's and include the consolidated interim financial statements of Avion Group hf. and its subsidiaries (the "Group").

Avion Group hf. is a leading international transportation solutions Group. The Group provides services in most transportation solutions. The Avion Group hf. consists of 6 subsidiaries, Excel Airways Group, Travel City Holding, Air Atlanta Icelandic, Eimskipafelag Islands, Avia Technical Services and Avion Aircraft Trading. With new subsidiaries joining the Group in 2005, services of the Group have expanded to shipping and logistics operation and tour operation.

The Company has moved forward to its objectives to be a leading and innovative force in the transportation industry. To be a Global Transportation Partner, offering efficient and flexible solutions with reliable transport operations as the cornerstone, to pursue steady growth through well managed organic growth and a proactive external business acquisitions and to become an attractive investment option, recognized for excellent value creation.

In September 2005 Avion Group hf, through its subsidiary Avion Aircraft Trading hf, became the second launch customer with Boeing of the B777 Freighter program by signing and confirming the order of 4 B777-200 Freighters, for delivery in 2009. Agreement for additonal 4 aircraft was signed early in November to be confirmed middle of December. In addition 3 Airbus A300-600 have been bought and freigther conversion slots already confirmed in 2006 - 2007. Total commitment due to these agreements is already in excess of USD 720 million. In addition Excel Airways Group has signed a lease for 6 new Boeing 737-800, 2 for delivery spring 2006 and 4 for spring 2007.

In 2005 Avion Group hf purchased all outstanding shares in Eimskipafelag Islands ehf. The Group will as a result of this purchase provide a leading air, sea and land transport solutions for its customers requiring logistical product support worldwide. The company is included in the consolidation from 1 June.

In June 2005 the Group acquired all outstanding shares of Travel City Holding Plc. The company was formed in May 1995 and operates leading brands: Travel City Direct, Transatlantic Vacations and Carshop. Travel City Direct is a tour operator selling direct to the public through its two call centres in Blackpool and Swansea. Its head office is based in Gatwick. The Company is included in the consolidation from 1 July.

In 2005 the Group has acquired additional 28.8% of outstanding share capital in Excel Airways Group and currently owns 99,9% of the share capital.

The Group's intention is to float on the Icelandic Stock Exchange in the beginning of 2006. The board of Avion Group hf. has agreed on the proposal to give each employe of the Group ISK 50,000 in share capital at market value. Total employees are around 4,500 so the total market value is ISK 225 million or USD 3.6 million.

Avion Group hf. - F.S. period ended 30 September 2005 ______3 ______Endorsement by the Board of Directors and the Executive Chairman

Net profit for the period amounted to USD 37.7 million for the Group, according to the income statement. Total equity amounted to USD 459.0 million at the end of the period according to the balance sheet. Changes in total equity and appropriation of net loss are further explained in the financial statements. Three stockholders owned more than 10% share in the Company at the end of the period, Frontline Holding S.A. with 40.9% ownership, Burdaras hf. with 18.2% ownership and Pilot Investors Ltd. with 13.1% share.

The board of directors and the executive chairman of Avion Group hf. hereby confirm the Group's consolidated interim financial statements for the nine months ended 30 September 2005 with their signatures.

Kopavogur, 23 November 2005

Board of Directors

Magnus Thorsteinsson Executive Chairman

Eamonn Eugene Mullany Gunnar M. Bjorg

Eggert Magnusson Arngrimur Johannsson

Avion Group hf. - F.S. period ended 30 September 2005 ______4 ______Auditors' Report

Board of directors and shareholders of Avion Group hf.

We have reviewed the accompanying consolidated balance sheet of Avion Group hf. as of 30 September 2005, and the related consolidated interim statements of income, changes in equity and cash flows for the nine months then ended (the interim financial information). This consolidated interim financial information is the responsibility of the Group's management. Our responsibility is to issue a report on this interim financial information based on our review.

We conducted our review in accordance with the International Standard on Review Engagements. A review is limited primarily to inquiries of company personnel and analytical procedures applied to financial data and thus provides less assurance than an audit. We have not performed an audit and, accordingly, we do not express an audit opinion.

Based on our review, nothing has come to our attention that causes us to believe that the accompanying consolidated interim financial information does not give a true and fair view of the financial position of the Company as of 30 September 2005, and the financial performance and cash flows for the interim period then ended, in accordance with IAS 34, 'Interim Financial Reporting'.

Without qualifying our review conclusion, we draw attention to Note 2 to the consolidated interim financial information that explains the Group's transition to International Financial Reporting Standards (IFRS). As explained in Note 1 there is a possibility that the Group's management may determine that changes to the accounting policies adopted in preparing the consolidated interim financial information are necessary when it prepares its first IFRS financial statements as of 31 October 2005.

Reykjavik, 23 November 2005

KPMG Endurskodun hf

Alexander G. Edvardsson

Sigridur Armannsdottir

Avion Group hf. - F.S. period ended 30 September 2005 ______5 ______Consolidated Income Statements for the periods 1.1.-30.9.2005 and 2004

2005 2004 Notes YTD YTD Operating revenue

Net sales ...... 5 1,193,328 318,635 Other income ...... 6 19,939 12,721 Total operating revenue 1,213,267 331,356

Operating expenses

ACMI ...... (324,277) (313,108) Leisure ...... (699,292) 0 Shipping ...... (141,759) 0 Total operating expenses (1,165,328) (313,108)

Operating profit...... 47,939 18,248

Income from associates ...... 52 8,306 Financial income / (expenses) ...... 7 4,051 (5,915) Net financing income 4,103 2,391

Profit before taxes...... 52,042 20,639

Income tax ...... (14,298) (415)

Net profit for the period...... 37,744 20,224

Attributable to: Equity holders of the parent ...... 37,900 20,224 Minority interest ...... (156) 0 Net profit for the period ...... 37,744 20,224

Earnigns per share

Basic earnings per share (USD) ...... 8 0.03866 0.03977

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______6 ______Consolidated Balance Sheets

Notes 30.9.2005 31.12.2004 Assets

Non-current assets

Goodwill ...... 9 477,099 145,445 Other intangible assets ...... 10 23,624 1,927 Property, aircraft, vessels and equipment ...... 11 450,781 149,806 Investments in associated companies ...... 13 774 0 Guarantee deposits ...... 17 23,677 12,190 Other investments ...... 14 8,614 657 Deferred tax assets ...... 18,022 9,572 1,002,591 319,597

Current assets

Inventories ...... 15 16,400 10,792 Trade receivables ...... 16 274,102 69,841 Other receivables ...... 18 102,316 17,574 Cash and cash equivalents ...... 19 184,858 58,861 577,676 157,068

Total assets 1,580,267 476,665

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______7 ______30 September 2005 and 31 December 2004

Notes 30.9.2005 31.12.2004 Equity and liabilities

Equity Issued capital ...... 20 22,746 8,628 Share premium ...... 21 364,258 27,874 Reserves ...... 22 10,723 2,273 Retained earnings ...... 23 56,565 18,821 Stockholders' equity 454,292 57,596

Minority interest ...... 24 4,696 9,459 Total equity 458,988 67,055

Liabilities

Non-current liabilities Interest bearing loans and borrowings ...... 26 479,218 162,006 Guarantee deposits ...... 350 4,806 Employee benefits ...... 777 1,196 Deferred income tax liability ...... 10,469 1,552 490,814 169,560

Current liabilities Interest bearing loans and borrowings ...... 27 115,879 80,378 Trade payables ...... 153,859 87,056 Other liabilities ...... 28 360,727 72,616 630,465 240,050

Total liabilities 1,121,279 409,610

Total equity and liabilities 1,580,267 476,665

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______8 ______Consolidated Statements of Cash Flow for the periods 1.1.-30.9.2005 and 2004

2005 2004 YTD YTD Cash flows from operating activities

Net earnings...... 37,744 20,224 Adjustments to reconcile net profit to net cash provided by operating activities: Depreciation and impairment of fixed assets ...... 44,764 21,919 Amortization and impairment of intangible assets and goodwill ..... 1,399 (6,676) Currency fluctuation and indexation ...... (9,315) (13) Gain on sale of fixed assets ...... (19,939) (4,128) Other changes ...... (19,852) (7,639) Working capital provided by operating activities 34,801 23,687 Changes in operating assets and liabilities ...... (17,871) 382 Net cash provided by operating activities 16,930 24,069

Cash flows from investing activities

Increase in fixed and intangible assets ...... (171,535) (113,032) Proceeds from sale of fixed and intangible assets ...... 54,888 14,553 Investments in subsidiaries net of cash acquired ...... (24,119) 146 Investments in financial assets ...... (5,472) 0 Proceeds from financial assets ...... 683 0 Change in guarantee deposits ...... (12,365) (301) Net cash used in investing activities (157,921) (98,634)

Cash flows from financing activities

Proceeds from new share capital issued ...... 146,263 0 Procceds from long-term borrowings ...... 237,363 109,312 Payments of long-term debt ...... (91,854) (24,377) Bank loans increase, (decrease) ...... (15,928) 977 Change in guarantee deposits ...... 544 0 Net cash provided in financing activities 276,387 85,912

Net change in cash and cash equivalents ...... 135,396 11,347 Effects of foreign exchange adjustments ...... (9,295) (127) Cash and cash equivalents at beginning of year ...... 58,757 2,334

Cash and cash equivalents at end of period ...... 184,858 13,554

Notes: Statement of cash flows ...... 19

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______9 ______Consolidated Statement of changes in Equity for the period 1 January 2004 to 30 September 2005

Share Share Translation Hedging Retained Minority capital premium reserve reserve earnings Interest Total

Balance at 1 January 2004...... 6,272 16,809 0 0 0 0 23,081 Translation difference of investment in foreign companies...... 2,273 2,273 Net gains / losses not recognised in the income statement...... 0 0 2,273 0 0 0 2,273 Purchases of treasury stock...... (38) (411) (449) New shares issued...... 2,394 11,476 13,870 Recognised on acquisition of subsidiaries...... 6,812 6,812 Net profit for the year...... 0 18,821 2,647 21,468 Balance at 31 December 2004...... 8,628 27,874 2,273 0 18,821 9,459 67,055 Change in fair value of hedges...... 5,604 5,604 Translation difference of investment in foreign companies...... 2,846 2,846 Net gains / losses not recognised in the income statement...... 0 0 2,846 5,604 0 0 8,450 New shares issued...... 5,813 140,450 146,263 Recognised on acquisition of subsidiaries...... (4,920) (4,920) New shares issued due to purchases of subsidiaries...... 8,110 189,876 197,986 Allocation of treasury stock due to purchase of subsidiaries...... 195 6,058 6,253 Net gain for the period...... 37,744 157 37,901 Balance at 30 September 2005...... 22,746 364,258 5,119 5,604 56,565 4,696 458,988

Avion Group hf. - F.S. period ended 30 June 2005 All amounts in thousands of USD ______10 ______Notes to the interim Financial Statements

1. General Information

Avion Group hf. the "Company" is a limited liability company domiciled in Iceland. The Consolidated Interim Financial Statements of the Group for the nine months ended 30 September 2005 comprise the Company and its subsidiaries (together referred to as the “Group”) and the Company's interest in the performance of associated companies.

Avion Group’s objective is to be the leading global provider of air, land and sea transportation solutions.

Avion Group is an investment company focused on investments in the transportation industry and is formed of three business divisions: Aviation Services, Charter & Leisure, and Shipping & Logistics. Aviation Services is represented by Air Atlanta Icelandic, Avia Technical Services, and Charter & Leisure by Excel Airways Group. The operations of both divisions combined have 61 aircraft supported by 3,200 employees in over 30 operational bases. The Shipping & Logistics division is represented by Eimskipafelag Islands in which there are 30 ships supported by 1,350 people at 55 operational bases.

Avion Group’s vision is to be a leading investment company in the field of global air, land and sea transportation solutions. The mission of Avion Group is to maximize total sharholder returns through financial strength and managment skills. Avion Group strategy is to invest in and build up profitable companies, driven by organic growth and complementary acqusitions. Core to this strategy is the development of profitable ACMI, leisure & charter operations, and shipping & logistics activities by identifying acquisitions that are complementary to the value chain. As acquisitions in all three divisions become integrated and supported within the Group, synergies are realised in areas such as joint purchasing, fuel and insurance as well as in functions such as marketing, IT and finance. As each successful acquisition develops within its division, further opportunities are identified to complement, extend and enhance the value chain.

2. Significant accounting policies

a. Statement of compliance

The consolidated Interim Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) for Interim Financial Statements. These are the Group’s second IFRS Consolidated Interim Financial Statements for part of the period covered by the first IFRS annual Financial Statements and IFRS 1 First-time Adoption of International Financial Reporting Standards has been applied.

b. Basis of preparation

The Interim Financial Statements are presented in USD, rounded to the nearest thousand. They are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, financial instruments held for trading, financial instruments classified as available-for-sale, and investment property.

The preparation of Interim Financial Statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The Interim Financial Statements have been prepared on the basis of IFRSs in issue that are effective or available for early adoption at the Groups’ first IFRS annual reporting date, 31 October 2005.

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______11 ______Notes to the interim Financial Statements

The IFRSs that will be effective or available for voluntary early adoption in the annual financial statements for the period ended 31 October 2005 are still subject to change and to the issue of additional interpretation and therefore cannot be determined with certainty. Accordingly, the accounting policies for that annual period that are relevant to this interim financial information will be determined only when the first IFRS financial statements are prepared at 31 October 2005.

The accounting methods described here below have been applied consistently for the period covered by these Interim Financial Statements and also in preparing the Opening Balance Sheet in accordance with IFRS on 1 January 2004 regarding transition to IFRS. The accounting policies have been applied consistently by Group entities.

c. Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The Financial Statements of subsidiaries are included in the Consolidated Financial Statements from the date that control commences until the date that control ceases.

(ii) Associates Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. The consolidated interim financial statements include the Group’s share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases. When the Group’s share of losses exceeds its interest in an associate, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of an associate.

(iii) Transactions eliminated on consolidation Intragroup balances, intercompany transactions and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements.

d. Foreign currency

(i) Foreign currency transactions Transactions in foreign currencies are translated at the foreign currency exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated to USD at the closing exchange rate ruling at the balance sheet date. Foreign currency exchange differences arising on translation are recognised in the income statement.

(ii) Financial statements of subsidiaries The assets and liabilities of foreign operations are translated to USD at foreign exchange rates ruling at the date of the transaction. The revenues and expenses of foreign operations are translated to USD at the average rate for the period. Foreign exchange differences arising on retranslation are recognised directly in a separate component of equity.

Goodwill and fair value adjustments arising on the acquisition of foreign entities are treated as assets and liabilities of the foreign entities and translated at the closing rate.

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______12 ______Notes to the interim Financial Statements

e. Hedging

(i) Hedge accounting

Derivative financial instruments are initially recognised in the balance sheet at cost and then remeasured at subsequent reporting dates to fair value. Hedging derivatives are classified on inception as fair value hedges, cash flow hedges or net investment hedges.

Where a derivative financial instrument is used to hedge economically the foreign exchange exposure of a recognised monetary asset or liability, no hedge accounting is applied and any gain or loss on the hedging instrument is recognised in the financial statement.

Changes in the fair value of derivatives designated as fair value hedges are recorded in the income statement, with the changes in the fair value of the hedged asset or liability.

Changes in the fair value of derivatives designated as cash flow hedges are recognised in equity. Amounts deferred in equity are transferred to the income statement in line with the hedged forecast transaction.

Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement.

f. Revenue recognition

(i) Revenue recognition, general

Revenue is recognised in the income statement when service is provided to customers. Revenue also includes copromotion income where the Group records its share of the revenue but no related cost of sales.

(ii) Revenue recognition of activities Revenue is recognised as follows for the different activities of the business after deductions for discounts and returns. • Revenue from ACMI sales is recognised on block hours flown for the customer. • Revenue from flight and shipping operations is recognised when the transportation service is provided. • Revenue from travel agencies are recognised when the service is provided. • Other revenue is recognised on delivery to the customer, at which point the risk and rewards of ownership pass to the customer. • Payments received from customers in advance of performance of the Group's obligations are included as deferred revenue, and not recognised until the Group performs its obligations.

(iii) Interest and dividend income Interest income is accrued on a time basis, byreference to the principal outstanding and at theeffective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount.

Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established.

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______13 ______Notes to the interim Financial Statements

g. Expenses

(i) Expenses, general

Expenses are recognised in respect of goods and services received when supplied in accordance with contractual terms. Provision is made when an obligation exists for a future liability in respect of a past event and where the amount of the obligation can be reliably estimated.

(ii) Aircraft and vessel maintenance expenditure

Routine maintenance costs are recognised as incurred. Major maintenance and overhaul costs are capitalised as a separate component of the cost of the aircraft and vessel fleet and depreciated on a systematic basis.

(iii) Borrowing cost

The Group capitalises borrowing cost that is directly attributable to the acquisition, construction or production of a qualifying asset and expenses other borrowing costs not meeting the criteria. The capitalisation of borrowing cost commences when i) expenditures for the asset are being incurred; ii) borrowing costs are being incurred; and iii) activities that are necessary to prepare the asset for its intended use or sale are in progress, and cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.

h. Retirement benefit plan

(i) Defined benefit scheme

The costs of providing pensions under defined benefit schemes are calculated using the projected unit credit method and spread over the period during which benefit is expected to be derived from the employees’ services, in accordance with the advice of qualified actuaries. Pension obligations are measured as the present value of estimated future cash flows discounted at rates reflecting the yields of high quality corporate bonds. Pension scheme assets are measured at fair value at the balance sheet date. Actuarial gains and losses, differences between the expected and actual returns, and the effect of changes in actuarial assumptions are recognised in the income statement in the year they arise.

(ii) Defined contribution scheme

The Group’s contributions to defined contribution plans are charged to the income statement as incurred.

i. Taxation

(i) Taxation, general

The income tax comprises tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. [Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible]. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date and any adjustment to tax payable in respect of previous years.

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______14 ______Notes to the interim Financial Statements

(ii) Deffered tax

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

A deferred tax asset is recognised only to the extent that it is probable that future benefits will be available against which the assset can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

j. Derivative financial instruments The Group uses derivative financial instruments to hedge its exposure to foreign exchange risk arising from operational, financing and investment activities. Derivative financial instruments are recognised initially at cost value. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognised immediately in profit or loss. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged.

k. Property and equipment

(i) Owned assets Items of property and equipment are stated at cost less accumulated depreciation and impairment losses.

Where parts of an item of property and equipment have different useful lives, they are accounted for as separate items of property and equipment.

(ii) Leased assets Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. The owner-occupied property acquired by way of finance lease are stated at an amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses.

(iii) Subsequent costs The Company recognises in the carrying amount of an item of property and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Company and the cost of the item can be measured reliably. All other costs are recognised in the Income Statement as an expense as incurred.

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______15 ______Notes to the interim Financial Statements

(iv) Depreciation Depreciation is charged to the Income Statement on a straight-line basis over the estimated useful lives of each part of an item of property and equipment. Land is not depreciated. The estimated useful lives are as follows:

Buildings ...... 15 - 50 years Vessels ...... 5 - 14 years Equipment ...... 3 - 10 years Aircraft fleet ...... 4-13 years

Capitalised engine hours are charged to expenses according to actual hours flown. The residual value, if not insignificant, is reassessed annually.

l. Intangible assets

(i) Goodwill All business combinations are accounted for by applying the purchase method. Goodwill represents amounts arising on acquisition of subsidiaries and associates. In respect of business acquisitions that have occurred since 1 January 2004, goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired.

Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is no longer amortised but is tested annually for impairment.

Negative goodwill arising on an acquisition is recognised directly as income in profit or loss.

(ii) Airport slots Airport slots provides a carrier a right to takeoff or land from an airport. Airport slot is stated at cost less any accumulated impairment losses.

(iii) Other intangible assets Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses.

(iv) Subsequent expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.

(v) Amortisation Amortisation is charged to the income statement on a straght-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. At each balance sheet date the Group reviews the carrying amount of goodwill and intangible assets with indefinite useful life to determine whether there is any indication that those assets have suffered impairment loss. If any such indication exists, the recoverable amount og the asset is estimated in order to derermine the extent of the imparment loss (if any). Other intangible assets are amortised from the date they are available for use. The estimated useful lives are as follows:

Software ...... 3-4 years Domain name ...... 10 years

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______16 ______Notes to the interim Financial Statements

m. Investments

(i) Investments in long-term notes The carrying-amount of long-term notes is the required return on the acquisition date. Accrued interest on long-term notes is calculated and presented among current assets.

n. Receivables Trade and other receivables are stated at their cost less impairment losses.

o. Inventories Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated sales price in the ordinary course of business, less the estimated cost of completion and selling expenses.

p. Cash and cash equivalents

Cash and cash equivalents consist of cash and bank deposits.

r. Impairment The carrying amounts of the Group’s assets, other than inventories and deferred tax assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. Impairment tests are conducted at least once a year on the intangible assets which are thought to have infinite lifetime. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in profit or loss. Formal impairment tests on capitalised goodwill was not conducted on 30 September 2005 as the goodwill relates to recently purchased subsidiaries. A limited review was performed which did not imply any impairment loss.

(i) Calculation of recoverable amount The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

(ii) Reversal of impairment An impairment loss in respect of receivable carried at amortised cost is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if a change has occurred in the estimates used to determine the recoverable amount.

An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______17 ______Notes to the interim Financial Statements

s. Share capital

(i) Treasury shares When share capital recognised as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is recognised as a change in equity. Purchase of treasury shares are deducted from total equity.

t. Liabilities (i) Interest-bearing borrowings Interest-bearing borrowings are initially recognised at fair value less related transaction costs. Subsequently, interest- bearing borrowings are measured at amortized cost based on effective interest rates.

(ii) Non-current liabilities

Non-current liabilities are valued at nominal value less payments made and the remaining nominal balance is adjusted by exchange rate or index, if applicable. Interest expenses are accrued on a periodical basis, based on the principal outstanding and at the interest rate applicable. Borrowing fees are capitalised and expensed using effective interest rates or over the term of the loan if it does not differ greatly form the effective interest rate method.

(iii) Accounts payable Accounts payable are valued at nominal value and accounts payable in other currencies than USD have been valued at the exchange rates prevailing on the balance sheet date.

(iv) Unearned transportation revenue Revenue from the sale of transportation that has not been provided is deferred. Transportation revenue is recognised in the Income Statement when the service is provided.

u. Earnings per share Earnings per share is the ratio between profit and weighted average number of shares for the period and reveals net profit per share. The nominal value of each share amounts to one ISK. Calculation of diluted earnings per share takes into consideraton stock options made with the Company's employees and the prospective deliverance of shares related to those options.

3. Quarterly statements Q1 Q2 Q3 YTD 2005 2005 2005 2005 Operating revenue ...... 174,758 387,407 651,102 1,213,267 Operating expenses ...... (194,904) (391,568) (578,856) (1,165,328) Operating profit/loss ...... (20,146) (4,161) 72,246 47,939 Financial income/(expenses) ...... (3,845) 1,344 6,604 4,103 Profit/loss before tax ...... (23,991) (2,817) 78,850 52,042 Income tax ...... 2,316 3,407 (20,021) (14,298) Net profit/loss for the period ...... (21,675) 590 58,829 37,744

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______18 ______Notes to the interim Financial Statements

4. Business segments The Group is currently organised into three operating activities - ACMI, leisure and shipping. Following is a segment review of Group's operation:

Income statement ACMI Leisure Shipping Eliminations Consolidated YTD 2005 YTD 2005 YTD 2005 YTD 2005 YTD 2005

Net sales...... 440,081 948,249 155,047 (350,049) 1,193,328 Operating expenses...... (453,985) (917,160) (144,232) 350,049 (1,165,328) Operating result...... (13,904) 31,089 10,815 0 28,000

Inter-segment sales are charged according to fixed contract rates.

Balance sheet

Assets Segment assets...... 1,061,012 414,547 379,501 (274,793) 1,580,267

Liabilities Segment liabilities...... 579,539 370,941 254,621 (83,822) 1,121,279

The YTD 2004 operation only includes ACMI operation.

5. Net sales

Net sales are specified as follows according to operating activities:

YTD 2005 YTD 2004 ACMI...... 310,373 318,635 Leisure...... 730,381 0 Shipping...... 152,574 0 1,193,328 318,635

6. Other income YTD 2005 YTD 2004

Gain on sale of fixed assets...... 19,939 12,481 Other revenue...... 0 240 19,939 12,721

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______19 ______Notes to the interim Financial Statements

7. Financial income / (expenses) YTD 2005 Income from investments: Interest income on bank deposits...... 3,101 Other interest income...... 1,739 4,840 Finance costs: Interest expenses on interest bearing loans...... (16,394) Other interest expenses...... (1,034) (17,429) Exchange rate differences...... 16,640 4,051 8. Earnings per share

The calculation of Earnings per Share is based on the following data:

YTD 2005 YTD 2004

Net profit the period...... 37,744 20,224

Total average number of shares outstanding during the period (in thousands) 976,306 508,514

Basic Earnings per Share (USD) ...... 0.03866 0.03977

9. Goodwill 30.9.2005 Cost At 1 January 2005...... 145,694 Currency adjustments during period ...... (7,952) Recognised on acquisition of a subsidiary ...... 339,680 At 30 September 2005...... 477,422

Amortisation At 1 January 2005...... 249 Currency adjustments during period ...... (24) Impairment loss during period ...... 98 At 30 September 2005...... 323

Carrying amount At 30 September 2005...... 477,099

At 31 December 2004...... 145,445

The Impairment of Goodwill, classified by operational category, is specified as follows: YTD 2005 Leisure ...... 64 Shipping ...... 34 98

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______20 ______Notes to the interim Financial Statements

10. Other Intangible assets Domain Airport name Software Slots Total Cost At 1 January 2005...... 1,960 0 0 1,960 Currency adjustments during period...... (170) 62 (88) (196) Recognised on acquisition of subsidiaries...... 0 12,040 13,734 25,774 Additions during period...... 0 880 0 880 At 30 September 2005...... 1,790 12,982 13,646 28,418

Amortization At 1 January 2005...... 33 0 0 33 Currency adjustments during period...... (8) 24 (22) (6) Recognised on acquisition of subsidiaries...... 0 3,466 0 3,466 Impairment during period...... 116 0 0 116 Amortised during period...... 0 629 556 1,185 At 30 September 2005...... 141 4,119 534 4,794

Carrying Amount At 30 September 2005...... 1,649 8,863 13,112 23,624 At 1 January 2005...... 1,927 0 0 1,927

The amortization and impairment of other intangible assets, classified by operational category, is specified as follows: YTD 2005 Leisure...... 672 Shipping...... 629 1,301

11. Property, aircraft, vessels and equipment

Vessels and Property Machinery and other transp. and plant equipment equipment Aircraft Total Cost At 1 January 2005...... 33,878 13,931 0 151,606 199,415 Currency adjustments ...... (3,523) (1,184) 1,189 (881) (4,399) Recognised on acquisition of subsidiaries ...... 106,129 1,947 191,752 0 299,828 Additions during period ...... 27,429 16,205 18,542 108,479 170,655 Sales during period ...... (1,389) (20) (1,000) (48,697) (51,106) At 30 September 2005...... 162,524 30,879 210,483 210,507 614,393

Comprising: At cost...... 162,524 30,879 117,903 210,507 521,813 At revalued cost...... 0 0 92,580 0 92,580 162,524 30,879 210,483 210,507 614,393

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______21 ______Notes to the interim Financial Statements

Accumulated depreciation At 1 January 2005...... 2,935 5,267 0 41,407 49,609 Currency adjustments ...... (429) (519) 67 (102) (983) Recognised on acquisition of subsidiaries ...... 14,062 1,343 58,147 0 73,552 Sales during period ...... (42) 0 (689) (2,599) (3,330) Depreciation during period ...... 2,675 2,532 7,728 31,829 44,764 At 30 September 2005...... 19,201 8,623 65,253 70,535 163,612

Carrying Amount At 30 September 2005...... 143,323 22,256 145,230 139,972 450,781 At 1 January 2005...... 30,943 8,664 0 110,199 149,806

Depreciation, classified by operational category, is shown in the following schedule:

YTD 2005 ACMI...... 33,591 Leisure...... 2,109 Shipping...... 9,064 44,764

Aircraft is further specified as follows: Aircraft Rotable Engine and engines parts hours Total Cost At 1 January 2005 ...... 86,301 61,523 3,782 151,606 Currency adjustments during period...... 0 (881) 0 (881) Additions during period...... 81,868 12,266 14,345 108,479 Sales during period...... (43,315) (2,717) (2,665) (48,697) At 30 September 2005 ...... 124,854 70,191 15,462 210,507

Accumulated depreciation At 1 January 2005 ...... 16,726 23,826 855 41,407 Currency adjustments during period...... 0 (102) 0 (102) Sales during period...... (2,599) 0 0 (2,599) Depreciation during period...... 16,014 8,822 6,993 31,829 At 30 September 2005 ...... 30,141 32,546 7,848 70,535

Carrying Amount At 30 September 2005 ...... 94,713 37,645 7,614 139,972 At 1 January 2004 ...... 69,575 37,697 2,927 110,199

Annual depreciation ratio ...... 8-25% 8-20% flighthours

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______22 ______Notes to the interim Financial Statements

12. The Consolidation At period-end the Company owned six subsidiaries that are all included in the consolidation. The subsidiaries further owned 71 active subsidiaries at period-end. The subsidiaries that are included in the Group are as follows:

Place of registration Ownership Name of subsidiary and operation % Principal activity Air Atlanta Icelandic hf ...... Iceland 100% ACMI Avia Technical Services Ltd ...... England 100% Maintenance provider Avion Aircraft Trading hf ...... Iceland 100% Holding company Excel Airways Group Plc ...... England 100% Leisure Travel City Holding Plc ...... England 100% Leisure Eimskipafelag Islands ehf ...... Iceland 100% Shipping and logistic

The Group acquired control of Air Atlanta Europe at the beginning of 2005 when management and financial and operational responsibility was transferred to the Group. In accordance with IFRS 3 all of the operation of Air Atlanta Europe is included in the consolidated interim report from 1 January 2005.

During the period the Group acquired additional 28.8 % of the issued share capital of Excel Airways Group plc. and at 30. September 2005 ownes 99.9% of issued share capital. The principal activity of Excel Airways Group and its subsidiaries is that of charter and seat broker operating flights mainly for UK tour operators. The group also charters aircraft for servicing travel agents' and tour operators' flight requirements and sub-leases aircraft to overseas airlines.

During the period the Group purchased all outstanding shares in Eimskipafelag Islands ehf. The Group will as a result of this purchase provide a leading air, sea and land transport solutions for its customers requiring logistical product support worldwide.

In June 2005 the Group acquired all outstanding shares of Travel City Holding Plc. The company was formed in May 1995 and operates leading brands: Travel City Direct, Transatlantic Vacations and Carshop. Travel City Direct is a tour operator selling direct to the public through its two call centres in Blackpool and Swansea. Its head office is based in Gatwick.

13. Investments in associates 30.9.2005

Recognised on acquisition of subsidiaries ...... 717 Currency adjustments during period ...... 11 Share in net profit of associate ...... 51 Other changes ...... (5) Total value end of period ...... 774

Ownership Book value Harbor Grace, Canada...... 25% 638 Euro container Line...... 50% 0 Dissaco GSS Airfreight NV, Holland...... 25% 12 Traxx, Holland...... 20% 82 Aalesund Shipping Agencies Norway...... 50% 42 774

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______23 ______Notes to the interim Financial Statements

14. Other Investments

a. Available for sale investments Investments in securities

At 1 January 2005...... 1,125 Recognised on acquisition of subsidiaries...... 350 Additions during period...... 1,522 Currency adjustments during period...... (111) Sold during the year...... (80) At 30 September 2005...... 2,807

The investments included above represent investments in equity securities which present the Group with opportunity for return through dividend income and trading gains.

During the period a 19% share in the US charter carrier Casino Express Airlines in Nevada was purchased. The investment will allow Avion to shift capacity and reduce fixed costs during the winter season by placing aircraft from our group airlines, Excel Airways, Air Atlanta Icelandic and Air Atlanta Europe to Casino Express Airlines when more capacity is required in the US counter-cyclical market.

b. Loans and receivables Loans and receivables At 1 January 2005...... 406 Recognised on acquisition of subsidiaries...... 4,372 New loans during the period...... 2,933 Payments during the period...... (603) Currency fluctuation and indexation...... (143) At 30 September 2005...... 6,965

Aggregated annual maturities are as follows:

On demand or within 12 months ...... 1,158 Within 24 months ...... 1,302 Within 36 months ...... 567 Within 48 months ...... 567 Within 60 months ...... 487 Subsequent years ...... 2,884 6,965

The investments included above represent investments in bonds, loans to associated companies and other long-term receivables which present the Group with opportunity for return through interest income and trading gains. The investments are valued at cost, less an allowance based on impairment by the management.

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______24 ______Notes to the interim Financial Statements

15. Inventories 30.9.2005 31.12.2004

Consumable spare parts...... 10,204 10,134 Fuel in vessels...... 2,034 0 Other...... 4,162 658 16,400 10,792

The Group recognises obsolete and defective inventory in the Income Statement. An allowance is deducted from inventories in the balance sheet and does not represent a final write-off. The allowance is based on management's best estimate and past experience.

16. Trade receivables

30.9.2005 31.12.2004

Trade receivables...... 283,170 78,748 Allowances for doubtful accounts...... (9,068) (8,907) 274,102 69,841

An allowance has been made for doubtful accounts. This allowance is determined by management with reference to past default experience.

The directors consider that the carrying amount of trade receivables approximates their fair value.

17. Guarantee deposits (assets)

30.9.2005 Guarantee deposits in USD ...... 21,694 Guarantee deposits denominated in other currencies ...... 5,587 27,281 Current maturities...... (3,604) Long term guarantee deposits...... 23,677

Movements in guarantee deposits during the period:

Guarantee deposits at beginning of year ...... 16,215 Additions during period ...... 14,565 Currency adjustments during period ...... (1,264) Repayments ...... (2,200) Total value at end of period ...... 27,281

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______25 ______Notes to the interim Financial Statements

18. Other receivables

30.9.2005 31.12.2004

Derivative assets...... 20,732 0 Other recivables...... 21,437 4,503 Prepaid expenses...... 60,147 13,071 102,316 17,574

An allowance has been made for doubtful accounts, this allowance has been determined by management in reference to past default experience.

19. Cash and cash equivalents

Bank balances and cash comprise cash and short-term deposits held by the Group's treasury function.

20. Share capital

The Company's capital stock is nominated in Icelandic kronur. The USD amount of capital stock was 8.6 million at the beginning of the year. During the period the capital stock was increased by USD 13.9 million of nominal value and sold for USD 351 million. One vote is attached to each share in Icelandic kronur. The total number of shares at period end was 1.519 million.

Changes in Share capital specify as follows:

Numer of shares in thousands USD

Outstanding capital stock at 1 January 2004...... 458,779 6,272 Treasury shares purchased...... (2,789) (38) Sale of new shares...... 151,996 2,394 Outstanding capital stock at 1 January 2005...... 607,986 8,628 New shares issued...... 373,640 5,813 New shares issued due to purchases of subsidiaries...... 525,325 8,110 Allocation of treasury stock due to purchase of subsidiaries...... 12,541 195 Outstanding capital stock at 30 September 2005...... 1,519,492 22,746

Capital stock is as follows in thousands of shares and USD thousands:

Shares Ratio USD Total capital stock issued...... 1,519,492 100.0% 22,746 Treasury shares at 30 September 2005...... 0 0.0% 0 Outstanding capital stock at 30 September 2005...... 1,519,492 100.0% 22,746

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______26 ______Notes to the interim Financial Statements

21. Share premium Share premium Balance at 1 January 2004...... 16,809 Purchases of treasury stock...... (411) New shared issued...... 11,476 Balance at 1 January 2005...... 27,874 New shares issued...... 140,450 New shares issued due to purchases of subsidiaries...... 189,876 Allocation of treasury stock due to purchase of subsidiaries...... 6,058 Balance at 30 September 2005...... 364,258

22. Reserves Translation Hedging reserves reserves Total Balance at 1 January 2004...... 0 0 0 Exchange differences arising on translation of subsidiaries...... 2,273 0 2,273 Balance at 1 January 2005...... 2,273 0 2,273 Exchange differences arising on translation of subsidiaries...... 2,846 0 2,846 Change in effective cash flow hedge...... 0 5,604 5,604 Balance at 30 September 2005...... 5,119 5,604 10,723

23. Retained earnings Retained earnings Balance at 1 January 2004...... 0 Net profit for the year...... 18,821 Balance at 1 January 2005...... 18,821 Net profit for the period...... 37,744 Balance at 30 September 2005...... 56,565

24. Minority interest Minority Interest Recognised on acquisition of subsidiaries in the year 2004...... 6,812 Minority interest in net profit for the year 2004...... 2,647 Balance At 1 January 2005...... 9,459 Minority interest in net profit for the period...... 157 Recognised on acquisition of subsidiaries...... ( 4,920) Balance at 30 September 2005...... 4,696

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______27 ______Notes to the interim Financial Statements

25. Risk management

a. Financial risk management and hedging activities The principal objective of risk management is to reduce financial risk in the Group and to increase its financial stability. Avions’ risk management policy constitutes a framework of guidelines and rules covering areas such as foreign exchange, interest, jet fuel price and use of derivatives, as well as liquidity risk.

Exposure to fuel prices, currency and interest rate risk and liquidity risk arises in the normal course of the Group’s business. The Group has established formal risk management policies and guidelines that are approved by the board of directors to manage such risks. When deemed appropriate, risk exposures are reduced by the use of derivatives. Derivative financial instruments are primarily used to reduce exposure to fluctuations in fuel prices, foreign exchange rates and interest rates in line with the Group’s documented risk management policies and strategy.

b. Interest rate risk The Group has it´s interest rate risk exposure from its debt, and lease liabilities. The Group aims to limit the interest rate risk and to achieve optimal ratios regarding fixed to float interest rate exposure and the duration of interest-bearing liabilities. The debt and leasing contracts are mainly denominated in USD.

c. Foreign currency risk Exposure to foreign exchange rates arises from transactions in currencies other than the Group’s base currency, which is the USD. The Group differentiates between risk from operations and risk from investments. The currencies giving rise to this risk are primarily the GBP, ISK and the EUR, though transactions also occur in a number of other currencies. Whenever possible, internal hedging principles (matching of foreign currency in- and outflows) are applied. The Group then hedges its net transaction exposure externally in the foreign exchange markets. The Group uses forward exchange contracts and currency options to hedge its foreign currency risk.

d. Fuel price risk One of the Group’s most significant operating cost is jet fuel. Therefore, the Group has a significant exposure to fluctuations in the price of crude oil and oil products. The Group hedges its jet fuel exposure mainly by entering into jet fuel swaps contracts.

e. Liquidity risk Corporate treasury is responsible for the Group’s liquidity management and funding. The Group aims to maintain sufficient reserves of cash and cash equivalents in order to meet its liquidity requirements.

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______28 ______Notes to the interim Financial Statements

26. Non current Interest bearing loans and borrowings 30.9.2005 Loans in GBP ...... 191,846 Loans in USD ...... 190,427 Loans in EUR ...... 79,875 Loans in CHF ...... 39,373 Loans in JPY ...... 30,258 Loans in NOK ...... 13,633 Loans in ISK ...... 10,813 Loans denominated in other currencies ...... 31,520 587,745 Current maturities...... (108,527) Loans from credit institutions...... 479,218

Aggregated annual maturities are as follows:

On demand or within 12 months ...... 108,527 Within 24 months ...... 63,698 Within 36 months ...... 51,418 Within 48 months ...... 257,838 Within 60 months ...... 19,647 Subsequent years ...... 86,617 587,745

Movements in long term loans:

Long term loans at beginning of year ...... 240,845 Addition due to acquisition of subsidiaries ...... 154,873 New loans during the period ...... 305,543 Payments during the period ...... (91,854) Currency fluctuation and indexation ...... (21,662) Total value at end of period ...... 587,745

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______29 ______Notes to the interim Financial Statements

27. Current Interest bearing loans and borrowings

30.9.2005

Bank loans ...... 7,352 Current maturities of long-term interest bearing loans and borrowings ...... 108,527 115,879

28. Other liabilities

30.9.2005

Other liabilities ...... 246,174 Unearned transportation revenue ...... 103,737 Derivative liabilities ...... 10,816 360,727

29. Acquisition of Air Atlanta Europe Ltd.

At the beginning of the 2005 the Group gained control of Air Atlanta Europe when it took over the management and financial and operational responsibilities of the company. This transaction has been accounted for by the purchase method of accounting.

Book Fair valueFair value adjustments value Net assets acquired Property, plant and equipment...... 65 65 Intangible assets...... 1,011 14,372 15,383 Deferred tax assets...... 6,613 6,613 Current assets...... 7,712 7,712 Trade and other liabilities...... (29,773) (29,773) (14,372) 14,372 Total consideration...... 0

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______30 ______Notes to the interim Financial Statements

30. Acquisition of Eimskipafélag Íslands ehf.

On 31st of May, the Group acquired all outstanding share capital of Eimskipafelag Islands ehf. for cash consideration of USD 204.6 million. This transaction has been accounted for by the purchase method of accounting.

Book Fair valueFair value adjustments value Net assets acquired Property, plant and equipment...... 193,600 25,800 219,400 Intangible assets...... 24,310 24,310 Deferred tax assets...... 823 823 Non current loans...... 3,657 3,657 Investments in other companies...... 1,560 1,560 Inventories...... 4,823 4,823 Current assets...... 125,584 125,584 Non current liabilities...... (150,778) (150,778) Bank loans...... (21,683) (21,683) Deferred tax liabilities...... (1,637) (1,637) Trade and other liabilities...... (71,457) (71,457) 108,802 25,800 Goodwill...... 229,681 Tax effects of fair value adjustments...... (4,644) Total consideration...... 359,639

Satisfied by: Cash...... (204,126) Directly attributable costs...... (466) New shares issued...... (155,047) (359,639)

Net cash outflow arising on acquisition: Cash consideration...... (204,592) Cash and cash equivalents acquired...... 25,836 (178,756)

If the acquisition of Eimskipafelag Islands ehf. had been completed on the first day of the financial year, group revenues for the period would have been USD 1.356.401 thousand and group profit attributable to equity holders of the parent would have been USD 39.570 thousand.

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______31 ______Notes to the interim Financial Statements

31. Acquisition of Travel City Holdings Plc

On 17th of June the Group acquired 100 per cent of the issued share capital of Travel City Holding Plc. for cash consideration of USD 27.5 million. Travel City Holding plc. is the parent company of a group of tour operating companies. This transaction has been accounted for by the purchase method of accounting.

Book Fair valueFair value adjustments value q Property, plant and equipment...... 1,307 1,307 Deferred tax assets...... 4,461 4,461 Current assets...... 148,872 148,872 Liabilities...... (157,226) (157,226) (2,586) 0 Goodwill...... 44,023 Total consideration...... 41,437

Satisfied by: Cash...... (27,342) Directly attributable costs...... (112) New shares issued...... (13,983) (41,437)

Net cash outflow arising on acquisition: Cash consideration...... (27,454) Cash and cash equivalents acquired...... 121,016 93,562

If the acquisition of Travel City Holding plc. had been completed on the first day of the financial year, group revenues for the period would have been USD 1.237.501 thousand and group loss attributable to equity holders of the parent would have been USD 29.748 thousand.

32. Cash flow

During the period, the Group acquired 100 per cent of the issued share capital of Eimskipafelag Islands ehf. A payment was made by increasing the Company's share capital valued at USD 145.5 million, with allocation of treasury stock valued at USD 6.3 million and a loan amounting to USD 53.6 million was also taken to finance the purchase. These transactions do not affect cash and are therefore not included in the statement of cash flow.

On 17th of June the Group acquired 100 per cent of the issued share capital of Travel City Holding Plc. A payment was made by issuing a loan note amounting to USD 14.6 million. These transactions do not affect cash and are therefore not included in the statement of cash flow.

At the end of June Group acquired 28.8 % of the issued share capital of Excel Airways Group plc. A payment was made by increasing the Company's share capital valued at USD 52.5 million. These transactions do not affect cash and are therefore not included in the statement of cash flow.

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______32 ______Notes to the interim Financial Statements

33. Capital commitments

In September 2005 Avion Group hf, throught its subsidiary Avion Aircraft Trading hf, became the second launch customer with Boeing of the B777 freighter program by signing and confirming the order of 4 B777-200 long range freighters, for delivery in 2009. Agreement for additonal 4 aircraft was signed early in November to be confirmed middle of December. In addition 3 Airbus A300-600 have been bought and freigther conversion slots already confirmed in 2006 - 2007. Total commitment due to these agreements is already in excess of USD 720 million. In addition Excel Airways Group has signed a lease agreement for 6 new Boeing 737-800, 2 for delivery spring 2006 and 4 for spring 2007.

In November Avion Group hf, through Eimskipafelag Islands ehf. received a new reefer vessel, Svartfoss, in Alesund, Norway. This is the first construction of a reefer vessel this size in the world since 1990. Svartfoss is the first of four reefer vessel to be constucted and taken into operation by Eimskip in the near future. All four vessels being constructed for Eimskip will be delivered and in operation by April 2007. That will ensure Eimskip’s leading position in reefer logistics in the North Atlantic. Eimskip-CTG capacity will more than double with the new fleet. Total commitment due to these purchases amounts to USD 15.5 million.

34. Subsequent events

In October Eimskipafelag Islands ehf. bought a 10% stake in the seafood exporting company Icelandic Group for USD 14.4 million. This acquisition further solidifies a long-standing and successful partnership between the two companies. Increased co-operation between them is expected to open many opportunities in the international arena for both companies.

The Group's intention is to be listed on the Icelandic Stock Exchange in the beginning of 2006. The board of Avion Group hf. has agreed on the proposal to give each employe of the Group ISK 50,000 in share capital at market value. Total employees are around 4,500 so the total market value is ISK 225 million or USD 3.6 million.

Avion Group hf increased the share capital in Air Atlanta Icelandic by USD 50 million in November 2005. This additonal share capital is a requirement from the Icelandic Civil for the operation of the two joint operation Certificates previously operated as Flugfelagid Atlanta hf d/b/a Air Atlanta Icelandic and Islandsflug. The capital injection has been paid in full with a long term loan from Landsbankinn.

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______33 ______Notes to the interim Financial Statements

33. Capital commitments

In September 2005 Avion Group hf, throught its subsidiary Avion Aircraft Trading hf, became the second launch customer with Boeing of the B777 freighter program by signing and confirming the order of 4 B777-200 long range freighters, for delivery in 2009. Agreement for additonal 4 aircraft was signed early in November to be confirmed middle of December. In addition 3 Airbus A300-600 have been bought and freigther conversion slots already confirmed in 2006 - 2007. Total commitment due to these agreements is already in excess of USD 720 million. In addition Excel Airways Group has signed a lease agreement for 6 new Boeing 737-800, 2 for delivery spring 2006 and 4 for spring 2007.

In November Avion Group hf, through Eimskipafelag Islands ehf. received a new reefer vessel, Svartfoss, in Alesund, Norway. This is the first construction of a reefer vessel this size in the world since 1990. Svartfoss is the first of four reefer vessel to be constucted and taken into operation by Eimskip in the near future. All four vessels being constructed for Eimskip will be delivered and in operation by April 2007. That will ensure Eimskip’s leading position in reefer logistics in the North Atlantic. Eimskip-CTG capacity will more than double with the new fleet. Total commitment due to these purchases amounts to USD 15.5 million.

34. Subsequent events

In October Eimskipafelag Islands ehf. bought a 10% stake in the seafood exporting company Icelandic Group for USD 14.4 million. This acquisition further solidifies a long-standing and successful partnership between the two companies. Increased co-operation between them is expected to open many opportunities in the international arena for both companies.

The Group's intention is to be listed on the Icelandic Stock Exchange in the beginning of 2006. The board of Avion Group hf. has agreed on the proposal to give each employe of the Group ISK 50,000 in share capital at market value. Total employees are around 4,500 so the total market value is ISK 225 million or USD 3.6 million.

Avion Group hf increased the share capital in Air Atlanta Icelandic by USD 50 million in November 2005. This additonal share capital is a requirement from the Icelandic Civil Avation for the operation of the two joint operation Certificates previously operated as Flugfelagid Atlanta hf d/b/a Air Atlanta Icelandic and Islandsflug. The capital injection has been paid in full with a long term loan from Landsbankinn.

Avion Group hf. - F.S. period ended 30 September 2005 All amounts in thousands of USD ______33 ______Glossary of terms

ACMI Type of lease contract, where Aircraft, Crew, Maintenance and Insurance are all provided – also known as “wet leasing”. The customer absorbs all other direct expenses of operation, such as fuel, landing fees and ground handling. The customer also bears the commercial risk of load and yield

Ad-hoc For the specific purpose, case, or situation at hand and for no other

AOC Aircraft operating certificates

Aspire Holidays Niche exclusive holiday company offering tailor made holidays

ATS Avia Technical Services

Avion Group The terms “Issuer”, “Avion Group”, “Avion”, “the Company” and “the Group” refer to Avion Group hf.

CAGR Compound Annual growth rate

C-Check Heavy maintenance check done every 15 to 18 months, parts of the aircraft are removed and inspected thoroughly. A and b checks are less thorough and are most often performed by engineers at airports

D.b.a Doing business as

D-Check Where everything removable is removed from the aircraft, including interior, control surfaces, fuel tanks, instrument panel, engines. D-checks are the most precise of several maintenance checks mandated

Dry lease The lease of an aircraft hull only from the lessor company

EASA European Aviation Safety Agency

EBIT Earnings before interest and tax

EBITDA Earnings before interest, tax, depreciation and amorrtisation Excel Airways Group plc. The terms “Excel” and “Excel Airways” refers to Excel Airways Group plc.

Excel Holidays Inclusive holidays through the retail trade

FAA Federal Aviation Administration

Flugfélagið Atlanta ehf. The terms “Air Atlanta Icelandic”, “Air Atlanta”, “Atlanta” and “AAI” refer to Flugfélagið Atlanta ehf. d/b/a Air Atlanta Icelandic

Freedom Flights A seat-only operator selling seats on primarily leisure destination routes

GBP United Kingdom Pound Sterling

ITO Independent tour operator

Landsbanki Íslands hf. The terms “Landsbanki” and “the bank” refer to the Manager of the offering and listing of Avion Group hf. shares on ICEX, Landsbanki Íslands hf.

LCL Less than container load

Narrow body A commercial with a single aisle

No-frill Low costs airline

NVOCC Non vessel operating common carrier

Reefer Refrigerated

RORO vessel Roll on, roll of vessel

Short haul Routes whereby round-trip flights can be operated by a single crew

TEU Twenty foot Equivalent Unit Container

Travel City Direct Long & short haul direct sell tour operator USD United States Dollar

Wet Leasing Aircraft leasing on an ACMI (Aircraft, Crew, Maintenance, Insurance) basis

Wide body A commercial airliner with two aisles

XL.com Internet portal for seat only & inclusive holidays