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Contents / Financial Statements and Management Reports / Iberia Group 4 Auditors' Report on Consolidated Financial Consolidated Management Report (Pg. 83) Statements (Pg. 12) Key Data (Pg. 84) 1. Highlights (Pg. 85) Consolidated Financial Statements (Pg. 14) 2. Operating Performance (Pg. 100) 2.1. Transport (Pg. 100) Consolidated statements of financial position at 31 december 2009 2.1.1. Capacity and passenger traffic (Pg. 100) and 2008 (Pg. 15) 2.1.2. Passenger traffic revenue (Pg. 105) Consolidated income statements for 2009 and 2008 (Pg. 16) 2.1.3. Cargo (Pg. 107) Consolidated statements of comprehensive income for 2009 and 2008 (Pg. 17) 2.2. Handling (Pg. 109) Consolidated statements of changes in equity for 2009 and 2008 2.3. Maintenance (Pg. 109) (Pg. 18) 2.4. Project development (Pg. 111) Consolidated cash flow statements for 2009 and 2008 (Pg. 19) 2.4.1. Total Customer Care Program (Pg. 111) Notes to the Accounts for 2009: (Pg. 20) 2.4.2. Implementation of sales agreements (Pg. 113) 1. Business of the Parent and Group (Pg. 20) 2.4.3. Management support platforms and systems 2. Group companies (Pg. 20) (Pg. 115) 3. Basis of presentation of the Consolidated Financial 2.5. Corporate Responsibility (Pg. 116) Statements and consolidation principles (Pg. 23) 2.5.1. Corporate culture (Pg. 116) 4. Application of Parent loss (Pg. 27) 2.5.2. Environmental protection (Pg. 117) 5. Accounting policies and measurement bases (Pg. 28) 2.5.3. Community work (Pg. 117) 6. Property, plant and equipment (Pg. 38) 3. Resources (Pg. 119) 7. Financial assets (Pg. 46) 3.1. Fleet (Pg. 119) 8. Receivables (Pg. 51) 3.2. Personnel (Pg. 120) 9. Equity (Pg. 51) 3.2.1. Headcount (Pg. 120) 10. Non-current provisions (Pg. 54) 3.2.2. Productivity (Pg. 122) 11. Non-current and current borrowings (Pg. 56) 4. Financial Performance (Pg. 123) 12. Financial instruments (Pg. 57) 4.1. Application of IFRS and changes in Group composition 13. Tax (Pg. 64) (Pg. 123) 14. Revenue (Pg. 70) 4.2. Earnings performance (Pg. 124) 15. Expenses (Pg. 71) 4.2.1. Operating revenue (Pg. 126) 16. Contribution of subsidiaries and associates to consolidated 4.2.2. Operating costs (Pg. 128) profit (Pg. 74) 4.2.3. Other operating gains and losses (Pg. 132) 17. Business and geographical segments (Pg. 75) 4.3. Other income and costs (Pg. 133) 18. Related party transactions (Pg. 78) 4.3.1. Net finance income (Pg. 133) 19. Remuneration of Directors and Senior Executives (Pg. 79) 4.3.2. Profit (loss) for the year (Pg. 133) 20. Detail of the Directors’ investments in companies with 4.4. Capital expenditure (Pg. 134) similar business activities and performance by Directors, as 4.5. Statement of financial position (Pg. 135) independent professionals or as employees, of similar 4.6. Cash flow statement (Pg. 136) activities (Pg. 80) 4.7. Financial risk management (Pg. 136) 21. Environmental information (Pg. 81) 4.7.1. Foreign exchange risk (Pg. 137) 22. Cash flow statements (Pg. 82) 4.7.2. Interest rate risk (Pg. 137) 23. Explanation added for translation to English (Pg. 82) 4.7.3. Fuel price risk (Pg. 138) 4.8. Iberia’s share price performance (Pg. 138) 4.9. Outlook (Pg. 139) 4.9.1. Business outlook (Pg. 139) 4.9.2. Overview of main risks and uncertainties (Pg. 141) 5. Performance of Investees (Pg. 143) 5.1. Fully-consolidated companies (Pg. 143) 5.2. Associates accounted for using the equity method (Pg. 144) 6. Annual Corporate Governance Report (Pg. 147) A. Ownership structure of the Company (Pg. 148) B. Management structure of the Company (Pg. 156) C. Related-Party Transactions (Pg. 185) D. Risk control systems (Pg. 187) E. General Meeting (Pg. 195) F. Degree of compliance with the Corporate Governance recommendations (Pg. 204) G. Other information (Pg. 220) Appendix: Activity report of the Audit and Compliance Committee of the Board of Directors of Iberia L.A.E. (Pg. 222) Contents / Financial Statements and Management Reports / Iberia, L.A.E., S.A. 5 Auditors’ Report on Financial Statements Management Report (Pg. 291) (Pg. 229) Key Data (Pg. 292) 1. Highlights (Pg. 293) Financial Statements (Pg. 231) 2. Financial and Operating Performance (Pg. 308) 2.1. Business (Pg. 308) Balance sheet at 31 December 2009 and 2008 (Pg. 232) 2.1.1. Transport (Pg. 308) Income statement for 2009 and 2008 (Pg. 233) 2.1.2. Handling (Pg. 311) Statement of changes in equity for 2009 and 2008: (Pg. 234) 2.1.3. Maintenance (Pg. 312) A. Statement of recognised income and expense (Pg. 234) 2.2. Resources (Pg. 313) B. Comprehensive statement of changes in equity (Pg. 235) 2.2.1. Fleet (Pg. 313) Cash flow statement for 2009 and 2008 (Pg. 236) 2.2.2. Personnel (Pg. 315) Notes to the Accounts for 2009: (Pg. 237) 2.3. Company earnings performance (Pg. 317) 1. Company description (Pg. 237) 2.3.1. Profit from operations (Pg. 317) 2. Basis of presentation of the Annual Financial Statements 2.3.2. Other income and costs (Pg. 324) (Pg. 237) 2.4. Balance sheet (Pg. 325) 3. Distribution of loss (Pg. 238) 2.5. Outlook (Pg. 326) 4. Accounting policies (Pg. 239) 2.5.1. Business outlook (Pg. 326) 5. Property, plant and equipment (Pg. 249) 2.5.2. Overview of main risks and uncertainties (Pg. 327) 6. Financial assets (Pg. 257) 3. Financial Risk Management (Pg. 329) 7. Investments in subsidiaries and associates (Pg. 262) 3.1. Foreign exchange risk (Pg. 329) 8. Derivative financial instruments (Pg. 265) 3.2. Interest rate risk (Pg. 329) 9. Trade and other receivables (Pg. 271) 3.3. Fuel price risk (Pg. 330) 10. Equity (Pg. 271) 4. Environmental Responsibility (Pg. 331) 11. Non-current provisions (Pg. 272) 5. Annual Corporate Governance Report (Pg. 332) 12. Non-current and current payables (Pg. 274) 13. Tax (Pg. 275) 14. Transactions in non-euro currencies (Pg. 281) 15. Income and expense (Pg. 281) 16. Related party transactions (Pg. 286) 17. Remuneration and other benefits to Directors and Senior Executives (Pg. 287) 18. Detail of the Directors’ investments in companies with similar business activities and performance by Directors, as independent professionals or as employees, of similar activities (Pg. 289) 19. Environmental information (Pg. 289) 20. Explanation added for translation to English (Pg. 290) Chairman's Statement 7 CHAIRMAN'S STATEMENT "A difficult year, but strategic for the future of Iberia" 2009, the most important facts and figures of which collapse of world trade. Iberia suffered an 11.6% drop in are set out in detail in this Annual Report, was demand, which clearly reflects the deepness of the unquestionably the worst year that the air transport recession. Even so, there was a slight upturn in the last industry has had to face, which has also been reflected in quarter with a year-on-year growth of 10.5% in traffic. Iberia’s earnings. Nevertheless, I trust that this year will be This drop in demand, together with the lowering of remembered in the history of our company more for the prices owing to the market situation and tough strategic decisions made than for the earnings obtained, competition, had a huge impact on the company’s which we hope will be just a snag in an otherwise revenues, which fell by 19%, this being the factor that outstanding track record. most affected the company’s year-end earnings. According to the International Air Transport In view of the evolution of revenues and the Association (IATA), the losses in 2009 were among the complicated economic environment, the company made a largest ever recorded in this sector, with provisional tremendous effort to reduce its operating costs, cutting estimates in December putting airline accounts some 11 them by 12% over the year, but this was obviously not billion dollars in the red. More than 30 airlines disappeared enough to offset the drop in revenues. This difference or were bought up or taken over. Just in Europe, the air between the drop in revenues and the reduction of transport industry is estimated to have lost 100,000 jobs expenses (19% and 12%, respectively), largely explains our and 100 million passengers. final results, with net losses of 273 million euro, compared Iberia did not escape the adverse effects of the year. with a profit of 32 million in 2008, when the industry was Firstly, both passenger and cargo traffic plummeted. The starting to feel the pinch of the crisis. drop was particularly severe in our Business Class as a Counterbalancing these results, the MRO business result of the crisis and the cuts made by all companies. increased its revenues from third parties by more than 4%, However, the performance of our Business Plus improved closing the year with a profit. Iberia Mantenimiento has in the second half of the year on long-haul routes, with a become a world benchmark in this industry, not only for reduction of just 6%, compared to the 20% experienced in its specific weight in market share -it is among the top 10 the first half of the year. companies in the world- but also for the technical Cargo transport was also hard hit by the severe competence and efficiency of the Iberia MRO workshops. Chairman's Statement 8 The Airports division has also achieved a noteworthy critical year, Iberia has considerable financial strength, its performance. In an extremely complicated environment, accounts being among the healthiest in the sector, with with a drop of 11% in global airport assistance in Spain 1,919 million euro cash and an on-balance-sheet debt of and when most of the companies that are customers of 1,417 million euro at 31 December 2009.