Annual Re P O R T 1 9

a n n u a l r e p o r t 1 9 9 8 IBERIA L.A.E. AND IBERIA GROUP SOCIEDAD ESTATAL DE PARTICIPACIONES INDUSTRIALES ANNUAL REPORT 1998 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. AND IBERIA GROUP LETTER FROM THE CHAIRMAN EXPANDED EARNINGS AND NEW MARKETS BY XABIER DE IRALA, PRESIDENT IBERIA AIRLINES With earnings before tax of 62.8 billion pesetas, four times larger than those of 1997, and a return on equity of 34%, there can be no doubt that 1998 was the best year in Iberia´s 72-year history. For the first time in many years our Company is able to distribute a dividend (40 pesetas/share) to our shareholders, including Iberia employees, who now own more than 6% of our stock. For the Iberia Group as a whole, net earnings before tax came to 65.97 billion pesetas, also a record. These results place Iberia at the top among European airlines in terms of profit ratios, an achievement whose significance was enhanced as our Company underwent privatisation. No less important than these business results were the sweeping changes made to our airline group last year as we prepared for privatisation by forging new partnerships, adding and improving services, and embarking on a major renewal of our fleet. In this context, last year brought new destinations, such as Chicago and Johannesburg, as we consolidated our leadership in domestic flights and routes to Latin America, substantially expanding and improving our services, and increasing the number of direct flights to major South American destinations. We also undertook the comprehensive remodelling and upgrading of our Business Class service. We entered into a new commercial alliance with American Airlines, which is enabling us to expand our coverage of the United States, the world’s largest air travel market, and in which we now reach 23 destinations. In partnership with other leading firms we set up Viva Tours, a tour operator poised to become a leading firm in Europe, while optimising our links with travel agencies through the Serviagencias programme. These and other commercial innovations, along with the hire of additional aircraft and flight crews, helped to boost our core operating income by 10%, while carrying nearly a million more passengers in the year. Cost containment measures limited the growth of expenditures to just 7.6%, which was well below the rate of revenue growth, signifying a considerable expansion of our operating margin. Overhead expenses were reduced by 6% in the year, in excess of our 5% target. p-6 ANNUAL REPORT 1998 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. AND IBERIA GROUP LETTER FROM THE CHAIRMAN The year under review also witnessed our careful preparations for the privatisation scheduled to take place in 1999. The reorganisation of our finances and balance sheet was completed, and negotiations proceeded with British Airways and American Airlines, which together took up a 10% stake in Iberia´s equity in 1999. Subsequently, four Spanish companies - BBV, Caja Madrid, Logista, Ahorro Corporación and El Corte Inglés - together acquired a 30% holding. As mentioned above, Iberia employees hold 6% of our equity, and the remainder of the stock will be sold through stock exchanges. Lastly, in 1998 Iberia became a founding member of oneworld, the world´s largest airline alliance. Meanwhile, we also completed our fleet renovation plan, calling for the acquisition of 92 new short- and medium-range aircraft and 11 long-distance aircraft, representing a total investment of some 600 billion pesetas. The investment formulas used include outright purchase, financial leasing, and operational leasing, among others, to ensure the maximum economy and flexibility. Our aim is to operate a more homogeneous and more competitive fleet that allows us to reduce fuel consumption and noise emissions, while increasing the number of flights and the productivity of our flight crews. But it takes more than aircraft to make an airline, and another noteworthy achievement in 1998 was the successful negotiation of three of our four major collective bargaining agreements with union representatives (negotiations with the airline pilots union continued into 1999). In order to maintain our rapid rate of growth, and to gain market share, we have added productivity clauses to our collective bargaining contracts, and more than 200 new pilots will have joined Iberia in the 1998-99 period. The commitment of Iberia employees to our Company´s future was crucial in helping us to emerge from a complicated situation in the early 1990s, and it will remain crucial as we compete for customers, market share, and investors in a crowded market. Despite these achievements, our business results are limited by aviation and airport infrastructures which do not always manage to keep pace with demand growth. The commissioning of the third runway at Madrid´s Barajas airport brought some relief, but the saturation of European air routes, airports, and traffic control facilities has not only constrained our growth, but also made it hard for airlines to maintain optimum punctuality and regularity. More modern and efficient aviation infrastructures are urgently needed throughout Europe, and especially in Spain, where tourism is the largest industry. Xabier de Irala p-7 a n n u a l r e p o r t 1 9 9 8 L E G A L I N F O R M AT I O N IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. a n n u a l r e p o r t 1 9 9 8 1998 FI N A N C I A L STAT E M E N T S A N D MA N AG E M E N T RE P O R T BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997 S T A T E M E N T S OF INCOME FOR 1998 AND 1997 TR A N S L AT IO N O F A R E P O R T A N D F I N A N C I A L S TAT E M E N TS O R IG I N A L LYIS S U E D I N SPA N IS H A N D P R E PA R E D I N AC C O R DA N C E W I T H G E N E R A L LYAC C E P T E D AC C O U N T I N G P R I N C I P L E S I N SPA I N (S E E NOT E 2 0 ) . I N T H E E V E N T O F A D IS C R E PA N C Y , T H E S P A N IS H - L A N G U A G E V E R S IO N P R E VA I L S . IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. ANNUAL REPORT 1998 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997 TRANSLATIONOF A REPORTANDFINANCIAL ASSETS M I L L I O N S O F P E S E TA S STATEMENTS ORIGINALLY ISSUEDIN SPANISH ANDPREPAREDIN ACCORDANCEWITHGENERALL Y ACCEPTED ACCOUNTINGPRINCIPLESIN SPAIN (SEE NOTE 20). 1998 1997 IN THEEVENTOF A DISCREPANCY, THE SPANISH-LANGUAGEVERSIONPREVAILS . FIXED AND OTHER NONCURRENT ASSETS: STA R T-U P E X P E N S E S ( NOT E 4 -a) 4 6 5 6 4 6 IN TA N G I B L E A S S E T S ( NOT E 5 ) 2 5 , 7 1 2 2 7 , 0 4 5 TA N G I B L E F I X E D A S S E T S ( NOT E 6 ) 2 0 2 , 1 9 4 1 8 1 , 1 5 8 AI R C R A F T: CO S T 3 3 8 , 8 0 9 3 0 9 , 4 0 8 AC C U M U L AT E D D E P R E C I AT IO N A N D P R O V IS IO N S ( 1 9 1 , 7 2 0 ) ( 1 8 3 , 8 0 9 ) 1 4 7 , 0 8 9 1 2 5 , 5 9 9 OT H E R TA N G I B L E F I X E D A S S E TS: CO S T 1 5 7 , 1 3 5 1 5 1 , 6 0 3 AC C U M U L AT E D D E P R E C I AT IO N A N D P R O V IS IO N S ( 1 0 2 , 0 3 0 ) ( 9 6 , 0 4 4 ) 5 5 , 1 0 5 5 5 , 5 5 9 LO N G-T E R M F I N A N C I A L I N V E S T M E N T S 1 3 6 , 0 7 4 8 2 , 9 3 3 HO L D I N G S I N GR O U P A N D A S S O C I AT E D C O M PA N I E S ( NOT E 7 ) 9 3 , 9 4 3 7 6 , 3 5 2 LOA N S TO GR O U P A N D A S S O C I AT E D C O M PA N I E S ( NOT E 7 ) 2 7 , 5 5 3 2 3 , 0 7 6 LO N G-T E R M R E C E I VA B L E S F R O M GR O U P C O M PA N I E S ( NOT E 1 4 ) 5 0 , 1 9 2 4 3 , 2 6 5 IN V E S T M E N T S E C U R I T I E S A N D OT H E R L OA N S 4 , 6 5 9 2 , 7 6 0 PR O V IS IO N S ( NOT E 7 ) ( 4 0 , 2 7 3 ) ( 6 2 , 5 2 0 ) TOTA L F I X E D A N D OT H E R N O N C U R R E N T A S S E T S 3 6 4 , 4 4 5 2 9 1 , 7 8 2 DEFERRED CHARGES (N OTE 5) 5 , 5 7 1 7 , 5 2 4 CURRENT ASSETS: IN V E N TO R I E S 8 , 7 4 4 7 , 4 2 7 RE C E I VA B L E F R O M GR O U P C O M PA N I E S ( NOT E 1 4 ) 1 4 , 3 8 5 1 3 , 0 1 3 AC C O U N T S R E C E I VA B L E ( NOT E 8 ) 5 5 , 4 1 8 6 0 , 9 5 0 SH O R T-T E R M F I N A N C I A L I N V E S T M E N T S ( NOT E 9 ) 7 6 , 5 5 7 7 6 , 9 4 9 CA S H 1 , 9 7 7 1 , 2 6 9 AC C R UA L AC C O U N T S 4 , 9 6 4 4 , 7 6 0 TOTA L C U R R E N T A S S E T S 1 6 2 , 0 4 5 1 6 4 , 3 6 8 TOTAL ASSETS 5 3 2 , 0 6 1 4 6 3 , 6 7 4 p-14 INFORME ANUAL 1998 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A.

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