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. Iberia have reduced their flights, this division has managed to close the year almost at breakeven point, after losses of Three major projects for the future almost 20 million euro in the previous year. It has also gained 22 new customers, included in its services area, and At the beginning of this letter, I mentioned that 2009 increased its market share by almost one point in Spain, will probably be remembered in Iberia for the strategic probably the country that has made most headway in the decisions adopted. During the year, impetus has been deregulation of this sector in Europe. given to three major projects that will mark the future of Another of the positive aspects highlighted from last this company: Plan 2012, the planned merger with British year is the company’s fleet utilisation, which has been Airways and the joint operation of North Atlantic routes raised to 10.3 hours a day (block hours per aircraft), up with British Airways and American Airlines. 3.7% year on year. This was achieved by resizing the fleet, These three major projects are designed to achieve withdrawing 10 units, and by cancelling aircraft leases, growth in long-haul operations, reorganise short and postponing deliveries and even temporarily parking some medium haul operations so that the network is covered in units. conditions of sustainability and competitiveness, and take The company also efficiently adjusted capacity to an active role in the progressive consolidation of the demand, maintaining its load factor at similar levels to the industry, guaranteeing Iberia’s position among the leading previous year. We reduced capacity by 6% while traffic airlines worldwide. dropped by 6.2%, so the load factor only fell by two In the short and medium haul, we are aware that we decimals to 79.8%, which is still one of the highest among cannot just stand by and watch the evolution of the European network airlines. market, in which new rivals are trying to push the large Despite that reduction of capacity, the company network airlines, such as Iberia, out of their traditional managed to maintain its market share on the most markets. Consequently, we plan to transform our short strategic routes, those joining Europe to Latin America and and medium haul operations gradually into a competitive Madrid to the rest of Europe. In the former, Iberia is still product that meets the new demands on the market. firm leader, with a market share of 20.1% in 2009, barely In the long haul, Iberia has a clear leadership in routes three decimals less than the previous year; and 23.6% in between Europe and Latin America. We have made Business, on a par with 2008. Between Madrid and Europe, enormous investments in our product, with considerable the market share was 41.6%, up one decimal on the commercial efforts and focussing almost obsessively on previous year. customers, which will enable us to take advantage of Before closing my comments on the economic market growth and corner an increasingly large share of aspects, I must mention the financial health of our that market. company. Despite the normal deterioration in such a
Chairman's Statement 9
The agreement between Iberia, American Airlines and Spain, its operating and financial base in the UK and both British Airways to jointly operate the North Atlantic is also the Board of Directors and the Executive Committee will be making progress. This is a vast project involving the joint mixed. If everything goes according to plan, the merger operation of all the routes between Europe and the United will be completed by the end of this year. States, Canada and Mexico. It is also an opportunity for In 2009, in spite of the crisis, Iberia continued to excel Iberia and our customers to compete on equal terms with in its corporate responsibility policy and was one of the other alliances and embrace a market of extraordinary few airlines in the world to be included, for the fourth year possibilities with new destinations to be included in the in succession, in the selective Dow Jones Sustainability network. World Index. For the first time this year, the company obtained the highest score in the sector in environmental “Iberia has very strong financial health, sustainability, which is proof of the company’s zeal for one of the best in the sector” making its business compatible with environment-friendly
As for the merger with British Airways, the actions. Another prestigious index in which Iberia was also Memorandum of Understanding (MOU) was signed in confirmed is the FTSE4Good Ibex, which rewards good November 2009 and the Merger Agreement in April 2010. practices in social performance, business ethics and According to these documents, a new Spanish enterprise, environmental performance. International Consolidated Airlines Group, will be the A final thought. 2009 was a difficult year, but at the owner of both operators, Iberia and British Airways, which same time promising, because we have laid the will maintain their own brands, operations, income foundations of major projects for the future. Iberia has statements, managers and boards of directors. The defined goals for success and we are working towards proprietary company, which will, among other duties, them. We trust that you will accompany us on this journey, define strategies and see that the intended synergies are the ultimate aim of which will always be to offer our best achieved, will have its registered office and tax residence in to our customers, employees and shareholders.
Antonio Vázquez Romero President of Iberia Financial Statements and Management Reports IBERIA GROUP Iberia Group / Auditor's Report 12
Consolidated Financial Statements
IBERIA GROUP Iberia Group / Consolidated Financial Statements / Statements of Financial Position 15
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AT 31 DECEMBER 2009 AND 2008 Millions of euros ASSETS Notes 31-12-09 31-12-08 LIABILITIES AND EQUITY Notes 31-12-09 31-12-08
NON-CURRENT ASSETS: EQUITY: Intangible assets 5.1 50 52 Share capital 743 743 Property, plant and equipment 6 1,046 1,118 Share premium 120 120 Aircraft 717 779 Reserves 1,094 1,089 Other property, plant and equipment 329 339 Treasury shares (64) (64) Investments in associates 5.5 134 17 Profit for the year attributable to the Parent (273) 32 Non-current financial assets 7.1 497 672 Consolidated profit (loss) for the year (273) 32 Equity instruments 269 247 Profit attributable to minority interests - - Loans to third parties 77 123 Valuation adjustments (72) (357) Derivatives 470 Equity attributable to Shareholders of the Parent 1,548 1,563 Other financial assets 147 232 Minority interests 31 Deferred tax assets 13 635 591 Total equity 9 1,551 1,564 Total non-current assets 2,362 2,450 NON-CURRENT LIABILITIES: CURRENT ASSETS: Non-current provisions 10 1,209 1,283 Non-current assets held for sale 6.7 911 Non-current payables 11 301 403 Inventories 215 224 Deferred tax liabilities 13 71 Aircraft spare parts 170 176 Long-term accruals 5.11 215 78 Other inventories 45 48 Total non-current liabilities 1,732 1,765 Receivables 8 478 586 Current financial assets 7.2 1,088 1,751 CURRENT LIABILITIES: Loans to third parties 31 34 Current payables 11 295 640 Derivatives 55 79 Customer prepayments 5.11 389 394 Other financial assets 1,002 1,638 Trade and other payables 1,075 1,254 Accruals 812Trade payables 807 970 Cash and cash equivalents 5.6 886 600 Remuneration payable 149 159 Cash 47 74 Payables to public authorities 13 119 125 Cash equivalents 839 526 Accruals 417 Total current assets 2,684 3,184 Total current liabilities 1,763 2,305 TOTAL ASSETS 5,046 5,634 TOTAL EQUITY AND LIABILITIES 5,046 5,634 Notes 1 to 23 to the financial statements form an integral part of the consolidated statement of financial position at 31 Iberia Group / Consolidated Financial Statements / Income Statements 16
CONSOLIDATED INCOME STATEMENTS FOR 2009 AND 2008
Millions of euros
Notes 2009 2008
CONTINUING OPERATIONS: Revenue 14.1 4,231 5,223 Other operating income 14.2 227 292 Recurring 178 227 Non-recurring 49 65 Procurements 15.1 (1,410) (1,864) Employee costs 15.2 (1,348) (1,321) Recurring (1,297) (1,320) Non-recurring (51) (1) Depreciation and amortisation charge 5.1 and 6 (176) (193) Other operating costs 15.3 (1,996) (2,157) Recurring (1,990) (2,152) Non-recurring (6) (5) Impairment losses and net gains on disposal of non-current assets (3) 25
PROFIT (LOSS) FROM OPERATIONS (475) 5
Finance income 14.3 64 137 Finance cost 15.4 (40) (52) Exchange differences (17) (2) Share of profits in associates 16 8 (18) Other finance revenue and expenses 25 (34)
PROFIT BEFORE TAX (435) 36
Income tax 13 162 (4)
PROFIT (LOSS) FROM CONTINUING OPERATIONS (273) 32
Attributable to: Shareholders of the Parent (273) 32 Minority interests -- BASIC EARNINGS PER SHARE (EUR) 9.7 (0.295) 0.034
Notes 1 to 23 to the financial statements form an integral part of the 2009 consolidated income statement. Iberia Group / Consolidated Financial Statements / Statements of Comprehensive Income 17
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR 2009 AND 2008
Millions of euros
Notes 2009 2008
PROFIT FOR THE YEAR (I) (273) 32 OTHER COMPREHENSIVE INCOME: Income and expenses recognised directly in equity From measurement of financial instruments: 25 (114) Available-for-sale financial assets 7.1.1 25 (114) From cash flow hedges 12 - (335) Tax effect 13.4 (7) 135
OTHER COMPREHENSIVE INCOME RECOGNISED DIRECTLY IN EQUITY (II) 18 (314)
Amounts transferred to income statement From cash flow hedges 12 382 66 Tax effect 13.4 (115) (20)
TOTAL AMOUNTS TRANSFERRED TO INCOME STATEMENT (III) 267 46
TOTAL COMPREHENSIVE INCOME (I+II+III) 12 (236) Attributable to: Shareholders of the Parent 12 (236) Minority interests --
Notes 1 to 23 to the financial statements form an integral part of the 2009 consolidated statement of comprehensive income. Iberia Group / Consolidated Financial Statements / Statements of Change in Equity 18
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR 2009 AND 2008 Millions of euros Reserves of companies consolidated by
Consolidated Share Share Legal Voluntary Full Equity Treasury Revaluation Minority Total profit for the Total capital premium reserve reserves consolidation method shares adjustments interests equity year Balance at 31 December 2007 743 120 148 777 (12) 10 (19) (89) 327 2,005 1 2,006
Consolidated comprehensive income for 2008 ------(268) 32 (236) - (236)
Distribution of 2007 profit: To reserves - - 1 192 7 (31) - - (169) - - -
To dividends ------(158) (158) - (158)
Change in treasury shares ------(45) - - (45) - (45)
Other changes - - - (3) - - - - - (3) - (3)
Balance at 31 December 2008 743 120 149 966 (5) (21) (64) (357) 32 1,563 1 1,564
Adjustments for first-time application of IFRIC 13 (Note 3) - - - (25) - - - - - (25) - (25)
Adjusted balance at 1 January 2009 743 120 149 941 (5) (21) (64) (357) 32 1,538 1 1,539
Consolidated comprehensive income for 2009 ------285 (273) 12 - 12
Distribution of 2008 profit To reserves - - - 44 6 (18) - - (32) - - -
Other changes - - - (50) - 48 - - - (2) 2 -
Balance at 31 December 2009 743 120 149 935 1 9 (64) (72) (273) 1,548 3 1,551 Notes 1 to 23 to the financial statements form an integral part of the consolidated statement of changes in equity for 2009. Iberia Group / Consolidated Financial Statements / Cash Flow Statements 19
CONSOLIDATED CASH FLOW STATEMENTS FOR 2009 AND 2008 (NOTE 22)
Millions of euros
2009 2008
CASH FLOWS FROM OPERATING ACTIVITIES: (280) 38
Profit before tax (435) 36 Adjustments for: 151 113 Depreciation and amortisation 176 193 Impairment losses (3) 6 Changes in provisions 72 52 Gains (losses) on retirements and disposal of property, plant and equipment 4 (25) Gains (losses) on retirements and disposal of financial instruments (21) - Finance income (63) (137) Finance cost 39 52 Exchange differences 17 - Change in fair value of financial instruments (4) 5 Other income and expenses (66) (33)
Changes in working capital 75 (56) Inventories 17 (26) Trade and other receivables 104 126 Other current assets 4 (26) Trade and other payables (69) (153) Other current liabilities (10) 11 Other non-current assets and liabilities 29 12
Other cash flows from operating activities (71) (55) Interest paid (16) (26) Dividends received 21 Interest received 104 137 Corporate income tax expense 14 (31) Other receipts (payments) (175) (136)
CASH FLOWS FROM INVESTING ACTIVITIES: (175) (390)
Payments on investments (277) (633) Group and associated companies (59) (57) Intangible assets (17) (20) Property, plant and equipment (110) (127) Other financial assets (55) (429) Other assets (36) -
Proceeds from disposals 102 243 Intangible assets -- Property, plant and equipment 37 106 Other financial assets 61 47 Other assets 490
CASH FLOWS FROM FINANCING ACTIVITIES: 39 (301)
Proceeds from and payments for equity instruments - (45) Issue of equity instruments -- Acquisition of treasury shares - (46) Disposal of treasury shares -1
Proceeds from and payments for financial liabilities 39 (98) Proceeds from bank borrowings 125 56 Repayment of bank borrowings (86) (154)
Dividends paid and payments on other equity instruments - (158) Dividends - (158)
EFFECT OF EXCHANGE RATE CHANGES (6) -
NET INCREASE/DECREASE IN CASH AND EQUIVALENTS (422) (653)
Cash and cash equivalents at the beginning of the year 2,182 2,835 Cash and cash equivalents at the end of the year 1,760 2,182 Notes 1 to 23 to the financial statements form an integral part of the consolidated cash flow statements for 2009 Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 20
IBERIA GROUP NOTES TO THE ACCOUNTS FOR 2009
1. BUSINESS OF THE PARENT AND GROUP
The main business of Iberia, Líneas Aéreas de España, S.A., (the "Parent") is the air transport of passengers and cargo, but it also carries out complementary activities, the most important of these being support services for passengers and planes in airports and aircraft maintenance.
As a passenger and cargo air transport group it operates an extensive network serving three core markets: Spain, Europe and the Americas. Iberia, Líneas Aéreas de España, S.A. is a full member of the oneworld alliance, one of the world's leading airline groupings, which allows it to extend its air transport business worldwide. Besides the business lines carried on directly by Iberia, Líneas Aéreas de España, S.A., the Parent has sought to complement these and develop in other transport-related businesses by setting up or investing in the different companies that comprise the Iberia Group (the "Group"), which is headed by Iberia, Líneas Aéreas de España, S.A. as parent. The registered office of Iberia, Líneas Aéreas de España, S.A. is in Madrid and, since April 2001, its shares have been listed on Spain's four stock markets.
2. GROUP COMPANIES
2.1 Subsidiaries
Basic information about the companies in the Iberia Group consolidated by the full consolidation method and their equity at 31 December 2009 is as follows: Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 21
Millions of euros % Ownership Information on the subsidiary at 31-12-09 (direct and indirect) Name Registered Office Carrying Share Profit (loss) Other Amount Corporate purpose 2009 2008 Equity capital for the year equity of the investment GROUP COMPANY:
Compañía Auxiliar al Cargo Exprés, S.A. Centro de Carga Aérea Parcela 2 p 5 nave 6; Madrid Cargo transport 75.00 75.00 - - 5 5 1
Cargosur, S.A. Velázquez, 130; Madrid Air cargo transport 100.00 100.00 6 - - 6 6
Iberia Tecnología, S.A. Velázquez, 130; Madrid Aircraft maintenance services 100.00 100.00 1 - - 1 1
VIVA Vuelos Internacionales de Vacaciones, S.A. Camino de la Escollera, 5; Palma de Mallorca Aircraft maintenance 100.00 100.00 1 - 4 5 1
Campos Velázquez, S.A. Velázquez, 34; Madrid Acquisition and holding of urban land 100.00 100.00 1 - - 1 1
Auxiliar Logística Aeroportuaria, S.A. Centro de Carga Aérea Parcela 2 p 5 nave 6; Madrid Cargo transport 75.00 75.00 - - 1 1 -
Consultores Hansa, S.A. Velázquez, 130; Madrid Market consultancy 100.00 100.00 - - - - -
Iberia Desarrollo Barcelona, S.L.R Bergara, 3; Barcelona Promotion and development of airport infrastructure 75.00 75.00 6 - (1) 5 4
Iberia Mexico, S.A. Ejercito Nacional 439; Mexico Aircraft engineering services 100.00 100.00 - 1 - 1 -
Binter Finance B.V. Strawinskian 3105 100 BL; Amsterdam Financing and cash management 100.00 100.00 - - 1 1 -
IB OPCO Holdings, S.L. Velázquez, 130; Madrid Asset management and consultancy services 100.00 ------
Iberia, Líneas Aéreas de España, Sociedad Anónima Operadora Velázquez, 130; Madrid Passenger transport and other related services 100.00 ------
Notes 9.4 and 16 of these notes to the consolidated financial statements set out the contributions made by each of these companies to the Group's profits and reserves. Assets contributed by these companies are immaterial as a proportion of total Group assets. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 22
2.2 Associates and jointly controlled entities
General information on the Group's main associates and jointly controlled entities and basic information on their equity at 31 December 2009, is as follows:
Millions of euros % Ownership Information on the subsidiary at 31-12-09 (direct and indirect) Name Registered Office Carrying Share Profit (loss) Other Total amount Corporate purpose 2009 2008 Equity Total assets capital for the year equity revenue of the investment ASSOCIATED COMPANIES:
Vueling Airlines, S.A. Parque de Negocios Mas Blau; Barcelona Passenger transport 45,85 - 30 28 89 147 424 605 109
Multiservicios Aeroportuarios, S.A. Bravo Murillo, 52; Madrid Auxiliary services in airports 49,00 49,00 - 1 5 6 25 68 -
Empresa Logística de Carga Aérea, S.A. (ELCA) Aeropuerto Jose Martí; Ciudad de La Habana Cargo terminal operator 50,00 50,00 - - 1 - 1 - -
Empresa Hispano Cubana de Mantenimiento de Aeronaves Ibeca, S.A. Aeropuerto Jose Martí; Ciudad de La Habana Aircraft maintenance 50,00 50,00 - 1 - 1 2 2 -
Handling Guinea Ecuatorial, S.A. (HANGESA) (a) Malabo (Guinea Ecuatorial) Handling 51,00 51,00 - 1 - 1 2 2 -
Sociedad Conjunta para la Emisión y gestión de Medios de Pago EFC, S.A. (Iberia Cards) Ortega y Gasset, 22; Madrid Issue and management of payment cards 43,50 43,50 6 1 13 20 35 43 4
Grupo Air Miles Avda. de Bruselas, 20; Alcobendas. Madrid Multi-sector loyalty scheme 33,33 (b) 25,00 (b) - (1) 3 2 98 54 1
Serpista, S.A. Velázquez, 130; Madrid Maintenance of airport equipment 39,00 39,00 1 1 4 6 11 13 -
International Supply Management, S.L. Pozuelo de Alarcón. Madrid Sale of chemical products 49,00 49,00 1 - (1) - 8 11 1
Iber-América Aerospace, LLC (a) Miami, Florida (Estados Unidos) Trading in aircraft parts and engines 65,33 65,33 1 - - 1 4 3 1
Noamar Air Handling Amsterdam Owning and financing companies 40,00 40,00 ------
Aerohandling Ltd Tenencia y financiación de Sociedades Handling 40,00 40,00 - - - - 3 3 -
Jointly controlled entities:
Madrid Aerospace Services, S.L. Pol. Ind. Las Monjas C/Verano, 9 Landing gear maintenance 50,00 50,00 3 (1) (1) 1 5 3 - (a) Due to limitations on the exercise of effective control over this subsidiary it has been classed as an associate. (b) The calculation of the percentage ownership of this company includes the treasury shares held by it.
Notes 9.5 and 16 set out the contributions of each of these companies to the Group's earnings and reserves. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 23
2.3 Changes in the scope of consolidation
Newly included within the Group's scope in 2009 were IB OPCO Holdings, S.L. and Iberia, Líneas Aéreas de España, Sociedad Anónima Operadora, both created during the year and wholly owned by the Parent. Also in 2009, the Parent increased its stake in Clickair, S.A. to 91.70% by further contributions to its share capital, by buying out the ownership stakes of three of the other four shareholders and by converting its preference shares into common shares (Note 7.1.2). In July 2009, the Parent contributed all its Clickair shares to the capital increase by Vueling Airlines, S.A., in return for a 45.85% stake in the company’s share capital. The transaction generated a profit for the Group of EUR 21 million, booked under “Other financial income and expense” in the 2009 consolidated income statement. In 2009 the Parent also increased its ownership stake in the Air Miles Group by buying 90 new shares in the company for approximately EUR 1 million, giving it a 33.33% stake.
3. BASIS OF PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATION PRINCIPLES
3.1 Basis of presentation of the consolidated financial statements
The consolidated financial statements for 2009 were prepared using the accounting records and financial statements of the Parent company and the companies falling within its consolidated group. These consolidated financial statements were prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union pursuant to Regulation (EC) No 1606/2002 of the European Parliament and Law 62/2003, of 30 December, on tax, administration and social order measures, to give a true and fair view of the consolidated equity and consolidated financial position of the Group at 31 December 2009 and of the consolidated profit from operations, changes in consolidated equity and consolidated cash flows that have occurred in the Group over the year ending on that date. The Group's consolidated financial statements and the individual financial statements of its constituent companies for 2009, prepared by their respective boards of directors, are pending approval by shareholders at their respective Annual General Meetings. However, the directors of the Parent expect these financial statements to be approved without significant changes. The Group's consolidated financial statements for 2008 were approved by shareholders at the Ordinary General Meeting on 3 June 2009.
3.2 Main policy decisions on IFRS
The Group took the following decisions on the presentation of the financial statements and other information contained in the notes to the consolidated financial statements:
A. The euro was considered the Group's functional currency. The consolidated financial statements are therefore given in euros. B. The statement of financial position is shown with a distinction made between current and non-current items. The income statement is presented on a "by nature" basis. C. The Group has opted to prepare the statement of cash flows using the indirect method. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 24
Regarding the adoption of new standards and interpretations, the following rulings were adopted:
3.2.1 Standards and interpretations effective in 2009:
The following interpretations of accounting standards became effective in 2009 and have been used by the Group where applicable in preparing the consolidated financial statements:
1. IFRIC 13 "Customer Loyalty Programmes". This interpretation establishes the accounting treatment of free or discounted goods and services given by companies to their customers as part of a customer loyalty scheme in the form of points or other types of credit when they sell a good or provide a service. Under this interpretation, Iberia, Líneas Aéreas de España, S.A. has changed the criteria for classification and measurement of points in the "Iberia Plus" scheme. Until the year ended 31 December 2008, points were measured as a cost under "Other Operating Costs" on the consolidated income statement and a provision for the estimated value of outstanding points at the end of each year was booked under "Trade and Other Payables Trade Payables" on the consolidated statement of financial position. At 31 December 2008, the related provision stood at EUR 115 million. As from 2009, the value assigned to points is recognised as an identifiable component of the sale of flight tickets at their fair value and the value measured is initially recognised as deferred income under "Non-current Accrued Expenses and Deferred Income" on the liability side of the consolidated statement of financial position. Iberia, Líneas Aéreas de España, S.A. applied this interpretation allowed under IFRIC 13 prospectively from 1 January 2009 as it was impossible to measure all the effects of retrospective application. The effect at this date was a charge of approximately EUR 36 million booked under "Reserves Attributable to the Parent" on the consolidated statement of financial position. The corresponding tax impact was recognised as a credit to the same item of approximately EUR 11 million. 2. Amended IFRS 7 - Additional disclosures: The consequential amendment to IFRS 7 expands disclosure requirements about fair value measurements and liquidity risk. In the first case, the biggest change is the requirement to disclose financial instruments measured at fair value according to a hierarchy based on how they were measured. Note 12 explains the additional disclosures required. 3. Revised IAS 1 Presentation of Financial Statements: These fundamental changes to IAS 1 are intended to improve the presentation of information so that users of consolidated financial statements can clearly identify changes in equity resulting from transactions with owners when they act as such (e.g., dividends and share buybacks) separately from changes resulting from transactions with non-owners (transactions with third parties or income or costs recognised directly in equity). The Group has made use of this option, as in previous years. As a result the application of this revision has extended the scope of some information in the financial statements and some changes to item names to comply with the revised standard. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 25
4. From 1 January 2009, the following new standards, amendments and interpretations have been applied: IFRS 8 Operating Segments, revised IAS 23 Borrowing Costs, amended IFRS 2 Share-based Payment, amended IAS 32 and IAS 1, "Puttable financial instruments and obligations arising on liquidation", amended IAS 39 and IFRIC 9 Reassessment of Embedded Derivatives, IFRIC 14 and IAS 19 "Limit on a defined benefit asset, minimum funding requirements and their interaction" and IFRIC 16 Hedges of a Net Investment in a Foreign Operation. Details of these standards and interpretations were summarised in Note 3 to the consolidated financial statements for 2008 and their application had no material impact on the Group.
3.2.2 Standards and interpretations issued but not yet effective:
At the date of preparation of these annual financial statements, the following standards and interpretations had been published by the IASB but had not become effective, either because their effective date was subsequent to the reporting date or because they had yet to be adopted by the European Union:
Mandatory application Standard Item (years beginning after) Approved for use in EU: Revised IFRS 3 Business Combinations 1 July 2009 Amended IAS 27 Changes in Investments 1 February 2010 Amended NIC 39 Eligible Hedged Items 1 February 2010 Amended IAS 32 Classification of Rights Issues 1 February 2010 IFRIC 12 (1) Service Concession Arrangements 1 April 2009 Agreements for the Construction of Real IFRIC 15 (1) Estate 1 January 2010 IFRIC 17 (1) Distribution of Non-cash Assets to Owners 1 November 2009 IFRIC 18 (1) Transfers of Assets from Customers 1 November 2009 Not approved for use in EU (2): Financial Instruments: Classification and IFRS 9 Measurement 1 January 2013 Various (mostly Projects for improvements in 2009 Non-urgent improvements to IFRS 1 January 2010) Amended IFRS 2 Group Share-based Payments 1 January 2010 Revised IAS 24 Related Party Disclosures 1 January 2011 Amended IFRIC 14 Minimum Funding Requirements 1 January 2011 Extinguishing Financial Liabilities with IFRIC 19 Equity Instruments 1 July 2010
(1) Date of mandatory application based on the date for adoption published in the Official Journal of the European Union, which is different from the original date set by the IASB. (2) Standards and interpretations not yet adopted by the European Union at the date of preparation of these consolidated financial statements.
The directors of the Parent have measured the potential impacts of future application of these standards and interpretations and consider that their entry into force will have no material effect on the consolidated financial statements. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 26
3.3 Responsibility for the information and estimates made
The information included in these consolidated financial statements is the responsibility of the directors of the Parent. The Group's consolidated financial statements for 2009 made use of estimates by the Parent's directors to measure some assets, liabilities, income, expenses and obligations. These estimates related basically to the following:
The assessment of possible impairment losses on certain assets. The assumptions used in the actuarial calculation of obligations to employees. The useful lives of property, plant and equipment and of intangible assets. The criteria used to measure certain assets. The value of travel tickets and documents sold but never used. The estimate of the liability accrued at year-end in respect of outstanding points granted to holders of "Iberia Plus" loyalty cards. Measurement of provisions and contingencies. The fair value of certain financial instruments. Measurement of the terms of leases
The estimates were made on the basis of the best information available at 31 December 2009 on the events analysed. It is however possible that future events may lead to a modification of these estimates in coming years. Any such changes would have only a prospective effect.
Loss for the year
The Group made a EUR 273 million loss in 2009. This loss was basically a result of weaker demand and lower average revenues. The Group's budget for 2010 envisages a profit, and projections drawn up by the Parent's management forecast positive and growing profit for the next 5 years. The implementation of the current merger with British Airways Plc, described in Note 7.1.1, should improve this profit outlook thanks to the resulting synergies. As a result, the Parent's directors do not consider it necessary to recognise provisions for impairment of Group assets beyond those recorded in the consolidated financial statements for 2009 and explained in the corresponding notes.
3.4 Consolidation principles
3.4.1 Subsidiaries
Subsidiaries are companies over which Iberia, Líneas Aéreas de España, S.A. can exercise effective control. Effective control is evidenced in general, although not exclusively, by the direct or indirect ownership of 50% or more of the voting rights of the subsidiaries or, when the Parent has a lower or no ownership stake, by shareholder agreements that assure it of control. Control is the power to govern the financial and operating policies of that entity so as to obtain benefits from its activities. The financial statements of the subsidiaries are consolidated with those of the Parent using the full consolidation method. Consequently, all material balances and effects of transactions between consolidated companies were eliminated on consolidation. Interests owned by third parties in Group equity and third parties' share in profit or loss for the year are recorded under "Minority Interests" in the consolidated statement of financial position and consolidated income statement, respectively. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 27
3.4.2 Associates
Associates are entities over which the Parent has significant influence and which are neither a subsidiary nor a joint venture. In general, this influence is evidenced by a direct or indirect holding of 20% or more of the investee company's voting rights. Investments in associates are accounted for using the equity method; that is, the Group accounts for its proportional share in the associate's equity, net of any dividends received and other equity eliminations. The Group's share of the associate's profit or loss for the year is recognised in "Group Share in Profit of Associates" in the income statement. Gains or losses from any transactions with associates are eliminated to the extent of the Group's interest in the associate concerned. If an associate incurs losses to the extent that its equity becomes negative, it is recorded as zero in the Group's consolidated statement of financial position, since the Group has no obligation to support the associate financially. Exceptionally, the "Iberbus" companies (Note 7.1), in which the group owns more than 20% of the voting rights, are not considered to be associates and therefore are not consolidated. This is because their controlling shareholder, Airbus, has guaranteed that Iberia, Líneas Aéreas de España, S.A., as a non-controlling shareholder, will recover the whole of its investment. The accounting policies and principles applied by consolidated companies have been harmonised with those of the Group during the consolidation process.
4. APPLICATION OF PARENT LOSS
The directors propose that the Parent's loss for 2009 should be taken in full to prior years' losses. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 28
5. ACCOUNTING POLICIES AND MEASUREMENT BASES
The main accounting policies and measurement bases used in preparing the consolidated financial statements for 2009 are as follows:
5.1 Intangible assets
Intangible assets include computer software which was mainly acquired from third parties. The Group recognises costs incurred to acquire or develop software programmes under this heading. Maintenance costs of computer applications are recognised with a charge to the income statement for the year in which they are incurred. Computer software is amortised on a straight-line basis over five years. In 2009 the charge for this item was EUR 20 million (compared to EUR 19 million in 2008).
5.2 Property, plant and equipment
Property, plant and equipment are carried at historical cost, net of the related accumulated depreciation and impairment losses, if any, in accordance with the criteria in Note 5.3. Improvements to items of property, plant and equipment leading to increased capacity, efficiency, or to a lengthening of the useful lives of the assets are capitalised. The Group depreciates the depreciable cost of its property, plant and equipment using the straight-line method at annual rates based on years of estimated useful life. The estimated useful life of property, plant and equipment items are as follows:
Years
Aircraft 18 - 22 Buildings and other structures 20 - 50 Machinery, fixtures and tools 10 - 15 Surface transport equipment 7 - 10 Furniture and fixtures 10 Computer hardware 4 - 7 Spare parts for property, plant and equipment 8 - 18 Flight simulators 12 - 14
The estimated residual value of rotatable fuselage parts (those assigned to specific types or families of aircraft), which is recognised under "Spare Parts for Property, Plant and Equipment", ranges from 10% to 20% of acquisition cost, depending on the type of aircraft to which the parts are assigned. The estimated residual value of repairable fuselage parts is 10% of acquisition cost. The Group depreciates in full the acquisition cost of other items of property, plant and equipment. When consolidating owned aircraft and aircraft operated under a finance lease, the Group strips out from the cost of the aircraft the cost of components that will be replaced during the scheduled overhauls that take place every four to seven years. This cost is depreciated on a straight-line basis over the period from the acquisition of the aircraft to the first scheduled overhaul. The cost of the repairs made during these overhauls is capitalised to property, plant and equipment and depreciated over the period until the next scheduled overhaul. For each aircraft operating under an operating lease, based on the terms of the lease, the Group recognises a provision for the total cost of scheduled overhauls and allocates this cost to the consolidated income statement on a straight-line basis over the period between two consecutive overhauls (Note 10). Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 29
Maintenance costs of property, plant and equipment and the cost of minor repairs to aircraft operated by the Group are recognised in the income statement as incurred.
5.3 Impairment of property, plant and equipment and intangible assets
When there is any indication of decline in value, the Group performs an impairment test to estimate the possible loss of value that may reduce the recoverable amount of the assets to below their carrying amount. Recoverable amount is the higher of fair value less costs to sell and value in use. If the recoverable amount of an asset is estimated to be less than its carrying amount, the Group recognises an impairment loss in the income statement. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to a maximum of the original carrying amount that would have been recognised had no impairment loss been recognised.
5.4 Leases
Leases are classified as finance or operating leases depending on the substance and the nature of the transaction. The main leases entered into by the Group are for aircraft and do not include automatic transfer of ownership at the end of the lease term. Leases are classified as finance leases whenever their terms include an option for the lessee to acquire the asset (purchase option) and Group management has decided to exercise the option. Other leases, with or without a purchase option, are classified as operating leases unless their terms and conditions make the transaction equivalent to an acquisition (based on following indicators: purchase option, lease term and present value of the payment obligations).
Finance leases
For finance leases, the Group recognises the cost of the leased assets in the consolidated statement of financial position based on the nature of the leased asset and, simultaneously, a liability for the same amount. This amount is calculated as the lower of the fair value of the leased asset and the present value, at the beginning of the lease term, of the minimum payments agreed upon, plus any purchase option, when there is no reasonable doubt as to its exercise. The calculation does not include contingent payments, service costs or taxes that can be passed on by the lessor. The total finance charge on the lease is recognised in the consolidated income statement for the year in which it is incurred, using the effective interest rate method. Contingent payments, if any, are recognised as an expense for the year they are incurred. The assets recognised for these types of transactions are depreciated on the basis of their nature using similar criteria to those applied to other items of property, plant and equipment.
Operating leases
Costs from operating leases are recognised in the consolidated income statement for the year when they are incurred. Any receipt or payment made on contracting an operating lease is treated as an advance receipt or payment and recognised in the income statement over the lifetime of the lease as the benefits of the leased asset are received or given. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 30
5.5 Investments in associates
This mainly consists of the Parent's stake in Vueling Airlines, S.A., recognised at EUR 117 million in the consolidated statement of financial position. At 31 December 2009, the Parent's stake in Vueling Airlines, S.A., based on its stock market price, was measured at EUR 169 million.
5.6 Financial assets
The financial assets held by the Group are classified as follows:
A. Loans and receivables: financial assets arising from the sale of goods or the rendering of services in the ordinary course of business, or financial assets which did not arise from the ordinary course of business but are not equity instruments or derivatives, have fixed or determinable payments and are not traded in an active market. B. Financial assets held for trading: those acquired with the purpose of selling them in the near term or part of a portfolio of identified financial instruments for which there is evidence of a recent actual pattern of short-term profit-taking. This category includes financial derivatives, except for those that constitute financial guarantee contracts (such as pledges) or have been designated as hedging instruments. C. Available-for-sale financial assets: these include debt securities and equity instruments of other companies that are not classified in any of the previous categories.
Loans and receivables are initially measured at the fair value of the consideration given plus directly attributable transaction costs and, thereafter, at amortised cost. The Group has recognised provisions to cover non-payment risks. These provisions are calculated according to the probability of recovering the debt based on its age and the debtor's solvency. At 31 December 2009 the fair value of these assets was not materially different from their value in the consolidated statement of financial position. Financial assets held for trading are measured at fair value through profit or loss on the consolidated income statement. Available-for-sale financial assets are measured at fair value until the asset is disposed of or has become permanently impaired, at which time the cumulative gains or losses previously recognised in equity are recognised in the consolidated income statement. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 31
At least at each reporting date the Group tests its financial assets not measured at fair value through profit or loss for impairment. Objective evidence of impairment is considered to exist when the recoverable amount of the financial asset is lower than its carrying amount. When this occurs, the impairment loss is recognised in the income statement. The Group derecognises financial assets when the rights to receive the asset's cash flows have expired or are sold and substantially all the risks and rewards of ownership have been transferred. However, the Group does not derecognise financial assets which it sells while retaining substantially all the risks and rewards of ownership, instead recognising a financial liability equal to the consideration received. The Group generally invests its temporary cash surpluses in short-term financial assets, which are recognised under "Current Financial Assets" and "Cash Equivalents" at the amounts invested. Interest on these investments is recognised as income when paid and interest accrued at year-end is recognised in the consolidated statement of financial position as an increase in the corresponding item.
Cash and cash equivalents
This includes cash and short-term highly liquid investments maturing in less than three months that are readily convertible to cash and where the risk of change in value is insignificant. Interest on these investments is recognised as income when paid and interest accrued at year-end is recognised in the consolidated statement of financial position as an increase in this item. "Cash Equivalents" in the consolidated statement of financial position at 31 December 2008 includes all investment maturing in less than three months from that date, irrespective of the original term of these investments. If 2009 criteria were applied to the 2008 consolidated financial statements "Cash Equivalents" would be reduced by EUR 104 million, and this amount would instead be recognised as an increase to "Current Financial Assets - Other Financial Assets".
Treasury shares of the Parent
Treasury shares are recognised at the value of the consideration paid and are deducted from equity. Gains and losses on the acquisition, sale, issue or cancellation of treasury shares are recognised in equity.
5.7 Financial liabilities
Financial liabilities include payables owed by the Group that arose from the purchase of goods and services in the normal course of its business, or non-commercial payables that cannot be considered to be derivative financial instruments. These payables are initially recognised at the fair value of the consideration received, adjusted for directly attributable transaction costs. They are subsequently measured at amortised cost. At 31 December 2009, the amortised cost was not materially different from fair value. The Group derecognises financial liabilities once the resulting obligations have been extinguished. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 32
5.8 Inventories
Inventories are measured at the lower of acquisition cost (weighted average cost) or market value (net realisable value) and include mainly aircraft spare parts, repairable aircraft engine parts and fuel. The Group makes the appropriate valuation adjustments, and recognises them as an expense in the income statement when the net realisable value of the inventories is lower than their acquisition cost.
5.9 Balances and transactions in currencies other than the euro
Transactions in currencies other than the euro and the resulting receivables and payables are recognised at their equivalent euro value at the transaction date. Receivables and payables denominated in currencies other than the euro are translated into euros at the exchange rates prevailing at 31 December each year. However, following customary airline practice, the balance of the liability for unused traffic documents is recognised in the consolidated statement of financial position at the exchange rate prevailing in the month of the sale, as set by the International Air Transport Association (IATA). The IATA exchange rate for each month is the average exchange rate for the last five bank working days prior to the 25th, inclusive, of the preceding month. Any differences in value arising from a discrepancy between the official exchange rates at year-end and the exchange rates at which non-euro receivables and payables were originally recognised or from differences with exchange rates at the date of collection or payment of non-euro receivables, payables and cash or equivalent balances are allocated to "Exchange Differences" in the consolidated income statement.
5.10 Income tax
Since 1 January 2002 Iberia, Líneas Aéreas de España, S.A. and certain subsidiaries file consolidated tax returns under the tax system provided for by Chapter VII of Title VII of the Amended and Consolidated Spanish Corporate Income Tax Law. The Consolidated Tax Group is made up of all the fully consolidated companies except for Binter Finance, BV and Iberia México, S.A., which do not meet the legal requirements for inclusion. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 33
For each company, the current tax for the year is the amount paid in settlement of the income tax returns for that year. Tax credits and other tax benefits applied to the taxable profit, excluding withholdings, prepayments and tax loss carryforwards effectively offset during the year, are deducted from the current tax amount. Deferred tax expense or income relates to the recognition and derecognition of deferred tax assets and liabilities. These include the temporary differences, measured at the amount expected to be payable or recoverable, between the carrying amounts of assets and liabilities and their tax bases, as well as tax loss and tax credit carryforwards. These amounts are measured at the tax rates that are expected to apply in the period when the asset is realised or the liability is settled. Deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are only recognised to the extent that it is considered probable that the Group will have sufficient taxable profits in the future against which the deferred tax asset can be offset. Deferred tax assets and liabilities arising from items directly charged or credited to equity accounts are also recognised with a charge or credit, respectively, to equity. Recognised deferred tax assets are reassessed at the end of each reporting period and the appropriate adjustments are made where there are doubts as to their future recoverability. Also, unrecognised deferred tax assets are reassessed at the end of each reporting period and are recognised where it has become probable that they will be recovered through future taxable profits.
5.11 Income and expense recognition
Income and expenses are recognised on an accrual basis, i.e. when the actual flow of the related goods and services occurs, regardless of when the resulting monetary or financial flow arises Ticket sales and sales of the traffic documents for cargo and other services are initially credited to "Customer Prepayments" in the consolidated statement of financial position. This shows the estimated liability for ticket sales and traffic documents sold each year prior to 31 December but not yet used at that date. The related revenue is recognised when the transport or service actually happens. Iberia, Líneas Aéreas de España, S.A. operates the "Iberia Plus" card to promote customer loyalty. Cardholders accumulate points for taking certain flights, using the services of entities participating in the programme or making purchases with credit cards signed up to the programme. The points can be exchanged for free tickets or other services offered by participating companies. Points are measured at fair value which is initially recognised as deferred income. The fair value of unused points at 31 December 2009 of EUR 156 million was recognised under "Non-current Accrued Expenses and Deferred Income" on the liabilities side of the consolidated statement of financial position. Iberia, Líneas Aéreas de España, S.A. bases its measurement of the fair value of points granted on the fares for its own flights and the terms of agreements with other companies participating in the "Iberia Plus" programme. These agreements state the prices that they can recovered from Iberia, Líneas Aéreas de España, S.A. for Iberia Plus points redeemed against their services. When programme users redeem the points against services provided by Iberia, Líneas Aéreas de España, S.A. it is recorded as income in the consolidated income statement. Income recognised for redeemed points includes not only the value of the points themselves but also a percentage estimated to represent the number of points that will be left unredeemed by Iberia Plus beneficiaries. It is currently estimated that 18% of points will never be redeemed, based on the experience of the Parent over the lifetime of the programme. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 34
In general, any incentives, bonuses or discounts received in cash or in kind by the Parent relating to aircraft coming into service under operating leases are recognised in the consolidated income statement either on a straight-line basis over the term of the lease or when the incentive, bonus or discount is used. Amounts not yet recognised as income at each year-end are included under "Non-Current Accrued Expenses and Deferred Income" on the liability side of the consolidated statement of financial position. Interest income from financial assets is recognised using the effective interest method and dividend income is recognised when the shareholder's right to receive payment is established. Interest and dividends from financial assets accrued after the date of acquisition are recognised as income in the consolidated income statement.
5.12 Non-Current Provisions
In preparing the consolidated financial statements, the directors drew a distinction between:
1. Provisions: credit balances covering present obligations arising from past events, the settlement of which is likely to cause an outflow of resources, but which are uncertain as to their amount and/or timing. 2. Contingent liabilities: possible obligations that arise from past events and whose existence will be confirmed only by the occurrence of one or more future events not wholly within the control of the consolidated companies.
The consolidated financial statements recognise provisions when it is considered more likely than not that the corresponding obligation will have to be settled. Contingent liabilities are disclosed in the notes to the financial statements, unless the possibility of an outflow in settlement is considered to be remote. Provisions are measured at the present value of the best possible estimate of the amount required to settle or transfer the obligation, taking into account the information available on the event and its consequences. Where discounting is used, adjustments made to provisions are recognised as a finance cost on an accrual basis. The Group reverses these provisions, fully or partially, when the obligations cease to exist or are reduced. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 35
Provisions for restructuring costs
In December 2001 the Parent obtained authorisation from the employment authorities for a collective redundancy procedure to be applied to various employee groups. This was extended by further authorisations (the last granted in November 2007) and remains in force until 31 December 2010 for ground staff and cabin crew. On 20 April 2009, the Parent approved an extension to the term and scope of the redundancy procedure until 31 December 2013 to include pilots on the same terms and conditions. The procedure provides for payments until the statutory retirement age to employees who meet certain conditions and decide to request early retirement. The actuarial studies used to determine the liability to the employees who have opted for early retirement under these conditions are based on similar assumptions to those described in the section on "Provision for Obligations to Employees". The successive payments resulting from these commitments are deducted from the provisions recorded. Liabilities arising from the redundancy procedure are recognised as "Provisions for Obligations to Employees" under "Non-Current Provisions" in the consolidated statement of financial position (Note 10). Also, a collective redundancy procedure for handling staff on the ground associated with the process for the assignment of resources by way of subrogation was approved in 2006 which will remain in force until 2014. The consolidated statement of financial position at 31 December 2009 includes no provisions for this second collective redundancy procedure, since there is no associated cost commitment.
Obligations to employees
Under the collective labour agreements in force at the Parent, on reaching the age of 60 flight crew cease to discharge their duties and are placed on reserve, although their employment relationship remains in place until their statutory retirement age. Since May 2009, pilots, on reaching the age of 60, have had the option of remaining active, subject to restrictions on certain aspects of their work. The Parent recognises the costs of staff placed on reserve throughout the active working life of each employee based on the related actuarial studies. The collective labour agreements in force at the Parent also provide that flight crew who meet certain conditions may take early retirement (special leave of absence and voluntary termination). The Parent is required to pay certain amounts of remuneration to these employees until they reach the statutory retirement age. The Parent recognises the provision required to meet the future payment obligations to the employees concerned, based on actuarial studies, with a charge against the consolidated income statement in the year that this happens. At present, 165 employees are on special leave and 257 employees have opted for voluntary termination. Liabilities arising from these agreements are recognised as "Provisions for obligations to employees" under "Non-Current Provisions" in the consolidated statement of financial position (Note 10). These liabilities were calculated on the basis of actuarial studies by independent actuaries using the projected unit credit method and based on a discount rate of 3.5% and PERM/F-2000 P mortality tables, assuming 2% growth in CPI.
5.13 Montepío de Previsión Social Loreto
The main purpose of the Montepío de Previsión Social Loreto is to pay retirement pensions to its members (who include the employees of Iberia, Líneas Aéreas de España, S.A.) and other welfare benefits in certain circumstances (death or permanent disability). Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 36
Under the current collective labour agreements, the Parent and its employees make the statutory contributions (defined contributions) to the Montepío, as established in these labour agreements. The Montepío's bylaws limit the Parent's liability to the payment of the statutory contributions established. The Parent's contributions in 2009 and 2008 were EUR 24 million and EUR 22 million, respectively, which was recognised under "Employee Costs - Recurring" in the consolidated income statement.
5.14 Non-current assets and disposal groups held for sale
The Group classifies a non-current asset or disposal group as held for sale when it has taken the decision to sell it and the sale is expected to be completed within twelve months or as stated in a signed sale agreement. These assets or disposal groups are measured at the lower of carrying amount and fair value less costs to sell. Non-current assets held for sale are not depreciated, but rather at the date of each consolidated statement of financial position the related valuation adjustments are made to ensure that the carrying amount is not higher than fair value less costs to sell. Income and expenses arising from non-current assets and disposal groups held for sale which do not qualify as discontinued operations are recognised under the corresponding heading in the consolidated income statement by nature.
5.15 Derivative financial instruments and hedging transactions
The derivatives held by the Group relate mainly to foreign currency, interest rate and fuel price hedges, the purpose of which is to significantly reduce these risks in the underlying hedged transactions. Financial derivatives are initially recognised at cost in the consolidated statement of financial position, and remeasured to fair value thereafter. Increases in value are recognised under "Derivatives" and reductions in value under "Non-current or Current Borrowings - Derivatives" in the consolidated statement of financial position. Gains and losses from these changes are recognised in the consolidated income statement, unless the derivative has been designated as a hedging instrument and the resulting hedge is highly effective, in which case the recognition criteria are as follows: Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 37
1. Fair value hedges: the hedged item and the hedging instrument are both measured at fair value, and any changes in their fair values are recognised in the consolidated income statement, netting their effects under the same heading. 2. Cash flow hedges: changes in the fair value of derivatives are recognised under "Equity - Valuation Adjustments". Gains or losses recognised in this heading are transferred to the consolidated income statement to match the underlying's impact (for the risk hedged) on the consolidated income statement; thus this effect is netted off under the same heading in the consolidated income statement.
The fair value of the derivative financial instruments is calculated using the valuation methods described in Note 12.1.
5.16 Current / Non-current classification
In the consolidated statement of financial position, assets and liabilities that are expected to be settled or fall due within 12 months from the reporting date are classified as current items and those which fall due or will be settled within more than 12 months are classified as non-current items.
5.17 Earnings per share
Basic earnings per share are calculated by dividing profit or loss for the year attributable to the Parent by the weighted average number of ordinary shares outstanding during the year, excluding the average number of shares of the Parent held by the Group companies.
5.18 Consolidated statement of cash flows
The following terms, with the meanings specified, are used in the consolidated statement of cash flows, which was prepared using the indirect method:
1. Cash flows: inflows and outflows of cash and cash equivalents, which are short-term investments that are subject to an insignificant risk of changes in value. 2. Operating activities: the principal revenue-producing activities of the Company and other activities that are not investing or financing activities. 3. Investing activities: the acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents. 4. Financing activities: activities that result in changes in the size and composition of the equity and borrowings of the Group companies that are not operating activities.
5.19 Activities with an environmental impact
Environmental activities are generally considered to be those aimed at preventing, reducing or repairing damage to the environment. Accordingly, investments deriving from environmental activities are measured at cost and capitalised as an increase to property, plant and equipment in the year they are carried out. Costs arising from environmental protection and improvements are taken to the income statement for the year in which they are incurred, irrespective of when the associated monetary or financial flows take place. Provisions for contingencies or liabilities, litigation in progress and indemnities or obligations of undetermined amount related to the environment that are not covered by insurance policies are made as soon as the contingency or liability giving rise to the indemnity or payment occurs. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 38
6. PROPERTY, PLANT AND EQUIPMENT
The variations in 2009 and 2008 in property, plant and equipment were as follows:
Millions of euros Additions or 2009 31-12-08 Transfers Retirements 31-12-09 provisions Cost: Aircraft 1,549 46 25 (163) 1,457
1,549 46 25 (163) 1,457
Other property, plant and equipment Land 3 - - - 3 Buildings and other structures 158 - - (3) 155 Machinery, fixtures and tools 450 16 4 (4) 466 Surface transport equipment 32 1 - - 33 Furniture and fixtures 21 2 - (1) 22 Computer hardware 112 5 - (3) 114 Spare parts for property, plant and equipment 216 22 - (29) 209 Flight simulators 3 - - - 3 Work in progress 21 29 (12) (16) 22
1,016 75 (8) (56) 1,027
Depreciation: Aircraft (731) (105) - 113 (723)
(731) (105) - 113 (723)
Other property, plant and equipment Buildings and other structures (118) (4) - 1 (121) Machinery, fixtures and tools (330) (22) - 5 (347) Surface transport equipment (23) (3) - - (26) Furniture and fixtures (16) (1) - 1 (16) Computer hardware (81) (11) - 2 (90) Spare parts for property, plant and equipment (105) (10) - 18 (97) Flight simulators (1) - - - (1)
(674) (51) - 27 (698)
Provisions: Aircraft (39) (2) - 24 (17) Other property, plant and equipment (3) - - 3 -
(42) (2) - 27 (17)
Total, net 1,118 1,046 Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 39
Millions of euros Additions or 2008 31-12-07 Transfers Retirements 31-12-08 provisions Cost: Aircraft 2,092 137 (315) (365) 1,549
2,092 137 (315) (365) 1,549
Other property, plant and equipment Land 3 - - - 3 Buildings and other structures 159 - - (1) 158 Machinery, fixtures and tools 464 10 1 (25) 450 Surface transport equipment 36 - - (4) 32 Furniture and fixtures 21 - - - 21 Computer hardware 100 15 - (3) 112 Spare parts for property, plant and equipment 207 19 - (10) 216 Flight simulators 3 - - - 3 Work in progress 8 21 (6) (2) 21
1,001 65 (5) (45) 1,016
Depreciation: Aircraft (1,162) (121) 280 272 (731)
(1,162) (121) 280 272 (731)
Other property, plant and equipment Buildings and other structures (116) (4) - 2 (118) Machinery, fixtures and tools (329) (24) - 23 (330) Surface transport equipment (23) (3) - 3 (23) Furniture and fixtures (15) (1) - - (16) Computer hardware (73) (11) - 3 (81) Spare parts for property, plant and equipment (99) (10) - 4 (105) Flight simulators (1) - - - (1)
(656) (53) - 35 (674)
Provisions: Aircraft (139) - 54 46 (39) Other property, plant and equipment (3) - - - (3)
(142) - 54 46 (42)
Total, net 1,133 1,118 Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 40
6.1 Aircraft
Additions
The additions in each year related to:
Millions of euros
2009 2008
Aircraft 15 73 Engines 12 44 Refurbishment 19 20
46 137
In 2009, the Group bought an aircraft for the A-320 fleet with two engines that were subsequently sold (see section on retirements). The Parent also bought one engine for the A-319 fleet and one for the A-340/600 fleet. The additions to the fleet in 2008 consisted of two A-320s, which were sold the same year (see section on retirements), and two A-340s which had been operated under operating leases. A finance lease was arranged for one and the purchase option exercised on the other.
Transfers
Transfers for 2009 mainly concerned deposits previously put down for the acquisition of aircraft and engines, recognised in "Non-current Financial Assets - Other Financial Assets" (Note 7.1.3), and transfers of work in progress. In 2008, the Group reclassified the aircraft in the MD fleet, which it no longer uses and which are under contract of sale to be delivered in the next few years, to "Non-current Assets Held for Sale", in amounts of EUR 345 million under costs, EUR 280 million of cumulative depreciation and EUR 54 million of impairment provisions. Other transfers in 2008 mainly concerned deposits previously put down for the acquisition of aircraft and engines, recognised in "Non-current Financial Assets - Other Financial Assets" (Note 7.1.3). Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 41
Retirements
The retirements in each year related to:
Millions of euros 2009 2008 Fleet Accumulated Accumulated Cost Provisions Cost Provisions depreciation depreciation A-320 34 (8) - 47 (10) - MD - - - 152 (132) (18) A-340 3 (3) - 15 (9) - B-747 126 (102) (24) 148 (120) (28) MD-88 - - - 3 (1) -
163 (113) (24) 365 (272) (46)
A-320 aircraft: In 2009, the Parent sold an A-320 that it had previously bought in the same year and had not brought into service. The sale of this aircraft generated a profit of EUR 2 million under "Impairment Losses and Gains (Losses) on Disposal Of Assets". Also derecognised was an engine damaged during the year, for which EUR 1 million was recovered from the insurer and recognised under "Impairment Losses and Gains (Losses) on Disposal of Assets" in the consolidated income statement for 2009. The Group also derecognised the cost of overhauls carried out under the scheduled maintenance programme for the fleet which had been fully depreciated. In 2008, the Parent sold two A-320s which it had bought earlier the same year and not brought into service. The gain from the sale was recognised under "Impairment Losses and Gains (Losses) from Disposal of Assets" on the consolidated income statement for 2008. The Parent also derecognised the cost of overhauls carried out under the scheduled maintenance programme for this fleet which had been fully depreciated. MD-87 aircraft: Retirements from the MD-87 fleets in 2008 refer to the sale of eight MD-87s and twenty engines. These retirements generated a profit for the Group of EUR 5 million, recognised under "Impairment Losses and Gains (Losses) from Disposal of Assets". B-747 aircraft: In 2008, the Group derecognised two aircraft and two engines from the B-747 fleet with a net carrying amount of zero. Also in 2009 the Group derecognised another two aircraft from the same fleet which were grounded at 31 December 2008, also with zero net carrying amount.
Provisions on aircraft
To cover possible impairment losses on scheduled derecognition of aircraft, the Group makes provisions so that the net carrying amount of aircraft to be derecognised equals their net realisable value. The main provisions in 2008 and 2009 were: Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 42
Millions of euros Balance at Balance at Balance at Aircraft Retirements Transfers Additions Retirements Transfers 01-01-08 31-12-08 31-12-09 B-747 63 (28) - 35 - (24) - 11 B-757 3 - - 3 - - (3) - MD 72 (18) (54) - - - - - A-320 - - - - 2 - 3 5 Other 1 - - 1 - - - 1
139 (46) (54) 39 2 (24) - 17
Commitments and other guarantees on the fleet
The Parent has given an undertaking to subscribers to a bond issue that it will continue using 20 planes subject to operating or finance leases for periods of between 9 and 14 years. At 31 December 2009, the amount of the bond outstanding was USD 86 million and EUR 120 million (compared to USD 101 million and EUR 120 million at 31 December 2008). The Parent is carrying out an aircraft renewal programme under various agreements with Airbus, covering the A-319, A-320, A-330 and A-340 fleets. Following updates to the Airbus agreement, the aircraft not yet delivered at 31 December 2009 and the years when they are scheduled to join the fleet are as follows:
Number of aircraft
Fleet 2010 2011 2012 2013 Total
A-320 - 3 - 7 10 A-340/600 2 - - - 2
23-712
The terms of this renewal programme oblige the Parent to post EUR 188 million in deposits, of which it had already delivered EUR 119 million at 31 December 2009 (Note 7.1.3). The following table shows the schedule for delivery of the outstanding amounts:
Millions of euros
2010 21 2011 18 2012 29 2013 1
69
Based on the basic prices in the agreements, the total cost of the aircraft subject to outright purchase commitments not yet delivered at 31 December 2009 was approximately EUR 719 million. The Parent also has options on 14 A-320 aircraft, and has made a prepayment of EUR 3 million, recognised under "Non-current Financial Assets - Other Financial Assets" in the consolidated statement of financial position at 31 December 2009 (see Note 7.1.3). Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 43
The details above also exclude two A-319s, one A-320 and two aircraft from the A-340/600 fleet which were awaiting formal delivery. The prepayments made for these planes total EUR 114 million, recognised under "Current Financial Assets - Other Financial Assets" on the consolidated statement of financial position at 31 December 2009 (Note 7.2).
Aircraft in service
Following is a summary of the Group's aircraft in service at 31 December 2009:
Number of aircraft
Fleet Owned Under finance lease Under operating lease Total
A-319 - - 22 22 A-320 2 6 28 36 A-321 - 4 15 19 A-340/300 6 1 13 20 A-340/600 - - 12 12
8 11 90 109
The foregoing table excludes one B-747 aircraft owned by the Group which was grounded at 31 December 2009 because it was to be sold or scrapped and which has a carrying amount of zero. It also excludes the MD aircraft discussed in Note 6.7 on "Non-Current Assets Held for Sale". Also excluded from the table above, are eight A-320s owned by the Group, which the Group temporarily grounded in 2009 because of the falloff in air traffic. Nor does the table include one aircraft from the A-340/600 fleet whose operating lease was signed in 2009 but which had not yet come into service at 31 December.
Aircraft operated under operating and wet leases
In 2009, "wet lease" were cancelled on three A-340/300s which were moved onto operating leases. Following are the expiry dates of the operating leases of aircraft being operated by the Parent: Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 44
Year No. of Fleet Aircraft 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
A-319 1 1 4 8 4 1 - - - 3 22 A-320 1 1 2 6 2 2 5 - - 9 28 A-321 - - - 1 - 2 3 2 1 6 15 A-340/300 3 1 3 2 3 1 - - - - 13 A-340/600 - - - - - 3 2 3 4 - 12
Total 5 3 9 17 9 9 10 5 5 18 90
As well as the aircraft shown in the table above, the Group has operating leases on a B-757 which at 31 December 2009 was sub-leased to another airline, an A-340/600 which was out of service on 31 December 2009 and an A-340/300 and an A-320 which at 31 December 2009 were out of service pending return to their respective lessors. Certain of the operating leases include a purchase option on the aircraft that can be exercised during the lease term, and the possibility of extending the lease for periods ranging from one to nine years. At the date of preparation of these consolidated financial statements, the Parent's directors did not intend to exercise the purchase options or to seek to avail themselves of the extensions provided for in the leases where these would involve using the aircraft for periods exceeding 16 years.
Operating lease costs
The lease payments in 2009 and 2008 for aircraft operating leases and wet leases amounted to EUR 331 million and EUR 357 million, respectively, and are included under "Other operating costs - Recurring" in the consolidated income statement (Note 15.3). The approximate total for operating lease payments payable for these aircraft, calculated based on the interest rates and exchange rates prevailing at 31 December 2009 and 2008, is as follows:
Millions of euros
Year 31-12-09 31-12-08
2009 - 292 2010 256 267 2011 242 252 2012 228 239 2013 177 190 2014 and beyond 606 588
1,509(*) 1,828
(*) Equivalent to USD 2,174 million at the year-end exchange rate. The exchange rate and interest rate risks on these lease payments are partially hedged with derivatives (Note 12).
6.2 Other property, plant and equipment
The carrying amount of the buildings and facilities built on state-owned land, mainly at Spanish airports, was EUR 33 million and EUR 32 million, respectively, at 31 December 2009 and 2008. The Parent's directors do not expect any material losses to arise as a result of the reversion process since the maintenance programmes ensure that the items are always in good operating condition. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 45
6.3 Assets held under finance leases
At 31 December 2009 the total cost of property, plant and equipment acquired under finance leases, mainly aircraft, was EUR 408 million with EUR 127 million of accumulated depreciation (EUR 408 million and EUR 104 million in 2008). The schedule for lease payments outstanding at 31 December 2009, including purchase options, is shown in Note 11.2.
6.4 Fully depreciated items
At 31 December 2009 and 2008, the cost of the Group's fully depreciated items of property, plant and equipment was EUR 407 million and EUR 356 million, respectively, the detail being as follows:
Millions of euros
31-12-09 31-12-08
Aircraft 29 24 Buildings 62 59 Machinery, fixtures and tools 229 196 Furniture and fixtures 88 Computer hardware 66 57 Vehicles and other items 13 12
407 356
6.5 Insurance coverage
Group companies have taken out insurance policies for their property, plant and equipment and intangible assets which provide adequate cover for their carrying amount at 31 December 2009. Also, the Group has taken out insurance policies to cover aircraft leased to third parties. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 46
6.6 Non-current assets not in service
The Group keeps certain assets of property, plant and equipment in the consolidated statement of financial position at 31 December 2009, basically aircraft and engines, which are not in service. The cost of these assets, EUR 78 million (EUR 204 million at 31 December 2008), is covered by the related depreciation and provisions recognised. These amounts do not include the aircraft which were temporarily grounded in 2009 (see Note 6.1 "Aircraft in service").
6.7 Non-current assets held for sale
All balances recognised under this heading in the consolidated statement of financial position relate to the Parent's MD aircraft which are to be sold in the next few years under the sale contracts for this fleet. At 31 December 2009 these aircraft were not in service. In 2009, the Group sold 11 engines from this fleet with a carrying amount of EUR 2 million, recognising gains of EUR 2 million under "Impairment and Gains (Losses) from Disposal of Assets" on the consolidated income statement for 2009. A damaged engine from the same fleet was also derecognised.
7. FINANCIAL ASSETS
7.1 Non-current financial assets
The detail of "Non-current Financial Assets" at 31 December 2009 and 2008 is as follows:
Millions of euros Equity Loans to third Derivatives Other financial 31 December 2009 Total instruments parties (Note 12) assets Loans and receivables 10 77 - 147 234 Available-for-sale financial assets: - At fair value 243 - - - 243 - At cost 16 - - - 16 Derivatives - - 4 - 4
Total 269 77 4 147 497
Millions of euros Equity Loans to third Derivatives Other financial 31 December 2008 Total instruments parties (Note 12) assets Loans and receivables 12 123 - 238 373 Available-for-sale financial assets: - At fair value 219 - - - 219 - At cost 16 - - - 16 Derivatives - - 70 (6) 64
Total 247 123 70 232 672
7.1.1 Equity instruments
Movements in equity instruments in the consolidated statement of financial position during 2009 and 2008 were as follows: Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 47
Millions of euros % Balance at Exchange Valuation Balance at 2009 Ownership Additions Retirements 31-12-08 differences adjustments 31-12-09 at 31-12-09 Loans and receivables: Iberbus companies 40.00-45.00 12 - (2) - - 10
Available-for-sale financial assets: -At fair value British Airways Plc 9.99 217 - - - 25 242 Other 2 - (1) - - 1
-At cost Servicios de Instrucción de Vuelo, S.L. 19.90 9 - - - - 9 Wam Acquisition, S.A. 11.57 7 - - - - 7
247 - (3) - 25 269
Millions of euros % Balance at Exchange Valuation Balance at 2008 Ownership Additions Retirements 31-12-07 differences adjustments 31-12-08 at 31-12-08 Loans and receivables: Iberbus companies 40.00-45.00 25 - (9) (4) - 12
Available-for-sale financial assets: - At fair value British Airways Plc 9.99 - 331 - - (114) 217 Other 1 - - - 1 2
- At cost Servicios de Instrucción de Vuelo, S.L. 19.90 9 - - - - 9 Wam Acquisition, S.A. 11.57 7 - - - - 7
42 331 (9) (4) (113) 247
Iberbus companies
Airbus, the controlling shareholder of the Iberbús, has guaranteed the recovery of all the financial investments and loans made by Iberia, Líneas Aéreas de España, S.A. to these companies. For this reason, no provisions were taken against the stakes in these companies and they continue to be carried at their acquisition cost.
British Airways Plc
In 2008 the Group acquired shares giving it a 9.9% ownership stake in British Airways plc for EUR 331 million. At year-end they were valued at EUR 217 million. At 31 December 2009 the fair value of these shares was EUR 242 million and the EUR 89 million fall in value from their original cost was recognised, net of tax effects, as a charge to "Valuation Adjustments" in the consolidated statement of financial position. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 48
In 2009, the boards of directors of Iberia, Líneas Aéreas de España, S.A. and British Airways plc approved the signature of a binding agreement setting the terms for a merger between the two companies, in order to create one of the world's leading airline groups. The agreement recognised the principle of parity on the board of directors and management bodies of the new Group. The planned merger involves the creation of a new holding company that will own the two current airlines and whose shareholders will be the current shareholders of Iberia, Líneas Aéreas de España, S.A. and British Airways plc. Under the terms of the planned merger, after cancellation of the Parent's treasury shares and before the cancellation of the two companies' current cross-shareholdings, the shareholders of Iberia, Líneas Aéreas de España, S.A. will own 45% of the holding company with British Airways plc shareholders owning the other 55%. In the first quarter of 2010, once the various stages in the process have been completed and the requisite authorisations obtained, it is planned to formalise a definitive merger agreement that will then be submitted to shareholders for approval.
Wam Acquisition, S.A.
The investment in Wam Acquisition S.A. was acquired in part exchange for the sale of Amadeus, S.A. and is structured as ordinary and preference shares, the latter being convertible into ordinary shares if the subsidiary is floated on the stock market. On this point, Wam Acquisition, S.A. is currently in the process of obtaining a listing. Once this process is complete and it is officially listed, the Parent will remeasure its stake in Wam Acquisition, S.A. at fair value, which is likely to result in a significant increase in the value of the investment.
Other available-for-sale financial assets measured at fair value
During 2009 the Parent sold its stake in Opodo Ltd. at its carrying amount.
7.1.2 Loans to third parties
The changes in this heading in the consolidated statement of financial position in 2009 and 2008 were as follows:
Millions of euros Balance at Exchange Balance at 2009 Additions Transfers 31-12-08 differences 31-12-09 Loans to Venezolana Internacional de Aviación, S.A. (a) 26---26 Loans to Iberbus companies 54 - (1) (15) 38 Loans to Aerolíneas Argentinas, S.A. (a) 36 - - - 36 Clickair, S.A.-Preference shares (Note 2.3) 76 - - (76) - Loans to Iberlease 2004 Ltd. 38 - (1) - 37 Other loans 1 1 - - 2
Total cost 231 1 (2) (91) 139
Provisions (108) - - 46 (62)
Total, net 123 77 Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 49
Millions of euros Balance at Exchange Balance at 2008 Additions Transfers 31-12-07 differences 31-12-08 Loans to Venezolana Internacional de Aviación, S.A. (a) 26 - - - 26 Loans to Iberbus companies 78 - 4 (28) 54 Loans to Aerolíneas Argentinas, S.A. (a) 36 - - - 36 Clickair, S.A.-Preference shares 23 53 - - 76 Loans to Iberlease 2004 Ltd. 36 - 2 - 38 Other loans 1 - - - 1
Total cost 200 53 6 (28) 231
Provisions (84) (18) - (6) (108)
Total, net 116 123
(a) The loans granted to Venezolana Internacional de Aviación, S.A. (VIASA) and Aerolíneas Argentinas, S.A. arose in prior years and had been provisioned in full at 31 December 2009 and 2008.
Iberbus companies
Iberia, Líneas Aéreas de España, S.A. has granted loans to each of the six Iberbus investees with which it has aircraft operating leases in force. The principal on these loans ranges from USD 11 million to USD 22 million. The loans were granted for a period equal to the term of the operating lease for the related A-340/300 aircraft and earn annual interest ranging from 4% to 6%. They are repayable in a one-off lump sum on maturity, which will take place in the period from 2010 to 2012. The loans maturing in 2010 were reclassified to "Current Financial Assets - Other Financial Assets" (Note 7.2). The non-current amounts outstanding, by maturity, are as follows:
Millions of euros
31-12-09 31-12-08
Matures in: 2010 - 29 2011 8 8 2012 30 17
38 54
Iberlease 2004 Ltd.
Iberlease 2004 Ltd., the lessor of four aircraft held by the Parent under finance leases, is also the recipient of four loans granted by Iberia, Líneas Aéreas de España, S.A. with the same term as the finance leases and repayable in a single payment in December 2014. The principal of these loans is USD 54 million and interest is an annual 6% to 6.5% paid quarterly. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 50
7.1.3 Other non-current financial assets
The changes under this heading in 2009 and 2008 were as follows:
Millions of euros Balance at Exchange Balance at 2009 Additions Retirements Transfers 31-12-08 differences 31-12-09 Deposits for acquisition of aircraft 216 40 (33) (98) (3) 122 Measurement of hedging transactions (6) - (9) - 15 - Other 22 1 (3) 6 (1) 25
232 41 (45) (92) 11 147
Millions of euros Balance at Exchange Balance at 2008 Additions Retirements Transfers 31-12-07 differences 31-12-08 Deposits for acquisition of aircraft 201 81 (31) (50) 15 216 Measurement of hedging transactions 3 4 - - (13) (6) Other 16 7 - (1) - 22
220 92 (31) (51) 2 232
Deposits
The amounts included in "Deposits for Acquisition of Aircraft" relate to the reimbursable advances paid for the acquisition of aircraft and engines (Note 6.1), the detail being as follows:
Millions of euros 2009 2008
Under option/ Under option/ Outright purchase Outright purchase right to acquire right to acquire A-320 family 62 3 70 3 A-340 family 55 - 137 - Engines 2 - 6 -
119 3 213 3
Based on scheduled aircraft deliveries, the Group considers that deposits of EUR 65 million will be used in 2009.
7.2 Current financial assets
The detail of this heading in the consolidated statement of financial position at 31 December 2009 and 2008 is as follows:
Millions of euros
Balance at 31-12-09 Balance at 31-12-08
Loans and receivables: Loans to companies 31 34 Other financial assets 1,002 1,638 Derivatives (Note 12) 55 79
Total 1,088 1,751 Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 51
"Other financial assets" at 31 December 2009 includes deposits for aircraft acquisition totalling EUR 114 million (EUR 24 million at 31 December 2008) (Note 6.1). At 31 December 2009 and 2008 the Group had EUR 874 million and EUR 1,579 million, respectively, in short-term financial assets. These were mainly deposits, eurodeposits, euronotes and fixed-term deposits and promissory notes and yielded an average return of 3.22% in 2009 and 4.74% in 2008. The return on investments recognised under "Cash Equivalents" in the consolidated statement of financial position was 1.08% in 2009 and 4.70% in 2008.
8. RECEIVABLES
This heading in the consolidated statement of financial position at 31 December 2009 and 2008 includes mainly receivables from customers for sales made either directly by the Group or by passenger and cargo agents. It also includes receivables from airlines, mainly for services provided by the Parent on tickets sold by other airlines, and tax receivables (Note 13.1). The collection periods of Group companies range between 20 and 45 days. Provisions recognised by the Group following its analysis of the recoverability of receivables, considering the age and specifics of each case, are also included under this heading.
9. EQUITY
9.1 Share capital
At 31 December 2009 and 2008 the Parent had share capital of EUR 743 million, represented by 953,103,008 shares of par value EUR 0.78 each, all of the same class, fully subscribed, paid and held using the book entry system. The shares of the Parent are listed on the Continuous Market of the Spanish stock exchanges and all confer the same voting and dividend rights. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 52
The owners of the Parent, at the end of 2009 and 2008, were as follows:
31-12-09 31-12-08
Number of shares % ownership Number of shares % ownership
Caja de Ahorros y Monte de Piedad de Madrid 219,098,519 22.99 219,098,519 22.99 British Airways Plc 125,321,425 13.15 125,321,425 13.15 Chase Nominees Ltd. 49,594,518 5.20 - - Sociedad Estatal de Participaciones Industriales 49,212,526 5.16 49,212,526 5.16 The Bank of New York Mellon 38,072,751 3.99 - - El Corte Inglés, S.A. 32,151,759 3.37 32,151,759 3.37 B. Metzler seel. Sohn & Co - - 28,458,106 2.99 Other 439,651,510 46.14 498,860,673 52.34
953,103,008 100.00 953,103,008 100.00
9.2 Share premium
The Amended and Consolidated Spanish Companies Law expressly permits the use of the share premium balance to increase capital and establishes no specific restrictions as to its use.
9.3 Legal reserve
Under the Amended and Consolidated Spanish Companies Law, 10% of net profit for each year must be transferred to the legal reserve until the balance of this reserve reaches at least 20% of the share capital. The legal reserve may be used to increase capital provided that the remaining reserve balance does not fall below 10% of the increased share capital amount. Otherwise, until the legal reserve exceeds 20% of share capital, it can only be used to offset losses, provided that sufficient other reserves are not available for this purpose. At 31 December 2009 and 2008 this reserve represented 20% of the share capital.
9.4 Reserves at fully consolidated companies
The detail by company at 31 December 2009 and 2008 was as follows:
Millions of euros
Company 31-12-09 31-12-08
Adjustments attributable to the Parent (7) (11) Compañía Auxiliar al Cargo Exprés, S.A. 4 3 VIVA, Vuelos Internacionales de Vacaciones, S.A. 3 3 Iberia México, S.A. 1-
1(5) Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 53
9.5 Reserves in companies accounted for using the equity method
The detail by company at 31 December 2009 and 2008 was as follows:
Millions of euros
Company 31-12-09 31-12-08
Clickair, S.A. - (31) Multiservicios Aeroportuarios, S.A. 13 Empresa Logística de Carga Aérea, S.A. -1 Empresa Hispano Cubana de Mantenimiento de Aeronaves Ibeca, S.A. - 1 Handling Guinea Ecuatorial, S.A. 1- Sociedad Conjunta para la Emisión y Gestión de Medios de Pago EFC, S.A. 4 3 Serpista, S.A. 21 Air Miles Group 11
Total 9 (21)
9.6 Treasury shares of the Parent
The changes during 2009 and 2008 to "Treasury Shares" in the consolidated statement of financial position were as follows:
2009 2008
Number of shares Millions of euros Number of shares Millions of euros
At the beginning of the year 27,898,271 64 8,050,000 19 Additions - - 20,255,916 46 Retirements - - (407,645) (1)
At year-end 27,898,271 64 27,898,271 64
The treasury shares held by Iberia, Líneas Aéreas de España, S.A. at 31 December 2009 and 2008 represented 2.93% of the share capital, with an aggregate par value of EUR 22 million. The average acquisition price of Parent shares held by the Group at year-end 2009 and 2008 was EUR 2.31 per share. The average selling price of the shares of the Parent in 2008 was EUR 2.69 per share As part of the merger process described in Note 7.1.1 these treasury shares will be cancelled.
9.7 Earnings per share
Basic earnings per share for 2009 and 2008 were as follows:
2009 2008
Profit for the year attributable to the Parent (millions of euros) (273) 32 Weighted average number of shares outstanding (millions of shares) 925 929 Basic earnings/(loss) per share (euros) (0.295) 0.034 Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 54
9.8 Valuation adjustments
The detail and changes in this heading in 2008 and 2009 are as follows:
Millions of euros Effect of change in Balance at Balance at Balance at Increase Reduction accounting policy Reduction 31-12-07 31-12-08 31-12-09 (Note 3.2) Hedging instruments 127 335 (66) 396 - (382) 14 Available-for-sale financial assets - 114 - 114 - (25) 89 "Iberia Plus" programme - -- - 36 (36) - Tax effect (38) (135) 20 (153) (11) 133 (31)
Total 89 314 (46) 357 25 (310) 72
10. NON-CURRENT PROVISIONS
The detail of these provisions at year-end 2008 and 2009 and the main changes during the year are as follows:
Millions of euros Balance at Overprovisions Balance at Additions Provisions used Transfers 31-12-08 (Note 14.2) 31-12-09 Provisions for obligations to employees 669 49 (20) (55) (45) 598 Provisions for restructuring costs 433 51 (114) 55 - 425 Provisions for major repairs (Note 5.2) 74 24 (2) - (10) 86 Otras provisiones (Nota 5.12) 107 3 (10) - - 100
1,283 127 (146) - (55) 1,209
10.1 Provisions for obligations to employees
The additions to "Provisions for obligations to employees" include the annual provision for the normal cost and for interest payments on provisions previously recognised, which are classified, respectively, under "Employee Costs - Recurring" (EUR 26 million) and under "Finance Cost" (EUR 23 million) in the consolidated income statement for 2009. Disbursements in this connection are amortised on an approximately straight-line basis. The EUR 55 million reduction due to "Transfers" relates to the provisions accrued at 31 December 2008 for obligations to employees who took part in the collective redundancy programme in 2009 (Note 5.10). These EUR 55 million were transferred to "Provisions for Restructuring Costs" which includes all provisions related to the collective redundancy procedure. The EUR 45 million in "Overprovisions" for 2009 relates to the option to remain active which was offered from May 2009 to pilots turning 60 that year (Note 5.12). Until then, "Provisions for Obligations to Employees" had included the estimated provisions for the future earnings of pilots on reserve (aged between 60 and 65). Since there is now an option to remain active, this provision is no longer necessary as remuneration of those who continue to fly will come under "Employee Costs" for the corresponding year. Since this is a new situation, with no precedents to indicate how many pilots will take up the option, the Parent opted to monitor take-up over the next two years and compare the actual results with assumptions made in the corresponding actuarial studies. It can then gradually adjust the remaining provision for this item in the consolidated statement of financial position at 31 December 2009. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 55
The EUR 45 million derecognised from this provision were booked as income under "Other Operating Income - Non-recurring" in the consolidated income statement for 2009.
10.2 Provisions for restructuring costs
Provisions for Restructuring Costs" relate to the present value of the liabilities arising from the voluntary collective redundancy procedure (Note 5.12) approved in 2001 and extended until 2010 (3,832 employees at 31 December 2009). On 20 April 2009, the Parent approved an extension to the term and scope of the redundancy procedure until 31 December 2013 to include pilots on the same terms and conditions. The payments related to this provision will continue over the next seven years in accordance with the age of the employees who have availed or will eventually avail themselves of the procedure.
10.3 Other provisions
"Other Provisions" includes the estimated amount required for probable liabilities of a diverse nature related mainly to litigation and unresolved tax assessments (Note 5.12). Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 56
11. NON-CURRENT AND CURRENT BORROWINGS
The detail by maturity of borrowings at 31 December 2009 and 2008 is as follows:
Millions of euros 31-12-09 31-12-08
Current Non-current Total Current Non-current Total
At amortised cost: Bank borrowings 221 27 248 115 76 191 Finance leases 30 224 254 55 223 278 Other financial liabilities 17 2 19 22 1 23 At fair value: Derivatives (Note 12) 27 48 75 448 103 551
Total 295 301 596 640 403 1,043
11.1 Bank borrowings
The detail, by maturity, of bank borrowings, in the form of loans and credit facilities, at 31 December 2009 and 2008 is as follows:
Millions of euros 31-12-09
Maturity
2015 and Currency 2010 2011 2012 2013 2014 Total beyond Euros 145 6 4 5 4 8 172 US dollar76-----76
221 6 4 5 4 8 248
Millions of euros 31-12-08
Maturity
2014 and Currency 2009 2010 2011 2012 2013 Total beyond Euros 5734 4 4 8 80 US dollar 58 53 - - - - 111
115 56 4 4 4 8 191
These loans and credit facilities bore weighted average annual interest of 4.70% in 2009 and 4.86% in 2008. The Group arranged credit lines with limits of EUR 193 million in 2009 and EUR 201 million in 2008 against which EUR 28 million remained undrawn at 31 December 2009.
11.2 Obligations under finance leases
At the end of 2009 and 2008 the Group was contracted to pay the following lease payments (including purchase options where applicable) under agreements in force: Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 57
Millions of euros Euro borrowings USD borrowings
2009 2008 2009 2008
Within one year 13 38 17 17 Between two and five years 100 90 110 124 Beyond five years 8 3 6 6
Total present value 121 131 133 147
Borrowings contracted by the Group are benchmarked to interest rates such as the Euribor or Libor. The main finance leases entered into by the Group relate to aircraft (Note 6.1). The terms of aircraft finance leases from their start date range from 7 to 16 years.
12. FINANCIAL INSTRUMENTS
12.1 Risk management policies
The Group carries out a broad range of actions to control and manage risks, putting in place systems that allow it to identify, measure, manage and mitigate the main risks affecting its various business lines. Risk management is integrated within the Group's key management parameters and tools, including the income statement, gearing levels, investments and disposals and the development of the "Director Plan". This approach to risk allows the Group to optimise the income statement and gearing and take balanced decisions on the risk/return offered by new investments. As for financial risks, the Group has a management programme to control and reduce the potential impact of fluctuations in exchange rates and fuel prices on earnings and to preserve sufficient cash for working capital and investments.
Capital management
The Group manages its capital to ensure that the Group companies are able to continue operating as profitable businesses whilst maximising shareholders' returns. One aspect of the policy implemented by the Group to meet its objectives is the maintenance of an appropriate balance between debt and equity. This policy reconciles the creation of value for shareholders with access to financial markets at a competitive cost to raise the funds required for its investment plans where these are not met from cash flow. The Group manages its capital using three financial measures: equity and two measures of debt, debt on the statement of financial position and adjusted or equivalent debt which takes account of lease obligations:
A. Equity includes share capital, reserves, earnings and exchange differences. B. Net borrowings reported in the consolidated statement of financial position include bank borrowings less cash and cash equivalents, excluding the measurements of derivatives. C. Adjusted or equivalent net borrowings includes capitalised aircraft leases, excluding the impact of derivatives, and eliminates capitalised interest on loans to Iberbus companies. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 58
The description and amounts of these measures are as follows:
Millions of euros
2009 2008
Consolidated profit/(loss) (273) 32 Equity 1,551 1,564
In balance-sheet net debt (1,417) (1,803)
Interest-bearing borrowings 502 469 Cash and cash equivalents (1,919) (2,272)
Adjusted net debt 1,229 1,012
Gearing (adjusted net debt/equity + adjusted net debt) 44.2% 39.3%
Foreign exchange risk
Due to the international nature of its business, the Group generates payments and receipts in non-euro currencies. The main risk is a strengthening of the US dollar against the euro as the Group has more expenses than income in dollars. This risk is basically managed by a combination of two approaches: strategic hedges (with terms of up to 5 years) using currency swaps as well as options or other derivatives to cover a particular percentage of the positions, and shorter-term tactical hedges (up to 1 year) which can be adapted to market trends and which are matched to real dollar payment flows.
Interest rate risk
The Group's position as a net borrower (including aircraft operating leases) means it is exposed to a rise in the interest rates of the currencies in which its borrowings are denominated. To manage this risk the Group keeps at least a percentage of its borrowings at fixed rates or hedged. Also, by diversifying the currencies it uses to raise finance (US dollar, euro, Swiss franc and pound sterling) it reduces the risk of a rise in interest rates affecting all the Group's borrowings.
Fuel-price risk
The Group manages the cost of aviation fuel through active risk-control policies and has a policy of directly hedging the price of kerosene (JET Kero CIF-NWE). This risk is usually mitigated using swaps and options.
Liquidity risk
Due to the seasonal nature of its business and the need for investment and finance to renew its aircraft, the Group applies a liquidity policy of maintaining substantial amounts of cash and current financial assets. This cash position is invested in highly liquid short-term instruments such as debt "repos", eurodeposits and bank promissory notes from leading financial institutions, in accordance with the policy on counterparty risk. All cash placements and all derivatives are contracted with highly solvent financial institutions,rated between AA and A+ by "Fitch IBCA". Besides these current assets and cash position, the Group also has permanent credit policies in place that guarantee its cash requirements. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 59
The Group exerts prudent management control over liquidity risk by using highly liquid short-term instruments: debt repos, eurodeposits and commercial paper, contracted with leading Spanish financial institutions. The table below analyses the Group's liquidity based on its financial instruments at 31 December 2009. Figures are based on undiscounted net cash flows in the case of derivatives, which were determined using rates implied on the yield curve, when the settlement (receivable or payable) is not fixed. Figures for the other financial instruments were determined using forecast cash flows, undiscounted:
Millions of euros
< 6 months 6 months - 1 year 1 year - 5 years > 5 years Total
Cash and cash equivalents 886 - - - 886 Financial assets: Loans to third parties - 31 77 - 108 Other financial assets 925 134 83 7 1,149 Receivables 478 - - - 478 Borrowings: Bank borrowings (220) (1) (19) (8) (248) Finance leases (17) (17) (250) (16) (300) Other financial liabilities (5) (12) (2) - (19) Trade and other payables (1.075) - - - (1,075) Derivative financial instruments: Aircraft lease hedges (11) (11) (28) - (50) Foreign exchange hedges (*) 9 5 - - 14 Fuel hedges 4 21 - - 25
974 150 (139) (17) 968
(*) Hedges of exchange rates, fuel costs, insurance and aircraft purchases
Credit risk
The Group's main financial assets are cash, equity instruments and other financial instruments, and trade and other receivables. These last two categories carry most of the insolvency and bad debt risk. In general, the Group controls its bad debt and insolvency risks by setting credit limits and applying strict conditions on collection periods. The financial assets recognised in the financial statements, net of impairment losses, represent the Group's maximum exposure to credit risk, without taking account of any guarantees in place or other credit enhancements. Trade and other receivables are mainly the amounts pending collection from travel and cargo agencies for the transport of passengers and goods as well as handling and maintenance services provided to customers. In transactions with national airlines and travel agencies the Group has an established policy of requiring bank guarantees in the form of pledges that hedge part of the credit extended to counterparties. Also, with some national travel agencies, the Group has a policy of requiring insurance cover for part of the credit offered. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 60
In 2009, the charge for impaired trade credit was EUR 12 million (EUR 4 million in 2008) and cumulative provisions for impaired trade credit at 31 December 2009 and 2008 were EUR 35 million and EUR 28 million, respectively.
Valuation techniques and assumptions used to measure fair value
The fair value of financial assets and liabilities are determined as follows:
A. Fair values of financial assets or liabilities with standard terms and conditions traded on active liquid markets are determined by reference to their quoted market price B. The fair values of other financial assets and financial liabilities (excluding derivative instruments) are determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable market transactions and dealer quotes for similar instruments. C. The fair values of interest rate derivatives are determined using a discounted cash flow analysis based on the rates implied on the yield curve according to market conditions. The fair value of options is determined by applying a Black- Scholes valuation model or its variants, based on market volatilities for the strike prices and expiry dates of the options concerned.
The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable:
A. Level 1: measurements derived from quoted prices in active markets for identical assets or liabilities. B. Level 2: measurements derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices). C. Level 3: measurements derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 61
Millions of euros
Level 1 Level 2 Level 3 Total
Derivative financial instruments: Assets - 59 - 59 Liabilities - (75) - (75) Available-for-sale financial assets 242 - 1 243
242 16 1 227
12.2 Derivative financial instruments
In accordance with the risk management policy set out in Note 12.1, Iberia Group mainly contracts exchange rate, interest rate and aviation fuel derivatives. The most-used exchange rate derivatives are cross currency swaps, forwards and options. For interest rate derivatives the most used are interest rate swaps. Fuel price derivatives used are mainly swaps and options. The Group classifies its derivatives into three types in accordance with International Financial Reporting Standards (IFRS):
1. Derivatives designated as cash flow hedges: these mainly hedge the cash flows from operating leases, ticket sales in non-euro currencies and fuel procurement. 2. Derivatives designated as at fair value: these hedge the market value of assets and liabilities recognised on the consolidated statement of financial position. 3. Other derivatives: those that have not been designated as a hedge or which fail to meet IFRS criteria for a hedge.
Foreign exchange hedges
At 31 December 2009, derivatives that hedged exchange differences, but were not specifically designated as a hedge under IFRS (being automatically offset in the consolidated income statement), and the underlying assets and liabilities they hedge, are as follows:
Millions of US dollars
Currency Amount
Underlying: Assets: Loan to Iberbus companies USD 112 Prepayments on aircraft & engines USD 332 Guarantees given USD 1 Venezuela funds USD 52 A-320 equity USD 54 Liabilities: Borrowings 4 A-320/321 USD (153) Borrowings 5 A-340 USD (101)
Total underlying 297
Derivative: Cross currency swap USD (7) Fx Swaps USD 302
Total derivatives 295 Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 62
The fair value of these derivatives at 31 December 2009 was a negative EUR 0.2 million and the change in their value since 31 December 2008 of EUR 6 million was recognised in profit for the year after being offset against the fall in the value of the corresponding asset and liability items. At 31 December 2009, the total notional value of cash flow hedges against exchange risks is as follows:
Millions of US dollars Cash flows hedged (millions of US dollars) Underlying Expected cash outflows Type of hedge 2010 2011 2012 2013 2014
Foreign currency cost 1,041 Cross Currency Swaps 206 171 153 95 40 Options: USD “Four Ways” - - - - - USD “Tunnels” 435 - - - - Fx Forwards 165 - - - - New aircraft 160 Fx Forwards 40 - - - - Insurance 14 Fx Forwards 7 - - - -
The market value of exchange rate derivatives (FX forwards and options) at 31 December 2009 was a positive EUR 6 million (EUR 23 million positive in 2008). The net amount in 2009 is derived from EUR 26 million recognised under "Non-current Financial Assets - Derivatives" and "Current Financial Assets - Derivatives" and EUR 20 million recognised under "Non-current Borrowings" and "Current Borrowings" on the liabilities side of consolidated statement of financial position. These hedges are related to cash flows that will take place in 2010. The changes in fair value of the ineffective portion of forward contracts, a negative EUR 200,000, were recognised as a cost in the consolidated income statement for 2009. The change in the fair value of the exchange rate derivatives that are effective as cash-flow hedges was a negative EUR 17 million before considering tax effects, which was deferred and taken to equity, net of its tax effect. Exchange rate and interest rate risks on aircraft leases were managed using "Cross Currency Swaps" (CCS) which transform an original US dollar payment into euros. The effect of a 10% increase in the EUR/USD exchange rate on the value of the Group's hedging positions at 31 December 2009 is approximately a negative EUR 70 million. In the event of a 10% decline the change in value of the hedging position at 31 December 2009 would be approximately a positive EUR 75 million.
Cash flow hedges at 31 December 2009
Millions (*) Nominal at Nominal at Nominal at Nominal at Nominal at Instrument Company Company 31-12-09 31-12-10 31-12-11 31-12-12 31-12-13 Cross currency swaps: Floating to fixed Receive USD Pay EUR 340 305 244 172 40 Floating to floating Receive USD Pay EUR 343 126 - - - Floating to floating Receive EUR Pay USD 386 77 - - - Fixed to fixed Receive USD Pay EUR 246 124 116 87 44
(*) Figures in the currency paid by the Parent. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 63
The fair value of cross currency swaps entered into at 31 December 2009 was a negative EUR 41 million. The net amount for 2009 is composed of EUR 8 million in assets and EUR 49 million in liabilities. These hedges are related to cash flows that will take place between 2010 and 2014.
Interest rate hedges
The Parent uses cross currency and interest rate swaps to manage its exposure to fluctuations in interest rates arising from its aircraft financing activities, as follows:
Nominal (millions of US dollars)
Instrument Currency 31-12-09 31-12-10 31-12-11 31-12-12
Interest Rate Swaps: Floating to floating (*) USD 256 235 212 63
(*) The Parent pays floating interest rate with a cap and floor and receives floating interest rate.
The fair value of interest rate swaps entered into at 31 December 2009 was a negative EUR 6 million, recognised as a liability. These hedges are related to cash flows that will take place between 2010 and 2012. The cumulative change in value by the effective portion of the swaps used for cash-flow and interest rate hedges, a total inflow of EUR 3 million, was recognised in equity, net of its tax effect. The cumulative change in value of the ineffective portion, a gain of EUR 1 million, was recognised in profit for the year. The effect of a change of +50bp in the euro yield curve on the value of the Group's hedging positions at 31 December 2009 is approximately a positive EUR 5 million. A change of -50bp would produce a change in value of the hedging position at 31 December 2009 of approximately a negative EUR 5 million. A movement of +/-50bp on the US dollar yield curve would have the following impacts: +50bp would increase the value of the hedges by approximately EUR 2 million. A movement of -50bp would reduce their value by approximately EUR 2 million. For the purpose of these calculations the Parent considers the likeliest scenario to be a movement in the yield curves of this scale in the course of 2010. However, for reasons of simplicity, it has been assumed that the change interest rates happens at the end of 2009 and rates then remain stable throughout 2010. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 64
Fuel price hedges
Metric tonnes Underlying Commodity Metric tonnes Type of hedge Nominal at 31-12-09
Purchases of JET Kerosene fuel JET Kero CIF-NWE 1,814,000 SWAPS 1,146,000
Fuel price risk is hedged with swaps that protect against changes in financial flows due to changes in the price of fuel. The market value of fuel price derivatives was a positive EUR 25 million at 31 December 2009 (negative EUR 373 million in 2008), of this, EUR 24.8 million was recognised under asset items and just EUR 30,000 under "Current Borrowings" on the liabilities side of the consolidated statement of financial position. The cumulative change in value of the effective portion of fuel hedges was a positive EUR 395 million before tax effects and was recognised under Equity, net of its tax effect. The cumulative change in value of the ineffective portion, a gain of EUR 3 million, was recognised in profit for the year. The impact of a +10% change in the price of fuel on the value of hedges at 31 December 2009 would be a positive EUR 51 million. A change of -10% would reduce the value of the hedging position at 31 December 2009 by EUR 51 million.
13. TAX
13.1 Tax receivables and payables
Details of tax receivables at 31 December 2009 and 2008 are as follows:
Millions of euros
2009 2008
Non-current: Deferred tax assets 635 591
635 591
Current: Foreign tax receivables 57 Value added tax 12 21 Other tax receivables 52
22 30 Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 65
Details of tax payables at 31 December 2009 and 2008 are as follows:
Millions of euros
2009 2008
Non-current: Deferred tax liabilities 71
71
Current: Take-off and security charges at airports 35 35 Foreign tax payables 33 35 Social Security taxes 20 21 Personal income tax withholdings 30 29 Other tax payables 15
119 125
13.2 Reconciliation of accounting profit to taxable income and income tax expense or (income)
Income tax on each company within the scope of consolidation is based on their financial or accounting profit. This may not be the same as their taxable income, which is the base on which tax is levied. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 66
The reconciliation of consolidated accounting profit to taxable profit and income tax expense or income is as follows:
Millions of euros
2009 2008
Receivable/(payable) Expense/(income) Receivable/(payable) Expense/(income)
Accounting profit for the year before tax (435) (435) 36 36 Consolidation adjustments (a) (8) (8) - - Permanent differences: Increase 2 2 2 2 Decrease - - (10) (10) Temporary differences: Arising in the year Increase (b) 151 - 117 - Decrease (c) (57) - - - Arising in prior years Increase 1 - - - Decrease (d) (222) - (210) -
Taxable income (568) (441) (65) 28
Tax rate of 30% (170) (132) (20) 8 Tax credits (6) (6) (6) (6)
Deferred tax assets - tax credits (176) - (26) -
Income tax expense/(income) - (138) - 2
Adjustment to income tax (Note 13.3) - (24) - 2
Total income tax expense/(income) - (162) - 4
(a) Consolidation adjustments mainly relate to profits from companies accounted for using the equity method. (b) Relating mainly to provisions for obligations to employees and other provisions for contingencies and charges and amounts received during the year in relation to memorandum credits and other deferred incentives. (c) Relating mainly to the use of the provision generated by the contribution of Clickair, S.A. shares to the capital increase of Vueling Airlines, S.A. and the deductible expense for the year arising from the restatement of "Iberia Plus" liabilities following the change in accounting policy detailed in Note 2.3. (d) Relating mainly to the use of provisions recorded in previous years for obligations to employees and the recognition in profit for the year of memorandum credits and other incentives received in previous years.
Current corporate income tax law provides certain tax incentives for investment and contributions to employees mutual funds. Consolidated companies have taken advantage of certain tax credits of this type, and plan to apply tax credits of EUR 4 million in the income tax return for 2009, following EUR 3 million in 2008. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 67
Iberia Group also plans to justify tax credits of EUR 2 million in its 2009 income tax return for domestic and international double taxation having justified EUR 2 million in 2008. In recent years, the amounts reinvested and corresponding tax credits were as follows:
Millions of euros
Reinvestment Tax credit
2005 825 129 2006 1- 2007 123 16 2008 -- 2009 81
13.3 Detail of income tax expense
The detail of income tax expense for 2009 and 2008 is as follows:
Millions of euros
2009 2008
Current tax: Continuing operations -- Deferred tax: Continuing operations (138) 2 Adjustments to income tax (24) 2
Total tax expense (162) 4
Adjustments to income tax mainly relate to income tax rebates from the Spanish tax authorities and differences between the income tax expense estimated at end 2008 and the expense in the income tax return filed. The reconciliation between income tax expense or income, the statutory Spanish tax rate and the Group's effective tax rate is as follows:
Millions of euros
2009 2008
Expense/(income) based on the Spanish statutory rate (130) 11 Effect of: Permanent differences -(3) Share of profit (loss) of associates (2) - Tax credits (6) (6) Income tax adjustments (24) 2
(162) 4 Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 68
13.4 Deferred tax assets and liabilities recognised directly in equity
The detail of tax recognised directly in equity in 2008 and 2009 is as follows:
Millions of euros Effect of change in Balance at Balance at Balance at Increase Reduction accounting policy Reduction 31-12-07 31-12-08 31-12-09 (Note 3.2) Hedging instruments 38 101 (20) 119 - (115) 4 Available-for-sale financial assets - 34 - 34 - (7) 27 "Iberia Plus" programme - -- - 11 (11) -
Total 38 135 (20) 153 11 (133) 31
13.5 Recognised deferred tax assets and liabilities
Deferred tax assets and liabilities are recognised in the consolidated statement of financial position under "Deferred Tax Assets" and "Deferred Tax Liabilities", respectively, as follows:
Millions of euros 2009 2008
Deferred tax Deferred tax Deferred tax assets Deferred tax assets liabilities liabilities Temporary differences 422 7 565 - Tax loss carryforwards 199 - 20 1 Unused tax credits 14 - 6 -
635 7 591 1
Deferred tax assets were mainly generated by provisions recorded to meet obligations to employees and other provisions, which will be deductible against tax in coming years, as well as income from memorandum credits and other deferred incentive income related to the aircraft. Also included are taxes recognised directly in Equity (Note 13.4). Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 69
Changes in deferred tax assets in 2009 and 2008 are as follows:
Millions of euros Deferred tax assets
Temporary Tax loss Unused tax Total differences carryforwards credits Balance at 31/12/2007 476 - - 476 Additions 158 20 6 184 Reductions (69) - - (69)
Balance at 31/12/2008 565 20 6 591
Effect of change in accounting policy (Note 3.2) 11 - - 11
Balance at 01/01/2009 576 20 6 602
Additions 45 170 6 221 Reductions (201) - - (201) Positive adjustment to income tax (Note 13.3) 2 9 2 13
Balance at 31/12/2009 422 199 14 635
At year-end 2009, based on estimated income tax for the year, the detail of the tax loss carryforwards and the maximum term for their recovery is as follows:
Millions of euros
Year of origin Taxable profit Tax effect Recoverable until
2008 97 29 2023 2009 566 170 2024
663 199
The deferred tax assets at 31 December 2009 are expected to be recovered as follows:
Millions of euros
Year of recovery
2010 82 2011 36 2012 and beyond 517
635
These deferred tax assets were recognised in the consolidated statement of financial position since the Parent's directors consider that, based on the best estimates of future results, it is likely that these assets will be recovered.
13.6 Tax audits
As a result of various tax audits, the tax authorities issued certain assessments for 1993 to 1997 (relating mainly to personal income tax withholdings), which were signed on a contested basis and appealed against by the Parent. Also, the Parent filed an appeal against the assessments issued in connection with customs duties for 1998 (second half), 1999 and 2000 (first five months). Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 70
During the audit performed in 2007 and 2008, the authorities issued assessments in relation to income tax for the period 2002 to 2004, and VAT for the period 2003 and 2004, both uncontested. The authorities also issued assessments in relation to non-resident tax and personal income tax for 2003 and 2004, which the Parent appealed against.
The directors and tax advisors of Iberia, Líneas Aéreas de España, S.A. consider that no tax liabilities additional to those recognised under "Other Provisions" will arise from the resolution of the various appeals described above (Note 10.3). In relation to the tax periods for which the limitation period has not expired, all years since 2005 for income tax and since 2006 for all other taxes applicable to the Group companies, the directors of Iberia, Líneas Aéreas de España, S.A. do not expect any liabilities to arise in addition to those recognised which might have a material effect on the consolidated financial statements.
14. REVENUE
14.1 Revenue
The breakdown of the Group's revenue in 2009 and 2008 is as follows:
Millions of euros
2009 2008
Passenger revenue (a) 3,325 4,218 Cargo revenue 251 347 Handling (aircraft dispatching and services in airports) 266 275 Technical assistance to airlines 310 297 Other income 79 86
4,231 5,223
(a) Including other income (recovery of unused tickets, commercial agreements, etc.) totalling EUR 188 million and EUR 327 million in 2009 and 2008, respectively. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 71
The breakdown of passenger revenue excluding "Other Income", by network, is as follows:
Millions of euros
2009 2008
Domestic 709 929 Medium-haul 890 1,124 Long-haul 1,538 1,838
3,137 3,891
14.2 Other operating income
The detail of "Other Operating Income" in the consolidated income statement is as follows:
Millions of euros
2009 2008
Recurring: Commissions 64 80 Rental income 15 18 Overprovisions (Note 10) 10 14 Other income 89 115 Non-recurring: Overprovisions (Note 10) 45 30 Other non-recurring operating income 4 35
227 292
The income from commissions relates basically to the commissions on the sale of tickets for other airlines, the commissions arising from the franchise agreement with Air Nostrum and the sale of tickets for Clickair, S.A. and Vueling Airlines, S.A. under Iberia's code. "Other Non-Recurring Operating Income" for 2008 includes mainly EUR 15 million of the settlement received from an insurance company.
14.3 Finance income
The detail of "Finance Income" in the consolidated income statement is as follows:
Millions of euros
2009 2008
Interest on short-term deposits 56 122 Interest on loans to associates 64 Other finance income 211
64 137
15. EXPENSES
15.1 Procurements
The detail of "Procurements" in the consolidated income statement for 2009 and 2008 is as follows: Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 72
Millions of euros
2009 2008
Recurring: Aircraft fuel 1,184 1,666 Aircraft spare parts 191 160 Catering materials 19 21 Other purchases 16 17
1,410 1,864
15.2 Headcount and other employee costs
The detail of "Employee costs" in the 2009 and 2008 income statements is as follows:
Millions of euros
2009 2008
Wages, salaries and similar expenses 997 1,001 Employee welfare costs 300 319 Non-recurring employee costs: Provisions for extension of collective redundancy procedure (Note 10.2) 51 1
1,348 1,321
In 2009 and 2008, the distribution of the workforce, measured as average equivalent headcount, by professional category, was as follows:
Number of employees 2009 2008
Senior executives 10 10
Ground staff: Managers and other line staff 1,145 1,121 Clerical staff 5,394 5,694 Ancillary services 4,697 5,104 Aircraft maintenance technicians 2,930 2,875 Other 1,160 1,207
15,326 16,001
Flight staff: Technical crew 1,590 1,644 Cabin crew 3,745 3,923
5,335 5,567
20,671 21,578 Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 73
At 31 December 2009 and 2008, the distribution of the workforce by gender and by professional category was as follows:
2009 2008
Women Men Women Men
Senior executives 1 9 1 9
Ground staff: Managers and other line staff 436 681 433 719 Clerical staff 3,699 1,911 4,032 2,026 Ancillary services 457 4,695 479 5,071 Aircraft maintenance technicians 32 2,891 31 2,894 Other 520 640 552 679
5,144 10,818 5,527 11,389
Flight staff: Technical crew 60 1,580 60 1,608 Cabin crew 2,935 975 3,084 1.070
2,995 2,555 3,144 2,678
8,140 13,382 8,672 14,076
15.3 Other operating costs
The detail of "Other Operating Costs" in the consolidated income statement for 2009 and 2008 is as follows:
Millions of euros
2009 2008
Air traffic services 342 362 Aircraft lease payments: Dry lease 315 324 Wet lease 16 33 Cargo 11 16 Other 713 Navigation charges 252 258 Aircraft maintenance 202 228 Commercial expenses 151 200 Booking system expenses 134 137 Other rent 73 76 In-flight services 66 72 Other types of maintenance 46 49 Stopover expenses 34 37 Indemnities for passengers, luggage and cargo 22 33 Other recurring costs 319 314 Non-recurring expenses 65
1,996 2,157 Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 74
"Aircraft Maintenance" includes the expenses for subcontracted maintenance work and the provision for major repairs of aircraft operated under operating leases. The fees for financial audit services provided to Iberia, Líneas Aéreas de España, S.A. and Group subsidiaries by the principal auditor were EUR 529,000 in 2009 and EUR 611,500 in 2008. Fees for non-audit services provided to Iberia, Líneas Aéreas de España, S.A. by the principal auditor and related companies in 2009 and 2008 were EUR 350,600 and EUR 428,000, respectively.
15.4 Finance cost
The detail of "Finance cost" in the consolidated income statement is as follows:
Millions of euros
2009 2008
Interest on employee liabilities (Note 10.1) 23 25 Interest on finance leases 14 15 Interest on loans 26 Other finance costs 16
40 52
16. CONTRIBUTION OF SUBSIDIARIES AND ASSOCIATES TO CONSOLIDATED PROFIT
The contribution of the Group subsidiaries and associates to the consolidated profit or loss for 2009 and 2008 is as follows:
Millions of euros Profit / (Loss) Company 2009 2008
Group subsidiaries: Iberia, Líneas Aéreas de España, S.A. (282) 48 Compañía Auxiliar al Cargo Exprés, S.A. - 1 Iberia México, S.A. 11
(281) 50
Associates and jointly controlled entities: Handling Guinea Ecuatorial, S.A. -1 Sociedad Conjunta para la Emisión y Gestión de Medios de Pago EFC, S.A. 1 1 Clickair, S.A. - (19) Vueling Airlines, S.A. 7- Air Miles Group (1) - Madrid Aerospace Services, S.L. (1) - Other 2-
8 (18)
Profit for the year attributable to the Parent (273) 32 Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 75
17. BUSINESS AND GEOGRAPHICAL SEGMENTS
Basis of segmentation
Segment reporting is structured on a primary basis by business segment and on a secondary basis by geographical segment.
Primary segments - business segments
The business lines described below were established on the basis of the Iberia Group's organisational structure at 2009 year-end and take into account the nature of the services provided and the customer segments at which they are targeted. In 2009 the Iberia Group engaged mainly in the following major lines of business, which provides the basis for the Group's primary segment reporting:
1. Transport business (including passenger and cargo transport). 2. Airports business (including handling). 3. Maintenance and engineering business. 4. Other business activities.
Income and expenses that cannot be specifically attributed to any operating line or that are the result of decisions affecting the Group as a whole - including expenses incurred in projects or activities affecting several lines of business, or income from strategic investments, income tax expenses, etc. - are attributed to a "Corporate Unit". Reconciliation items arising from the consolidation of the financial statements of the various business lines (prepared using a management approach) to the Group's consolidated financial statements are also allocated to the same "Corporate Unit". The costs incurred by the Corporate Unit are allocated among the various lines of business using an internal cost allocation system. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 76
Secondary segments - geographical segments
The Group's activities are also classified into geographical segments: Domestic (Spain), Short- and Medium-Haul International (Europe, Africa excluding South Africa, and the Middle East) and Long-Haul markets.
Basis and methodology for segment reporting
The segment reporting below is based on monthly reports prepared by the Iberia Group. These are drawn from the Group's cost accounting system which classifies transactions carried out by the Group by business line and geographical segment. Segment revenue relates to the external and internal revenue directly attributable to the segment and excludes finance income, dividends or proceeds from disposals. The expenses of each segment are determined by the directly allocable expenses incurred in the operating activities of the segment plus the corresponding proportion of the corporate expenses which can be allocated to the segment using reasonable allocation bases. The expenses thus allocated do not include interest, losses from disposals or income tax expenses that are unrelated to the segments' operating activities and that, therefore, cannot be allocated using reasonable allocation bases.
Segment assets and liabilities are those directly related to each segment's operations, plus the assets and liabilities that can be directly attributed to them using the bases for allocation mentioned above. Segment liabilities do not include income tax payables. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 77
Segment information about these businesses is presented below:
Millions of euros Maintenance and Corporate unit and Transport Airports Total Group engineering other businesses
2009 2008 2009 2008 2009 2008 2009 2008 2009 2008
Operating income: External 3,780 4,813 283 289 322 309 24 39 4,409 5,450 Inter-segment 5 5 195 202 411 387 370 381 - - Operating expenses: External 3,579 4,239 451 480 644 616 198 194 4,872 5,529 Inter-segment 723 694 30 31 33 31 195 219 - -
Operating profit (loss) (517) (115) (3) (20) 56 49 1 6 (463) (80)
E.B.I.T.D.A.R. (49) 413 13 (4) 80 73 18 17 62 499 Aircraft lease payments (349) (386) ------(349) (386) E.B.I.T.D.A. (398) 27 13 (4) 80 73 18 17 (287) 113 Depreciation and amortisation (119) (142) (16) (16) (24) (24) (17) (11) (176) (193) Non-recurring profit (12) 85 (12) 85 Financial profit 32 49 32 49 Share of profit/(loss) from companies accounted for using the equity method 8 (18) 8 (18) Profit before tax (436) - (435) 36 Income tax 162 (4) 162 (4)
Net profit/(loss) (273) 32
Average headcount (FTEs) 8,408 8,776 7,132 7,769 3,845 3,767 1,286 1,266 20,671 21,578 Investments 88 231 4 5 42 27 14 22 148 285 Property, plant and equipment 754 829 61 74 180 172 51 43 1,046 1,118 Inventories 42 39 - - 170 179 3 6 215 224 Other assets ------3,7854,2923,7854,292
Total assets 5,046 5,634
Customer prepayments390394------390394 Remuneration payable8691323721211010149159 Other liabilities------2,9563,5172,9563,517
Inter-segment sales are made applying an internal transfer pricing system based on market prices for equivalent areas and volumes. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 78
The following table shows the geographical breakdown of the Group's revenue:
Revenue Secondary segments 2009 2008
Domestic 1,686 2,076 International short- and medium-haul 940 1,272 Long-haul 1,783 2,102
4,409 5,450
Nearly all the Group's assets can be allocated to the domestic market, except for aircraft, which have no defined geographical location. The percentages of aircraft utilisation in each geographical market, measured in terms of total block hours, are as follows:
Percentage of utilisation Secondary segments 2009 2008
Domestic 25.55 25.07 International short- and medium-haul 27.04 39.36 Long-haul 47.41 35.57
100.00 100.00
18. RELATED PARTY TRANSACTIONS
Balances and transactions with related parties
The following transactions took place with related parties in 2009 and 2008:
Millions of euros 2009 2008
Collected from Iberia Paid to Iberia Collected from Iberia Paid to Iberia
Associates 46 86 47 100 Significant shareholders: British Airways Plc 13 24 16 37 El Corte Inglés Group 23 - 29 - Caja Madrid 26 29 33 22
108 139 125 159
The transactions with British Airways Plc relate mainly to commissions on passenger tickets collected from and paid to this company, for tickets issued by one company with the related flight being flown by the other, collections and payments arising from loyalty programmes, and collections and payments for handling services provided. The main transactions with the El Corte Inglés Group relate to the supply of uniforms for flight staff, commissions and incentives for passenger ticket sales and computer software and hardware development. Lastly, the transactions with Caja Madrid relate mainly to the interest on aircraft financing transactions, guarantees provided on aircraft, aircraft lease payments and returns on financial investments. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 79
In addition, the consolidated statement of financial position at 31 December 2009 and 2008 includes the following balances with related parties that arose in the normal course of business:
Millions of euros
2009 2008
Associates (6) 4 Significant shareholders: British Airways Plc 49 Caja Madrid 365 550 El Corte Inglés Group 75
At 31 December 2009 and 2008, the Group owed aircraft lease payments to Caja Madrid group companies in the amounts of EUR 194 million and EUR 224 million, respectively.
19. REMUNERATION OF DIRECTORS AND SENIOR EXECUTIVES
The detail of remuneration received in 2009 and 2008 by directors of Iberia, Líneas Aéreas de España, S.A. is as follows:
Thousands of euros
2009 2008
Fixed remuneration 783 780 Attendance fees 783 774 Compensation in kind 111 85
Total 1,677 1,639
Iberia, Líneas Aéreas de España, S.A. also incurred expenses relating to the performance of non-executive directors' functions of EUR 6,000 and EUR 5,000 in 2009 and 2008, respectively. Two of the Parent's directors also have executive positions (one director in 2008), for which they were paid the following amounts:
Thousands of euros
2009 2008
Fixed remuneration 550 693 Variable remuneration - 503 Compensation in kind 311 Social security and other costs 57 128
610 1,335
In 2009, the former Chairman (director of the Parent Company until termination) received remuneration of EUR 838,000 and the social security and other costs paid by the Parent Company amounted to EUR 57,000. Also, upon termination he received EUR 3,167,000, of which EUR 277,000 were paid by the Parent Company and the remainder was covered by insurance. In addition, in 2009 and 2008 premiums were paid in respect of an insurance policy to a value of approximately EUR 1 million and EUR 300,000, respectively. In 2009 and 2008, no advances or loans were granted to the directors of Iberia, Líneas Aéreas de España, S.A. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 80
Remuneration of Senior Executives
Remuneration received by members of senior management of the Parent Company in 2009 and 2008, excluding those who serve on the board of directors (see above), is as follows:
Thousands of euros
Item 2009 2008
Salaries (fixed and variable) 2,919 3,010 Indemnities 1,467 - Compensation in kind 126 112
4,512 3,122
In addition, in 2009 and 2008 premiums were paid in respect of an insurance policy and pension plans to a value of EUR 167,000 and 151,000, respectively. In 2009 and 2008, no advances or loans were granted to the members of the Management Committee of Iberia, Líneas Aéreas de España, S.A.
20. DETAIL OF THE DIRECTORS' INVESTMENTS IN COMPANIES WITH SIMILAR BUSINESS ACTIVITIES AND PERFORMANCE BY DIRECTORS, AS INDEPENDENT PROFESSIONALS OR AS EMPLOYEES, OF SIMILAR ACTIVITIES
Pursuant to Article 127 ter.4 of the Spanish Companies Law, introduced by Law 26/2003, of 17 July, which amends Securities Market Law 24/1988, of 28 July, and the Amended and Consolidated Spanish Companies Law, in order to reinforce the transparency of listed corporations, the table below details the activities carried on in 2009 by directors that are identical, similar or complementary to the corporate purpose of Iberia, Líneas Aéreas de España, S.A. and its subsidiaries:
Type of Name Company Activity Position/Function arrangement Rafael Sánchez-Lozano British Airways Plc Air transport Employee Director Roger Maynard British Airways Plc Air transport Employee Director of Alliances and Investments British Airways CityFlyer Ltd. and British Airways European Ltd. Air transport Employee Executive/Director Keith Williams British Airways Plc Air transport Employee CFO/Director Jorge Pont Sánchez Vueling Airlines, S.A. Air transport Employee Director
Also, pursuant to the same Law, it is stated that the only directors who own any equity interests in companies engaging in an activity that is identical, similar or complementary to the corporate purpose of Iberia, Líneas Aéreas de España, S.A. and subsidiaries are Roger Maynard, who has a 0.0004994% ownership interest in British Airways plc, and Keith Williams, who has a 0.00286% ownership stake in British Airways Plc. Lastly, directors (or persons acting on their behalf) have not entered into transactions other than ordinary business transactions on normal market conditions with Iberia, Líneas Aéreas de España, S.A. or with other Iberia Group companies. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 81
21. ENVIRONMENTAL INFORMATION
As part of its environmental policy, the Group continued various activities and projects in 2009 to guarantee the proper management of the main environmental impacts of the air transport business as a whole. In 2009 and 2008 the Group incurred environmental expenses of EUR 5 million and EUR 4 million respectively, the detail being as follows:
Millions of euros
2009 2008
Environmental repair and maintenance 21
Employee costs relating to environmental management 1 1
Environmental taxes and other 22
54
At 31 December 2009, the acquisition cost and accumulated depreciation of the Group's environmental assets, which include water-treatment plants, hazardous waste storage facilities, gas recharge and filter systems and water recycling infrastructure, amounted to EUR 78 million and EUR 57 million, respectively (2008: EUR 77 million and EUR 52 million, respectively). With respect to its aircraft, the Group has a renewal policy in which the environment (minimising the impact of noise and atmospheric emissions) is an important factor. Accordingly, the Group is continuing to add new aircraft models that reduce fuel consumption by approximately 20% compared to earlier generation aircraft. In its ground operations, the Parent achieved certification under the ISO 14001/AENOR Environmental Management System, including the Parent's aircraft maintenance facilities at Barajas airport in Madrid. As a result of this certification, together with the existing ones in handling and the Parent's other maintenance facilities, all of the Parent's significant environmental issues are covered by external certification. Iberia Group / Consolidated Financial Statements / Notes to the Accounts for 2009 82
Since 2009, the Parent has been a member of the European SESAR programme to reorganise European air space with the aim of reducing aircraft congestion and environmental impacts. The Parent considers that any possible environmental contingencies that might arise are covered sufficiently by its third-party liability insurance policies and by the provisions relating to probable or certain third-party liability arising from litigation in progress or from outstanding indemnity payments or obligations of undetermined amount. Lastly, environmental investments in 2009 totalled EUR 1 million.
22. CASH FLOW STATEMENTS
In preparing the statement of cash flows the Company included under "Cash and Cash Equivalents" not only the balance under "Cash and Cash Equivalents" in the statement of financial position but also part of the balances under "Current Assets - Other Financial Investments" (see Note 7.2) which met the conditions to be considered as highly liquid investments that are subject to an insignificant risk of changes in value. The main items in the statement of cash flows relate to payments on investments related to aircraft purchases (Note 6) as well as finance received and payments made under "Other Collections (Payments)" which include payments made to employees arising from the provisions for restructuring and from obligations to employees (Note 10).
23. EXPLANATION ADDED FOR TRANSLATION TO ENGLISH
These consolidated financial statements are presented on the basis of IFRS, as adopted by the European Union. Certain accounting practices applied by the Group that conform with IFRS may not conform with other generally accepted accounting principles. Consolidated Management Report
IBERIA GROUP Iberia Group / Consolidated Management Report / Key Data 84
KEY DATA
IBERIA GROUP 2009 2008 % Change
Revenue and result (millions of euros) Recurring operating revenue 4,409 5,450 (19.1)
EBITDAR (1) 61 500 (87.8)
Recurring EBIT (464) (79) nm
Profit (loss) from operations (2) (475) 5 nm
Profit (loss) before tax (435) 36 nm
Profit (loss) after tax (273) 32 nm
Profit (loss) attributable to Shareholders of the Parent (273) 32 nm
Basic earnings per share (euro cents) (3) (29.5) 3.4 nm
Passenger traffic: operating statistics and revenue Available seat kilometres (ASK) (millions) 62,158 66,098 (6.0)
Revenue passenger kilometres (RPK) (millions) 49,612 52,885 (6.2)
Load factor (%) 79.8 80.0 (0.2 p.)
Passenger revenue (millions of euros) 3,137 3,891 (19.4)
Passenger revenue / RPK (euro cents) 6.32 7.36 (14.1)
Passenger revenue / ASK (euro cents) 5.05 5.89 (14.3)
Finance indicators and ratios Equity (millions of euros) 1,551 1,564 (0.8)
In-balance sheet net debt (millions of euros) (4) (1,417) (1,803) (21.4)
Adjusted net debt (millions of euros) (5) 1,229 1,012 21.4
EBITDAR margin (%) (1) 1.4 9.2 (7.8 p.)
Recurring EBIT margin (%) (1) (10.5) (1.5) (9.0 p.)
Profit (loss) after tax margin (%) (6.2) 0.6 (6.8 p.)
ROE (%) (6) (17.6) 2.1 (19.7 p.)
Operating revenue / ASK (euro cents) (1) 7.09 8.24 (14.0)
Operating cost / ASK (euro cents) (1) 7.84 8.36 (6.3)
Operating cost (non fuel) / ASK (euro cents) (1) 5.93 5.84 1.5
Resources Average headcount (FTEs) (7) 20,671 21,578 (4.2)
Operating revenue per employee (thousands of euros) (1)(8) 215 254 (15.3)
Productivity (thousands of ASK / employee) (8) 3,042 3,097 (1.8)
Number of aircraft at year-end 109 119 (8.4)
Fleet utilisation (block hours / aircraft / day) 10.3 10.0 3.7 nm: Not meaningful (1) EBITDAR (earnings before interest, tax, depreciation, amortisation and fleet rentals), margins over recurring revenue, unit revenue and costs exclude non-recurring items. (2) Profit (loss) from operations includes recurring and non-recurring operating results. (3) Weighted average number of shares outstanding (in thousands): 925,205 in 2009 and 929,348 in 2008. (4) Negative balance means cash equivalents in excess of interest-bearing debt (without including the measurement of hedges at year-end 2009 and 2008). (5) Calculated as follows: in-balance sheet net debt + capitalised fleet leases – capitalised interest on Iberbus loans (at 4% in 2009, and at 6% before that). (6) Return on Equity: Profit (loss) after tax / Equity. (7) Includes the employees of Iberia, CACESA, ALAER and Binter Finance. (8) Productivity stated for Iberia’s entire workforce. Iberia Group / Consolidated Management Report / Highlights 85
1. HIGHLIGHTS
Iberia, Líneas Aéreas de España, S.A. (hereinafter, Iberia) is one of Europe’s largest passenger and cargo airlines. It operates an extensive network of scheduled flights and its main hub is Madrid-Barajas airport where the carrier operates flights connecting with 83 international destinations across Europe, the Americas, Africa and the Middle East. Iberia carries the highest number of passengers between Europe and Latin America of any airline. Iberia also engages in other businesses, with the aircraft maintenance and ground handling services standing out. In addition, over the years it has set up or invested in a series of companies that comprise the Iberia Group, whose business activities complement or are related to those of the parent company. All of the company’s services are provided under the umbrella of a commitment to satisfy its customers’ expectations and to create shareholder value on an ongoing basis. The company manages its businesses based on the principles of respecting and protecting the environment, while actively engaging in community work. Iberia is part of the DJSI World and FTSE4Good IBEX sustainability indexes which track leading sustainability companies in terms of their economic, social and environmental strategies and management. Iberia is a fully-fledged member of the oneworld alliance, one of the biggest airline alliances in the world. Iberia’s shares have been listed on Spanish Stock Exchange since April 2001. Its main shareholders are Caja de Ahorros y Monte de Piedad de Madrid, with a 22.99% shareholder interest, and British Airways, which owns 13.15% of the company. In November 2009, Iberia and British Airways signed a binding agreement setting the foundations for a merger of equals between the two companies.
IBERIA GROUP. BREAKDOWN OF RECURRING OPERATING REVENUE IN 2009
Economic climate
In 2009, the global economy suffered the worst recession since the 1930s. The economic contraction began mid-2008, reflecting the knock-on effects of the international financial crisis, with economic conditions rapidly deteriorating thereafter. The swift downturn gave rise to a dramatic contraction in industrial output, financial market paralysis, rising unemployment and highly-leveraged households, precipitating the risk of a deeper and more prolonged recession, which was sidestepped thanks to unprecedented intervention by governments and central banks, which rolled out a concerted battery of monetary and fiscal stimulus measures. The International Monetary Fund (IMF) estimates that global gross domestic product (GDP) narrowed by 0.8% in 2009, compared to growth of 3.0% in 2008. Iberia Group / Consolidated Management Report / Highlights 86
Real GDP growth (a) 2009 2008
Global (b) (0.8) 3.0 US (2.5) 0.4 Eurozone (b) (3.9) 0.6 Japan (5.3) (1.2) Latin America and Caribbean (b) (2.3) 4.2 Spain (3.6) 0.9
Source: IMF. World Economic Outlook (January 2010). (a) Annual percent change in gross domestic product. constant prices. (b) Global and regional growth aggregates reflect average GDP weighted according to purchasing power parity.
During the third quarter of 2009 certain economic indicators began to show signs of turnaround. Fourth-quarter economic figures confirmed the recovery in the main European economies and Japan, while the US economy posted its first quarter of growth since the start of the recession. Although uncertainty lingers as to the sustainability of this recovery, as it is heavily underpinned by economic stimulus measures, car purchase incentive schemes and inventory cycle factors, there is broad consensus that the international economy is set to improve. The expected pace of this recovery, however, varies significantly depending on the economic situation of each country. Members of the European Union are slated to post weak growth, while emerging and developing economies are expected to prove more dynamic, spearheaded by Asia, most notably China and India. Turning to Spain, the combination of the global financial crisis with the collapse of the real estate market has had far-reaching economic consequences. In 2009, household spending and the construction sector, the drivers of the protracted economic boom that terminated abruptly in 2008, contracted sharply. Faced with slumping demand, inventory levels rose and this prompted losses, bankruptcies and a significant drop in investment in capital goods. Most notably, the crisis has had a profound impact on unemployment in Spain, where the jobless rate as a percentage of the economically- active population stood at 18.8% at year-end. Spain’s GDP fell sharply during the first three quarters of 2009, albeit easing in the last quarter of the year to leave the annual year-on-year contraction at 3.6% according to the latest IMF estimates, for a decline of 4.5 points on the rate of growth registered in 2008. The global economic crisis also had significant adverse ramifications for the Spanish tourist industry, which accounts for 11% of national GDP. Last year some 5.1 million fewer tourists visited Spain, a drop of 8.7% on 2008. However, the pace of year-on-year declines eased as the year progressed, after registering very high levels during the first half (down 16.3% in 1Q09 and 11.4% in 2Q09). The majority of international tourists visiting Spain last year flew: 40.2 million visitors arrived by plane (77.1% of the total), 9.3% fewer than in 2008.
Airline sector performance
The global recession had significant repercussions for the airline sector, one of the industries hardest hit by the cutbacks in household and corporate spending. Overall, in 2009 the airline industry suffered the largest declines in passenger and cargo traffic and revenues in its entire history. International passenger traffic across the global airline sector had begun to gradually wane in 2008, resulting in a moderate year-on-year contraction in the last quarter of that year. The situation worsened during the early months of 2009, when demand began to slacken at a record pace, reaching rates of over 10% in the months of February and March, easing gradually thereafter. During the last four months of 2009, international passenger traffic rose year-on-year, boosted by the incipient economic recovery, although also helped by an easier comparison. For the full year, international passenger travel, measured by revenue passenger kilometres (RPK), fell by 3.5% on 2008, according to International Air Transport Association (IATA) data, decreasing in virtually all regions of the world. Iberia Group / Consolidated Management Report / Highlights 87
The European network carriers similarly sustained sharp drops in passenger traffic in the first months of 2009. Although the sharp pace of decline eased somewhat during the second half, the rebound in demand in Europe continues to lag that of other regions. According to the Association of European Airlines (AEA), the number of revenue passenger kilometres on scheduled flights fell 4.5% in 2009, underpinned by widespread declines in traffic that affected European routes as well as most long-haul routes. Faced with weak demand, AEA carriers began cutting capacity at the end of 2008, cuts that were sustained throughout 2009. This meant that load factors began to improve year-on-year from July 2009. For the full year, the number of AEA available seat kilometres (ASK) narrowed 4.2%, yielding a load factor of 76.0%, 0.3 points below the 2008 figure. Overall, the industry managed capacity astutely in 2009. However, unit revenue fell sharply.
SCHEDULED TRAFFIC AT AEA AIRLINES IN 2009 % YEAR-ON-YEAR CHANGE
The March-April figures are presented in aggregate to prevent the distortion arising from the fact that the Easter travel period was concentrated in different months in 2009 versus 2008.
In 2009, international air cargo traffic plummeted 10.1% on the back of the global trade crisis. Cargo traffic began to fall before passenger traffic, in mid-2008, and also fell more sharply (in December 2008 and January 2009 cargo traffic plunged by over 24%). This metric began to stage a gradual recovery mid-2009, underpinned by the improvement in the outlook for emerging Asian economies, registering positive growth from October on. Specifically, at AEA airlines, cargo traffic measured in revenue tonne kilometres (RTK) transported narrowed 16.5% year-on-year. In addition to the significant drop in traffic volumes, the airline sector also suffered a sharp decline in unit passenger and cargo revenue in 2009. According to IATA estimates, the average decline in passenger fares on international flights in 2009 ranged between 10% and 15% compared to the previous year. At AEA carriers meanwhile, revenue per RPK narrowed 14.4% during the first nine months. One of the key drivers of this deterioration in unit revenue was the sharp drop in first and business class travellers, where traffic narrowed 17.1% through November according to the IATA. Iberia Group / Consolidated Management Report / Highlights 88
Throughout 2009 the airlines intensified their cost cutting efforts, reduced flight frequency and took aircraft out of operation. However, new aircraft deliveries also took place, driving overall fleet utilisation lower across the industry. This did not benefit unit costs. On the other hand, fuel costs fell significantly on 2008 levels although kerosene prices rose sharply from mid-March 2009, climbing from $400/metric tonne to around the $670 mark by year-end. Escalating fuel prices also took their toll on the airlines’ earnings, already hit hard by the slump in revenue. As a result, the most recent IATA figures point to net losses across the entire sector last year to the tune of USD 11 billion. For its part, the AEA estimates its members will have notched up between EUR 3 and 3.5 billion in losses in 2009. Faced with these circumstances, many airlines were forced to scale back capacity and jobs. And some airlines, particularly smaller operators, also had to deal with liquidity issues. Merger and acquisition activity intensified as a result. Logically, the Spanish airline sector was not immune to the effects of the economic crisis, as well as having to tackle the major roll out of railroad infrastructure, notably the consolidation of the Madrid-Barcelona high speed rail connection which started to operate in February 2008. According to the Spanish Public Business Entity Aena, passengers travelling through Spanish airports fell 8.0% in 2009 in relation to the previous year. The monthly declines narrowed as the year progressed, partly reflecting the gradual weakening in traffic in 2008, climbing 2.1% year-on-year in December, the first positive reading since May 2008.
TOTAL PASSENGERS AT SPANISH AIRPORTS IN 2008 AND 2009 % YEAR-ON-YEAR CHANGES
In short, air traffic volumes in the airline sector, having contracted sharply in the last quarter of 2008 and in early 2009, began to stage a gradual recovery during the second half of the year, equalling or bettering 2008 levels at the end of 2009.
The Iberia Group’s operating and financial performance
Capacity and demand The adverse climate affecting the airline industry as a whole in 2009 naturally took its toll on the Iberia Group’s business performance. Weak demand and the sharp drop in unit passenger and cargo revenues had a profound effect on the Group’s profitability, pushing recurring operating result (EBIT) into the red by EUR 464 million. Recurring operating revenue narrowed 19.1% on 2008, albeit partially offset by an 11.9% reduction in recurring operating costs, thanks to cost control measures rolled out by the company and the drop in fuel prices. Iberia Group / Consolidated Management Report / Highlights 89
Throughout 2009, Iberia adjusted its flight capacity to the evolving and complex market conditions. The company reduced capacity, measured in available seat kilometres, by 6% with respect to 2008, while demand narrowed 6.2%. By maintaining capacity in line with demand, the company managed to keep its passenger load factor at 79.8%, very close to the 2008 level, remaining towards the top end of the range across full service European carriers.
TREND IN ANNUAL LOAD FACTOR. TOTAL NETWORK
Analysing Iberia’s entire network, capacity cutting was fairly consistent throughout the year, while the best performance in terms of load factor came in the fourth quarter.
IBERIA GROUP PASSENGER CAPACITY AND DEMAND QUARTERLY TREND. YEAR-ON-YEAR PERCENTAGE CHANGES Iberia Group / Consolidated Management Report / Highlights 90
The capacity adjustment was less pronounced in the long-haul segment (-3.3%), which once again increased its weight in the company’s overall demand mix, accounting for 63.9% of total revenue passenger kilometres. All year demand in this segment was lower than in 2008, contracting 5.4% over the full year, albeit showing signs of recovery in the fourth quarter. The load factor in the long-haul segment was 83.4% in 2009, 1.8 points lower than in 2008, but improved 0.6 points in the last quarter. Iberia, with a market share of 20.1% in 2009, held onto the leadership spot in the Europe-Latin America market, which shrank by 8.8% on aggregate for all carriers. In medium-haul international flights, the load factor improved by 2.5 points on 2008, reaching an average for the year of 75.6%, on the back of a 9.2% capacity adjustment, as the company fine-tuned its flight schedule in response to the challenging European market conditions. Demand was 6% lower in 2009, registering the largest drop in the first quarter (-10.7%), although slipping monthly by less than capacity from April onwards. The company continued to prioritise optimising connections through its Madrid-Barajas hub. Indeed, analysing medium-haul international flights departing from or landing at Madrid airport, the year-on-year decline in traffic narrows to 2.3% with respect to the previous year. In accordance with strategic planning, Iberia continued to cut capacity on its domestic routes: this strategy resulted in an 11% reduction in ASK relative to 2008, pushing the load factor 0.4 points higher to 71.7%. Twenty per cent of capacity was taken off the Madrid-Barcelona route in 2009; capacity was slashed by 36.5% during the first quarter and by 11.7% during the next three quarters. Iberia began restructuring its flight schedule on this route in April 2008, primarily by introducing smaller aircraft following the start-up of the high speed train in February of that year. This explains the higher percentage decrease during the first quarter of 2009. Since 9 September 2009 all Iberia and associate airline flights operate from the new Terminal 1 at Barcelona-El Prat airport. This new location saves time for shuttle passengers, while the new and extended installations have enabled the airline to raise customer service levels. The global economic recession had an especially strong impact on business travel which fell sharply in all markets. On Iberia’s long-haul flights, the number of passengers travelling in the Business Plus class fell 13.3% on 2008. Nonetheless, the company held on to its leadership of the business travel segment in the Europe-Latin America market, commanding a market share of 23.6%.
Operating revenue Passenger revenue from flights operated by Iberia in 2009 were EUR 754 million lower than in 2008, which translates into an annual decline of 19.4%, driven by a 14.1% drop in passenger revenue per RPK and, to a lesser extent, slumping demand. The decline in unit revenue reflected the adverse trend in the class mix, more intense fare pressure in most markets, and the impact of the (4.4%) increase in the average passenger stage length. The economic crisis had even greater ramifications in the air cargo segment. The airline’s cargo traffic began to fall mid-2008, earlier than passenger demand, while the recovery also took place early: in the fourth quarter, cargo traffic climbed 10.5% higher year-on-year, although contracting 11.6% for the full year in terms of revenue tonne kilometres. The drop in demand, combined with a sharp drop in unit cargo revenue, resulted in a 27.4% decline in consolidated cargo revenues. Iberia Group / Consolidated Management Report / Highlights 91
Iberia’s revenue from handling services, despite the lower volume of airlines handled, narrowed moderately (easing 3.3% on 2008). Meanwhile, technical assistance revenue rose 4.2%, extending the healthy earnings performance of this business. In all, Group operating revenue (including non-recurring items) were 19.2% lower in 2009, at EUR 4,458 million.
Operating costs Last year fuel costs fell a noteworthy 28.9% to EUR 1,184 million, a reduction of EUR 482 million, due mainly to the sharp drop in average market prices and lower consumption (6.6% measured in litres) as a result of lower business volumes and increased fleet efficiency. The prices for oil and refined products, including aviation kerosene, flirted with historical highs throughout 2008, proving highly volatile, hindering the risk management function. In July 2008, kerosene prices (according to the Jet CIF NWE index) surpassed $1,400/metric tonne. They then changed tack, unpredictably, falling sharply through March 2009. Since then kerosene prices have responded to the successive upward revisions to economic forecasts, rising in tandem with the growing perception that economic recovery was underway. By year-end 2009, kerosene prices had rallied 51% from January levels. However the average price for the year in dollars was 44% below the average 2008 level.
JET CIF NWE - PERFORMANCE 2008 - 2009
In 2009 non-fuel operating costs (recurring) narrowed 4.5% to EUR 3,689 million. Iberia Group / Consolidated Management Report / Highlights 92
During the second quarter of 2009 Iberia began execution of its Contingency Plan in a bid to mitigate the profound impact the economic crisis was having on earnings. Under this program, the company scaled back capacity and personnel and general costs, selectively pruning planned capital expenditure. Thanks to its flexible fleet management approach, Iberia was able to cut capacity more quickly and more significantly than its competitors. The company has temporarily taken out of operation eight owned short and medium haul aircraft (four since May, a fifth since June and the remaining three since October). In addition, mid-year it took back three long-haul aircraft operated under wet leases at the start of the year; these aircraft were accordingly operated using in-house resources during the second half. The company also agreed with Airbus to defer receipt of four aircraft to 2010, delivery of which was originally slated for 2009. At year-end, Iberia’s operating fleet comprised 109 aircraft, with an average age of 7.2 years, giving it one of the most modern fleets in the global airline industry, thanks to the strategic renovation pursued in recent years. This process has also resulted in significant aircraft standardisation: Iberia exclusively operates two families of Airbus aircraft, the A340 on long-haul flights and the A320 on short and medium-haul flights. This enables it to optimise the deployment of technical crews while providing operating management and cost control benefits. In 2009, average fleet utilisation continued to improve, rising 3.7% on 2008 to 10.3 block hours per aircraft per day. In 2009, Iberia put in place a series of measures to bring its personnel costs in line with the economic environment and the slump in volumes and revenues. These measures included: a salary freeze applicable to the management team and all personnel not included in the collective bargaining agreements; a cut in certain variable pay components; a hiring freeze and the non-renewal of temporary contracts; and application of early retirement, contract renegotiation and leave with guaranteed job security formulae under its workforce restructuring plan (hereinafter ERE for its initials in Spanish). In 2009 a total of 1,012 Iberia employees opted for one of these options.
In April the company signed the VII collective bargaining agreement for technical crew workers, valid from 2005 to 2009, providing for wage moderation and a series of measures designed to raise flexibility and productivity. The agreement also allows pilots to continue to work half-time between the ages of 60 and 65. This last measure lowered the net present value of the estimated technical crew pension fund provision, with a positive impact on 2009 earnings. The Iberia Group’s recurring personnel costs narrowed 1.8% year-on-year to EUR 1,297 million, thanks to wage control measures and, above all, a 4.2% reduction in the average headcount to 20,671 full-time equivalents (FTEs). In addition, in 2009 Iberia topped up its provision for workforce restructuring by EUR 51 million (non-recurring) to reflect the extension of its prevailing program. Iberia Group / Consolidated Management Report / Highlights 93
Most of the other cost headings registered year-on-year declines due to lower volumes, fine-tuned procedures, consumption rationalisation and contract renewal with goods and service suppliers. In all, operating costs narrowed 10.9% on 2008 to EUR 4,930 million, a figure that includes EUR 57 million of non-recurring costs. Profit from operations amounted to a loss of EUR 475 million in 2009 compared to a profit of EUR 5 million in 2008.
Net finance income The merger between airlines Vueling and Clickair closed in July 2009 with Iberia taking a 45.85% stake in the merged entity. The transaction generated EUR 21 million in gains for Iberia. The Group’s share of profits in associates amounted to EUR 8 million in 2009, a more than EUR 25 million improvement on the losses of 2008, mainly thanks to the profits generated by Vueling. Net finance income from other headings amounted to EUR 11 million in 2009, down EUR 38 million on 2008, due mainly to lower interest rates.
Net profit (loss) and balance sheet health In 2009 the Group posted a pre-tax loss of EUR 435 million compared to profit in 2008 of EUR 36 million. In all, the Group loss after tax was EUR 273 million in 2009, compared to profit of EUR 32 million the previous year. The consolidated year-end statement of financial position illustrates the company’s healthy financial position. At EUR 1,551 million, equity was broadly similar year-on-year.
ANNUAL TREND IN THE IBERIA GROUP'S EQUITY
The adjusted liquid balance (current financial investments plus cash and cash equivalents and excluding the measurement of hedge arrangements) stood at EUR 1,919 million at 31 December 2009, down 15.5% on the 2008 year-end balance. Adjusted net debt, including the capitalisation of operating lease costs, stood at EUR 1,229 million, up 21.4% on 2008. Leverage, measured as the ratio of adjusted net debt to total capital employed (the sum of equity and borrowings), stood at 44.2% at the end of 2009, up 4.9 percentage points on year-end 2008. Iberia Group / Consolidated Management Report / Highlights 94
Plan 2012
In 2009 Iberia put in action an initial Contingency Plan with the aim of mitigating the significant slump in revenues sustained as a result of weak demand. This plan prioritised capacity cuts in a bid to match supply to demand, although also focusing on scaling back costs and capital expenditure. Although the plan was on target, the greater than initially forecast fallout from the recession prompted the company to design what it has termed Plan 2012. The overriding goal of this plan is to maintain and even improve Iberia’s leadership position in its core markets. The plan extends to franchisees and investees. The idea is to enhance the airline’s strategic positioning as both an independent company and against the backdrop of sector consolidation. Plan 2012 is designed to transform Iberia, boosting its long-haul business and shaping Group companies and/or associates to compete competitively in the short and medium haul segments going forward. Accordingly, the plan calls for growth in transcontinental routes and gradual capacity cuts on domestic and European routes.
Plan 2012 also calls for significant personnel cost savings, and therefore includes a wage freeze in 2010 and 2011. Other cost cutting measures will drive annual savings of EUR 37 million in 2011. Finally, the program calls for enhanced productivity across the company’s entire workforce. Capital expenditure under Plan 2012 amounts to EUR 200 million, EUR 120 million to upgrade business class on long-haul flights and EUR 80 million to extend the workforce restructuring measures already underway, which will result in the departure of around 325 employees.
Service quality
At the Iberia Group, customer orientation and service quality are core components of its strategic vision and competitive positioning. The company has prioritised investments that improve service quality based on its understanding that this yardstick sets it apart from its competitors. The airline takes a segmented approach to customer service. In 2009, Iberia launched its Total Customer Care Program. This is a multi-year plan designed to achieve excellence in customer service and quality. It is a cross-departmental plan in which all management disciplines are engaged. It takes a three-pronged approach: (I) enhancing product and service levels; (II) overhauling all operational processes that affect the customer; and (III) a structured approach to systematically improving staff’s attitude towards customers via both training initiatives and selective hiring. Based on feedback from its ongoing customer satisfaction evaluation systems and procedures, Iberia has been able to verify that customers indeed perceive an improvement in service quality, thanks to the host of initiatives rolled out during the year. Iberia Group / Consolidated Management Report / Highlights 95
In 2009 Iberia embarked on a project to transform Business Plus cabins on its long-haul aircraft with a view to increasing passenger legroom and comfort. By the end of 2010 all its Airbus A340 aircraft will have been upgraded and business class customers will be able to enjoy up to 2.20 metres of personal space as well as the option of putting their modern seats into a fully reclined bed position. The new configuration of the business class cabin is rounded out with best of class communication and entertainment systems. In addition, the company is collaborating with prestigious chefs, sommeliers and renowned companies to update the broad range of Spanish cuisine and fine wines offered on board and in its VIP lounges. Iberia passengers can choose from a total of 65 VIP lounges, which are especially designed and fitted out to make the time spent in the airport by Iberia’s Business Plus and Business Class passengers and oneworld alliance business class passengers more pleasant. Holders of Iberia Platinum, Gold and Club Fiesta cards are also entitled to use these facilities. Notably, the company has fully remodelled its VIP lounges in Madrid airport’s Terminal 4: passengers can now enjoy a total of 4,600m2 equipped with meeting rooms, relaxation zones, showers, computers and internet connections, among other services and comforts. As part of its Total Customer Care Program, the company also upgraded its VIP lounges in Valencia, Bilbao, Santo Domingo and Frankfurt. A very significant percentage of the tickets issued and passenger revenues booked by the company is generated by members of its Iberia Plus frequent flyer program, which the Iberia Group views as a valuable tool for interacting with and acknowledging the loyalty of its best customers. At the end of 2009 Iberia Plus had 4.2 million members, growth of 10.5% for the year, located across 200 countries worldwide. Over half of these have signed up for Iberia Plus online, a direct channel accessed via the Iberia website. Throughout its 18-year history, the frequent flyer program has been incorporating leading companies from a range of sectors. In December 2009 the number of corporate affiliates totalled 89, following the addition of 12 new members last year, including: Fiesta Hotels, Rusticae, Heineken, Mutua Madrileña, Cortefiel and Vueling. Iberia Plus is the best-rewarding frequent flyer program. According to a report carried out by international consultant IdeaWorks on how easy it is to find reward seats and other services online, querying ten US and European airlines’ websites, Iberia’s frequent flyer program topped the chart on seat availability.
IBERIA PLUS MEMBERS Iberia Group / Consolidated Management Report / Highlights 96
Iberia’s punctuality (industry standard, flights departing within 15 minutes of schedule) was 81.2% for the overall network in 2009, similar to the 2008 figure (81.4%). The company’s punctuality performance was undermined in January and December of last year by adverse weather conditions at Madrid-Barajas airport.
Innovation and technology
The Iberia Group has always prioritised innovation, viewing this driver as a value that takes in all the important business elements: strategy, processes, services and products. The company has pioneered the use of emerging technologies, viewing them as essential tools for raising competitiveness and quality in the airline industry. This innovation is reflected in the company's investment in technology. Specifically, in 2009, Iberia received recognition for 34 innovation projects through certification or independent appraisals from public bodies such as the Ministry of Industry, Tourism and Commerce, the Ministry of Science and Innovation and the Centre for the Development of Industrial Technology, among others, spanning different areas relating to information technology and aircraft and engine maintenance and engineering. Iberia.com, the company’s website and online marketing tool, is one of the most comprehensive and innovative e-commerce sites in Spain, as evidenced by the numerous prizes it has received in recognition of its quality and design. In Spain it is the highest grossing e-commerce site. Outside Spain 42 country-specific websites are available in seven different languages. Average daily visits in 2009 amounted to 343,000.
Passengers can reserve flights and book tickets at www.iberia.com. Thanks to agreements in place with other companies, customers can also purchase other products and services, such as hotel bookings, car rental, tour packages, travel insurance, excursions, airport transfers and even Business Plus wines. In 2009, revenue from online flight bookings (tickets and fees) approached EUR 588 million, up 10% on 2008. Iberia’s international websites registered the highest growth: ticket issuance via these sites jumped 21.0% compared to growth of 10.2% in Spain. Adding in other products and services purchased, total revenue from online purchasing amounted to EUR 600 million. The company provides a wide range of information on its website (flight schedules, fares, arrivals and departures, weather conditions at destination) as well as other services, including, notably, self check-in online from any computer, allowing passengers to go straight to the boarding gate without passing by a check-in desk if not checking in luggage. In 2009, Iberia passengers issued around 14,500 boarding passes via the website each day. Iberia has also added new functionality such as the ability to download boarding passes onto a mobile phone or PDA for scanning at the gate. This innovative system was available at 13 of Iberia’s airports at year-end. New destinations will be added as the airports are fitted out with the enabling technology. Iberia Group / Consolidated Management Report / Highlights 97
The company continually renews and extends the functionality of its website in a bid to provide an increasingly interactive and efficient service. Noteworthy developments and upgrades added in 2009 include: a destination map featuring special offers; the ability to buy tickets from any city in all markets; last minute availability information; access to detailed and personalised flight information, enabling reservation changes, seat selection and special requests; adaptation for access and use by the visually or hearing impaired; a new tool for advance payment of excess baggage; family discounts; lost luggage enquiries; and integration of ticketing and billing for Vueling flights, among others. Last year the company created a new portal, iberiacorporate.com, to provide an open channel enabling travel staff at over 1,300 companies to access all the information relating to the agreements in place with Iberia. The new portal includes exclusive offers and provides practical information on all aspects of business travel, among other features. Iberia has joined the most recent tool for introducing electronic ticketing for interline travel of airline staff, myIDTravel, which enables Iberia employees to self-issue tickets on any airline associated with this program. Iberia’s cargo management team and the International Air Transport Association (IATA) continued to implement the IATA e-Freight initiative in Spain. e-Freight, or paperless electronic cargo documentation, entails a series of electronic records that store all information relating to each dispatch, eliminating the need to send as many as 13 hard copy documents, thereby shaking up process, improving speed and reliability and lowering costs. In 2009 the e-Freight system was rolled out in new European and US destinations. Iberia’s airport management team implemented a new baggage handling and control system in Madrid which significantly raises passenger service levels and reduces the costs incurred by the company in relation to lost luggage incidents. This initiative, developed with the Orión-BRS/SAMB group, is an innovative solution for automatically reconciling luggage with its owner and his or her corresponding flight.
Corporate Transactions
Agreement with British Airways On 12 November 2009 the boards of Iberia and British Airways approved a binding agreement that sets the foundations for a merger between the two airlines, theoretically allocating equal participation on the enlarged group’s board and other governing bodies. The merger agreement contemplates the creation of a newco, TopCo, owned by both Iberia and British Airways, under which each company will continue to operate existing brands and rights, remaining responsible for daily operations management. TopCo will be owned by the current shareholders of Iberia and British Airways. Under the terms of the planned merger, the shareholders of the British company will receive one ordinary share in TopCo for every share currently owned in British Airways, while Iberia shareholders will receive 1.0205 ordinary shares in TopCo for every common share held in the Spain airline. Based on this exchange ratio, and following cancellation of Iberia’s treasury shares and prior to cancellation of the current cross shareholdings between British Airways and Iberia, Iberia shareholders will own 45% of Topco’s equity, with British Airways shareholders holding the remaining 55%. Iberia Group / Consolidated Management Report / Highlights 98
TopCo’s registered business address will be Madrid and it will be a tax resident of Spain, while the financial and operational head office will be in London where the group’s main functions will be located, although the necessary Madrid offices will be maintained. There will be 14 seats on the Board of Directors of TopCo, to be appointed in equal proportion by both airlines. Antonio Vázquez will chair the new group while Martin Broughton will serve as vice-chair. The two companies are continuing to make progress, having set a deadline of one year from signature of the letter of intent to close the merger which will create one of the world’s biggest airlines. The merger will benefit both airlines’ shareholders and employees who will be partners in a more robust, global company. Meanwhile, the carriers’ passengers will have more flight and destination options, among other benefits under the deal.
Merger between Vueling and Clickair The publicly notarised deeds to the merger of Clickair and Vueling (with the former merging into the latter) were filed with the Barcelona Companies Register on 16 July 2009, having been ratified by both companies’ shareholders in general meeting on 5 May. Registration of the merger deeds resulted in the official dissolution of Clickair (an Iberia investee) and the transfer en bloc of its assets and liabilities to Vueling, which acquired all the rights and obligations of Clickair by universal succession.
In accordance with the terms of the merger, and after receipt of the pertinent waiver from the securities market regulator exempting Iberia from having to launch a tender offer, Clickair converted outstanding privileged shares into common shares, leaving a single series of shares with a face value of EUR 10 each. Subsequently, Clickair increased capital by EUR 25 million and Iberia bought out the remaining Clickair shareholders, except for Nefinsa, at the updated acquisition price. Vueling also increased capital by enough to cover the share exchange in a rights issue reserved exclusively for Clickair shareholders. As a result of the merger and agreed exchange ratio, Iberia is now the largest shareholder and strategic partner in Vueling, with a 45.85% shareholding.
Changes in Iberia’s governing bodies
On 9 July 2009 the Board of Directors of Iberia accepted the voluntary resignation of its Chairman, Mr. Fernando Conte García, agreeing to name Mr. Antonio Vázquez Romero Chairman of the Board and Chief Executive Officer of the company. At the same meeting, the Board of Directors agreed to appoint Mr. Rafael Sánchez-Lozano Turmo, who had served on the airline’s Board since 2007 as representative of Valoración y Control, S.L., as Chief Operating Officer. At the Iberia Board of Directors’ meeting held on 17 December 2009, Mr. Keith Williams was appointed director at the proposal of British Airways. Iberia Group / Consolidated Management Report / Highlights 99
At the end of August 2009 Iberia shook up its top management, simplifying the management structure with a view to reinforcing the company’s competitive positioning. As a result, two major areas have been set up within the transport business: a Sales and Customer Department focused on revenue generation and run by Mr. Manuel López Aguilar, former managing director of Maintenance and Engineering, and the Production Department, oriented towards enhancing operations and raising productivity, and headed by Mr. Juan Manuel Bujía Lorenzo. This restructuring led to the elimination of the Airline Department under the stewardship of Mr. Enrique Donaire Rodríguez. A Purchasing and Services Department was also set up and entrusted to Mr. José María Fariza Batanero, former Head of Control and Administration, with the overriding task of streamlining costs. The administrative and control functions have been brought under the remit of the Finance Department; the Chief Financial Officer is still Mr. Enrique Dupuy de Lôme Chávarri. Lastly, Mr. José Luis Ruíz de Castañeda de la Llave was appointed Managing Director of Maintenance and Engineering.
Events after the statement of financial position date
At Iberia’s Board of Directors' meeting held on 12 February 2010, Mr. Rodrigo de Rato Figaredo was appointed member of the Board at the proposal of Caja Madrid, to fill the vacancy left following the voluntary resignation of Mr. Miguel Blesa de la Parra. As such, he will act as Vice Chairman of Iberia and will be a member of the Executive Committee of the company’s Board of Directors. No events have taken place after the statement of financial position date. Iberia Group / Consolidated Management Report / Operating Performance 100
2. OPERATING PERFORMANCE
2.1. Transport
Passenger and cargo air transport is the Iberia Group’s core business. In 2009 this activity generated 81.1% of total recurring operating revenue. The following section analyses passenger capacity, traffic and revenue statistics for Iberia, Líneas Aéreas de España, S.A. (hereinafter, Iberia) in 2009 and 2008, broken down into three commercial segments, as follows: (i) domestic, which takes in connections among Spanish airports; (ii) medium-haul, which includes international routes between Spain and destinations in Europe, the Middle East, North Africa and Central Africa; and (iii) long-haul, which includes connections with the Americas and South Africa.
2.1.1. Capacity and passenger traffic
In the early months of 2009 global passenger demand slumped heavily year-on-year, extending the pattern unfolding since mid-2008, reflecting the fallout from the global economic recession. According to International Air Transport Association (IATA) data, during the first half of 2009 international passenger traffic, measured by revenue passenger kilometres (RPKs), fell by 7.5% in comparison to the previous year. During the second half, demand recovered dramatically, posting positive year-on-year growth during the fourth quarter. This turnaround was driven by the brightening economic outlook in some countries and the stimulus provided by widespread fare cuts. The dip in business class travel was proportionately higher than the headline figure in virtually all markets, exacerbating airlines’ losses. According to IATA data through November 2009, the number of tourist class passengers on international flights narrowed 2.9% year-on-year while first and business class passengers plunged 17.1%, driving an overall drop in aggregate passengers in all classes of 4.3%. Aggregate traffic for the airlines comprising the Association of European Airlines (AEA), measured in RPK, narrowed 4.5% on 2008, compared to a 4.2% reduction in capacity, so that the load factor deteriorated by 0.3 percentage points to 76.0%. For European network carriers, the rebound in demand from the trough (traffic plummeted 10.3% year-on-year in March 2009) has proven slower, with the first positive year-on-year register coming in December 2009. The European full service airlines have been harder hit by the recession than their low-cost no frills competitors as demand elasticity has increased. The Spanish airline sector was hit by the global economic crisis and, more specifically, the severe recession gripping the Spanish economy (GDP is estimated to have contracted by 3.6% in 2009). According to the Public Business Entity Aena, commercial traffic passing through Spain’s airports (measured in passengers) fell 8.0% in 2009, with international and domestic travel declining at similar rates. Passenger numbers plunged by around 18% during January and February 2009, easing throughout the rest of the year to register growth of 2.1% by December. At Madrid airport, passenger numbers were down 5.0% in 2009, following a similar recovery pattern as the year progressed. Domestic air travel in Spain is also tackling the competition posed by the development of the nation’s high speed rail network. Specifically, on the all-important Madrid-Barcelona route, the high speed train, which began operations in February 2008, registered rapid growth during its first year of operation, stabilising throughout last year, commanding a market share of 45.7% in 2009. The number of passengers across all airlines operating this route fell 18.3% on 2008. Iberia Group / Consolidated Management Report / Operating Performance 101
Under these adverse circumstances, Iberia managed to keep its passenger load factor at 79.8% in 2009, very close to the prior year’s level and once again one of the highest levels seen at any European full service carrier. Throughout the year the company fine-tuned its flight schedule in order to bring capacity in each segment into line with weakened demand. Over its entire network, capacity in terms of available seat kilometres (ASK) fell 6.0% on 2008. At the beginning of 2010 Iberia directly operated flights to 79 destinations: 56 international cities (with four additional destinations operated during summer 2009) and 23 national destinations. Factoring in cities serviced by franchisee Iberia Regional Air Nostrum, this number rises to 104 (within another 12 in high season). In addition, its code sharing agreements with other carriers (American Airlines, Avianca, British Airways, Japan Airlines, Mexicana de Aviación, LAN, Royal Air Maroc, Qantas and Vueling, among others) meant that at the end of 2009 Iberia offered its customers flights to almost 230 destinations. For the full year and across all segments, available seat kilometres totalled 62,158 million. The breakdown by segment is as follows:
Millions
ASK 2009 2008 % Change
LONG-HAUL 38,023 39,330 (3.3) MEDIUM-HAUL 15,643 17,223 (9.2) Europe 13,586 15,192 (10.6) Africa & Middle East 2,057 2,031 1.3 DOMESTIC 8,492 9,546 (11.0)
TOTAL 62,158 66,098 (6.0)
The capacity adjustment was less pronounced in the long-haul segment (-3.3%), which once again increased its weight in the company’s overall supply, accounting for 61.2% of total ASK. Capacity on short and medium haul routes fell by 9.8% on aggregate in 2009.
ANNUAL TREND IN CAPACITY MIX (ASK) Iberia Group / Consolidated Management Report / Operating Performance 102
Capacity fell by 1,307 million ASK in the long-haul segment in 2009. A little over two-thirds of this decline was accounted for by Central American flights, where capacity was scaled back by 5%, mainly due to a sharp cut on Mexican destinations (-28%), in part due to the impact on demand of the outbreak of swine flu from the end of April. Traffic plummeted so sharply than in May and June Iberia had to cut capacity on these routes by almost half. Capacity narrowed 2.9% year-on-year on North American routes while available seat kilometres fell a slight 0.3% on South American routes, where reduced capacity on Argentine destinations (-5.5%) was offset by increased flight frequency to Brazil and Uruguay. In Europe, capacity was reduced by 10.6% in relation to 2008, with cuts on most destinations, reflecting the company’s attempt to match capacity to falling demand in highly competitive markets and the ongoing streamlining of point to point routes. Analysing international flights to European destinations departing from or landing at Madrid airport, the year-on-year decline in capacity (ASK) narrows to 6.2%. Last year Iberia added one new destination, the Croatian capital Zagreb, to its proprietary flight schedule during the summer months. Capacity on flights to Africa and the Middle East rose 1.3% on 2008, with the biggest increases in absolute terms on flights to Israel, Senegal and Egypt. In keeping with its strategic plan, Iberia continued to cut capacity on its domestic routes last year (by 11.0%). These cuts were higher in the first quarter of 2009 (-20.9%) than in the rest of the year (-7.3% between April and December) due in part to the capacity restructuring initiated on the Barcelona-Madrid route in April 2008 in response to the start-up of the high speed rail connection. In 2009, capacity operated directly by the company on all connections between these two cities fell by 20.0%, while capacity on all other domestic flights taking off or landing in Madrid narrowed 8.2%. Meanwhile, domestic flights suffered most cancellations as a result of the pilot strike during the first three weeks of 2009, and the four days of strike action by cabin crew in October and November. Production, measured in block hours, was 7.3% lower in 2009, primarily in response to slumping demand. Block hours under wet lease regime (aircraft and crew) dropped by 66.9% in comparison with 2008. No aircraft has been operated under this formula since September 2009. The number of block hours operated with proprietary aircraft and crew fell 4.6% on 2008. Circumstantially Iberia had to increase the number of hours leased from third parties, in part to mitigate the impact on operations of the aforementioned strike action.
Passenger fleet block hours 2009 2008 % Change OWNED AIRCRAFT 424,941 445,331 (4.6) WET LEASE 6,920 20,891 (66.9) OTHER LEASES 729 422 72.6 TOTAL 432,590 466,645 (7.3)
In 2009 Iberia carried 20.9 million passengers across its entire network, of which 4 million corresponded to long-haul flights. The breakdown of Iberia’s traffic, measured in RPK, is depicted in the following table:
Millions RPK 2009 2008 % Change LONG-HAUL 31,698 33,490 (5,4) MEDIUM-HAUL 11,823 12,584 (6,0) Europe 10,314 11,049 (6,7) Africa & Middle East 1,510 1,535 (1,6) DOMESTIC 6,091 6,810 (10,6) TOTAL 49,612 52,885 (6,2) Iberia Group / Consolidated Management Report / Operating Performance 103
Across the entire network, traffic narrowed 6.2% on 2008, due to streamlining of the short and medium haul flight schedule and weak demand for air travel throughout the year, although signs of recovery were noted during the last few months. Iberia’s traffic dropped 4.4% in the fourth quarter of 2009, compared to a decline of 6.7% during the first three quarters of the year. Aggregate traffic across the medium haul international and domestic segments slipped 7.6% in comparison to 2008, outstripping the dip in RPK on long-haul routes, at 5.4%. As a result, the trend of recent years continued, with the contribution of long-haul to total network traffic increasing 0.6 percentage points to 63.9%.
ANNUAL TREND IN DEMAND MIX (RPK)
Last year the biggest declines in demand in the long-haul segment in absolute terms were sustained in Argentina and, most notably, Mexico. Demand plummeted by 35% in the latter market, partly due to the outbreak of swine flu at the end of April, driving overall traffic on Central American routes down by 6.5% last year. Demand in North America and South America narrowed by 3.7% and 4.1%, respectively. Iberia, garnering a market share of 20.1% in 2009 as a whole, held on to its leadership of the Europe-Latin America market, where demand contracted by 8.8% for all operators in 2009. Looking exclusively at first and business class travel, the Europe-Latin America market shrank by 21.0% on 2008, although Iberia held onto the same market share (23.6%), giving it leadership of this segment also. In Europe, Iberia’s traffic fell 6.7% due to the fallout from the widespread recession, intense prevailing competition and, to a lesser extent, capacity cuts on point to point routes. Analysing international European flights originating or arriving at Madrid airport, the year-on-year decline in traffic narrows to 2.8%. On African and Middle Eastern routes, demand tapered off by 1.6%. Traffic on domestic routes declined 10.6%, in line with the volume of capacity taken off stream last year (-11.0%). The biggest drop in relative terms was evidenced on the Barcelona-Madrid route (RPK down 27.6% considering the shuttle plus scheduled flights) following the start up of the high speed rail connection in 2008. Iberia Group / Consolidated Management Report / Operating Performance 104
The table below breaks down the load factor by segment:
Load factor (%) 2009 2008 % Change
LONG-HAUL 83.4 85.2 (1.8) MEDIUM-HAUL 75.6 73.1 2.5 Europe 75.9 72.7 3.2 Africa & Middle East 73.4 75.6 (2.2) DOMESTIC 71.7 71.3 0.4
TOTAL 79.8 80.0 (0.2)
Thanks to capacity fine-tuning, the company managed to register an overall network load factor of 79.8% in 2009, a mere 0.2 percentage points below the 2008 register. The load factor improved 1.5 points in the second quarter, although the year-on-year comparison was partially boosted by the timing of Easter (in April in 2009 and in March in 2008). In contrast, this same phenomenon hurt the first-quarter load factor which deteriorated by 2.9 points, although it was also hurt by operational challenges in January as a result of adverse weather conditions in March and labour disputes. The gradual recovery in traffic underpinned the biggest improvement in the load factor in the fourth quarter (up 1.7 points on 4Q08).
QUARTERLY TREND IN LOAD FACTOR
Relative to 2008, the load factor improved in both the domestic and medium-haul segments, with a noteworthy 3.2 point increase in Europe to 75.9%. Aggregating all European flights (international and domestic), the load factor climbed 2.1 points to 74.3% in 2009, significantly higher than at the company’s main European full service competitors. In the long-haul segment, the load factor slipped 1.8 points on 2008. In a bid to consolidate its strategic leadership on Latin American routes, Iberia cut capacity in this market by relatively less than elsewhere, generating a higher imbalance relative to demand. Nevertheless, traffic performed well during the last quarter. Iberia Group / Consolidated Management Report / Operating Performance 105
2.1.2. Passenger traffic revenue
In 2009 the yield (revenue per RPK) across the entire network narrowed 14.1% due to the significant deterioration in the class mix, more intense fare pressure in most markets, and the impact of the (4.4%) increase in the average passenger stage length. The lower yield, combined with a slight drop in load factor, drove a 14.3% decline in passenger revenue per ASK. The impact of exchange rate movements on unit revenue accounted for a slight 0.8 percentage point increase in this metric.
In response to the sharp declines in traffic, from the second quarter of 2009 fares were slashed in a widespread effort on the part of the airlines to stimulate demand. Iberia’s unit revenue per ASK declined 15.5% year-on-year in the second quarter, recovering somewhat during the second half, with a year-on-year decline of 8.9% in December. The following tables break down unit revenue per RPK and per ASK by segment:
Euro cents
Yield 2009 2008 % Change % Change(*)
LONG-HAUL 4.85 5.49 (11.6) (12.9) MEDIUM-HAUL 7.53 8.94 (15.7) (16.2) DOMESTIC 11.65 13.64 (14.6) (14.8)
TOTAL 6.32 7.36 (14.1) (14.9)
(*) At constant currency
Euro cents
Revenue per ASK 2009 2008 % Change % Change(*)
LONG-HAUL 4.04 4.67 (13.5) (14.7) MEDIUM-HAUL 5.69 6.53 (12.8) (13.3) DOMESTIC 8.35 9.73 (14.2) (14.4)
TOTAL 5.05 5.89 (14.3) (15.1)
(*) At constant currency Iberia Group / Consolidated Management Report / Operating Performance 106
In the long-haul segment, the yield fell 11.6% in 2009 as a result of more intense competition on the back of slumping demand. More specifically, the 13.3% year-on-year drop in Business Plus passengers had a significant impact on yield, even though business traffic has been staging a recovery since the summer, in part stirred by sales and marketing efforts. As a result, Business Plus traffic slid 6.0% during the second half compared to a drop of 20.4% in the first half. Revenue per ASK narrowed 13.5% on 2008, compounded by the drop in the load factor in this segment.
TREND IN LONG-HAUL TRAFFIC IN 2009
The yield across the overall medium-haul segment declined 15.7% in 2009 due to the collapse in business class travel at all airlines operating in the Spain-Europe market (off 32.0%), mirroring fierce competition on European routes and the impact of the (3.2%) increase in the average passenger stage length. The improvement in the load factor meant that revenue per ASK fell by almost three points less than the yield (-12.8%). In the domestic segment, the yield fell 14.6% year-on-year due to a 3.3% increase in the average stage length, the sharp deterioration in the class mix, and the reduction in fuel surcharges, while revenue per ASK ended down 14.2%. The table below depicts the trend in passenger revenues broken down by segment:
Millions of euros
Passenger revenue 2009 2008 % Change
LONG-HAUL 1,538 1,838 (16.4) MEDIUM-HAUL 890 1,124 (20.8) DOMESTIC 709 929 (23.6)
TOTAL NETWORK 3,137 3,891 (19.4)
Other passenger revenue 188 327 (42.6)
TOTAL 3,325 4,218 (21.2)
Passenger revenue for the entire network (tied to production for the year) was 19.4% lower than in 2008, at EUR 3,137 million. The segment split reveals the gradual increase in the weight of the long-haul segment; this segment’s contribution to total network passenger revenue climbed 1.8 points on 2008 to 49% (up 9.0 points on 2006). Iberia Group / Consolidated Management Report / Operating Performance 107
“Other passenger revenue” includes revenue from unused expired tickets, from frequent flyer programs and adjustments and restatements of an accounting nature.
ANNUAL TREND IN PASSENGER REVENUE SPLIT BY SEGMENT
2.1.3. Cargo
Worldwide, cargo traffic was hit very hard by the recession, which had a profound and prolonged impact on all markets. The drop in international trade prompted a dip in demand from mid-2008. According to AEA data, revenue tonne kilometres (RTK) across European carriers narrowed 16.5% in 2009, registering declines of 22% in the first two quarters, 16% in the third quarter and 6% in the last quarter, illustrating both the scale of the downturn and a gradual recovery during the second half. At Iberia, freight and mail RTK totalled 1,021.5 million in 2009, a drop of 11.6% on 2008, compared to a decline of 1.8% in total available tonne kilometres (ATK). These trends drove a 6.8 percentage point deterioration in the annual load factor, albeit with a 7.9 point improvement during the last quarter. A year-on-year comparison of second half traffic statistics reveals a 1.2% increase in RTK. 94.4% of total cargo traffic was carried in the Iberia passenger aircraft holds, a slight increase on the 2008 balance (93.5%). Cargo traffic declined 11.2% on long-haul routes (the Americas and South Africa), accounting for 87.9% of the network total in 2009. In the short and medium haul segments, traffic, measured in RTK, slumped 14.7% on 2008. In 2009, revenue from freight and mail transport at Iberia fell 29.9% to EUR 208 million, although, driven by the aforementioned recovery in demand, this decline narrowed to 19.7% in the last quarter, compared to 33.4% during the first nine months. The figures reported by the benchmark sector players reveal topline contractions in the order of 35%-40% for the full year. The yield (revenue per RTK) stood at 20.4 euro cents, a drop of 20.6% on 2008, due to three factors: (I) widespread price cuts across the sector as a result of surplus capacity, (II) the drop in fuel prices, and (III) the decision to maximise utilisation of Iberia’s holds by pursuing a very aggressive price strategy. Iberia Group / Consolidated Management Report / Operating Performance 108
CARGO TRAFFIC IN 2009. YEAR-ON-YEAR CHANGE
In order to improve its position in central and eastern Europe, Iberia extended the scope of its agreement with Air Logistics Group in May 2009, selecting it as exclusive cargo agent in seven new countries: the Czech Republic, Croatia, Hungary, Poland, Slovakia, Rumania and Greece. The agreement between Iberia and Scandinavian firm Air Logistics Group started up a month earlier, covering the Nordic countries (Denmark, Sweden, Norway and Finland). As a result, Air Logistics Group now provides a comprehensive sales and customer support service in Iberia’s cargo division on flights to Madrid from Athens, Bucharest, Prague, Warsaw and Zagreb. Iberia also markets cargo services beyond Madrid on all scheduled destinations in Spain, Europe, the Americas, Africa and Asia. In 2009, the company renewed its AENOR ISO 9001:2008 quality certification for cargo activities. Work also continued on extending the electronic paperless cargo ticketing initiative under the framework of the IATA e-Freight project. Iberia ranks fourth in the world on use of electronic documentation. Implementation of the Cargo Yield Management Project, designed to optimise cargo revenues, concluded in 2009. The key performance indicators for this business are as follows:
Cargo 2009 2008 Change
ATK (millions) 1,683.9 1,714.2 (1.8) Holds 1,597.8 1,591.6 0.4 Freighters 86.1 122.6 (29.8) RTK (millions) 1,021.5 1,156.1 (11.6) Holds 964.7 1,080.7 (10.7) Freighters 56.7 75.4 (24.8) Load factor (%) (a) 60.7 67.4 (6.8 p.) Holds 60.4 67.9 (7.5 p.) Freighters 65.9 61.5 4.4 p. Revenue / RTK (euro cents) 20.37 25.67 (20.6) Cargo Transport revenue (millons of euros) (b) 208 297 (29.9)
(a) Year-on-year difference expressed in percentage points, (b) Revenues from freight and mail transport services (excluding excess luggage) Iberia Group / Consolidated Management Report / Operating Performance 109
2.2. Handling
Iberia Airport Services is the management unit responsible for providing ground handling services at Spanish airports to both third party carriers and Iberia itself. In 2009, the company continued to act as ramp handling agent at 36 airports by virtue of 21 concessions in effect since 2007. The company also operates in Barcelona, Lanzarote and Fuerteventura airports through its interests in the joint venture concessionaires (holding 32% of the Barcelona JV and 30% of the Canary Island airports). Since July 2008 the company also provides meet and greet services to persons with reduced mobility (PRM) under concession, operating directly at the airports where Iberia is the sole ground handler and in JV in Madrid, Palma de Mallorca and Alicante (with shareholdings of 51%, 50% and 50%, respectively). This business line made a EUR 2.5 million contribution to lberia Airport Services’ income statement. 2009 will go down in history for the widespread fallout on productive sectors from the economic crisis. This fallout was particularly harsh in commercial aviation and related businesses. The overall Spanish ground handling market, measured in aircraft operations, shrank 10.8% on 2008, although the volumes handled by Iberia Airport Services fell by a narrower 7.8% (including handling for Iberia and measured in terms of notional aircraft handled). The number of passengers handled by Iberia Airport Services fell from a total of 80 million in 2008 to 73 million 2009, implying a drop of 8.7%. In 2009, third party handling operations accounted for 56.6% of total production, measured in terms of the number of equivalent notional or standard aircraft handled, slightly above the 2008 level (56.2%). Despite the adverse economic climate and the handling market conditions, the company managed to pick up market share from 30.7% in 2008 to 31.5% in 2009 by shoring up its customer portfolio with 22 new airline adds. Handling revenues (including the JVs and services provided to Iberia aircraft) tapered off 2.5% on 2008 to EUR 478 million, owing to the drop in volumes. Unit revenue rose 2.7%. The average headcount for the year was 7,132 full time equivalents (including the 515 transferred to the Barcelona JV concession), 637 fewer than in 2008. The number of man-hours worked declined in line with production, so that employee productivity held steady (+0.2%), despite the higher number of incidents (cancellations and delays due to cabin crew strike actions, adverse weather conditions, etc.). The rollout of the IT Gaudí project RealTime module at Madrid airport continued last year, with completion of the hub control centre, leaving only coordination of boarding and deplaning for 2010. This application enables real time centralised operation planning, facilitating enhanced response to traffic incidents and the redeployment of staff and equipment, all entailing significant cost savings and paving the way for productivity and management improvements.
2.3. Maintenance
Iberia Maintenance provides engine, aircraft and part maintenance, repair and overhaul (MRO) services for the company and other aircraft operators. Iberia is presently a significant player in the aviation maintenance business. Iberia Maintenance carried out a total of 220 C and D inspections, weighted for value, which marks a drop of 2.3% on last year. Of these, 56.6% were performed for third parties (2008: 59.7%). In engine maintenance, weighted production (for Iberia and third parties) declined 11.9% to 214. Iberia Group / Consolidated Management Report / Operating Performance 110
Total operating revenue from maintenance work to other airlines (which includes technical support services and also other work undertaken by the company, renting and selling) amounted to EUR 322 million in 2009, surpassing the 2008 figure by 4.1%. Last year Iberia Maintenance signed important sales agreements with a number of operators and manufacturers across all operating areas, enhancing its positioning in the industry and boosting third party revenues. The following agreements stand out for their economic or strategic significance:
Line maintenance agreement for the B757 fleet operated by DHL Air in Spain. The agreement expands the scope of the existing maintenance agreement signed in May 2008 covering Rolls Royce RB211-535 C37 engines. Component support agreement with Finnair Technical Services for the provision of spare components and related repair services for Finnair's Airbus A330 and Airbus A340 aircraft. Exclusive contract from SAS for the provision of major maintenance operations (C and D checks) for the MD80s and Airbus A330s and A340s operated by the Scandinavian airline. Two new contracts to repair and maintain Rolls Royce aircraft engines, one for the provision of MRO services on Rolls Royce RB211-535E4 engines belonging to Russian airline Yakutia, and an MRO contract on the engines powering the B757-200 aircraft owned by India’s Blue Dart Aviation Ltd. Renewal of the contract with Xiamen Airlines for the overhaul of the RB211-535E4 engines installed in its B757-200 fleet. Overhaul contract with Federal Express (Fedex) for its RB211-535E4 engines. Binding agreement with SR Technics for component maintenance for different aircraft. Agreement with Airbus Military for the conversion, in Iberia Maintenance’s Hangar 5, of A330 passenger aircraft to Multi-Role Tanker Transport (MRTT) configuration with in-flight refuelling capacity.
It is worth noting that with respect to the RB211-535 engine, Iberia Maintenance is one of the few MRO support centres in the world, and the only one in Europe. Also the engine subdivision is the only centre in Spain and one of just three in Europe equipped to provide maintenance on General Electric’s CF34 engine. In 2009, Iberia Maintenance fully overhauled its first CF34-3A engine belonging to Air Nostrum, successfully concluding bench tests. Iberia Group / Consolidated Management Report / Operating Performance 111
Iberia Maintenance’s customer portfolio includes nearly all the Spanish carriers, where it is market leader, as well as a significant number of international companies: Aero Fan, Aerogal, Air Comet, Air Europa, Air Finland, Airbus, Alitalia, Audeli, Aurora Airlines, Belair Airlines, Berkut, Blue Dart Aviation, Caesa, Conviasa, Dana Airlines, Dubrovnic Airlines, Eurofly, European Air Transport, Finnair Technical Services, Gestair, Iberworld, ILFC, Interjet, MAeS, Meridiana, Olympic Airways, Pluna, Precision Conversions, Presidencia Mexicana, Primaris, Privilege Style, Pullmantur, Southwest Sports Jet, Spanair, SR Technics, Swiftair, Titan, Tunisair, Varig, Vueling and Yakutia Air Company, among others. In 2009, the average headcount at Iberia Maintenance was 3,845 full time equivalents, an increase of 2.1% on 2008. On 19 May 2009 Iberia Maintenance, together with ST Aerospace, inaugurated its landing gear maintenance repair workshop for Airbus’ A320, A330 and A340 aircraft in Madrid. The new venture, called MAeS (Madrid Aerospace Services) marks an important strategic milestone, opening the door to new markets in Europe, Africa and the Middle East. Iberia Maintenance has invested a total of EUR 14 million to upgrade its facilities and services in 2009. Within the capex program the following initiatives stand out: development of technology to handle compressors in the engine workshop and the installation of a new vertical vacuum furnace; the upgrade and remodelling of Hangar 5, dedicated to the A330 MRTT project, and of the Hangar 4 painting booths; and kitting out of a component test bench. In addition, in a joint venture with the Barcelona free trade consortium, a hangar is being built at Barcelona-El Prat airport which will entail investment of an estimated EUR 24 million.
2.4. Project development
2.4.1. Total Customer Care Program
At the beginning of 2009 Iberia launched its Total Customer Care Program (TCCP) with the goal of perfecting every aspect of the customer service experience: during flight reservations and ticketing, at check-in and during passage through the airport, on-board, in the baggage lounge, in resolving any potential incidents and in relation to the frequent flyer program. This all-encompassing approach to customer service requires the commitment and involvement of all areas of the company. The program’s overriding goal is encourage passengers to choose Iberia over its competitors because of its higher quality service. The measures designed under the umbrella of the TCCP are grouped into three main lines of initiative: (i) ongoing product enhancement, (ii) operating process overhaul, and (iii) taking customer services to the next level. During 2009 Iberia launched over 50 specific initiatives, some of which have already been successfully executed; others will be fleshed out throughout the life of the current Plan 2012. The initially-budgeted outlay is EUR 150 million through 2011, a figure that is set to rise as new measures are added. In any event, many of the initiatives imply first and foremost a change in attitude and processes more than a significant investment. A brief description of some of the key initiatives follows. Iberia is in the process of remodelling its Business Plus cabins to give business class passengers more leg room and privacy. The seat-beds fitted can now be fully reclined into a horizontal position. An entire row of seats is being taken out of the wide-body aircraft, increasing the separation between rows by 30cm so that each passenger will have 2.20 metres of personal space in the business class cabin, making travel more enjoyable and comfortable. The transformation of all the A340 aircraft is being performed on a gradual basis by Iberia personnel. The process began last October and is slated for completion by March 2010. In parallel to the seat and space modifications, the company is working on designing and selecting the elements that will make up the new business class on long haul flights from 2012. This new product implies not only upgrading the aircraft’s interior design but enhancing passengers’ entire in-flight experience. Another TCCP initiative related to the long haul fleet, already formulated and pending execution, entails upgrading tourist class on the A340/300 by installing more modern and more comfortable seats. Iberia Group / Consolidated Management Report / Operating Performance 112
In terms of in-flight service measures, gastronomic improvements have been made on long haul flights in all classes. In tourist class, for example, the main meal menus (lunch or dinner) were updated in July 2009, a second meal has been added (breakfast or afternoon snack), alongside a new service between meals (water, juice and snacks). Some service processes have also been modified on intercontinental flights. The catering service has also been improved on short and medium haul flights. Also in July, the company made style changes to in-flight intercom messages, making them simpler and more customer-friendly. Meanwhile, a campaign was conducted among pilots to encourage them to communicate with passengers in order to improve their perception of the airline. The TCCP has also drawn up initiatives to enhance customer relations before and after flights. For example, new features were added to the airline’s website last year. The process of buying a ticket on Iberia.com was simplified and website access for persons with disability was improved. Also, to facilitate self check-in online, the graphic design of this feature was upgraded and this functionality was extended to all of the company’s flight destinations (as a result, 21 new international destinations were added last year to the extensive list of options).
In order to reduce the amount of time passengers need to spend checking in and to make the time spent in the airport more pleasant, gate access has been enabled via scanning of electronic boarding passes downloaded onto mobile phones/PDAs, luggage tagging desks have been set up and the desks dealing with ticketing and customer service have been integrated. The remodelling and expansion of Iberia’s three VIP lounges (Dalí, Goya and Velázquez) in the state-of-the-art Terminal 4 at Madrid-Barajas airport was completed in July, enabling enhanced passenger service. In collaboration with the prestigious Spanish chef, Sergi Arola, a new food and drink line has been designed and tailored to flight traffic and schedules. The Velázquez lounge, earmarked for passengers on Iberia’s transcontinental flights, located in the satellite building, is now open 24 hours a day. The VIP lounges in Valencia, Bilbao, Santo Domingo, Guatemala and Frankfurt have also been remodelled in recent months. In London, following Iberia’s move to Heathrow’s Terminal 3, passengers are offered access to the Galleries Club Lounge which is shared by oneworld alliance members. There are also plans to remodel the Mexico City, Sao Paulo and Buenos Aires lounges. The limousine service has been extended (chauffer-driven limos on transfers to and from airports for value added customers) to Buenos Aires, Mexico and Sao Paulo; this service was already available in Madrid, Barcelona and Santiago de Chile. Iberia Group / Consolidated Management Report / Operating Performance 113
Meanwhile, the company is looking at alternatives to speed up the boarding process. One of the options is to enable two doors for boarding: one for business class travellers and another for tourist class passengers. To date this initiative has been implemented in Brussels and in Madrid where the boarding gates permit two distinct access routes. Elsewhere, the company is looking for ways to better manage connections through Madrid airport, such as the self-service transfer desk, meet and greet on transfers, and SMS notification when a passenger will not make his or her connection. The airline is also working on speeding up baggage reclaim, and on informing passengers via SMS of their luggage status in the event of separation. Most baggage handling incidents occur when passengers have two or more flight connections. To prevent this from happening the company is testing separate baggage holding on certain flights. One of the most recent initiatives rolled out is the new baggage tagging for priority customers (business class travellers and Iberia Plus platinum, gold, silver or fiesta cardholders). This tag features priority status prominently along the sides, enabling ready visual identification of these passengers’ bags and faster delivery to the carousels. At the end of 2009 a door-to-door baggage pick-up and delivery service, which has been outsourced to CACESA, was rolled out. The Iberia Plus frequent flyer program now has 4.2 million members and is an excellent tool for getting to know customers and rewarding them for their loyalty to the airline. For this reason, the TCCP includes several initiatives designed to improve the program and the service provided to its members: new companies from other sectors are being incorporated; all the information sent to club members has been digitalised; the ability to buy points online will be enabled; a new procedure has been set up to enable the provision of personalised service to Iberia Plus gold and platinum cardholders in the event of contingencies; and, lastly, the Iberia Plus Platinum 10 card has been launched to reward those passengers that have flown most frequently with Iberia since Iberia Plus was set up.
2.4.2. Implementation of sales agreements oneworld
oneworld is a global alliance made up of 11 prestigious airlines with international reach: American Airlines, British Airways, Qantas, Iberia, Cathay Pacific Airways, LAN, Finnair, JAL Japan Airlines, Malév Hungarian Airlines, Royal Jordanian and Mexicana de Aviación. oneworld allows passengers to enjoy and benefit from a series of advantages, such as: access to a network of over 700 destinations across 150 countries, the ability to earn and redeem miles in any frequent flyer program of any oneworld alliance member, access to around 550 VIP lounges worldwide and assistance from the allied airlines’ more than 300,000 employees. The tenth anniversary of the oneworld alliance was marked in Madrid in February 2009 with a meeting of all airline CEOs. In conjunction with the celebrations, the alliance organised a series of promotional, communication and sales events, noteworthy among which was the creation of the Circle Atlantic fare and the decision to paint the oneworld logo onto all member airline aircraft. On 10 November 2009, Mexicana de Aviación (along with its two subsidiary airlines, Mexicana Click and Mexicana Link), became a fully fledged member of oneworld having completed its integration process, which was overseen and coordinated by Iberia. oneworld forged ahead with its expansion plans last year, inviting Russian airline S7 (Siberia Airlines) to join the alliance. S7 is slated to become a member of oneworld at the end of 2010. The oneworld alliance offers member airline passengers a broad product portfolio designed to meet individual needs, ranging from around the world trips to trips to one or more continents, all leveraging the oneworld network. Iberia Group / Consolidated Management Report / Operating Performance 114
Agreement with American Airlines and British Airways
In 2009, American Airlines, British Airways and Iberia continued preparatory work to guarantee execution - as swiftly as possible once the go-ahead from the authorities has been secured - of the cooperation agreement on transatlantic flights signed in August 2008. Under this agreement the three carriers will jointly market flights between the United States, Mexico and Canada, on the one hand, and the European Union, Switzerland and Norway, on the other. Nonetheless, the three airlines will continue to operate as standalone carriers. The three airlines will extend existing code sharing agreements on flights between the European Union and the United States, generating a significant increase in the number of flight destinations offered to their respective passengers. American Airlines, British Airways and Iberia filed their application for anti-trust immunity with the US Department of Transportation in 2008. Once all the requested information had been filed, the Department of Transportation declared the application complete on 27 April 2009, leaving only the final decision from this body pending. A similar process is being pursued simultaneously with the European authorities and all the documentation required by the European Commission was submitted in 2009. This application is also in the final stages of approval. The cooperation agreement will benefit passengers by enabling them to fly to more destinations, making easier connections. In addition, the three carriers will be able to fine-tune their flight schedules to better suit passenger needs and to enhance their frequent flyer programs. Tighter cooperation between the three airlines will boost customer choice and enable the oneworld alliance to compete effectively and on an equal footing with the other two rival alliances which have already been granted anti-trust immunity: the six airlines comprising SkyTeam and the nine making up Star Alliance have already been granted immunity.
Code sharing agreement with American Airlines
In January 2009, Iberia and American Airlines extended the scope of their code sharing agreement. Iberia began to sell seats under its own code on flights operated by American Airlines between Chicago and Toronto and Montreal, and between Boston and Toronto. Meanwhile, American Airlines began to market under its code the flights operated by Iberia between Madrid and Asturias, Granada, La Coruña, Ibiza, Santa Cruz de la Palma, Tenerife, Amsterdam, Athens, Brussels, Milan, Paris, Rome, Stockholm, Venice, Vienna and Warsaw. Subsequently, in May 2009, the agreement was extended further, with Iberia selling coded seats on the flight operated by American Airlines between Madrid and Dallas. In all, Iberia offers flights to 47 US destinations, five of which are operated directly by Iberia (Boston, Chicago, Washington, Miami and New York, the latter two also operated by American Airlines) with the rest under code sharing agreements operated by the US airline.
Franchise agreement with Air Nostrum
Iberia Regional Air Nostrum operated a total of 184 routes (some seasonally) throughout 2009, of which 128 were domestic, and 56 were international routes to 10 European and North African destinations. At year-end 2009 this carrier’s fleet comprised 54 aircraft, including CRJ-200, CRJ-900 and ATR72-500 regional jets, among other models. Until last October, ten DH3s were also in operation. In 2009, the carrier transported 4.68 million passengers. In 2009, Iberia Regional Air Nostrum added new domestic routes connecting Extremadura with Gran Canary Island and Valencia. It also operated flights between the Canary Islands and Salamanca and Leon, between Ibiza and Valladolid, between Menorca and Leon and between Salamanca and Valladolid. Two new international destinations were added from Bilbao: Marrakech and Funchal. Routes were also added between Valencia and Marrakech and Funchal, as well as with Dubrovnik and Venice, while a Badajoz-Paris flight was added. Bari, Corfu and Malta were added to the international flight destinations. Iberia Group / Consolidated Management Report / Operating Performance 115
Code sharing agreements
Iberia has code sharing agreements with 25 airlines. The following carriers stand out: American Airlines, British Airways, Finnair, Grupo Lan, JAL, Avianca, Mexicana de Aviación, Qantas, Royal Air Maroc, Grupo TACA, Avianca, El Al, Malev and Vueling. A new code sharing agreement was signed with Air Bulgaria in April 2009 under which Iberia will sell seats on the flights operated by the Bulgarian airline between Sofia and Spain. In July 2009, when the merger between Spanish airlines Vueling and Clickair was completed, Iberia cancelled its code sharing agreement with Clickair (absorbed by Vueling), transferring it to Vueling. This agreement has enabled Iberia to offer new domestic and international flight destinations. Also in July a code sharing agreement was implemented with Australia’s Qantas on the Madrid – Sydney routes via Heathrow and Frankfurt. Lastly, in November 2009 a code sharing agreement was signed with Brazil’s GOL Transportes Aéreos, under which Iberia can sell as many as ten Brazilian connections from its Sao Paulo and Rio flights under its own code.
Frequent Flyer agreements with airlines
Iberia currently has 15 frequent flyer programs in place with the ten oneworld members, the TACA group, Royal Air Maroc, Avianca, Binter Canarias and Vueling.
2.4.3. Management support platforms and systems
The following is a summary of the key modules developed and implemented specifically by Iberia’s IT department in 2009, although most fall under the umbrella of projects started in 2007 and rolled out during 2008. The modules are grouped in accordance with the company’s strategic targets and broken down by the sponsoring business functions which ultimately have to leverage these applications to improve business processes.
Projects to improve quality and optimise revenues
In the passenger transport area the Enhanced Revenue Management project was completed, optimising revenues from ticket sales as a function of origination and destination instead of by segment. This tool will be rounded out with a specific model for markets where low cost carriers predominate. Development of this software began in 2009 and is slated for completion in 2010. Within the cargo unit the implementation of the new revenue management tool was also finished, while rollout of the e-AWB, equivalent to the passenger e-ticket, is being gradually extended. Also in the area of revenue optimisation, work began on defining all the IT requirements posed by the joint business agreement (JBA) between American Airlines, British Airways and Iberia. The plan is to complete development and implementation of all requirements that are vital to implementing the agreement by mid-2010, although a second phase of upgrades will be ongoing throughout 2011. In 2009, the important development work undertaken to enhance Iberia’s online presence was completed. These initiatives included rolling out the website targeted at large corporates (www.iberiacorporate.com) a new version of en iberia.com with enhanced features such as the mobile handset boarding barcode, simplification of reservation mechanisms, enhanced accessibility and affinity shopping. Iberia Group / Consolidated Management Report / Operating Performance 116
Projects to raise productivity and cut costs
In the handling business, the rollout of the Gaudí real time modules continued as part of the process of increasing staff and resource efficiency and control. This rollout is being performed inside the airport and is slated for completion in 2010. In maintenance, work on the Paperless project designed to fully eliminate the paper trail in management processes, concluded. The resulting system will be rolled out gradually over the course of 2010. Under this system all work orders will be generated, filled out and signed digitally. In the operations management area a new version of the flight programming and arrivals and departure information was implemented. This system compiles information on aircraft movement, slots, cargo, passengers and fuel on all flights within the Iberian network and for those airlines that Iberia handles. New features were added such as automatic licence allocation. This project is scheduled for completion in 2010.
2.5. Corporate Responsibility
2.5.1. Corporate culture
Iberia’s corporate principles form part of its corporate governance policy and include the mission, vision and values shared by all. Iberia’s mission is to offer air transport, aircraft maintenance and ground handling services that satisfy our customers’ expectations and create sustainable economic and social value. Vision: Iberia aspires to being the leader on customer satisfaction in its strategic markets, providing the best value in terms of price and service quality. Iberia wants to provide its shareholders with sizeable and stable returns, to lead by example in supplier dealings and to bring out the best in its employees via career development. Among its values, Iberia advocates quality, innovation, continual improvement and management excellence as the key tools for creating value and guaranteeing the company’s sustainability. The company aims to be associated with transparency and acknowledged for its unwavering commitment to society and the environment. Iberia maintains as direct contact as possible with its stakeholders in order to respond to their demands and incorporate their suggestions into the initiatives for improving the company’s processes, products and services. To this end Iberia has established procedures and communication channels for gathering feedback on its stakeholders' expectations. Iberia Group / Consolidated Management Report / Operating Performance 117
2.5.2. Environmental protection
Iberia applies a global environmental protection policy that takes in all its activities on the ground and in the air. Its activities on the ground are guided by measures designed to eke out continual improvements via certified the environmental management systems in place in the handling and maintenance divisions. As regards flight operations, fleet renewal via the retirement of less fuel-efficient aircraft, the adoption of new operational measures and matching the flight program to evolving demand, enabled the company to cut emissions once again last year, especially the greenhouse gas emissions associated with climate change.
In 2009m the company received AENOR certification for cutting CO2 emissions on the Puente Aéreo (Barcelona-Madrid shuttle). This certification, the first in its class in Spain, testifies that Iberia has cut CO2 emissions on the Madrid-Barcelona shuttle thanks to fleet renewal and new cabin interiors.
Iberia collaborates on various national and international taskforces that analyse, promote and disseminate best environmental practices in the airline sector. Here it is worth noting the airline’s participation in the pan-European SESAR (Single European Sky ATM Research) R&D program, an initiative sponsored by the European Commission and Eurocontrol with a view to easing air traffic congestion and make flying more environmentally friendly. The new air traffic management system will reduce fuel consumption, thereby slashing the European aviation industry’s carbon emissions by between 6% and 12%.
Also notable was Iberia’s collaboration last year with Aena and INECO on research conducted at Barajas airport to verify the environmental benefits in the airport arena of the use of continuous descent approach (CDA) in takeoff and landing, particularly in relation to the reduction of noise levels and air pollution. All these initiatives evidence the high level of involvement across the company in improving its environmental record.
2.5.3. Community work
Iberia is a founding member of the Spanish chapter of the Global Pact (since 2004), through which it promotes application of the ten basic human rights through an Ethics Guide adapted for the company’s culture which is provided to all company employees. Iberia is also committed to promoting and achieving the Millennium Development Goals through projects related to workforce integration for disabled persons, meet and greet services for special needs passengers and the donation of hold space for the transportation of humanitarian aid. Additionally, Iberia supports public and private institutions that carry out community work to raise living conditions. Iberia encourages its customers and suppliers to engage in these initiatives and stimulates active employee collaboration. Here, the company’s collaboration with two NGOs born within the heart of the company thanks to the charitable volunteer work of its employees, Mano a Mano (hand-in-hand) and APMIB (Iberia association of employees with disabled children), stand out. Iberia earmarks most of its donations to these initiatives. In 2009 Iberia earmarked over EUR 1 million to charitable projects. Iberia Group / Consolidated Management Report / Operating Performance 118
In terms of sponsorship arrangements, the company continues to back the institutions with which it has a long standing history of collaboration, such as the Spanish cancer research society and the Spanish international cooperation agency, to which it facilitated EUR 830,000 worth of cargo and passenger space in 2009. The company also collaborates closely with Fundación Ilusiones, Instituto Cervantes, Fundación Príncipe de Asturias and Casa de América, among many other institutions, trusts and foundations. In 2009, Iberia joined the “Donate your mobile” campaign sponsored by the Red Cross and the Entreculturas Foundation, making all its work centres in Spain (offices and airports) and airport customer attention desks available to the initiative. The company safeguards its workers’ rights in accordance with the ILO’s fundamental conventions. Iberia employees enjoy among the best and broadest legal representation. The company guarantees workplace health and safety and equal opportunities and is working to help its employees achieve work-life balance. Iberia’s efforts on these fronts have been acknowledged: in 2009 it was selected, for the fourth year running, for inclusion in the Dow Jones Sustainability Index (DJSI World) and the FTSE4Good index, two of the world’s most prestigious sustainability indices. These indices track the performance of the companies with the best records on economic, social and environmental practice. This year, in its assessment for inclusion in the DJSI World index, which includes just three airlines, Iberia obtained the highest marks for its environmental dimension. The company’s Corporate Responsibility Report provides in-depth information on all these matters. Iberia Group / Consolidated Management Report / Resources 119
3. RESOURCES
3.1. Fleet
At the end of 2009, the Iberia Group had a total of 109 passenger aircrafts in operation, 32 for long-haul travel, with the remaining 77 airplanes earmarked for short and medium haul flights. The table below breaks down the fleet by aircraft type and ownership regime:
Aircraft type (a) (b) Owned outright Finance lease Wet lease Wet lease Total operated
A340/300 6 1 13 20 A340/600 12 12 Long-haul 6 1 25 32 A319 22 22 A320 2 6 28 36 A321 4 15 19 Short/medium-haul 2 10 65 77
TOTAL 8 11 90 109
(a) The number of passenger jets in operation by Iberia at 31 December 2009, excluding aircraft temporarily grounded or grounded pending sale. (b) In addition, at 31 December 2009, Iberia had leased one Boeing B757 to another carrier.
At the end of 2008, Iberia had a total of 119 passenger aircraft in operation. Operating fleet additions and retirements during 2009 are listed below:
Additions
One A320 under operating lease (leased out at the end of 2008).
Returns
Two A320s under operating lease. One A340/300 under operating lease.
Grounded
Eight owned A320s (temporarily grounded).
In February, Iberia added one A320 to its short/medium haul fleet under an operating lease arrangement. This plane had formerly been leased out to another carrier. One of the measures contemplated under the Contingency Plan is to cut capacity to match declining market demand. As a result, in the short and medium haul fleet, the company has temporarily grounded eight owned A320s (four since May, a fifth since June and the other three since October). In April and October, the company ceased operating two A320s leased under operating lease arrangements. In the long haul fleet, the company retired one leased A340 in October. Also throughout the course of the year, fleet ownership and lease arrangements shifted considerably. The three A340/300s that Iberia was operating under wet lease at the start of 2009 were switched to operating lease regimes, two in the first half and the third at the end of August. The number of block hours operated under wet lease declined 66.9% in 2009. Iberia Group / Consolidated Management Report / Resources 120
At present over 80% of the passenger fleet is held under operating lease, providing the company with greater flexibility to match capacity to unfolding market circumstances without jeopardising its financial health. One of the company’s greatest achievements in recent years has been to standardise its fleet into two families of aircraft: the Airbus A340 for long haul flights, with an average age of 8.8 years, and the Airbus A320 (which includes the A319, A320 and A321 models) for short and medium haul flights, where the average age of the fleet is 6.6 years. One of the highlights of 2009 is the improvement in average fleet utilisation: this metric improved 3.7% on 2008. Considering only the aircraft operated by Iberia crew (namely, excluding wet leases), the year-on-year increase is 4.5%.
BH / aircraft / day 2009 2008 Average fleet utilisation, short and medium haul 8.8 8.4 Average fleet utilisation, long haul 14.3 14.5 Average fleet utilisation, Iberia crew 10.3 9.8 Average fleet utilisation, wet lease (a) 14.5 13.4 Average fleet utilisation, total 10.3 10.0 (a) In 2009 three A340/300s were operated under wet lease for Iberia. These contracts ended in June and August.
TREND IN FLEET UTILISATION AT IBERIA
3.2. Personnel
3.2.1. Headcount
The table below depicts the Iberia Group’s average total headcount, measured in terms of full time equivalents, in 2009 and 2008.
GROUND IN-FLIGHT TOTAL
2009 2008 2009 2008 2009 2008 IBERIA 15,100 15,778 5,335 5,567 20,435 21,345 CACESA 114 120 114 120 ALAER 118 110 118 110 BINTER FINANCE 4 3 4 3 IBERIA GROUP 15,336 16,011 5,335 5,567 20,671 21,578 Year-on-year change (%) (4.2) (4.2) (4.2) Iberia’s senior officers (ten in both years) are included in "Ground". Iberia Group / Consolidated Management Report / Resources 121
The Group’s average headcount decreased by 907 employees with respect to 2008, a decrease of 4.2% to 20,671 equivalent employees. The decrease in the average headcount of ground staff and flight personnel fell by the same proportion (-4.2%). The average headcount at Iberia, which in 2009 represented 98.9% of the Group total, fell 4.3%. Iberia ground staff (FTEs) fell 4.3% in 2009, with greater headcount reductions in Spain (-4.4%) than abroad (-2.6%). The drop in headcount at Iberia Airport Services (handling), 637 FTEs or 8.2%, is noteworthy. Iberia’s in-flight staff accounted for 25.8% of the Group total, at 5,335 FTEs. By union member categories, the average technical crew headcount narrowed 3.3% on 2008, while passenger cabin crew were 4.5% fewer. At 31 December 2009, 38% of total Iberia Group employees were female. Iberia continued to execute its workforce reduction program in a bid to bring its human resources into line with the sector’s plight. Most of last year’s employee departures came under the company’s workforce restructuring programs (EREs for their initials in Spanish) which are voluntary on the part of both employee and employer. The labour authorities authorised the extension of ERE 72/01 covering ground and cabin crew staff to 31 December 2010. The rollover of ERE 35/05, specific to Iberia handling staff, to 31 December 2014 was similarly authorised. In April 2009 representatives of the company’s management and of the pilot union SEPLA agreed to request inclusion of pilots under the framework of extended ERE 72/01, in this particular instance extending validity until 31 December 2013. Once authorised, a total of 236 technical crew members over 60 years of age, on reserve, left the company in 2009. In 2009, 185 passenger crew employees and 591 Iberia ground staff opted for one of the options afforded under ERE 72/01, with most choosing early retirement or leave with guaranteed job security. A further 44 ground staff left the company, 16 under the Spanish employment plan, while the remaining 28 worked abroad and will not be replaced. The table below provides a breakdown of employee departures at Iberia under the auspices of its workforce restructuring programs:
Passenger Iberia workforce. Departures in 2009 Technical crew Ground TOTAL cabin crew Early retirement 236 16 342 594 Leave with job security - 98 190 288 Paid leave - 1 14 15 Contract renegotiation - 70 45 115
Total ERE 72/01 236 185 591 1,012
ANE (national employment agreement) - - 16 16 Personnel located outside Spain - - 28 28
TOTAL 236 185 635 1,056
These come on top of the 462 employees that left the company in 2008 (339 ground staff and 123 cabin crew), mostly during the second half of the year, just over half of which took early retirement under the scope of ERE 72/01. In April 2009, management of Iberia and the company section of pilot union SEPLA signed the VII technical crew workers’ collective bargaining agreement which was valid through 31 December 2009. The XV passenger cabin crew agreement, initially valid from 2005 to 2007, was extended to 31 December 2008. Meanwhile, the XVIII collective bargaining agreement covering Iberia ground staff (signed in July 2008) ended on 31 December 2008. Talks are currently underway to hammer out new agreements with all three union groups. Iberia Group / Consolidated Management Report / Resources 122
3.2.2. Productivity
Iberia’s workforce productivity was 3.04 million ASK per employee in 2009, an annual decline of 1.8%. Iberia Airport Services (34.5% of total Group headcount in 2009) managed to maintain productivity (measured in block hours per equivalent aircraft handled) despite the drop in business volumes. In the maintenance segment, workforce productivity rose 3.2% on 2008. The table below shows the trend in productivity broken down by segment and by group:
Iberia workforce productivity 2009 2008 % Change
Total workforce (‘000 ASK per employee) 3,042 3,097 (1.8) Ground staff (‘000 ASK per employee) 2,101 2,139 (1.8) Technical crew (BH per crew member) 267,3 270,9 (1.3) Auxiliary crew (BH per crew member) 115,3 118,8 (3.0) Handling (man hours per notional aircraft)(a) 32,68 32,75 (0.2) Maintenance (operating revenue per employee) (€, ‘000) 19,052 18,457 3.2
(a) A lower number of man hours per equivalent aircraft handled means an improvement in productivity
Iberia’s workforce productivity, measured in ASK per employee, has climbed 17.1% in four years.
PRUCTIVITY TREND. TOTAL IBERIA WORKFORCE
In 2009, productivity dropped by 1.8% year-on-year, due to the reduction in capacity (ASK down 6.0% vs 2008) implemented by Iberia in response to slumping demand, which was only partially offset by the reduction in headcount. Iberia Group / Consolidated Management Report / Financial Performance 123
4. FINANCIAL PERFORMANCE
4.1. Application of IFRS and changes in Group composition
Application of IFRS
The 2009 consolidated financial statements have been prepared in accordance with European Union-endorsed International Financial Reporting Standards (hereinafter IFRS). Iberia has applied the same accounting rules, interpretations and principles as used to draw up the 2008 consolidated financial statements and has applied for the first time those standards and interpretations that took effect in 2009. IFRIC 13 on customer loyalty programs stands out on account of its significance. IFRIC 13 addresses recognition of the customer obligations assumed by the company under these programs, establishing a single accounting criterion. This new interpretation requires recognition of part of the proceeds from the initial sale corresponding to the value of the points, or miles, as a liability so that this portion is recognised as revenue once the company has fulfilled its obligations under the program. Under IFRIC 13, Iberia accounts for miles awarded under its Iberia Plus frequent flyer program separately, as an identifiable component of flight ticket sales. The points or miles are measured at fair value and are initially recognised as deferred revenue on the liability side of the statement of financial position. Up until the year ended 31 December 2008 the value assigned to these points was recognised as an expense under “Commercial costs” in the income statement. From 2009 onwards revenue is recognised when frequent flyers redeem the points. Iberia has applied IFRIC 13 prospectively from 1 January 2009 as it was not possible to measure all the effects of retroactive application. Adoption of this interpretation had a negative net effect of EUR 25 million (including fiscal impact) on reserves in the consolidated statement of financial position as a result of restating liabilities for the new measurement of points granted prior to 2009. Application of IFRS 8 on operating segments, which replaces IAS 14, is mandatory from 1 January 2009. The main change lies with the requirement under IFRS 8 that an entity adopt a ‘management approach’ to reporting on its operating segments. For the Iberia Group the application of IFRS 8 has meant extending disclosures on its operating segments in its half-yearly financial statements but has not had any impact on the information presented in the 2008 consolidated financial statements or on the Group’s financial performance or financial situation. A number of other standards, amendments and new interpretations have been applied since 1 January 2009, implementation of which has not had any significant impact on the Iberia Group.
Changes in Group composition
In July 2009 the merger between Vueling Airlines, S.A. (Vueling) and Clickair, S.A. (Clickair) closed. This transaction altered the Iberia Group’s consolidation scope: Clickair, hitherto an Iberia associate, was deconsolidated and Vueling was consolidated. Vueling absorbed Clickair and the latter company was dissolved without liquidation and all its assets and liabilities were transferred en bloc to the former, which acquired all the rights and obligations of Clickair by universal succession. Also in July, as a result of a series of ensuing transactions, Iberia increased its ownership interest in Clickair to 91.7%. Iberia contributed all its shares of Clickair in a capital increase undertaken by Vueling, giving it a 45.85% equity interest in the latter. Since then this investment has been consolidated under the equity method. Iberia Group / Consolidated Management Report / Financial Performance 124
On 23 December 2009, as part of the merger with British Airways, Iberia registered two new companies in the Companies Register. This first, IB OPCO Holding S.L., has share capital of EUR 3,006; its corporate object is the management and administration of securities representing the equity of resident and non-resident entities in Spain via the corresponding organisational structure of physical and human resources. The second company registered is Iberia Líneas Aéreas de España Sociedad Anónima Operadora. It has subscribed share capital of EUR 60,102 and its corporate object is the provision of passenger, freight and mail air transport and the provision of aircraft ground handling services and aviation consultancy services.
4.2. Earnings performance
As a result of the global recession, 2009 was one of the worst years in aviation history. The entire airline sector suffered an unprecedented contraction in traffic and a significant drop in revenue. Against this backdrop, the Iberia Group’s revenue fell 19.2% on 2008. The impact was partially cushioned by continual rationalisation of capacity in response to unfolding market weakness and the introduction of new cost cutting measures. The Group posted a loss at the operating level of EUR 475 million in 2009. The loss narrows to EUR 464 million if we strip out non-recurring items. The table below details Group recurring EBIT by company during the last two years:
Millions of euros
Recurring EBIT 2009 2008
IBERIA (464) (88) CACESA (0) 1 ALAER 00 BINTER FINANCE 00
IBERIA GROUP (a) (464) (79)
(a) The Iberia Group totals include consolidation adjustments. Iberia Group / Consolidated Management Report / Financial Performance 125
Below is the consolidated income statement for the Iberia Group for 2009 and 2008, including the breakdown of the most significant revenue and cost headings:
Millions of euros IBERIA GROUP 2009 2008 % Change
PROFIT (LOSS) FROM OPERATIONS (475) 5 nm
OPERATING REVENUE 4,458 5,515 (19.2)
REVENUE 4,231 5,223 (19.0) Passenger revenue 3,325 4,218 (21.2) Cargo revenue 251 347 (27.4) Handling revenue 266 275 (3.3) Technical assistance to airlines 310 297 4.2 Other revenue 79 86 (7.4) OTHER OPERATING INCOME 227 292 (22.3) Recurring 178 227 (21.8) Non-recurring 49 65 (24.3)
OPERATING COSTS 4,930 5,535 (10.9)
PROCUREMENTS 1,410 1,864 (24.4) Aircraft fuel 1,184 1,666 (28.9) Aircraft spare parts 191 160 19.0 Catering materials 19 21 (6.8) Other purchases 16 17 (9.3) EMPLOYEE COSTS 1,348 1,321 2.0 Of which: non-recurring 51 1 nm DEPRECIATION AND AMORTISATION 176 193 (8.9) OTHER OPERATING COSTS 1,996 2,157 (7.4) Aircraft leases 349 386 (9.5) Other rentals 73 76 (4.1) Aircraft maintenance 202 228 (11.5) Commercial costs 151 200 (24.9) Traffic services (a) 397 413 (3.9) Navigation charges 252 258 (2.3) In-flight services 66 72 (7.3) Booking systems 134 137 (2.7) Other costs 372 386 (3.4) Of which: non-recurring 6 5 43.7
IMPAIRMENT LOSSES AND NET GAINS ON DISPOSAL OF NON-CURRENT ASSETS (3) 25 nm
RECURRING EBIT (464) (79) nm
Operating revenue (recurring) 4,409 5,450 (19.1) Operating costs (recurring) 4,873 5,529 (11.9)
EBITDA (288) 114 nm
EBITDAR 61 500 (87.8) nm: Not meaningful (a) Includes air traffic services and expenses relating to stopovers and incidents. Iberia Group / Consolidated Management Report / Financial Performance 126
The Iberia Group generated positive EBITDAR (earnings before interest, taxes, depreciation, amortisation and aircraft rentals) of EUR 61 million in 2009.
4.2.1. Operating revenue
In 2009 operating revenue were 19.2% lower than in 2008. Excluding non-recurring items, the drop in operating revenue was 19.1%, due mainly to the slump in passenger and cargo transport revenue (-21.7%), hit hard by the drop in unit revenue and traffic. The limited decline in handling revenue (-3.3%) should be viewed against the backdrop of the sharp contraction in airport flight volumes. Technical assistance to airlines revenue rose yet again last year, climbing 4.2% on 2008.
IBERIA GROUP'S RECURRING OPERATING REVENUE COMPONENTS % YEAR-ON-YEAR CHANGES
Passenger revenue
Total passenger revenues fell 21.2% on 2008 to EUR 3,325 million. This income statement heading includes passenger revenues from actual flights every year (as reflected in the “Key Data” table) and revenue from expired unused tickets, revenue from frequent flyer programs and adjustments of an accounting nature. Passenger revenue from used tickets totalled EUR 3,137 million, down 19.4% on 2008, driven by price erosion (which accounted for a 12.6% decline in revenue) and, to a lesser extent, lower traffic volumes. All three segments (long haul, international medium haul and domestic) were affected by the drop in yield, especially European flights, due to competitive pressure and the deterioration in the class mix. The slump in traffic was also widespread, with the domestic segment contracting the furthest in relative terms. Iberia cut capacity by 11% in response to this. Other passenger revenue, which in aggregate accounted for 5.6% of total passenger revenue in 2009, declined 42.6%, in part due to the application of IFRIC 13 which has changed how frequent flyer points are recognised from 2009 on (this change also entails a reduction in commercial costs). Section 2.1 of this management report includes a more detailed analysis of passenger revenue. Iberia Group / Consolidated Management Report / Financial Performance 127
Cargo
The Iberia Group’s cargo revenue (which includes invoicing of freight and mail transport services, fuel and security charges or top-up charges and excess baggage fees) fell 27.4% in 2009 to EUR 251 million, driven by the decline in traffic (RTK: -11.6%), a sharp drop in yield (-20.6%), due partly to lower fuel surcharges. Revenue at subsidiary CACESA also dipped, while revenue from excess baggage rose 8.6%.
Handling
Revenue from third party ground handling (passengers and aircraft) declined by EUR 9 million on 2008, due to the drop in ramp handling for third party airlines (-7.3% measured in equivalent notional aircraft), partially mitigated by an increase in unit revenue (2.1%) and higher revenue from other airport handling services. The latter include meet and greet services for passengers with reduced mobility under the JV concessions in which the company has ownership interests. During the second half of 2009, handling revenue climbed 1.0% on 2H08, as the drop in third party handling was stemmed at 2.9% following the addition of Vueling to the customer portfolio.
Maintenance
Although the recession also drove aviation maintenance prices lower, revenue from third party technical assistance services at the Iberia Group rose EUR 12.5 million to EUR 310 million in 2009, in part due to dollar appreciation relative to the average 2008 exchange rate. The growth in third party invoicing was driven mainly by engine inspections (particularly on the CFM56), maintenance work performed for the Spanish department of defence and landing gear MRO work.
Other revenue
“Other revenue” narrowed by 7.4% on 2008. Revenue from the use of booking systems, where Amadeus stands out, fell 7.4% to EUR 59 million as a result of the decline in booking volumes. Revenue from the cargo terminals and other cargo services also fell.
Other operating income
“Other recurring operating income” (fees, deferred revenue, income from assigning employees to JV concessions, rental income and sundry other items) fell on aggregate by 21.8% on 2008, with the decline in passenger fees and sundry revenue items standing out. In 2009, the company booked one-off revenue of EUR 49 million, most of which (EUR 45 million) corresponds to the reversal of a portion of the provisions recognised to cover pension obligations vis-à-vis technical crew members as a result of actuarial studies completed following execution of the VII Collective Bargaining Agreement, which gives pilots the chance to keep flying until the age of 65. In 2008 the company recognised EUR 65 million in non-recurring revenue related mainly to the reversal of a number of provisions and an aircraft insurance settlement. Iberia Group / Consolidated Management Report / Financial Performance 128
4.2.2. Operating costs
In 2009 the Iberia Group’s operating costs amounted to EUR 4,930 million, down 10.9% on 2008. Stripping out non-recurring items, the reduction in operating costs rises to 11.9%, with a noteworthy 28.9% year-on-year drop in fuel costs. Other cost headings also declined on the back of lower business volumes (capacity – ASK - down by 6.0%) and the raft of cost savings initiatives rolled out by the company under the umbrella of its Contingency Plan. Unit operating cost narrowed 6.3% on 2008 to 7.84 euro cents per ASK.
IBERIA GROUP'S RECURRING OPERATING COST COMPONENTS % YEAR-ON-YEAR CHANGES
Cost control efforts proved satisfactory in 2009: during the first half of the year operating costs narrowed 9.6% year-on-year, intensifying sharply during the second half, as evidenced by a 14.1% decline on 2H08.
IBERIA GROUP'S RECURRING OPERATING COSTS. QUARTERLY TREND Iberia Group / Consolidated Management Report / Financial Performance 129
Aircraft fuel
The Iberia Group’s fuel cost, which accounted for 24.3% of total operating costs in 2009, narrowed EUR 482 million to EUR 1,184 million last year, driven by a significant drop in market fuel prices and lower consumption (down 6.6% in litres), as a result of reduced business volumes and enhanced fleet efficiency. The table below breaks out last year’s fuel savings by component drivers:
Millions of euros Drivers of reduction in fuel spend Total change on 2008 Price (*) Volume Exchange rate (*) Fleet efficiency
Iberia Group (368) (90) (17) (7) (482)
(*) The changes in prices and exchange rates include the effect of hedges.
The market price of aviation kerosene (CIF NWE) rose steadily throughout the first half of 2008, registering heady levels and peaking at an all-time high in the summer of 2008. Prices then corrected sharply during the second half of 2008 and throughout the first quarter of 2009, bottoming out at around $400 per metric tonne in March 2009. From that point on prices escalated rapidly, rising to over $600 per tonne by June. Prices stabilised at around $600 in the third quarter, heading higher once again during the last quarter to around $665. Despite rising steadily throughout most of 2009, average market kerosene prices in dollars were 44% lower year-on-year. The company benefitted from this trend only partially, due to hedges arranged mid-2008. As a result, the unit fuel cost fell 24.4% on 2008 to 1.91 euro cents per ASK.
ANNUAL TREND IN IBERIA'S UNIT FUEL COST
Employee costs
The Iberia Group’s recurring personnel costs, which represent 26.6% of total operating costs, narrowed 1.8% year-on-year to EUR 1,297 million, thanks to wage control measures and a 4.2% reduction in the average equivalent headcount, primarily on account of voluntary redundancy provided for under the company’s workforce restructuring initiatives. Iberia Group / Consolidated Management Report / Financial Performance 130
Ground staff costs narrowed 1.6% on 2008 on the back of a 4.2% reduction in the average headcount. The number of in-flight staff (technical and passenger cabin crew) also fell by 4.2% on average, and their related costs narrowed 2.0% in aggregate on 2008. Total salaries, wages, severance and similar items amounted to EUR 997 million in 2009, down 0.4% on 2008, including the impact of wage drift and compensation deals struck with in-flight staff. Social security and other social benefit payments totalled EUR 300 million, down 5.9% on 2008, in part due to the adjustment to crew member pension plans. Non-recurring personnel costs amounted to EUR 51 million in 2009, corresponding to a one-off provision to recognise the impact of management’s updated estimate of restructuring expenses upon authorisation of the program’s extension. A similar provision in 2008 totalled EUR 1.4 million.
Depreciation and amortisation charge
The depreciation and amortisation charge was 8.9% lower last year, at EUR 176 million. Almost 60% of this balance corresponds to fleet equipment, for which the depreciation charge was 14.2% lower due to the lower number of in-balance sheet aircraft in operation, mainly due to the retirement of the MD87/88 fleet, a process that concluded in the last quarter of 2008.
Aircraft leases
Fleet lease costs narrowed 9.5% on 2008 to EUR 349 million. This marks an annual saving of almost EUR 37 million and was driven by all heading components. Passenger aircraft operating lease costs stood at EUR 315 million, decreasing by EUR 9 million on 2008 as a result of the drop in the interest rates and a slight reduction in the average number of aircraft in operation. The cost of renting seats on other airline operated flights stood at EUR 7 million, down EUR 6 million on 2008. The biggest component drop was sustained in wet lease costs which stood near EUR 16 million compared to a cost of EUR 33 million in 2008, due to the drop in the number of aircraft and block hours operated, which were down 66.9% on volumes leased in 2008. Lastly, cargo aircraft lease costs stood at EUR 11 million, nearly 5 million below the previous year, due to a 32.5% decline in block hours leased as the company responded to the sharp drop in demand for cargo transport by scaling back capacity. Unit lease cost narrowed 3.8% on 2008 to 0.56 euro cents per ASK. Iberia Group / Consolidated Management Report / Financial Performance 131
Aircraft maintenance
Aggregate recurring aircraft maintenance costs (which includes outsourced services, the provision for major repairs of aircraft and spare parts) amounted to EUR 393 million in 2009, up 1.1% on 2008. The increase reflects growth of 19.0% in expenditure on spare parts, mainly due to the appreciation of the dollar against the euro, as well as higher volumes of maintenance work performed in owned aircraft. The increase in spare parts cost was partially offset by an 11.5% reduction in spending on outsourced services.
Commercial costs
In 2009, commercial costs were more than EUR 49 million, or 24.9%, lower than in 2008. Aggregate commissions, promotional costs and development expenditure narrowed EUR 47 million on 2008 (by 26.7%) due, in part, to the impact of first-time application of IFRIC 13 (affecting measurement of points or miles associated with the frequent flyer program) from January 2009. In 2008 close to EUR 23 million was recognised as commercial cost in connection with the measurement of the points earned by the company’s frequent flyers under the Iberia Plus program. In 2009, under the new standard, the value of points earned was recognised as a deduction from revenue. Advertising costs fell EUR 3 million (by 12.3%). The ratio of net commercial costs to passenger revenue narrowed 0.2 percentage points to 2.4% in 2009.
Traffic services
Traffic services costs narrowed 3.9% in 2009 due mainly to the reduced number of flights operated (11.8% fewer take-offs than in 2008), which had an impact on the items included under this heading: landing fees, as well as fees for the use of jet bridges and other airport services fell by EUR 5 million on 2008. Aircraft dispatch, Tariff H and other traffic services dropped by EUR 9 million. Aircraft cleaning and catering equipment handling services were down by EUR 5 million, while flight staff accommodation costs fell by EUR 3 million on 2008. Costs for flight disruptions, missed connections and baggage reclaim, on the other hand, increased by EUR 6 million, essentially due to operational difficulties caused by labour disputes involving cabin crew and by adverse weather conditions. Iberia Group / Consolidated Management Report / Financial Performance 132
Navigation charges
Navigation charges fell by 2.3% on 2008, mainly as a result of reduced business volumes during that period. This impact was partially mitigated by the appreciation of the dollar, and above all, by price increases. In-flight navigation assistance charges were 0.9% lower in 2009, at EUR 208 million. Eurocontrol increased its unit fees, which represent 75.5% of all navigation charges, by 4.0% on average in 2009, adjusted to account for the main countries that Iberia flies over. Airport approach fees fell 8.5% on 2008 to EUR 44 million, due primarily to reduced flight traffic. Unit approach fees at Spanish airports rose 3.0% on 2008.
In-flight services
The aggregate cost of in-flight services and catering materials was EUR 85.7 million in 2009, down 7.2% on 2008. The was primarily due to reduced traffic and more specifically a drop in the number of business class passengers, together with savings unlocked as a result of renegotiating supplier contracts.
Booking systems
Reservation system costs fell 2.7% to EUR 134 million, due to lower booking volumes as a product of the decline in traffic. This was again partially eroded by the appreciation of the dollar and an increase in average prices.
Other recurring costs
The recurring component of “Other costs” in 2009 was EUR 366 million in 2009, 3.9% lower than in 2008; this trend held steady throughout the year thanks to the Contingency Plan. The most significant cost reductions were sustained in transport costs, severance payments, ground equipment maintenance, other mechanization expenses, security services and levies.
Other non-recurring costs
In 2009 the Group recognised EUR 6 million of non-recurring costs relating to various provisions, fines and penalties. In 2008 non-recurring costs, which also included sundry provisions, amounted to EUR 5 million.
4.2.3. Other operating gains and losses
The aggregate amount of the impairment and disposals of non-current assets resulted in a net loss of EUR 3 million in 2009, primarily losses from the derecognition of rotables. In 2008 the Group recognised a net gain of EUR 25 million in connection with capital gains obtained on aircraft sales under this heading. Iberia Group / Consolidated Management Report / Financial Performance 133
4.3. Other income and costs
The table below shows the rest of the consolidated income statement headings:
Millions of euros IBERIA GROUP 2009 2008 % Change
PROFIT (LOSS) FROM OPERATIONS (475) 5 nm
NET FINANCE INCOME 32 49 (35.3) Finance income 64 137 (53.7) Finance cost (40) (52) (23.7) Exchange differences (17) (2) nm Other finance revenue and expenses 25 (34) 172.0 SHARE OF PROFITS IN ASSOCIATES 8 (18) nm
PROFIT BEFORE TAX (435) 36 nm
INCOME TAX 162 (4) nm
PROFIT (LOSS) AFTER TAX (273) 32 nm
Attributable to shareholders of the Parent (273) 32 nm Basic earnings (loss) per share (euros) (0.295) 0.034 nm
nm: Not meaningful
4.3.1. Net finance income
Net interest amounted to EUR 24 million in 2009, EUR 61 million less than in 2008, reflecting a 53.7% drop in finance income due to a lower average balance of short term investments and lower interest rates on deposits. Finance costs declined by a narrower 23.7% due to lower interest on loans. Net exchange losses were EUR 17 million in 2009, EUR 15 million wider than in 2008. Due to a 50% devaluation of the Venezuelan currency (the bolivar) against the US dollar, Iberia was forced to recognise a EUR 6 million provision at year-end 2009 to cover the impact on local currency deposits related to revenue generated in Venezuela pending receipt. “Other finance revenue and expenses” in the 2009 consolidated income statement includes gains on the Clickair and Vueling share exchange as part of the merger between the two companies (EUR 20.5 million). This heading also includes recognition of the fair value re-measurement of hedging instruments: application of IAS 39 resulted in a gain of EUR 4 million in 2009, compared to a loss of EUR 29 million in 2008, reflecting primarily the decline in value of the inefficient portion of fuel hedges (loss of EUR 23 million). In 2008 this heading also included an impairment provision in connection with Iberia’s investment in Clickair. The Group’s share of profits in associates amounted to EUR 8 million in 2009, a more than EUR 25 million improvement on the losses of 2008, mainly thanks to the profits generated by Vueling, consolidated since July 2009.
4.3.2. Profit (loss) for the year
In 2009 the company posted a consolidated loss before tax of EUR 435 million due mainly to the erosion in revenue, driven by the fallout on the airline sector from the recession. In 2008 the company recognised profit before tax of EUR 36 million. Iberia Group / Consolidated Management Report / Financial Performance 134
In 2009 tax income included recognition of the tax credit corresponding to the tax loss for the year, as well as restatements of amounts paid in prior years. This left a loss after tax of EUR 273 million in 2009 compared to a profit of EUR 32 million in 2008. The chart below reflects key margins at the Iberia Group during the past four years:
IBERIA GROUP. PROFIT MARGINS AS A % OF RECURRING OPERATING REVENUE
4.4. Capital expenditure
The increase in “Property, plant and equipment – Aircraft” carried out by Iberia during 2009 included modifications, aircraft service bulletins and cell work capitalised on A319, A320, A321 and A340 models for a total of EUR 33 million. In addition, two spare engines were acquired for the A319 and A340 for a total investment of EUR 13.5 million. Fleet disposals include derecognition of an A320 engine (carrying amount: EUR 0.7 million). The Group also acquired one A320 aircraft which was derecognised in December 2009 following its sale. Under fleet assembly, net derecognitions amounted to EUR 8 million in 2009. The main investments made in other assets related to maintenance machinery and tools, rotable and repairable parts, airport machinery and equipment, installations, and software and hardware. Net investment in these items totalled EUR 63 million (considering the net carrying amount for disposals). The most significant financial investment was to increase the Group’s shareholding in Clickair to 91.7% in a series of transactions for an aggregate outlay of EUR 58.6 million. Subsequent to the aforementioned transactions, Iberia contributed all its Clickair shares to the capital increase undertaken by Vueling in July 2009, giving it a 45.85% stake in the latter low cost airline. The increase in Vueling’s share price when the Clickair merger closed gave rise to an additional EUR 20.5 million gain. It is also worth noting that the re-measurement of the fair value of Iberia’s equity investment in British Airways increased the Group’s financial assets by EUR 25.1 million. The main disposals of financial assets related to the net return of advances on A320 and A340 aircraft, for a total reduction of EUR 93 million, and the transfer of the Iberbus Agustina and Beatriz loans (EUR 29 million) to current loans. Iberia Group / Consolidated Management Report / Financial Performance 135
4.5. Statement of financial position
The table below provides the main consolidated statement of financial position headings at 31 December 2009 and 2008:
Millions of euros
IBERIA GROUP 2009 2008 % Change
Intangible assets and property, plant & equipment 1,096 1,170 (6.3) Investments in associates 134 17 nm Non-current financial assets 497 672 (26.0) Other non-current assets 635 591 7.3 Non-current assets held for sale 9 11 (22.3) Receivables and other current assets 701 822 (14.6) Current financial assets and other cash equivalents 1,974 2,351 (16.0)
Total Assets 5,046 5,634 (10.4)
Equity 1,551 1,564 (0.8) Provisions 1,209 1,283 (5.8) Non-current borrowings 251 299 (15.6) Other non-current liabilities 272 183 47.4 Current borrowings 251 170 46.8 Other current liabilities 1,512 2,135 (29.1)
Total equity and liabilities 5,046 5,634 (10.4)
The Iberia Group’s equity stood at EUR 1,551 million at 31 December 2009, 0.8% below the 2008 balance. The impact of the loss for the year (EUR 273 million) was almost fully mitigated by the re-measurement to fair value of hedge arrangements and, to a lesser extent, the impact of the revaluation of the Group’s British Airways shares. There were no transactions in treasury shares in 2009. As a result, on 31 December 2009 the parent company’s consolidated statement of financial position registered a balance of EUR 64 million on the 27,898,271 treasury shares (2.927% of equity) recognised, with an overall nominal value of EUR 22 million and at an average acquisition price of EUR 2.313 per share. Non-current provisions for contingencies and charges stood at EUR 1,209 million at year-end 2009, a drop of 5.8% on the year-end 2008 balance. This balance breaks down as follows: EUR 598 million in provisions for employee commitments (down 10.6% on 2008) including the provision recognised for flight personnel put on reserve; EUR 86 million in provisions for major fleet repair work; and EUR 525 million for other obligations, including workforce restructuring initiatives. Current and non-current interest-bearing borrowings (bank loans and finance lease obligations) stood at EUR 502 million at the end of 2009, up 7.2% on the year earlier balance. The liquid balance (current financial investments plus cash and cash equivalents) stood at EUR 1,974 million at 31 December 2009, EUR 377 million less than at year-end 2008. This balance includes the measurement of hedging arrangements (under IAS 39). This accounting rule increased the measurement of short term investments at 31 December 2009 by EUR 55 million in the statement of financial position, compared to the EUR 79 million recognised at year-end 2008. The Iberia Group continued to present a net cash balance surplus at year-end 2009 in the statement of financial position: i.e., the balance of current assets (excluding hedge measurement) was greater than interest-bearing borrowings by EUR 1,417 million at 31 December 2009, compared to a net cash balance of EUR 1,803 million twelve months earlier. Iberia Group / Consolidated Management Report / Financial Performance 136
Adjusted net debt, including the capitalisation of fleet lease cost (and adjusting for interest on the loans to the Iberbus companies), stood at EUR 1,229 million, up 21.4% on 2008. Leverage, measured as the ratio of adjusted net debt to total capital employed (the sum of equity and borrowings), stood at 44.2% at the end of 2009, up 4.9 percentage points on year-end 2008.
Millions of euros
Balance sheet situation 2009 2008 % Change
Adjusted liquid balance (a) 1,919 2,272 (15.5) In-balance sheet interest-bearing borrowings 502 468 7.2
In-balance sheet net debt (1,417) (1,803) (21.4)
Aircraft lease capitalisation (×8) (b) 2,646 2,816 (6.0)
Adjusted net debt 1,229 1,012 21.4
(a) Current financial assets and cash and cash equivalents, excluding the measurement of hedge arrangements. (b) Leases capitalised over eight years and adjusted for the interest capitalised on the Iberbus company loans.
4.6. Cash flow statement
The table below depicts the main headings of the consolidated cash flow statements for 2009 and 2008:
Millions of euros
IBERIA GROUP 2009 2008
Profit (loss) before tax (435) 36 Adjustments to profit (loss) 151 113 Changes in working capital 75 (56) Other cash flows from operating activities (71) (55)
Cash flows from operating activities (280) 38
Payments on investments (277) (633) Proceeds from disposals 102 243
Cash flows from investing activities (175) (390)
Proceeds from and payments for equity instruments - (45) Proceeds from and payments for financial liabilities 39 (98) Dividends paid and payments on other equity instruments - (158)
Cash flows from financing activities 39 (301)
Effect of exchange differences (6) - Net increase/decrease in cash and equivalents (422) (653) Cash and cash equivalents at the beginning of the year 2,182 2,835 Cash and cash equivalents at the end of the year 1,760 2,182
4.7. Financial risk management
As for financial risks, Iberia has management programme to control and reduce the pontential impact of fluctuations in exchange rates, interest rates and fuel prices on earnings and to preserve sufficient cash for working capital and investments. Iberia Group / Consolidated Management Report / Financial Performance 137
The derivatives arranged to this end are designed to partially or fully mitigate price risk; the idea is to write highly effective hedges in accordance with the risk management strategy documented at hedge inception for each instrument in order to quality for hedge accounting under IFRS and the new Spanish accounting standards. The next three sections deal with the company’s hedging program.
4.7.1. Foreign exchange risk
Due to the nature of its activities, Iberia is exposed to exchange rate risk at both the operating (cash flows) and balance sheet levels. The main dollar hedges are detailed below.
Flows
The company had US dollar exposure of around EUR 1,417 million in 2009. This short position reflects the fact that revenues denominated in this currency (22% of the total) were lower than dollar expenses (41% of the total). Under the hedge program, this position is hedged as follows:
Up to 50% of the short position is hedged with strategic hedges with durations of up to five years using swaps into euros to cover fleet rentals denominated in dollars. The remaining exposure is managed via tactical hedges with a time horizon of between one and three years. This enables risk officers to adapt to market conditions and to respond to actual payments flows in dollars.
At year-end 2009, Iberia had hedged 77% of forecast dollar flows in 2010.
Statement of financial position
The company has EUR 551 million of dollar-denominated assets. The most notable are the loans extended to the Iberbus companies, advance payments to aircraft and engine suppliers, the capital in the A340 and guarantees. The dollar denominated liability balance meanwhile is EUR 254 million which helps neutralise the impact of translation differences, in addition to the hedges arranged.
4.7.2. Interest rate risk
Although Iberia enjoys a net cash surplus, adding in the notional debt corresponding to its operating leases (by multiplying aircraft lease obligations by a factor of 8), total adjusted net debt (in the individual financial statements) stands at EUR 1,244 million. At 31 December 2009, 49% of adjusted net debt carried fixed rates, another 6% carried floating rates that have been hedged, and the remaining 45% was freely floating. Sensitivity to a percentage point increase in euro interest rates is a positive EUR 11 million, due to the company’s cash balance. However, sensitivity to a percentage point increase in dollar interest rates is a negative EUR 6.1 million.
Liquidity risk
As per Iberia’s individual financial statements, at 31 December 2009, the company had cash and cash equivalents (cash and liquid assets plus short term financial investments redeemable in less than three months and not including derivatives or loans to companies) amounting to EUR 1,746 million. These balances are invested in highly liquid, short term instruments such as debt repos, euro deposits and commercial paper at top rated Spanish banks in accordance with the company’s prevailing risk management policy which stipulates that counterparties have a short term credit rating of at least P1. Iberia Group / Consolidated Management Report / Financial Performance 138
4.7.3. Fuel price risk
Iberia controls its aviation fuel costs, which are directly linked to fluctuations in oil prices, using active risk management policies to mitigate the impact of fluctuations in kerosene prices on the international market and minimise budget deviations in this significant cost heading. The company has pursued a policy of directly hedging kerosene prices using a combination of financial instruments such as swaps and zero-cost option structures.
Following the price shock in 2008, oil prices climbed steadily higher throughout the first half of 2009, rebounding from $40 a barrel during the first quarter to stabilise in the range of $65-75 a barrel, fuelled by brightening expectations for economic recovery. In the fourth quarter prices hovered around the $70-80 mark. Hedges locking in fuel prices covered around 60% of fuel consumption levels for the year, curtailing cash flow volatility, while enabling the company to benefit from market prices to some extent. Iberia consumes virtually two million metric tonnes of kerosene a year, a volume it expects to repeat in 2010. At 31 December 2009, Iberia had hedged approximately 65% of its fuel position. These hedges could give rise to gains or losses for the Group depending on trends in fuel prices throughout 2010.
4.8. Iberia's share price performance
Price at 31 December 2009 1.899 Price at 31 December 2008 1.98 Year-on-year change (4.1%) Average price in 2009 1.799 High 2.555 Low 1.,42 Average daily volume (no. of shares) 7,026,847 No. of shares outstanding 953,103,008
All share prices expressed in euros. Iberia Group / Consolidated Management Report / Financial Performance 139
Last year the world’s most important stock exchanges managed to recoup the losses sustained in 2008, the worst year in equity market history since 1929, to close the year higher. Specifically, the Ibex 35 posted one of the highest gains of the decade, at 29.8%. Equity market performance during the first months of the year mirrored the deepening crisis (increase in unemployment, downward revisions to growth and corporate profit forecasts, bank interventions, etc.); however, the positive impact of banks’ provisioning efforts and the attendant financial system stabilisation, combined with improving business sentiment, drove the main indices higher during the second half. Demand in the airline sector remained weak all year, especially in business class travel. However, traffic began to show signs of recovery during the second half of the year, although price pressure remained intense all year long. Iberia’s share price ended the year 4.1% lower and was heavily influenced throughout the year by news regarding the merger with British Airways. This newsflow intensified during the second half as expectations grew that the process was picking up pace following senior management changes at the airline. The merger letter of intent was announced to the market on 12 November and was very well received.
IBERIA-IBEX - MAIN COMPETITORS (BASE 100= 30 DECEMBER 2008)
For the first time since its IPO, Iberia did not pay a dividend last year due to its poor earnings performance in 2008.
4.9. Outlook
4.9.1. Business outlook
In the wake of the severest recession in recent history, the global economy is beginning to come back to life, driven largely by extensive intervention by governments and central banks worldwide, whose actions have diminished financial market uncertainty and stimulated demand. The most recent International Monetary Fund (IMF) estimates point to global gross domestic product (GDP) growth of 3.9% on average in 2010, compared to a contraction of 0.8% in 2009. Iberia Group / Consolidated Management Report / Financial Performance 140
However, growth is expected to prove very uneven geographically; economic performance could even vary significantly among countries in the same economic region depending on pre-recession circumstances, structural imbalances and policy measures implemented. In most developed economies, the recovery looks set to be slower than following earlier episodes of recession: GDP growth is forecast at 2.1% in 2010, while economic expansion is expected to be relatively buoyant in many emerging economies, at around 6.0%. The IMF forecasts scant growth of around 1% for the eurozone in 2010, compared to around 3.7% in Latin America. The Spanish economy remained recessionary in 2009, although performing slightly better than forecast in recent months, underpinned by a stronger than anticipated trend in consumption and gross fixed capital formation. Based on this recent relative improvement in national and international indicators, the IMF (as of January 2010) estimates that the Spanish economy will contract by 3.6% in 2009 and by a further 0.6% in 2010. Although Spanish households have deleveraged, debt remains high. This, combined with very high unemployment, will curtail the scope for any consumption-led recovery. This potential will be further undermined by the ongoing credit crunch: lending is not expected to flow freely until the banks and savings banks, also embroiled in deleveraging and absorbing losses on real estate loan books, shore up their balance sheets. This factor will also curtail scope for expansion in corporate spending for some time. In addition, the need to clean up the state accounts will result in restrictive fiscal policy over the coming years, further limiting the Spanish economy’s growth potential. The fate of the airline sector is directly tied to economic growth. Accordingly, following the sharp contraction sustained during the first half of 2009, global air traffic began to stage a gradual recovery during the second half, with cargo traffic rebounding first, followed by passenger traffic. However, the recovery is proving uneven across the various economic regions. Indeed, demand has rebounded sharply in Asia-Pacific, Latin America and the Middle East, in line with the healthy growth in these regions’ emerging economies. Meanwhile in Europe and the US traffic is staging a more tentative recovery. The latest International Air Transport Association (IATA) forecasts call for growth in global traffic (domestic and international) in 2010, measured in TKP (passenger and cargo), of 5.2%. Unit revenue fell drastically across the airline sector during the first half of 2009, similarly staging a relative recovery in long-haul flights since mid-2010. For the European full service airlines traffic continues to improve slowly, lifting load factors. The airlines are expected to continue to scale back capacity in their ongoing search for equilibrium vis-à-vis demand in an attempt to drive unit margins higher. The recovery in corporate spending, which will lead any recovery in consumer spending, should drive the recovery in business travel, which is already showing signs of strengthening. The business travel segment on transatlantic routes is forecast to be the first to recover. Meanwhile, oil prices are expected to continue to firm, in line with recovering demand on the back of the economic rebound. Higher fuel prices could offset the effect on earnings of airlines’ efforts to cut costs and capacity. As a result, IATA forecasts (as of December 2009) that the global airline sector will see revenue rise by 4.9%, but that this will not be enough to eliminate the red ink: the airline association is forecasting net losses of $5.6 billion in 2010. In 2009, Iberia took some important decisions that it believes will be decisive to its performance. On 12 November 2009 the boards of Iberia and British Airways approved a binding letter of intent that sets the foundations for a merger between the two airlines, in a bid to create Europe’s third largest carrier by revenue. The merger is expected to close at the end of 2010. Both British Airways and Iberia will preserve their respective brands and operations; however, the combination of the two airlines will improve their strategic positions in the global aviation industry. The merged airline’s growth potential will be underpinned by optimisation of their two main traffic hubs, Madrid and London, unlocking synergies medium term. Iberia Group / Consolidated Management Report / Financial Performance 141
Elsewhere, Iberia expects the US and European authorities to approve application for anti-trust immunity (submitted in August 2008) for the combined marketing, together with British Airways and American Airlines, of flights on routes between Europe and the US, during the first half of 2010. This is a multilateral project that will improve all three carriers’ competitive position in this important market. Faced by a deteriorating operating climate, slumping demand and falling profitability, in October 2009 Iberia approved its Plan 2012. The new business plan prioritises revenue generation and the search for cost efficiency in order to ensure the company’s sustainability and strength. The company’s management is focused on tackling the economic crisis and reinforcing the airline’s leadership in strategic markets. To this end, Iberia plans to continue to focus its efforts and investments on raising quality and customer service levels by executing the measures designed in the Total Customer Care Program. The airline will continue to strategically increase its network of intercontinental flights. In addition, Plan 2012 calls for a radical shift in operating strategy in the short and medium haul segments where the company is less competitive since the advent of low cost carriers and the rollout of the high speed rail network. In 2010 Iberia expects overall network capacity to be reduced by a further 1.8% on 2009. However, it has the flexibility to adapt to market trends, specifically to respond to higher than forecast demand if necessary. In 2010 Iberia will continue to renew its fleet, adding two new narrow-body and as many as five wide-body aircraft. Meanwhile the company plans to consolidate its position in the maintenance and handling businesses, by leveraging any new opportunities to increase revenue and raise productivity, while maintaining an iron grip on costs.
4.9.2. Overview of main risks and uncertainties
The current outlook for global economic growth remains hostage to significant risk factors. On the bright side, it is possible that resolution of the confidence crisis and reduced uncertainty will continue to underpin a stronger than forecast improvement in financial markets, and higher than anticipated growth in capital flows, trade and private demand. On the down side, the clearest risk factor is that a premature withdrawal of public stimulus measures will drag down global growth. Another important risk is that the deterioration in the financial systems and housing market, or spiralling unemployment in most advanced economies, will curtail the forecast recovery in household spending. In addition, growing concerns over the budget deficits of certain countries could destabilise the financial markets and snuff out recovery by increasing the cost of household and corporate debt. Another downside risk is that the spike in commodity prices could erode the recovery in developed economies. Uncertainty over the recovery in demand for business class travel is key. The loss of business class passengers was very significant in 2009, and had a devastating impact on yields. Similarly, the industry is facing fuel price uncertainty in terms of absolute price levels and volatility. Oil prices climbed steadily throughout 2009 and are expected to extend this pattern in response to the brightening perception of the economic situation. The International Air Transport Association (IATA) estimates that the average price per barrel of Brent crude oil will be $75 in 2010. Medium term, the outlook for oil and the attendant risk of renewed price escalation will depend on the balance between supply and demand. Demand for oil is expected to grow sharply in emerging economies while remaining stable across developed economies. The outlook for the US dollar is another source of uncertainty. The analyst community believes that the euro is overvalued relative to the dollar and expects the trend over the coming months to be one of depreciation. Dollar appreciation would increase both revenue and expenses at Iberia, as around 41% of the company’s costs and 22% of revenues are tied to the greenback. Iberia Group / Consolidated Management Report / Financial Performance 142
Iberia has in place a global financial risk management program designed to control and diminish the potential impact of swings in fuel prices, exchange rates and interest rates on its income statement. Specifically, the fuel price hedges in place at the start of 2010 should cover 65% of estimated consumption for the year. In 2010, Iberia’s management team will work towards reaching agreement with its union members on renewal of their respective collective bargaining agreements; the pertinent negotiating committees have already been appointed. On 20 April 2009, management of Iberia and of the company section of pilot union SEPLA signed the VII technical crew workers’ collective bargaining agreement which was valid through 31 December 2009. The XV passenger cabin crew agreement was extended to 31 December 2008. The XVIII ground staff collective bargaining agreement similarly ended in December 2008. Iberia Group / Consolidated Management Report / Performance of Investees 143
5. PERFORMANCE OF INVESTEES
5.1. Fully consolidated companies
Compañía Auxiliar al Cargo Express, S.A. (CACESA), which operates as a cargo forwarding agent and consignee, was incorporated in 1987 by Iberia, which owns 75% of the company, and by Marítimas Reunidas S.A. (MARESA), which owns the other 25%. CACESA also engages in freight transport, warehousing and distribution activities, as well as other ancillary airport-related businesses. In 2009 CACESA’s revenue narrowed 28.5% to EUR 36.3 million. In general, revenue fell sharply across all the company’s business lines on the back of the drop in volumes due to the adverse global economic backdrop, as well as the widespread slump in unit prices across the entire transport market as a result of the supply-demand imbalance.
Revenue from express courier services (Ibexpress) fell 24.6% on 2008 to EUR 15.7 million. Domestic traffic fell on a widespread basis as demand slumped, with the Canary Islands business hardest hit as a result of intense competition in the night-time cargo business. The exception was traffic on the Balearic Islands routes which actually rose. The drop in domestic market traffic was partially offset by the increase of close to 14% in international traffic. Freight-forwarding revenue (Ibertrás) declined 29.1% on 2008 to 19.1 million. As with Ibexpress, national traffic was the worst-performing segment due to lower volumes on the back of economic weakness and substitution by more affordable options (road and sea). International freight-forwarding traffic was stronger, with exports standing out thanks to strong traffic between Asia and Latin America. In 2009 there was no revenue from auxiliary logistics services as the services provided to the Madrid cargo terminal were transferred to ALAER in July 2008. The company’s average headcount narrowed by 4.6% to 114 full-time equivalents employees. CACESA recorded an operating loss (recurring) of EUR 0.4 million in 2009, compared to profits of EUR 1.35 million in 2008. This translated into a loss before tax of EUR 0.3 million (under IFRS). Auxiliar Logística Aeroportuaria, S.A. (ALAER) was founded by CACESA in June 2002. Iberia controls ALEAR indirectly via its 75% ownership interest in CACESA. Both companies are fully consolidated by the Iberia Group. This company provides a series of auxiliary logistics services including the operation and administration of the cargo terminals. Iberia Group / Consolidated Management Report / Performance of Investees 144
Revenue rose 3.6% to 10.9 million in 2009. This growth was driven primarily by the increase in revenue from logistics services provided to Iberia’s cargo management team at the Madrid cargo terminal. ALAER began to offer this service mid-2008, and accordingly throughout all of 2009. Revenue from distribution services, in relation to both lost luggage and CACESA’s Ibexpress courier service, narrowed slightly. The average headcount fell 6.9% to 118 FTEs. Profit before tax (under IFRS) was EUR 37 thousand compared to EUR 185 thousand in 2008. Dutch company Binter Finance B.V., a 100%-owned Iberia subsidiary, began operations in November 1991. Through its permanent establishment in Spain, this company performs Iberia’s treasury function. The company administers and optimises the currency denominated fund flows generated by Iberia abroad. It also advises on the management and execution of Iberia’s foreign exchange and interest rate hedges in international markets. This company generated EUR 18 thousand in profit before tax in 2009, down 11.5% on 2008. Iberia México S.A., a wholly-owned Iberia subsidiary, was founded in 1951. Since 2007 it has acted as the concessionaire operating the cargo terminal in Mexico, providing foreign trade merchandise warehousing, safekeeping and custodial services. Iberia Desarrollo Barcelona S.L. is the developer set up to build the maintenance hangar at Barcelona-El Prat airport. The deeds incorporating this company were notarised on 18 September 2007. It is 75%-owned by Iberia via Iberia Tecnología. The following companies, of scant materiality, are also fully consolidated in the Group’s financial statements: Iberia Tecnología, Viva, Consultores Hansa, Cargosur and Campos Velázquez.
5.2. Associates accounted for using the equity method
Vueling Airlines S.A. (hereinafter, Vueling) is a low cost airline that has been operating since 2004. Its headquarters and main operating base is located at Barcelona-El Prat airport. Vueling combines the advantages of a low cost carriers, such as low fares and high productivity, with certain of the value added services associated with traditional airlines, such as flexibility, leading European network destinations, use of leading booking systems (GDS), and the ability to offer its passengers the possibility of earning miles under the Iberia Plus frequent flyer program. The merger of Clickair into Vueling closed on 16 July 2009. Having swapped all its shares in Clickair for shares of Vueling, Iberia took a 45.85% stake in the low cost airline and new investee. Nefinsa owns 4.15%. Vueling is publicly listed. The integration of Clickair’s operations into the Vueling organisational structure also took place in July 2009. This airline had a fleet of 35 Airbus A320 aircraft at the end of 2009, with which it operated to 45 airports in 17 European and North African nations, six of them (Barcelona, Bilbao, Madrid, Malaga, Seville and Valencia ) are the company's operating bases. As a result of the merger, the new Vueling became the fourth airline in Spain by passenger volume. Vueling has been operating out of Terminal 1 at El Prat airport since September 2009. In 2009, Vueling carried 8.2 million passengers, 39.3% more than the year before. Capacity totalled 10,181 million ASK (growth of 28.1% on 2008), yielding a load factor of 73.7%, a 3.4 percentage point improvement on 2008. In making a year-on-year comparison of the Group’s share of profits from this associate, it is important to note that the enlarged post-merger airline has been operating since July 15, 2009. Iberia Group / Consolidated Management Report / Performance of Investees 145
Sociedad Conjunta para la Emisión y Gestión de Medios de Pago EFC, S.A. (Iberia Cards) is a credit finance establishment that engages in activities related to the issuance and management of credit cards and other payment means. The company was set up in April 2002 by Iberia (43.5% stake) and financial institutions Banco Popular, BBVA and Caja Madrid. In 2009 this market was marked by the recession which prompted the first decline in credit cards and credit card financing in the overall Spanish market since the Bank of Spain began tracking statistics. Iberia Cards was not immune from this adverse climate. The decline in invoicing was particularly significant in the corporate card segment, in line with the broader market trend. Corporate turnover fell significantly against this adverse backdrop. The retail segment, on the other hand, outperformed the market. From the sales standpoint, management focused all year on fostering migration over to the new Sendo product with a series of promotions and campaigns designed to raise customer familiarity with the product, showing them how to get the most out of it. Migration began in October 2008 and has already been completed for all individual card holders and the process is very advanced in the business card segment. This has enabled the company to continue to offer its customers an appealing and competitive product. In fact, despite the drop in the number of Iberia Plus points offered on Visa cards as a result of the reduction in interchange fees, holders of the Iberia Sendo American Express card saw their benefits remain intact or even improve. This endows the company with an important competitive advantage, especially at a time when most premium credit cards have been forced to drastically cut the benefits offered. The company continues to command a clear leadership position in the premium credit card market, leaving management upbeat about its growth prospects going forward. Iberia Cards obtained profit before tax of EUR 1.7 million in 2009, narrowing EUR 0.5 million on the previous year. Multiservicios Aeroportuarios S.A. (MASA) was set up in April 2002 by ZENIT Servicios Integrales S.A., which owns a 51% stake, and Iberia, which holds the remaining 49%. This company performs all manner of auxiliary airport services, including: cleaning of aircraft (inside and out) and of equipment and facilities, baggage handling, cargo and mail handling, meet and greet services for persons with reduced mobility and runway handling operations. Through this company Iberia has built up a significant business to complement its ground handling activities. Its customer portfolio includes Iberia, Aena, Air Europa and Groundforce. In 2009, MASA continued to diversify its customer portfolio, most notably adding aircraft cleaning services for Vueling at Barcelona airport following the low cost airline’s merger with Clickair in July 2009. Also noteworthy was the start-up of aircraft cleaning services for ground handler Flightcare in Fuerteventura, and the provision of the Star-up service to companies handled by Iberia. Iberia Group / Consolidated Management Report / Performance of Investees 146
This company generated profit before tax of EUR 0.86 million in 2009, compared to a loss of EUR 0.32 million in 2008. Iberia also has a significant ownership interest in the following companies: IBECA, founded in March 2001 by Iberia, which owns an indirect 50% stake through Iberia Tecnología, and Cubana de Aviación, which holds the remaining 50%. This company provides aircraft line maintenance services at Cuban airports. ELCA, set up in October 2001 by Cargosur, giving Iberia a 50% indirect stake, and Aerovaradero, which owns the other half. This company markets and warehouses air cargo in transit in Cuba. SERPISTA was set up in Madrid in June 2004. Iberia owns 39% of this company. The company performs equipment maintenance and repair work for ground handlers in Spanish airports. HANGESA was set up in October 2000 to provide passenger and cargo handling services at Malabo airport. Iberia owns 51% of this company via Viva Air, while local partners own the remaining 49%. ISM (International Supply Management) was set up in March 2006 by Iberia, which owns 49% of the company, and GECI Española Levante S.A., owner of the remaining 51%. ISM's main business line is the purchase and sale of chemical products, industrial equipment, spare parts and accessories mainly for the aeronautical industry. Madrid Aerospace Services was set up in June 2008 by Iberia and Singapore Technologies Aerospace (STA), and endowed with initial capital of EUR 2.6 million. It is 50/50 owned by both shareholders (through their respective shareholders, Iberia Tecnología and STA Solutions Europe). Headquartered in Madrid, this new company is engaged in the maintenance, repair and overhaul of aircraft landing gear and related parts. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 147
6. ANNUAL CORPORATE GOVERNANCE REPORT
The preparation and publication of the Annual Corporate Governance Report is a legal obligation imposed on all listed companies by Act 26/2003 of 17 July, known as the “Transparency Act”, the structure and contents of which are developed in the Order of the Ministry of Economy 3722/2003 of 26 December. The National Securities Market Commission (CNMV), authorised for the subsequent, detailed development of these provisions, passed a single standard model on 17 March 2004 for preparing the Annual Corporate Governance Report, which was later modified by Circular 4/2007 of the CNMV of 27 December. Pursuant to the amendments made to Article 49 of the Commercial Code and section 202 of the recast Corporations Act by Act 16/2007 of 4 July on the reform and adaptation of commercial accounting laws for international harmonisation based on the European Union legislation, the Corporate Governance Report 2009 is included as a separate section in the Separate and Consolidated Directors’ Reports of Iberia, Líneas Aéreas de España, S.A. The Board of Directors of Iberia, L.A.E., S.A., whose governance rules and practice comply with the latest rules and recommendations approved on good governance of companies, publishes the Iberia Annual Corporate Governance Report 2009 for shareholders and investors, with the following structure:
A. Ownership structure of the company B. Management structure of the company C. Related party transactions D. Risk control systems E. General meeting F. Degree of compliance with the corporate governance recommendations G. Other information of interest
The Report contains all the explanations required by the CNMV, together with any other information considered expedient to give a complete picture of the company’s governance structure, decision-making processes, directors’ obligations and emoluments and, in general, any aspect that shareholders and investors might consider important in respect of company management. The Report is supplemented with information published on the company’s web site (www.iberia.com)), in the section "Investor Relations", where shareholders and investors can view the company’s rules and regulations and any other material information on company management. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 148
The Board has maintained its responsible attitude and efficiency throughout 2009, striving to protect the corporate interests and making whatever decisions have been considered necessary to guarantee Iberia’s viability and competitiveness.
A) OWNERSHIP STRUCTURE OF THE COMPANY
A.1. Capital
Capital at year-end
At 31 December 2009, the capital of Iberia, L.A.E., S.A., fully subscribed and paid up, divided into shares issued in book-entry form with a par value of 0.78€ each, was as follows:
Number of voting Date of the last modification in 2009 Capital Number of shares rights - 743,420,346.24 953,103,008 953,103,008
No capital increases have been made in 2009. At 31 December 2009, Iberia, L.A.E., S.A. had 94,736 shareholders.
Classes of shares
There are no different classes of shares with different associated rights.
A.2. Significant interests at year-end, excluding Directors
The ownership structure of the Company at year-end is indicated below, highlighting the significant interests, as broadly defined in Royal Decree 1362/2007 of 19 October. The following table includes, therefore, both stakes equal to or greater than 3% in the capital and those held by shareholders who, although holding less than that percentage, have signed shareholding agreements undertaking to act in concert.
(at 31 December 2009) No, direct No, indirect % total voting Holders of significant shareholding interests voting rights voting rights. rights Caja de Ahorros y Monte de Piedad de Madrid (Caja Madrid) 219,097,719 800 22.99 British Airways PLC 125,321,425 13.15 El Corte Ingles. S,A, 32,151,759 3.37 Caja de Ahorros y Monte de Piedad de Zaragoza. Aragón y Rioja (IBERCAJA) 3,231,693 26,000 0.34 Caja de Ahorros y Monte de Ronda. Cádiz. Almería. Málaga y Antequera (UNICAJA) 991,763 0.10 Sociedad Estatal de Participaciones Industriales (SEPI) 49,212,526 5.16 Chase Nominees Ltd. 49,594,518 5.20 The Bank of New York Mellon 38,072,751 3.99
TOTAL HOLDERS SIGNIFICANT SHAREHOLDING INTERESTS 517,700,954 54.30
Others (shareholders and treasury stock) 435,402,054 45.70
TOTAL IBERIA SHARES 953,103,008 100.00 Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 149
*Through: Number of % total voting Direct holder of the significant interest direct voting rights rights VALORACIÓN Y CONTROL, S.L. E INMOGESTIÓN Y PATRIMONIOS, S.A. 800 0.000084 IBERCAJA GESTIÓN 26,000 0.002728
The most significant changes in the shareholding structure during the period are set out below:
Holder of significant interest Date of transaction Description of transaction
B METZLER SEEL SOHN UND CO 31-Dec-2009 Sale of 28,458,106 shares
A.3. Directors' shareholding interests
Iberia shares held by members of the Board
According to the company’s records, directors directly or indirectly held the following shares in Iberia L.A.E., S.A. at 31 December 2009:
(at 31 December 2009) No, direct voting No, indirect voting % total voting Directors rights rights. rights Mr. Antonio Vázquez Romero 502,000 - 0.052670 Mr. Rafael Sánchez-Lozano Turmo 101,000 - 0.010597 Mr. Miguel Blesa de la Parra 24,400 - 0.002560 Mr. Felipe Benjumea Llorente 400 24,600 0.002623 Mr. José M, Fernández Norniella 800 - 0.000084
INMOGESTIÓN Y PATRIMONIOS, S.A. (1) 400 - 0.000042 Mr. Antonio Masa Godoy 5,250 - 0.000551 Mr. Roger Paul Maynard 401 - 0.000042 Mr. José Pedro Pérez-Llorca 400 - 0.000042 Mr. Jorge Pont Sánchez 401 - 0.000042 Mr. José B, Terceiro Lomba 400 - 0.000042 Mr. Keith Williams 1,000 - 0.000105
(1) Represented by Mr. Alberto Recarte García-Andrade
*Through:
Direct holder of the interest Number of direct voting rights % total voting rights
ARDACHON, S.L. 24,600 0.002581
% total voting rights held by Directors 0.069400
Directors' options over shares in the company
At 31 December 2009, none of the directors had any options over shares in the company. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 150
A.4. Family, commercial, contractual or corporate relationships between significant shareholders, as far as the Company is aware, unless they are insignificant or deriving from ordinary business activities
Apart from the Shareholders’ Agreement signed when the company was privatised, described below, the company has not been informed and is not aware of any relationships between significant shareholders other than those deriving from the ordinary business of the companies.
A.5. Commercial, contractual or corporate relations between significant shareholders and the Company, unless they are insignificant or deriving from ordinary business activities
The most important commercial, contractual and corporate relations between significant shareholders and the company are described in the section on related party transactions. Iberia and British Airways, its major shareholder and industrial partner through British Airways Holdings B.V., are determined to reach a level of cooperation that will benefit the operations of both companies and enable them to improve their competitive positions on the market, coordinating and possibly integrating their commercial and marketing strategies and their distribution practices and procedures. On 19 July 2002, British Airways, Iberia and GB Airways notified the European Commission of several cooperation agreements and applied for an exemption under Article 81(3) of the EC Treaty. On 10 December 2003, the European Commission approved the alliance, which should enable the airlines to make specific agreements to complement one another through their respective networks, essentially in pricing, scheduling and capacity. Under this alliance, Iberia and British Airways signed an agreement on 16 December 2004 to jointly operate their routes between London Heathrow, Madrid and Barcelona as from 1 January 2005. This agreement contemplates the joint management of the routes, sharing costs and profits. In addition, American Airlines, British Airways and Iberia are in the process of establishing a trans-Atlantic alliance through which consumers will benefit from greater discounts, better connections and a broader network of destinations. The alliance is pending authorisation by the European Commission and the DOT (US Department of Transportation). At the date of publishing this report, favourable results are expected in both cases. Finally, on 29 July 2008, the Iberia Board announced its intention to enter into talks with British Airways with a view to a possible merger of the two companies, through an exchange of shares. In May and June 2008, Iberia acquired a strategic interest in British Airways to establish a shareholding symmetry with the interests that the latter company holds in the capital of Iberia and to reflect its conviction of the benefits of a closer collaboration between the two groups. The investment consisted of a purchase of 34,478,120 shares in British Airways, representing 2.99% of its capital, and an economic position linked to the price of British Airways shares based on financial derivatives for 6.99% of the British Airways capital. In September and October 2008, Iberia increased its interest in British Airways and now holds 9.98% of its capital. This purchase of additional British Airways shares substitutes the position held by Iberia in the afore-mentioned financial derivatives. On 12 November 2009, Iberia and British Airways signed a memorandum of understanding (MOU) laying down the bases for a merger between the two companies to create one of the largest airline groups in the world, recognising the principle of parity on the board and in the management bodies of the new Group. The new group will combine the leaderships of both companies in the UK and Spain and boost its already strong presence in the long-haul international markets. Both airlines will preserve their respective trade names and operations. This merger is expected to be completed by the end of 2010. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 151
Shareholders' agreements of which the company has been notified
The company is only aware of the Shareholders’ Agreement signed on 15 December 1999 between the shareholders of the Stable Core, as described below.
Shareholders' Agreement of 15 December 1999
With regard to the controlling shareholders, and as indicated in the Prospectus checked and recorded in the Official Register kept by the Spanish Securities Exchange Committee (CNMV) on 16 March 2001 in respect of the sale of the Iberia shares held by SEPI, a deed was executed on 17 March 2000 putting on record a private stock purchase agreement whereby Caja Madrid, BBVA, El Corte Inglés, Logista, Participaciones Aeronáuticas and BA & AA Holdings Limited acquired 40% of the capital of Iberia. These “Stable Core shareholders” have undertaken to SEPI to remain in the capital of the company for the following lengths of time:
Caja Madrid: at least six years, BBVA : at least five years, Logista: at least five years, El Corte Inglés: at least five years, Participaciones Aeronáuticas; at least three years, and BA & AA Holdings Limited: at least three years
During these times, the core shareholders undertake not to assign, sell or transfer the shares to any third party, except companies in their respective groups. Participaciones Aeronáuticas, S.A. sold its shares in the capital of Iberia to the following entities, which are, consequently, bound by the commitments undertaken by Participaciones Aeronáuticas in the purchase agreement and act jointly, all being members of the Ahorro Corporación Group.
Corporación Financiera de Galicia, S.A. Caja de Ahorros y Monte de Piedad de Zaragoza, Aragón y Rioja (IBERCAJA) Caja de España de Inversiones (CAMP) Caja Castilla- La Mancha Caja de Ahorros y Monte de Piedad de Ronda, Cádiz, Almería, Málaga y Antequera (UNICAJA) Caja de Ahorros de Murcia Caja de Ahorros y Monte de Piedad de Huelva y Sevilla Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 152
BA & AA Holdings Limited sold the shares it held in Iberia to British Airways and American Airlines Holdings BV, which is now bound by the commitments undertaken by the vendor. The controlling shareholders signed an agreement regulating their relations on 15 December 1999, with a view to creating a stable core of Iberia shareholders committed to corporate management, in order to ensure coherent management criteria and make the company stable in the medium and long term, in defence of corporate interests. Accordingly, a pool of shareholders was formed, including the shares of the industrial partner (British Airways and American Airlines Holdings B.V.) and the institutional investors. The pooled shares are those shares held by the Stable Core shareholders at the date of the Agreement, representing 40% of the capital. The agreement is not applicable to any additional Iberia shares those shareholders may acquire after that date, unless they are acquired through exercise of their preferential subscription right or by virtue of the right of pre-emption established in the shareholders’ agreement. The shares held by the Stable Core shareholders covered by the Agreement were:
(at 15 December 1999) % of the capital Parties to the Shareholders' Agreement No. shares pooled stock affected Caja de Ahorros y Monte de Piedad de Madrid (CAJA MADRID) 91,290,716 10.00% British Airways and American Airlines Holdings B,V, 91,290,716 10.00% Banco Bilbao Vizcaya Argentaria. S,A, (BBVA) 66,642,223 7.30% Compañía de Distribución Integral. S,A, (LOGISTA) 61,164,780 6.70% El Corte Inglés. S,A, 27,387,215 3.00% Corporación Financiera de Galicia. S,A 18,457,254 2.02% Caja de Ahorros y Monte de Piedad de Zaragoza. Aragón y Rioja (IBERCAJA) 2,480,772 0.27% Caja de España de Inversiones (CAMP) 1,984,891 0.22% Caja Castilla-La Mancha 1,489,009 0.16% Caja de Ahorros y Monte de piedad de Ronda. Cádiz. Almería. Málaga y Antequera (UNICAJA) 991,763 0.11% Caja de Ahorros de Murcia 991,763 0.11% Caja de Ahorros y Monte de Piedad de Huelva y Sevilla 991,763 0.11%
TOTAL SHARES POOLED 365,162,865 40.00%
The shareholders also undertake to act in concert if a takeover bid has to be made as a result of the purchasing of new shares. The agreement will be deemed immediately terminated and void if: (a) British Airways and American Airlines Holdings B.V. reduces its stake in the capital of Iberia to below 7%, or such other percentage as may coincide with the arithmetic mean of the shareholding percentages held by the other shareholders bound by the agreement, or (b) all the parties to the agreement so agree in writing. The pooled shareholders meet to discuss the business to be transacted by the Board, the Board committees and the General Meeting. They undertake to block vote within the competent bodies of Iberia as decided at the corresponding meeting of the pool. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 153
If a shareholder wishes to sell its shares after the first three years of the shareholders’ agreement, the other members of the pool will have a right of pre-emption, such that the shares can only be sold to a third party if that right of pre-emption is not exercised. This pre-emption is also applicable to sales between members of the pool and to any other transaction whereby a third party may acquire the voting rights of the pooled shares. If a person or entity buys or plans to buy (directly or indirectly or in concert with a third party) from a shareholder a block of shares representing at least 3.5% of the capital (in one or several tranches over a period of twelve months) or if any of the other shareholders acquires all or part of the shares (with no minimum limit), the buyer must accept all the terms and conditions of this agreement, in the legal position of the vendor in respect of the shares offered. The Iberia Stable Core shareholders’ agreement establishes a number of guarantees to avoid possible conflicts of interest. If one or several of the shareholders are considered to have a conflict of interest, those shareholders must abstain in the vote on the corresponding matter. There is public access to the other terms of the agreement, since the Full Prospectus of the 2001 IPO is recorded in the Official Register of the Stock Exchange Commission and in the Trade Register.
Situation of the shareholders' agreement at year-end
On 15 November 2006, British Airways bought the stake held by American Airlines in British Airways and American Airlines Holdings, B.V., thereafter wholly owned by British Airways, changing its name to British Airways Holdings B.V. In December 2007, CAJA MADRID purchased the shareholding interests held by BBVA and LOGISTA, exercising the right of pre-emption established in the Shareholders’ Agreement, thereby raising its interest in Iberia to 22.99%. During 2008, British Airways Holdings, B.V. increased its interest in Iberia to 13.15%. However, it has only pooled 94,303,612 shares, representing 9.89% of the company’s capital. Also during 2008, El Corte Inglés increased its interest in Iberia to 3.37%. However, it has only pooled 27,387,215 shares, representing 2.87% of the company’s capital. The situation of the shareholders’ agreement has not changed during 2009, so at 31 December 2008, the Stable Core shareholders held the following shares subject to the Shareholders’ Agreement (pooled shares):
(at 31 December 2009) % of the capital Parties to the Shareholders' Agreement No. shares pooled stock affected Caja de Ahorros y Monte de Piedad de Madrid (Caja Madrid) 219,097,719 22.99 British Airways Holdings B,V, 94,303,602 9.89 El Corte Inglés. S,A, 27,387,215 2.87 Caja de Ahorros y Monte de Piedad de Zaragoza. Aragón y Rioja (IBERCAJA) 2,480,772 0.26 Caja de Ahorros y Monte de Ronda. Cádiz. Almería. Málaga y Antequera (UNICAJA) 991,763 0.10
TOTAL SHARES POOLED 344,261,071 36.12
The company is not aware of any shareholders’ agreements or pooling of shares other than as described above.
A.7. Control over the Company
Apart from the Shareholders’ Agreement described above, no persons or entities exercise or are able to exercise control over the company in pursuance of section 4 of the Securities Exchange Act. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 154
A.8. Treasury Stock
Treasury Stock at year-end
At year-end, the company held the following own shares:
(at 31 December 2009)
No. direct shares No. indirect shares* % capital stock
27,898,271 - 2.927%
Significant variations in treasury stock
There was no dealing in own shares during 2009:
A.9. Term and conditions of the current authorisation granted by the General Meeting to the Board of Directors for dealings involving treasury stock
At the AGM held on 3 June 2009, the Board of Directors was authorised to buy back shares in Iberia, L.A.E., S.A., directly or through controlled companies, over the following 18 months, rendering void the authorisation granted at the AGM of 29 May 2008. In pursuance of the Corporations Act s. 75 et seq., the General Meeting authorised the Board to acquire such shares within the following 18 months, through a purchase transaction or under whatsoever other title permitted by law, provided that the total number of shares bought back, together with the par value of any shares held by the company and/or its subsidiaries from time to time, does not exceed 5% of the capital of IBERIA, L.A.E., S.A., for a price between 50% of the par value of the shares and the equivalent of 110% of their market value, which is, for this purpose, the highest value recorded on the market on the business day immediately preceding the date of purchase, subject to the limits and requirements stipulated in law. The AGM also expressly authorised use of the treasury stock, inter alia, to acquire shares to be delivered to employees, executives and executive directors of the company, or deriving from exercise of the options they hold over IBERIA shares. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 155
After the AGM on 3 June 2009, using this authorisation and the powers vested in it under the Regulations of the Board of Directors, the Board approved a Plan for Acquisition of Iberia, L.A.E., S.A. Treasury Stock, establishing the conditions for buy-back and a treasury stock cap of 5% of the capital stock.
A.10. Restrictions on voting and the acquisition or transfer of shares
Restrictions established in law or the bylaws on the exercise of voting rights
According to the Bylaws all shareholders may attend and vote at General Meetings provided that they hold, individually or through pooling, at least 400 shares and have recorded them in the corresponding register five days before the relevant General Meeting.
Legal restrictions on the acquisition or disposal of shares in the capital
The Bylaws do not establish any restrictions on the acquisition or disposal of shares in the capital, so the shares are freely transferable by law and the bylaws, subject only to the obligation to notify the company of any acquisitions or disposals that directly or indirectly result in the acquisition of a holding of more than 0.5% in the capital stock, expressly stating the nationality of the transferor and transferee, and the establishment of any encumbrances over the shares affecting exercise of the corresponding rights. Finally, the limitations regarding the nationality of shareholders must be borne in mind, since in pursuance of the Air Navigation Act and Regulation (EC) No 1008/2008 of the European Parliament and of the Council, Spanish air carriers holding an operating licence must be majority-owned by EC Member States or nationals of Member States. Restrictions are also established for exercising the traffic rights deriving from bilateral air traffic agreements signed by Spain whenever these agreements stipulate that the appointed carrier must be under Spanish ownership and/or effective control. With regard to this requirement, section 86 of the Fiscal, Administrative and Social Measures Act 14/2000 of 29 December 2000, on, provides that: “When adopting the legal form of a company, the capital stock of Spanish air carriers holding an operating licence granted in pursuance of Council Regulation (EEC) No 2407/92 of 23 July shall be represented by registered shares, expressly stating the nationality of the shareholder. When an air carrier with a valid operating licence becomes aware, through the share registers to which it has access, that owing to percentages of capital directly or indirectly held by foreign persons or companies, there is a risk for maintaining the operating licences or exercising the traffic rights deriving from bilateral air traffic agreements signed by Spain, it shall notify the Stock Exchange Councils and the Stock Exchange Commission, to guarantee due publicity. Those institutions shall notify the investment service undertakings and credit entities authorised to provide investment services of the circumstance detected. The Ministry of Development shall also be notified, through the Directorate General for Civil Aviation. Once due notification has been given of this circumstance, no further shares may be purchased or transferred by foreign persons or entities, unless accompanied by a certificate issued by the Board of Directors of the air carrier indicating that the acquisition or transfer in question does not exceed the limits stipulated in Community laws and regulations or bilateral air traffic agreements signed by Spain, to prove that the air carrier is Spanish. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 156
Should the air carrier become aware of any acquisition or disposal of shares made in breach of the previous paragraph which could jeopardise fulfilment of the legal requirements and the above-mentioned agreements, the Board of the company may acquire the relevant shares for redemption. This acquisition shall be made at the market price on the date of undue acquisition of the shares in question or the theoretical book value of those shares according to the latest audited balance sheet of the company published in compliance with the legislation applicable to listed companies, whichsoever shall be lower. In the latter case, the Board may suspend the voting rights corresponding to those shares until they have been physically transferred to the company”.
A.11. Breakthrough rule for takeover bids
No takeover bids have been made in 2009, hence the breakthrough rule has not been applied.
B) MANAGEMENT STRUCTURE OF THE COMPANY
B.1. Board of Directors
B.1.1. Size of the Board of Directors
Maximum number of Directors according to Bylaws 14
Minimum number of Directors according to Bylaws 10
According to the bylaws, the Board of Directors of Iberia, L.A.E., S.A. must have a minimum of ten and a maximum of fourteen members. Accordingly, the Board consists of 12 directors, all experienced persons with a proven track record. The number of directors stipulated in the bylaws is considered proportionate to the size of the company and number of shareholders and adequate to allow efficient functioning. It also conforms to the Unified Good Governance Code, which recommends a Board of no fewer than five nor more than fifteen members. The Board is assisted by the non-director Secretary of the Board, who is also legal adviser to the Board and responsible for overseeing the formal and material legality of its resolutions and ensuring that it heeds the rules of good governance. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 157
B.1.2. Members of the Board
Members of the Board of Directors at 31 December 2009
The members of the Board are named below, indicating the position held, the dates of their first and latest appointment as Board members and the type of directorship.
Date of first Date of last Name Position Nature appointment appointment Mr. Antonio Vázquez Romero (1) N.I.F.: 2.644.336-A Chairman 09.07.09 - Executive Mr. Miguel Blesa de la Parra (2) N.I.F.: 26.166.340-E Vice-Chairman 23.03.00 30.05.06 Proprietary Mr. Rafael Sánchez-Lozano Turmo (3) N.I.F.: 05.219.151-Z CEO 09.07.09 - Executive Mr. Felipe Benjumea Llorente N.I.F.: 28.526.035-D Member 30.05.07 - Independent Mr. José Manuel Fernández Norniella N.I.F.: 1.158.700-Y Member 12.06.03 30.05.07 Non-Executive Mr. Antonio Masa Godoy N.I.F.: 8.414.129-Q Member 31.03.01 30.05.07 Independent Mr. Roger Paul Maynard Pasaporte nº. 500.163.204 Member 23.03.00 30.05.06 Proprietary Mr. José Pedro Pérez-Llorca N.I.F.: 31.128.825-G Member 31.03.01 30.05.07 Independent Mr. Jorge Pont Sánchez N.I.F.: 36.817.268-H Member 23.03.00 30.05.06 Proprietary Mr. Alberto Recarte García-Andrade (4) N.I.F.: 50.268.912-C Member 20.12.07 - Proprietary Mr. José B. Terceiro Lomba N.I.F.: 35.203.147-Z Member 31.03.01 30.05.07 Independent Mr. Keith Williams Pasaporte nº. 060.249.491 Member 17.12.09 - Proprietary Mrs. Lourdes Máiz Carro Non-Director N.I.F.: 51.340.955-X Secretary 10.05.01 - -
(1) Appointed Chairman of the Board at the Board meeting held on 09.07.09 (2) Appointed Vice-Chairman of the Board on 26.04.00 and re-appointed on 30.05.06 (3) Appointed CEO at the Board meeting held on 09.07.09. From 20.12.07 to 09.07.09, Mr. Sánchez-Lozano represented VALORACIÓN Y CONTROL, S.L. on the Board. (4) Representing INMOGESTIÓN Y PATRIMONIOS, S.A.
Election procedure
All the directors have been re-elected by the General Meeting on expiry of their term of office and they are, consequently, in their second term, except the following directors:
Felipe Benjumea Llorente, who was appointed for the first time at the AGM on 30 May 2007. INMOGESTIÓN Y PATRIMONIOS, S.A., represented by Alberto Recarte García-Andrade, who was appointed by the Board on 20 December 2007, ratified at the following AGM. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 158
Mr. Antonio Vázquez Romero, who was appointed at the Board meeting on 9 July 2009 and his appointment is to be ratified at the forthcoming AGM. Mr. Rafael Sánchez-Lozano Turmo, who was appointed at the Board meeting on 9 July 2009 and his appointment is to be ratified at the forthcoming AGM. Mr. Keith Williams, who was appointed at the Board meeting on 17 December 2009 and his appointment is to be ratified at the forthcoming AGM.
Professional profile of the members of the Board
A brief description of the professional profile of each member of the Board is set out below.
Chairman Antonio Vázquez Romero, born in Cordoba on 23 November 1951, with national identity/tax number: 30.069.611-D, appointed member of the Board on 9 July 2009.
BSc in Economics, Malaga University. Worked for Arthur Andersen & Co from 1974 to 1978 and then up to 1983 held different positions in the Osborne Group, as Manager of Subsidiaries of Osborne, S.A. and General Manager of Osborne México, S.A. Between 1983 and 1993 he worked in the Domecq Group as Commercial Manager of Domecq México, S.A. and General Manager of Domecq Internacional, S.A. Since 1993, he has held different positions in Tabacalera, S.A. and Altadis, S.A.: 1993-1996 International Development Manager in Tabacalera; 1997-1999 General Manager of Cigars in Tabacalera; 2000 May 2005 General Manager of the Cigar Division of Altadis. 2005-2008, Chairman of the Board of Altadis, S.A., Chairman of the Board of Logista, CEO of Altadis, S.A., Chairman of its Executive Committee and Director of Aldeasa. Between May 2005 and December 2007, Non-Executive Proprietary Director of Iberia, nominated by Logista. In June 2008, appointed Independent Director of Telefónica Internacional.
Vice-Chairman Miguel Blesa de la Parra, born in Linares (Jaén) on 8 August 1947, with national identity card/tax number: 26.166.340-E, appointed member of the Board at a Board meeting held on 23 March 2000, ratified at the Extraordinary General Meeting of 26 April 2000. Appointed Vice-Chairman at a Board meeting held on 26 April 2000 and re-elected at the AGM of 6 June 2002 and at the AGM of 30 May 2006. Non-Executive Proprietary Director proposed by Caja Madrid.
BA in Law, Granada University. State Finance and Tax Inspector. Between 1978 and 1986 he worked at the Ministry of Economy and Finance, and then up to 1996 he worked freelance as a lawyer specialising in Tax Law. Former board member of ENDESA, Antena 3 TV, Telemadrid and the General Foundation of the Complutense University of Madrid. Chairman of the Board of Caja Madrid, Corporación Financiera Caja Madrid, Altae Banco, S.A. and Caja Madrid Cibeles, S.A. Vice-Chairman of the Board of CECA and member of the board of FCC and MAPFRE, S.A. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 159
CEO Rafael Sánchez-Lozano Turmo, born in Madrid on 20 February 1957, with national identity/tax number 5.219.151-Z, appointed Board member on 9 July 2009 and appointed chief executive officer (CEO) at the same board meeting.
BA in Law, ICADE, and BA Business Studies. Between 1980 and 1984 held several positions in Citibank, N.A. (Deputy to Controller, Accounts Manager in the Capital Goods, Energy and Construction Division). 1984-1989 several positions in Manufacturers Hanover Trust Co. (Director Credits Department, Manager of Corporate Finance and Manager of Relations with Multinationals). 1989-1991 Manager of the Mergers and Acquisitions Department in companies of Asfín, S.A. 1991-1998 several positions in J.P. Morgan (Accounts Manager responsible for relations with undertakings, Manager of Credits for Spain and Member of the Management Committee of J.P. Morgan in Spain). From September 1999 to 2008, he held the following positions in CAJA MADRID: Manager Corporate Risks Management of the Business Banking Unit, Manager Special Investments, Manager Mergers and Acquisitions, Manager International Development and Special Investments, and former Board member of several subsidiaries of CAJA MADRID. 2008-July 2009, held an executive position in the company Cibeles Caja Madrid. December 2007-July 2009, representative of VALORACIÓN Y CONTROL S.L. on the Iberia Board. During 2009, has also been Director of Grupo Su Casita, Hipotecaria Su Casita, City National Bancshares, City National Bank of Florida, Holding de Inversiones Salovel, S.L., Vice-Chairman and Trustee of Fundación Padre Garralda and Joint and Several Director of CM Florida Holdings. On 11 December 2009, appointed Director of British Airways, nominated by Iberia.
Members Felipe Benjumea Llorente, born in Seville on 14 September 1957, with national identity/tax number 28.526.035-D, appointed at the AGM on 30 May 2007. Non-Executive Independent Director.
BA in Law, Deusto University. Currently Executive Chairman of ABENGOA, Chairman of the FOCUS-ABENGOA Foundation, Chairman of Inversión Corporativa, I.C., S.A., Director of Compañía Operadora del Mercado Español de la Electricidad (OMEL), and Director, member, of the Spanish Energy Club -Club Español de la Energía-. He is also Trustee of the Spain–United States Council Foundation, Trustee of the Foundation of Studies and Applied Economy (FEDEA) and on the Board of Governors of the Pontifical University Foundation of Salamanca. Former board member of Sociedad General de Cablevisión (1993-1996), La Papelera Española (1987-1995), Thyssen Industrie (1989-1993), Hispano Inmobiliaria de Gestión (1989-1998) and Banco Santander Central Hispano (1990-2002). Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 160
José Manuel Fernández Norniella, born in Oviedo on 9 October 1945, with national identity/tax number 1.158.700-Y. Appointed member of the Board of Directors of Iberia at the AGM held on 12 June 2003 and re-elected at the AGM on 30 May 2007. Non-Executive Non-Proprietary Director.
BSc in Energy Techniques Engineering, Polytechnic University of Madrid. Diplomas in Foreign Trade, Logistics & Procurements and Project Management. Held several positions as business agent: between 1970 and 1979 in ELECTROMECANIQUE, ALFA-LAVAL and BLAKTCONE; then several management positions from 1979 to 1993 first in the BROWN BOVERI Group, as Supplies Manager, and subsequently in AESA BROWN BOVERI (ABB) as General Affairs Manager and General Manager Administration. Former Vice-Chairman of ALDEASA and Chairman of EBRO PULEVA from 2000 to 2005. Formerly on the Boards of: RTVE, ARGENTARIA, ALDEASA, CHILECTRA, ENDESA and ENAGAS. Elected MP for Madrid in the IV and V terms of the Spanish government, Secretary of State for Trade, Tourism and SMEs, Alternate Representative for Spain in the World Bank, Representative for Spain in the International Development Bank and Alternate Representative for Spain in the EBRD. Member of the International Chamber of Commerce and Chairman of the Council of Spanish Chambers of Commerce (1996-2005). Vice-Chairman of the W.S.R. Currently member of the board of Caja Madrid, representing the depositors, director of TELVENT and Honorary Chairman of the Ebro Puleva Group.
Antonio Masa Godoy, born in Badajoz on 14 January 1942, with national identity/tax number: 8.414.129-Q. Appointed member of the Board at the General Meeting held on 31 March 2001. Reappointed at the AGM of 12 June 2003 and the AGM of 30 May 2007. Non-Executive Independent Director.
Economist and Auditor. University Lecturer in Applied Economics. Among other positions, former Chairman of the insurance company Hércules Hispano, former Chairman of the holding company Cartex, S.A. and former Founding Chairman of Caja Rural de Extremadura. Former Vice-Chairman of CEOE (Spanish Confederation of Business Organisations) and Chairman of CEPYME (Confederation of Small and Medium-Sized Enterprises). Currently Chairman of Confederación Regional Empresarial Extremeña (Regional Business Confederation of Extremadura) and Inversiones Varias Extremeñas, S.L. (property company); Director of Corporación Empresarial de Extremadura, S.A., Proyectos y Promociones del Tormes, S.L., the IEE (Institute of Economic Studies) and Refinería Balboa, S.A. and Vice-Chairman of the Institute of Pharmaceutical Studies. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 161
Roger Paul Maynard, born in Birkhampstead (England-Great Britain) on 10 February 1943, with passport no.: 500.163.204 (valid), appointed at the Board meeting of 23 March 2000 and ratified at the Extraordinary General Meeting of 26 April 2000. Reappointed at the AGM of 6 June 2002 and AGM of 30 May 2006. Non-Executive Proprietary Director proposed by British Airways.
BSc in Economics, Queens College, Cambridge, 1965. UK Civil Servant from 1965-1987 in the Department of Trade, Industry and Transport. Transferred to the Diplomatic Corps in Geneva between 1968 and 1972 and in Washington between 1982 and 1987, Councillor for Aviation. Subsequently hired by British Airways as Vice-President Commercial Affairs North America. Then Executive Director North America, before returning to the UK as Director of Investor Relations. In 1991 he was appointed Director of Corporate Strategy before taking up his present position. Former Director of Qantas Airways and Opodo Limited. Director of Investments and Alliances of British Airways and board member of British Airways City Flyer Ltd. and British Airways European Ltd.
José Pedro Pérez-Llorca Rodrigo, born in Cádiz on 30 November 1940, with national identity/tax number: 31.128.825-G, appointed at the General Meeting of 31 March 2001. Reappointed at AGM of 12 June 2003 and AGM of 30 May 2007. Non-Executive Independent Director.
BA in Law. Member of the Diplomatic Corps and Parliamentary Counsel. One of the authors of the Spanish Constitution. Former Minister of The Presidency, Parliamentary Relations, Regional Government and Foreign Affairs. Several former positions on the boards of different companies, particularly in the credit sector. Among other offices, former Chairman of Urquijo Leasing and AEG Ibérica and member of the Madrid Stock Exchange Council. Founding partner of the Pérez- Llorca Law Office.
Jorge Pont Sánchez, born in Premia De Dalt (Barcelona) on 22 January 1938, with national identity/tax number: 36.817.268-H, appointed at the Board meeting of 23 March 2000, ratified at the Extraordinary General Meeting of 26 April 2000. Reappointed at the AGM of 6 June 2002 and the AGM of 30 May 2006. Non-Executive Proprietary Director proposed by El Corte Inglés.
BA in Law. Junior Lecturer of Mercantile Law in the Faculties of Law and Economics of Barcelona University from 1960 to 1964. In 1965, he joined El Corte Inglés, where he is currently Deputy to the Chairman and Director International Affairs. Director of the Ramón Areces Foundation. Chairman of the Board of Sephora Cosméticos de España, director of Parque Temático de Madrid, S.A. and President/CEO of The Harris Company (U.S.A.). Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 162
Alberto Recarte García-Andrade, born in Madrid on 14 March 1947, with national identity/tax number 50.268.912-C, appointed Board member representing INMOGESTIÓN Y PATRIMONIOS, S.A. at the Board meeting of 20 December 2007 and ratified at the AGM on 29 May 2008. INMOGESTIÓN Y PATRIMONIOS, S.A. is Non-Executive Proprietary Director proposed by Caja Madrid.
BA in Law and Economics, Complutense University of Madrid and Commercial Expert and Economist of the State. Between 1974 and 1982 he was Commercial Advisor to the Spanish Embassy in La Habana, Director General for Organisation of the Cabinet of the President of the Government, Economic Adviser to the President of the Government, Managing Director of the Post Office Savings Bank, Vice-Chairman of Círculo de Empresarios (Circle of Entrepreneurs) and Club de Exportadores (Exporters Club), and director of FENOSA and ENDESA, S.A. From March 1982 to the present, Executive Vice-Chairman and CEO of CENTUNION, Española de Coordinación Técnica Financiera, S.A. Currently Director of CAJA MADRID, Director of Corporación CAJA MADRID, Director of Altae Banco, S.A., Chairman of Libertad Digital, S.A., Chairman of Inversiones Loarga, Vice-Chairman/CEO of Centurión, Española de Coordinación Técnica y Financiera S.A. and CEO of Alcalagrés, S.A.
José B. Terceiro Lomba, born in Santiago de Compostela (La Coruña) on 14 July 1943, with national identity/tax number: 35.203.147-Z, appointed Board member at the General Meeting held on 31 March 2001. Reappointed at the AGM of 12 June 2003 and AGM of 30 May 2007. Non-Executive Independent Director.
Professor of Applied Economics at Complutense University in Madrid. Executive Vice-Chairman of ABENGOA and Chairman of BIOETANOL GALICIA; Director of TELVENT, the PRISA GROUP and Corporación Caixa Galicia. Has held the following positions in the State Administration: Under Secretary of the President of the Government (1981-82), Director General of Books and Libraries (1977-79), National Education Adviser and Vice-President of the Constitutional Studies Centre (1981-82). He has published works including especially four books: “Diccionario de Economía” [‘Dictionary of Economy’], “Estructura Económica” [‘Economic Structure’], “Socied@d digit@l” [‘Digital Society’. (Runner-Up for the National Literature Prize, essay section, in 1997) and “Digitalismo. Hacia un nuevo horizonte socioeconómico” [‘Digitalism. Towards a new social and economic horizon’]. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 163
Keith Williams, born in Guisborough, England on 13 May 1956, passport no.: 060249491 (valid), appointed at the Board meeting held on 17 December 2009. Non-Executive Proprietary Director proposed by British Airways.
BA in Medieval History, Liverpool University. 1976-1986 Auditor in Arthur Anderson. Several executive positions in The Boots Co Plc (1986-1991), Apple Computer (Treasurer) in Paris (1991-1996); and Reckitt and Coleman (1996-1998). Joined BA in 1998; appointed Chief Finance Officer and Executive Director in 2006. Non-executive director of Transport for London, a government organisation responsible for surface and underground transport in London.
Non-Director Secretary Lourdes Máiz Carro, born in Santiago de Compostela (La Coruña) on 26 April 1959, with national identity/tax number: 51.340.955-X, appointed at the Board meeting on 10 May 2001.
BA in Law and in Philosophy and Education Science. From 1982 to 1988 she formed part of the Research Staff Programme of the Ministry of Education, obtaining a PhD in Philosophy. State Attorney since 1992. Since 1993 she has held successive positions as Director of the Office of the Under Secretary for Public Administrations, Director of the Office of the Under Secretary for Education, Director General for Administrative Organisation (Ministry of Public Administrations), Director General of Sociedad Estatal de Participaciones Patrimoniales (Ministry of Economy and Finance) and Technical Secretary General of the Ministry of Food, Agriculture and Fisheries. Formerly on the Boards of RENFE, Gerencia de Infraestructuras Ferroviarias (G.I.F.), Instituto de Crédito Oficial (I.C.O.), INISAS, Aldeasa, Almacenaje y Distribución, S.A. (ALDEASA), and Banco Hipotecario (ARGENTARIA).
B.1.3. Types of Directors
The Regulations of the Board of Directors classify directors into three groups -Executive, Proprietary and Independent-, following the classification proposed by the Olivencia Code -largely maintained in the Aldama Report and confirmed in the Unified Good Governance Code- and the composition of the Board maintains a balance between the representatives of the largest possible percentage of capital (proprietary directors) and a sufficient number of independent directors to counterbalance the executive and proprietary directors. By virtue of this classification, of the twelve members currently making up the Board of Directors, two are executive directors –the Chairman of the Board, also Executive Chairman– and the CEO. The other ten are non-executive directors. Of the latter, four are independent, since they are not and do not represent shareholders able to exert any influence in the control of the company. Five are proprietary directors, having been proposed by the holders of sufficiently significant stable interests in the capital of the company and one is a non-executive non-proprietary director who, according to CNMV criteria, is considered included in the group “Other Non-Executive Directors”. The different conditions of the Board members are indicated below. Since 2001, when the Nomination and Remuneration Committee was set up, all the directors have been proposed by that Committee to the Board. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 164
Executive Directors
Name of Director Position
Mr. Antonio Vázquez Romero Chairman Mr. Rafael Sánchez-Lozano Turmo CEO
Total number of executive directors 2
% total of Board 16.66%
Non-Executive Propietary Directors
Significant Shareholder that proposed Name of Director appointment Mr. Miguel Blesa de la Parra CAJA MADRID Mr. Roger Paul Maynard BRITISH AIRWAYS Mr. Jorge Pont Sánchez El CORTE INGLÉS, S.A.
Mr. Alberto Recarte García-Andrade (1) CAJA MADRID Mr. Keith Williams BRITISH AIRWAYS
Total number of Proprietary Directors 5
% total of Board 41.66%
(1) Representing INMOGESTIÓN Y PATRIMONIOS, S.A.
Non-Executive Independent Directors
Name of Director Position
Mr. Antonio Masa Godoy Member Mr. José Pedro Pérez-Llorca Member Mr. José B. Terceiro Lomba Member Mr. Felipe Benjumea Llorente Member
Total number of Independent Directors 4
% total of Board 33.33%
Other Non-Executive Directors
Name of Director Position
Mr. José Manuel Fernández Norniella Member
Total number of Other Non-Executive Directors 1
% total of Board 8.33%
Reason why the latter group of directors cannot be considered Proprietary or Independent Directors and their relationships, with the company or its executives or with the shareholders
Company with which he has a Name of Director Reasons relationship Appointed member of the Board of Caja Mr. José Manuel Fernández Norniella CAJA MADRID Madrid on 19 July 2006. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 165
B.1.4. Appointment of Proprietary Directors at the proposal of shareholders with interest of less than 5% in the capital
Name of shareholder Justification
EL CORTE INGLÉS By virtue of Shareholders’ Agreement
B.1.5. Retirement of Directors before the end of their term of office
The following directors retired from the board during 2009:
Type of director on Name of Director Date of retirement Reason for retirement retirement Mr. Fernando Conte García Executive 9 July 2009 Resignation VALORACIÓN Y CONTROL, S.L. Proprietary 9 July 2009 Resignation Lord Garel-Jones Proprietary 17 December 2009 Resignation
B.1.6. Powers delegated to directors
The Chairman, as highest executive of the company, is permanently vested with all the powers of the Board, save those duties that the Board must, by law or the bylaws, perform directly.
B.1.7. Company directors who are directors or executives of other Group companies
During 2009, none of the IBERIA directors have held office as directors or executives of any other companies in the Group.
B.1.8. Company directors on the Boards of non-group companies listed on Spanish stock exchanges, of which the company has been notified
Details on the company directors who are also directors of other companies listed on Spanish stock exchanges at 31 December 2009 are set out in the following table:
(at 31 December 2009) Company listed on Spanish Name of Iberia Director Position Market FCC Board member Mr. Miguel Blesa de la Parra MAPFRE Board member Mr. Felipe Benjumea Llorente ABENGOA Executive Chairman GRUPO PRISA Board member Mr. José B. Terceiro Lomba ABENGOA Executive Vice-Chairman Mr. Jorge Pont Sánchez VUELING Board member
B.1.9. Limit on number of directorships of Board members
The company has not established any rules regarding the number of directorships its directors may hold. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 166
B.1.10. Policy and general strategies of the company reserved for approval by the Board
The Board focuses mainly on overseeing and controlling the ordinary management of the company, undertaking in particularly to directly exercise the following responsibilities, as stipulated in the Regulations of the Board:
A. approval of the general strategies, plans and policies of the Company; B. appointment, remuneration and, if necessary, removal of senior officers; oversight and assessment of their management; C. approval of treasury stock policies; D. pinpointing of the main risks of the company, especially implementing and monitoring adequate internal control and reporting systems; E. definition of policies regarding information and communication with shareholders, markets and the public opinion; F. in general, any operations involving the disposal of substantial assets of the company and major corporate transactions, and any specifically contemplated in the Regulations of the Board.
In particular, the Board analyses every month the evolution of accounts and activity of the company, as well as sector trends, evolution of the company’s share on the stock exchange and treasury stock. During this period, it has approved the Annual Budget for 2010 and regularly monitors fulfilment. The Board also approves the most significant investments and divestments.
B.1.11. Directors’ emoluments earned during the period
The emoluments earned during 2009 according to the system of remuneration approved by the General Meeting are described below: a) Directors’ remuneration in Iberia, L.A.E., S.A.
The total remuneration earned by directors during 2009 as members of the Board of Directors of Iberia, L.A.E., S.A., is indicated below: Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 167
2009 (thousands of euro) Maximum remuneration authorised by Type of remuneration Remuneration earned AGM Fixed Remuneration 783 - Attendance Fees (Per Diems) 783 - Payment in kind 111 -
TOTAL REMUNERATION OF BOARD 1,677 2,000
Directors’ remuneration for 2009 is 16.15% less than the overall amount approved by the General Meeting for the year.
2009 (thousands of euro)
Other benefits
Advances - Loans granted - Pension Funds and Schemes: contributions - Pension Funds and Schemes: obligations contracted - Life insurance premiums 0.210 Guarantees furnished by the company for directors -
The previous tables include the remuneration and other benefits received by the former Executive Chairman and the current Executive Chairman and CEO of the company as Board members in 2009. The expenses incurred by the entire Board in the performance of directors’ duties in 2009 totalled 5,340 euro. b) Remuneration received by directors as Board members and/or senior officers of other Group companies
Apart from the remuneration received by the Executive Chairman and the CEO for their top management position in the company mentioned in e) of this section, the directors have not received any additional remuneration during 2009 for belonging to any other Group company. c) Emoluments earned by types of directors
The following table shows the emoluments earned by the directors according to their classification as Executive, Proprietary or Independent. The emoluments of the executive directors include those payable to the former Executive Chairman and the current Executive Chairman and CEO of the company as members of the Board.
2009 (thousands of euro) Total remuneration by Iberia, Total remuneration by the Types of Directors L.A.E., S.A. Group Executive 202 - Non-Executive Proprietary 780 - Non-Executive Independent 527 - Other Non-Executive 168 -
TOTAL 1,677 1,677 Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 168 d) Share received by Board members in the profit of the parent company
Considering an income after tax attributed to the parent company of -273,249 thousand euro, the directors, as such, have received the following share:
2009
Total remuneration directors (thousands of euro) 1,677
Percentage of attributed income Not applicable e) Remuneration of executive directors for their top management relationship with the Company
As regards the executive directors, the Bylaws approved at the AGM of 6 June 2002 stipulate that the emoluments payable to members of the board are compatible with and independent of any salaries, remunerations, indemnities, pensions or compensations of any nature established generally or individually for any board members who have an employment relationship, whether ordinary or top management, or services contract with the company. Up to 9 July there was only one Executive Director in the Company, the Executive Chairman. Since then, there have been two Executive Directors, the current Executive Chairman and the Chief Executive Officer.
Current Executive Directors: Chairman and CEO
The total remuneration earned by the current two Executive Directors in 200 by virtue of their contractual relationships with the company is €553 thousand. The following table gives a breakdown of the different types of remuneration earned by the Executive Directors during 2009, by virtue of their contractual relationships with the Company:
2009 (thousands of euro)
Remuneration Executive Director Chairman CEO
Fixed remuneration 335 215 Variable remuneration (Accrued 2008) - - Payment in kind 21
TOTAL 337 216 Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 169
Former Chairman
The total remuneration earned by the former Chairman in 2009 by virtue of his contractual relationship with the company is €838 thousand, while the expenditure in social security, insurance, and contributions to welfare schemes totalled €57 thousand. The following table gives a breakdown of the different types of remuneration earned by the former Chairman during 2009 by virtue of his contractual relationship with the Company:
Ejercicio 2009 (thousands of euro)
Remuneration Executive Director
Fixed remuneration 368 Variable remuneration (Accrued 2008) 463 Payment in kind 7
TOTAL 838
Moreover, the former Chairman received €3,167 thousand when he left.
B.1.12. Remuneration of the senior officers of the Company, excluding Executive Directors
The Executive Committee, excluding executive directors, received a total of €3,213 thousand in 2009. This group includes the Executive Committee and the Internal Audit and Quality Manager, following the recommendations of the CNMV Circular 4/2007. The senior officers of the company are listed below:
(during 2009)
Name Position
Mr. Enrique Donaire Rodríguez General Manager of the Airline (up to 27/08/09) Mr. Manuel López Aguilar General Manager Commercial and Clients Mr. Juan Manuel Bujía Lorenzo General Manager Production (since 27/08/09) Mr. José Luis Ruiz de Castañeda de la Llave General Manager Maintenance and Engineering (since 27/08/09) Mr. José Luis Freire Santos General Manager Airports Mr. José Mª Fariza Batanero Procurements and Services Manager Mr. Sergio Turrión Barbado Human Resources Manager Mr. Enrique Dupuy de Lôme Chavarri CFO & Corporate Strategy Manager Mr. Manuel López Colmenarejo Deputy General Manager Commercial and Clients Mrs. Lourdes Máiz Carro Secretary Mr. Martín Cuesta Vivar Internal Audit and Quality Manager
The expenses associated with the removal of the General Manager of the Airline amounted to €1,466,538 in 2009.
B.1.13. Golden handshake clauses for members of the Management Committee of the Company or its Group, including the Executive Directors, in the event of redundancy or change of ownership
The contracts of company executives include a golden handshake clause. For the above-named senior officers, pay-off would be equivalent to between twelve months’ and three and a half year’s pay. Some contracts also include a clause prohibiting them from competing with the company after the end of their top management relationship with Iberia, compensated with one-year’s fixed pay. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 170
For executive directors, on 9 January 2002 the Board of Directors passed a proposal submitted by the Nomination and Remuneration Committee for severance pay in certain cases of termination of contracts of employment of up to two and a half years’ fixed remuneration. The Board also approved a compensation for the clause stipulating no competition with the company after termination of the top management relationship, equivalent to eighteen months’ fixed remuneration. These sums are covered by an insurance policy, the cost of the insurance premium being recorded on the Income Statements each year. This system is applicable to the current executive directors.
B.1.14. Determination of the remuneration of Board members and relevant clauses of the bylaws, where appropriate
The AGM/EGM held on 6 June 2002 approved an amendment to Article 47 of the company bylaws on directors’ emoluments. The remuneration was made more specific and transparent, combining different systems (fixed annual assignment, payment for attendance of Board and committee meetings and variable payment in kind), and the General Shareholders’ Meeting reserved the right to set the maximum overall amount for all these items. Once the General Meeting has established the maximum overall amount, the Board may freely distribute that sum among the different items and directors, as and when it may deem fit. The same AGM approved the maximum overall amount payable to directors for 2002, setting it at one million, five hundred thousand euro (1,500,000€) for the fixed assignment, attendance fees for Board and committee meetings and payment in kind. At the AGM in 2003, 2004, 2005 and 2006, the shareholders resolved to maintain the same maximum overall amount of annual remuneration of directors for the respective years. At the AGM 2007, the shareholders resolved to raise the maximum overall amount of the annual directors’ emoluments for 2007 to one million, eight hundred thousand euro (1,800,000€). At the proposal of the Nomination and Remuneration Committee, the Board resolved on 28 June 2007 to distribute this sum established for 2007 as follows:
A. A fixed sum for each director of 65,000 euro/year. B. A sum of 2,500 euro for each Board meeting actually attended. C. A sum of 2,000 euro for each committee meeting actually attended. D. A variable remuneration payable in tickets with the airline or its franchisee of up to 140,000 euro maximum for all the directors.
At the AGM 2008, the shareholders resolved to raise the maximum overall amount of the annual directors’ emoluments for 2008 to two million euro (2,000,000€). The internal distribution of that sum was maintained as decided by the Board on 28 June 2007. At the AGM 2009, the shareholders resolved to maintain the same maximum overall amount of annual remuneration of directors. The internal distribution also remained unchanged for 2009.
B.1.15. Pay policy
The Board approved a detailed pay policy combining the following aspects: Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 171
Internal distribution of the maximum overall amount established by the General Shareholders’ Meeting among the following items:
Fixed annual remuneration for each director. Payment for attendance of Board and committee meetings. Payment in kind, consisting of airline tickets.
Executive pay policy. Welfare systems, estimating the amount or equivalent annual cost. Conditions to be respected in the contracts of those with top management duties.
B.1.16. Voting at General Meetings on a Report on the Directors’ Pay Policy
The maximum overall amount of directors’ emoluments is submitted to the General Shareholders’ Meeting for approval. Within the limits approved by the General Meeting, the Board then distributes that maximum overall amount internally among the different items.
B.1.17. Members of the Board who are board members or executives of companies holding significant interests in Iberia L.A.E., S.A. and/or in companies in the same Group
(at 31 December 2009)
Name of Director Name of significant shareholder Position
Mr. Miguel Blesa de la Parra Caja Madrid Chairman Mr. José Manuel Fernández Norniella Caja Madrid Board member Mr. Roger P. Maynard British Airways Director Investments & Alliances BA Mr. Jorge Pont Sánchez El Corte Inglés Deputy to Chairman
Mr. Alberto Recarte García-Andrade (1) Caja Madrid Board member Mr. Rafael Sánchez-Lozano Turmo British Airways Board member Mr. Keith Williams British Airways Chief Finance Officer and Executive Director BA
(1) Representing INMOGESTIÓN Y PATRIMONIOS, S.A.
B.1.18. Modifications to the Regulations of Board made during 2009
No modifications were made to the Regulations of the Board during 2009. The Regulations of the Board of Iberia were originally based on the principles established in the Olivencia Code. Subsequently, in 2008, they were modified to adapt them to the recommendations of the Unified Good Governance Code.
B.1.19. Procedures for the appointment, re-election, assessment and removal of directors
The persons nominated by the Board to the General Meeting for appointment as directors and the appointments by cooptation made by the Board must, in addition to meeting the requirements established in law and the bylaws for this appointment, have recognised prestige and adequate professional experience and expertise to be able to perform their duties. The Nomination and Remuneration Committee prepares a report in this regard. All Iberia directors meet the applicable requirements and all the appointments made since the Regulations came into force have been made following this procedure. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 172
With a view to the possible re-election of directors, the Nomination and Remuneration Committee is responsible for assessing the quality of the proposed directors’ work and dedication to their office during the previous term and must inform on the nomination for re-election submitted by the Board to the General Meeting. This Committee submits an annual report to the Board on the directors’ remuneration policy, previously assessing the performance of their duties.
B.1.20. Events in which directors are obliged to retire
The Regulations of the Board of Directors contemplate the events in which directors must tender their resignations to the Board, to ensure that they meet at all times the requirements for being directors and do not incur in any conflicts of interest or any other conduct that may be detrimental to the company:
A. The retirement age for the Chairman and Chief Executive Officer is 65, although they may continue as directors after that age. B. For executive directors, when they cease to hold the positions to which their appointment as director was tied. C. If they come into any circumstance of incompatibility or prohibition contemplated in law. D. If they are brought to trial for a presumed criminal offence or if disciplinary proceedings are brought against them by the supervisory authorities of the Securities Market for serious or very serious misconduct. E. If they are given a serious warning by the Audit and Compliance Committee for infringing their obligations as directors. F. If by remaining on the Board they may jeopardise the interests of the company, or if the reasons for which they were appointed cease to exist. G. Institutional or proprietary directors will step down when the shareholder they represent on the Board disposes of its shares in the company. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 173
B.1.21. Explain whether the Chairman of the Board is the highest executive of the company and the measures adopted to limit the risks of any single person having unfettered powers
YES X NO --
According to the Regulations of the Board of Directors, the Chairman of the Board is the highest executive of the company and, as such, directs the company’s business, according to the decisions and criteria established by the General Meeting and the Board. There is currently also a Chief Executive Officer with full powers. To prevent the risks of any single person having unfettered powers, the Board of Directors has approved a set of Internal Regulations on the Use and Limitation of Delegated Powers, according to which, although the Chairman has sufficient powers in respect of third parties, certain decisions must at all events be adopted by the Board.
B.1.22. Explain whether special majorities differing from those stipulated in law are required for any type of decision and the procedure for adopting resolutions in the Board
YES X NO --
General rule
The general rule for the adopting of resolutions by the Board, in pursuance of the Corporations Act and the Bylaws of the company, is that Board meetings are quorate when attended, in person or by proxy, by one-half plus one of the members and resolutions are adopted by absolute majority of the directors present or represented at the meeting. Written votes without assembly are possible provided that no directors object to this procedure. Board meetings are also valid without prior call whenever all the directors are present or represented and unanimously agree to assemble in a Board meeting.
Special resolutions
This notwithstanding, according to the Bylaws, the permanent delegation of any power of the Board to the Executive Committee or Chief Executive Officer and the appointment of the directors who are to hold these positions require the favourable vote of two-thirds of the Board members, as established in the Corporations Act. This rule is deemed applicable to the delegation of powers to the Executive Chairman. The Regulations of the Board of Directors of Iberia also requires a special resolution for the appointment of the Chairman, which requires a quorum of two-thirds of the directors and votes in favour cast by at least two-thirds of the Board members. The same rule is applicable for appointment of the Chairman of the Audit and Compliance Committee, according to the Internal Regulations of that Committee.
B.1.23. Are there any specific requirements, other than those established for directors, to be appointed Chairman?
YES -- NO X Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 174
The Chairman is not subject to any specific requisite, except the age limit, which in this case is 65. Apart from this, the Chairman, just like all other directors, must have business experience and a proven track record, as required by the Bylaws. He must also hold at least 400 shares in the company, which may not be transferred during his term in office.
B.1.24. Does the Chairman have a casting vote?
YES -- NO X
There is no mention in the company regulations of the casting vote of the Chairman.
B.1.25. Do the Bylaws or Regulations of the Board establish an age limit for directors?
YES X NO --
Age limit Chairman 65
Age limit Chief Executive 65 Age limit Directors --
The Regulations of the Board set the age limit for the Chairman and Chief Executive Officer at 65.
B.1.26. Do the Bylaws or Regulations of the Board establish a limited term of office for independent directors?
YES X NO --
Maximum years in office of Independent Directors 12
The statutory term of office of directors is four years, after which they are eligible for reappointment on one or several occasions for the same maximum term. On expiry of their appointment, the relevant directors’ term in office ceases at the first General Meeting held thereafter or on expiry of the legal time limit for holding the General Meeting at which the financial statements of the previous year are laid before the shareholders. An exception to this rule is established for independent directors. According to the Regulations of the Board, these directors have a limited term of office and may not be reappointed on more than two occasions, in other words, no Independent Director may hold office as such for more than twelve years. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 175
B.1.27. Proportion of female directors on the Board
At present there are no female directors on the Board of Directors of the company. All the Board members have been selected objectively in consideration of their prestige, knowledge and professional experience, with no implicit bias in the selection processes that could preclude the appointment of female directors. Iberia has had a female non-director Secretary of the Board since 2001. Among other duties she is responsible for ensuring compliance with the rules and recommendations for good governance.
B.1.28. Are there any formal procedures for the delegation of votes at Board meetings?
The Regulations of the Board require directors to use their best endeavours to attend Board meetings and, when they are unable to do so in person, to grant a proxy to another Board member of the same group (Executive, Proprietary or Independent), issuing the appropriate voting instructions. No single director may hold more than three proxies, except the Chairman, who is not subject to this limit, although he may not represent the majority of the Board.
B.1.29. Number of meetings held by the Board of Directors and Committees of the Board during the year, indicating how many times the Board has met without the Chairman
Board Meetings
2009
Total number of board meetings 17
No. board meetings not attended by the Chairman 0
Meetings of the Board Committees
2009
Committees No. meetings
Executive Committee 6 Audit and Compliance Committee 13 Nomination and Remuneration Committee 15 Safety Committee 4
B.1.30. Number of meetings held by the Board during the period without the attendance of all its members
The percentage attendance of Board meetings during 2009 was 93%.
2009
Number of absences of directors 13
% absences to total votes during the year 6,7% Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 176
B.1.31. Are the separate and consolidated financial statements submitted to the Board for approval previously certified?
YES X NO --
The 2009 separate and consolidated financial statements were submitted by Management to the Board after being certified by the Chief Finance Office, the CEO and the Chairman. This certificate guarantees that the accounts have been taken from the company’s accounting records, reflecting all its transactions, assets and liabilities and give, in all material respects, a true and fair view of the equity and financial position of the company at 31 December 2009, the results of its operations and any changes produced in its financial position during 2009, and that they contain all necessary information for adequate interpretation and comprehension, in accordance with generally accepted accounting standards and principles, applied on a consistent basis. A favourable report was also issued on the financial statements by the Audit and Compliance Committee.
B.1.32. Mechanisms established by the Board to avoid a qualified auditors’ report on the separate and consolidated financial statements laid before the General Meeting
The Audit and Compliance Committee is responsible for dealing with these issues to avoid, as far as possible, the filing of financial statements with a qualified report. The Committee meets with management and the external auditor to ensure the absence of diverging criteria regarding the company’s financial statements, in an effort to avoid any discrepancies that could arise.
B.1.33. Is the Secretary of the Board a Director?
YES -- NO X
According to the Bylaws, the Secretary of the Board may or may not be a director. However, to date it has not been considered convenient for these positions to be combined, increasing the number of executive directors on the Board. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 177
B.1.34. Procedure for appointment and removal of the Secretary of the Board
The Nomination and Remuneration Committee did not yet exist when the present Secretary of the Board was appointed. It is stipulated in the corresponding regulations that the Nomination and Remuneration Committee shall review nominations for the Secretary of the Board. Since 2001, when this Committee was created, all Board members have been and are appointed subject to a report by the Nomination and Remuneration Committee.
B.1.35. Mechanisms established by the Company to preserve the independence of the external auditor, financial analysts, investment banks and rating agencies
The Audit and Compliance Committee ensures strict compliance with the legal provisions applicable to Iberia regarding incompatibilities of auditors, to guarantee their independence from the executive team. Their fees are stated in the financial statements. There are no peculiarities in the company’s relations with the other entities, which are entirely independent of the company.
B.1.36. State whether the external auditor has changed during the year
The auditors did not change during 2009.
B.1.37. Does the firm of auditors do any work for the Company and/or its Group other than standard audit work?
YES X NO --
The Annual Report 2009 indicates the fees charged by the main auditor and related firms for different professional services they have provided for Iberia. The services performed in 2009 are compatible with auditing activities, consisting essentially of counselling on updating the application of international accounting standards (IAS), the progress of the new National Chart of Accounts and auditing of the financial statements corresponding to the consumption of oil products in 2009.
2009 Other companies of Iberia, L.A.E. Total the Iberia Group Cost of work other than auditing (thousands of euro) 351 - 351 Cost of work other than auditing / Total amount invoiced by the firm of auditors (%) 42.73% - 39.87%
B.1.38. Indicate whether the auditors’ report is qualified
The auditors’ report on the 2009 annual accounts is unqualified.
B.1.39. Number of years in succession that the current firm of auditors has been auditing the financial statements of the company and/or its group. Indicate the ratio of the number of years audited by the current auditors to the total number of years that the financial statements have been audited
Deloitte has audited the company’s financial statements for the past 8 years. Prior to that, the firm Andersen audited the financial statements of Iberia, L.A.E., S.A., and in recent years, prior to its merger with Deloitte, it also audited the financial statements of some of the Group subsidiaries. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 178
Since the merger of Andersen with Deloitte, the General Meeting has been approving the appointment of the latter firm as external auditors, which is independent and objective in its work. From 2001 to 2006, one partner was responsible for the audit. In 2007 this partner was changed.
Iberia, L.A.E. Iberia Group
No. years in succession of Deloitte, S.L.’s appointment 8 8
Iberia, L.A.E. Iberia Group
No. years audited by current auditors / no. years that the company has been audited (%) 28,6% 28,6%
B.1.40. Stakes held by members of the Board of Directors of the Company in the capital of undertakings engaged in activities identical, similar or complementary to those of the Company and its Group, as far as the Company has been notified. Positions held or duties performed in those undertakings
The positions and stakes held by company directors in other undertakings engaged in activities identical, similar or complementary to those of the Company and its Group, as far as Iberia has been notified, are indicated below. None of the stakes held by directors in those undertakings is significant.
(at 31 December 2009)
Director Company Activity % stake Position or duties
Director Investments Mr. Roger P. Maynard British Airways Air transport 0.0004994% & Alliances Chief Finance Officer Mr. Keith Williams British Airways Air transport 0.0028% & Executive Director GRUPO FCC Mr. Miguel Blesa de la Parra (Flightcare) Handling 0.004% (FCC) Board member FCC Mr. Jorge Pont Sánchez Vueling Air transport 0% Board member Mr. Rafael Sánchez-Lozano British Airways Air transport 0% Board member
B.1.41. Procedure for external counselling of Directors
The Regulations of the Board of Directors provide that the Board and its Committees may request assistance from external advisers on any matters in which they may so require. In 2009, the Safety Committee and the Nomination and Remuneration Committee were assisted by an expert external adviser in the performance of their duties.
B.1.42. Procedure for Directors to obtain sufficiently in advance any information they may need to prepare the meetings of the governing bodies
The Regulations of the Board stipulate that notices of call to meetings must include the agenda for the meeting and be accompanied by the relevant information, duly summarised and prepared, and the minutes of the previous meeting, regardless of whether they have been approved, and must be received by the directors seven days in advance, wherever possible, and in any case no less than 72 hours before the meeting. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 179
During 2009 the directors have promptly received the most important information concerning the items on the agenda for each meeting and have had at their disposal any other information they have considered necessary or convenient, which they have requested through the Chairman or Secretary of the Board.
B.1.43. Rules obliging Directors to report and, if necessary, retire in any cases that could be detrimental to the prestige and reputation of the company
According to Article 15 of the Regulations of the Board, Directors shall tender their resignation to the Board, among other causes, in the following circumstances:
D. If they are tried for a presumed criminal offence or if disciplinary proceedings are brought against them by the supervisory authorities of the Securities Market for serious or very serious misconduct. E. If they are given a serious warning by the Audit and Compliance Committee for infringing their obligations as directors. F. If by remaining on the Board they may jeopardise the interests of the company, or if the reasons for which they were appointed cease to exist.
B.1.44. Has any member of the Board informed the company that he/she has been sued or brought to trial for any of the offences contemplated in section 124 of the Corporations Act?
None of the Board members has informed the Company of any such situation.
B. 2. Board Committees
B.2.1. Board Committees and their members
With a view to strengthening and, particularly, increasing the efficiency of the Board’s duties, four specialist committees have been set up to spread the work so that in certain matters, except when they are so urgent and important that they require direct consideration by the full Board, the proposals and resolutions of the Board are first studied by a specialist body, which can filter and inform on its decisions, thereby increasing the guarantees of resolutions adopted objectively and after due reflection. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 180
On 5 April 2001, the Board of Directors set up an Executive Committee, with executive duties to adopt resolutions binding on the company within the scope of its delegation. The members of this Executive Committee at 31 December 2009 were:
Executive Committee
Name of Director Position Type
Mr. Antonio Vázquez Romero Chairman Executive Mr. Rafael Sánchez-Lozano Turmo Member Executive Mr. Miguel Blesa de la Parra Member Proprietary Mr. Roger Paul Maynard Member Proprietary Mr. José B. Terceiro Lomba Member Independent Mr. Antonio Masa Godoy Member Independent Mrs. Lourdes Máiz Carro Secretary of the Commission Non-Secretary Director
Since 2001, the Board has also had three committees with duties of reporting and submitting proposals to the Board: the Audit and Compliance Committee, Nomination and Remuneration Committee and Safety Committee. The members are non-executive directors. The members of these Committees at 31 December 2009 were:
Nomination and Remuneration Committee
Name of Director Position Type
Mr. Jorge Pont Sánchez Chairman Proprietary Mr. José Manuel Fernández Norniella Member Other non-executive Mr. José Pedro Pérez-Llorca Member Independent Mrs. Lourdes Máiz Carro Secretary of the Commission Non-Director Secretary
Audit and Compliance Committee
Name of Director Position Type
Mr. José Manuel Fernández Norniella Chairman Other non-executive Mr. José B. Terceiro Lomba Member Independent Mr. Alberto Recarte García-Andrade * Member Proprietary Mr. Jorge Pont Sánchez Member Proprietary Mrs. Lourdes Máiz Carro Secretary of the Commission Non-Director Secretary
*En representación de INMOGESTIÓN Y PATRIMONIOS, S.A.
Safety Committee
Name of Director Position Type
Mr. Roger Paul Maynard Chairman Proprietary Mr. José Pedro Pérez-Llorca Member Independent Mr. Antonio Masa Godoy Member Independent Mrs. Lourdes Máiz Carro Secretary of the Commission Non-Director Secretary Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 181
B.2.2. Duties of the Audit and Compliance Committee
Duties of the Audit Committee YES NO
Oversee the preparation and integrity of the company’s, and if necessary the group’s, financial reporting, checking compliance with the legal requirements, adequate definition of the consolidated group and correct application of accounting principles Regularly check the internal control and risk management systems, ensuring that the principal risks are adequately identified, managed and reported Ensure the independence and efficacy of the internal audit duties; propose the nomination, appointment, re-appointment and removal of the chief audit officer; propose the budget for this department; receive regular information on its activities; and check that the top management heeds the conclusions and recommendations set out in its reports Establish and supervise a “whistle-blowing” procedure so employees can confidentially or, where appropriate, even anonymously report any irregularities they observe in the company's conduct, particularly in financial and accounting aspects. Submit to the Board proposals for nomination, appointment, re-appointment and replacement of external auditor, and terms of engagement Receive regularly from the external auditor information on the audit plan and the outcome of its fulfilment and see that top management heeds its recommendations
Guarantee the independence of the external auditor
In the case of groups, encourage the group auditor to audit the different companies in the group
B.2.3. Rules of organisation and procedure attributed to each Committee
Executive Committee
All the powers of the Board of Directors are permanently delegated to the Executive Committee, except those which may not be delegated, whether by law, institutional provision or under the Regulations of the Board. Without prejudice to the effectiveness of an extensive delegation of powers in respect of third parties, the Executive Committee has the following internal powers, according to the Regulations of the Board:
A. Adoption of the final resolution on specific matters previously discussed by the Board and referred to the Executive Committee for a final decision, either to resolve within the limits previously defined by the Board or to develop and complete detailed aspects of the action or transaction previously approved by the Board. B. Adoption of resolutions, in case of urgency, on delegated matters. In urgent matters, the Executive Committee may act when it is not possible to call the Board to discuss the matter in question and decision cannot be delayed. C. Discussion and submission of proposals for a decision by the Board on the matters reserved to the latter, whenever the Chairman considers this procedure most expedient.
In principle, the ordinary meetings of the Executive Committee are monthly. In 2009 it held six meetings. The Board is promptly informed on the contents of its meetings. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 182
Audit and Compliance Committee
There are no executive directors on the Audit and Compliance Committee and the chairman is a non-executive non-proprietary director. It has its own Regulations, approved by the Board of Directors on 28 February 2002 and adapted to the Financial System (Reform Measures) Act at the Board meeting of 24 July 2003, following the necessary adjustment of the Bylaws at the AGM held on 12 June 2003. The main duty of the Audit and Compliance Committee is to assist the Board in the oversight and control of the company, regularly checking compliance with the legal provisions and internal regulations applicable to the company. Without prejudice to any others assigned by the Board, the Audit and Compliance Committee has the following duties:
A. Inform at General Meetings on any issues within its competence raised by shareholders. B. Propose to the Board, to be submitted to the General Meeting, the appointment of the external auditor, terms of engagement, the scope of its professional appointment and, if necessary, the revocation or non-renewal of said appointment. Supervise fulfilment of the audit contract, endeavouring to ensure that the opinion on the financial statements and the main contents of the auditors’ report is set out clearly and precisely. C. Keep in contact with the auditor to receive information on any issues that could jeopardise its independence, and any other information relating to the auditing process, and to receive information and exchange with the auditor the communications stipulated in the auditing laws and technical auditing standards. D. Act as liaison between the Board and the auditors, assess the results of each audit and the response by management to their recommendations, and intervene in the event of discrepancies between the auditors and the Board in connection with the principles and criteria applicable in the preparation of the financial statements. E. Check the financial statements, ensure compliance with all legal requirements and correct application of the generally accepted accounting principles. F. Oversee the internal financial control manuals and procedures adopted by the company, ensure compliance and check the appointment and replacement of those responsible for them. G. Supervise the internal audit services. H. Check compliance with the Internal Code of Market Conduct, the Regulations of the Board and, in general, the rules of governance of the company and make such proposals as may be necessary to improve them. In particular, the Audit and Compliance Committee must receive information and, where appropriate, issue reports on disciplinary measures against senior officers of the company. I. Consider any suggestions submitted by the Chairman, members of the Board, senior officers or shareholders of the company and inform and submit recommendations to the Board on the measures it considers appropriate in respect of auditing and any other activities assigned to it, and on compliance with the applicable legal provisions on reporting to the markets and transparency and accuracy of the information given.
The Audit and Compliance Committee holds ordinary meetings at least once every three months and additional meetings whenever called by the Chairman, on his own initiative or at the request of two or more of the Committee members. It also meets whenever the Board requests reports, recommendations or the adopting of decisions within the scope of its duties. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 183
Thirteen meetings were held in 2009, at which the Committee, in close communication with the auditors, assessed the results of audit work, checked the accounts and financial statements of the company, reviewed the internal control and risk management systems and examined the degree of compliance with the rules of good governance. In short, it performed its duties as assigned in law and the Regulations of the Committee. The Audit and Compliance Committee also underpinned the organisation and work of the company’s internal auditor, paying particular attention to risk management and fulfilment of the 2009 Audit Plan.
Nomination and Remuneration Committee
In pursuance of good governance requirements, there are no executive directors on the Nomination and Remuneration Committee, which is chaired by a non-executive proprietary director.
The main duty of the Nomination and Remuneration Committee is to assess the profile of the most suitable persons to sit on the different governing bodies of the Board and submit the corresponding proposals to the Board. Without prejudice to any other duties assigned by the Board, the Nomination and Remuneration Committee has the following basic responsibilities:
A. Draw up and check the criteria to be followed for the composition of the Board and its Committees and selection of candidates, submitting the corresponding reports or proposed nominations to the Board for the latter to directly appoint them (cooptation) and the report or nomination for the appointment, re-election, ratification and removal of directors, which must be submitted to the General Meeting for a decision. Propose the members of each of the committees and their chairmen, as well as the persons nominated for the positions of Chairman of the Board and Managing Director/CEO, if any. B. Propose to the Board the system and amount of the annual remunerations of directors and senior officers, and, once approved, regularly review the remuneration programme, assessing adequacy and performance. C. Supervise and establish guidelines on the appointment, recruiting, career, promotions and dismissals of senior officers to ensure that the company has adequate highly qualified management. D. Propose measures to guarantee transparency of remunerations and watch over their fulfilment. E. Inform on any transactions that involve or may involve conflicts of interest and, in general, on the matters contemplated in Chapter VI of the Board Regulations. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 184
The Nomination and Remuneration Committee met formally on fifteen occasions during 2009, some of these meetings focused on the succession of the company Chairman.
Safety Committee
Finally, the Board has a Safety Committee to specifically oversee and watch over the safety of operations from the point of view of aircraft and engine reliability and maintenance and the actions of crew and other staff involved in flight operations. The Safety Committee consists of one non-executive proprietary director and two non-executive independent directors and is chaired by a non-executive proprietary director. Without prejudice to any other duties assigned by the Board, the Safety Commission has the following basic powers:
A. Analyse the general policy of the company regarding in-flight safety systems. B. Submit to the Board such proposals as it may deem fit to improve the company’s systems in this respect, and monitor the measures adopted by the Board in respect of in-flight safety. C. In general, compile, analyse and disseminate all information available on in-flight safety, and make such studies of this subject as may be considered necessary. D. Any other duties that may be assigned to it by the Board.
The Safety Committee must meet formally at least four times a year. Four meetings were held during 2009, specifically analysing aircraft and engine reliability and the safety parameters of operations. It was also decided to include within the scope of this Committee’s powers an analysis of the safety of ground operations and other safety aspects related with Iberia’s activity.
B.2.4. Powers of counselling, consultation and, where appropriate, delegation of each Committee
Only the Executive Committee has, as such and in general, the powers delegated by the Board on the terms indicated hereinabove. The other Committees have essentially advisory, proposal and reporting functions, notwithstanding the possibility, in certain cases, of specific delegation by the Board.
B.2.5. Regulations of the Board Committees, where they are available for consultation and any modifications made during the year, indicating, where appropriate, whether an annual report has been issued on the activities of each Committee
As indicated above, the Audit and Compliance Committee has its own Regulations, adapted to the new legislation on 24 July 2003. The text of these Regulations can be consulted on the company’s web site. A report has also been issued of the activities of this Committee in 2009.
B.2.6. Does the composition of the Executive Committee reflect the participation on the Board of the different types of Director?
YES X NO --
The types of directors are represented on the Executive Committee in the same proportion as on the Board. It thus consists of six directors: two executive director, two proprietary directors and two independent directors. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 185
C) RELATED PARTY TRANSACTIONS
The most important transactions made during 2009 with the major shareholders are described below.
C.1. Does the full Board reserve the right to approve, subject to a favourable report by the Audit and Compliance Committee or such other committee it may have commissioned, any transactions between the company and its directors, significant or represented shareholders or parties related thereto
YES X NO --
C.2. Major transactions involving a transfer of resources or obligations between the Company and/or Group and its significant shareholders
The main details of these transactions in 2009 are set out in the following table:
(in thousand euro) Summary of Related Party Transactions December 2009
VIVA. VUELOS AUXILIAR COMPAÑÍA INTERNACIONALES LOGISTICA IBERIA AUXILIAR AL IBERIA GROUP DE VACACIONES. AEROPORTUARIA. CARGO EXPRES S,A, S,A, ALAER Shareholder Received Paid Received Paid Received Paid Received Paid Received Paid British Airways 12,857 24,159 123 12,980 24,159 El Corte Inglés 22,649 12 6 22,661 6 Caja Madrid 25,971 29,386 1 236 4 25,972 29,626
TOTAL 61,477 53,545 1 135 242 4 61,613 53,791
British Aiways:
These transactions include:
Payments to Iberia for the Advantage Frequent Flyer Programme. Code Sharing Commissions charged and paid between the two companies for tickets issued by one company and flown by the other. Payments to and by Iberia for Passenger, Cargo and Goods Handling Services. Payments received for aircraft and engine Maintenance Services. Charges and payments for Leasing of VIP Lounges and others.
El Corte Inglés:
These transactions mainly include charges to Iberia for:
Supplies of uniform for flight crew. Computer equipment and development of software. Passenger sales commissions and incentives.
Caja Madrid:
Interest on fleet financing transactions and guarantees furnished for aircraft purchases. Aircraft chartering expenses. Interest on financial investments deposited. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 186
C.3. Significant transactions involving a transfer of resources or obligations between the Company and/or Group and the Directors or Executives of the Company
The Company has no record of any transactions of this nature made during the year.
C.4. Significant transactions with other companies in the same group (Intercompany Transactions), that are not eliminated in the consolidated financial statements and which do not, by virtue of their object or terms, correspond to the normal trade of the Company
There have been no transactions in Iberia in 2009 that meet these two conditions, i.e. that are not eliminated in the consolidated financial statements and which do not correspond to the normal trade of the company, by virtue of their object or terms. During 2009, Iberia invoiced 109,335 thousand euro to subsidiaries and associated companies and received services from these companies for the value of 59,556 thousand euro, as indicated in the Notes to the Financial Statements. It received dividends from these companies to the tune of 1,188 thousand euro and incurred financial expenses of 182 thousand euro.
C.5. Conflicts of interest of company directors, pursuant to s. 127 ter of the Corporations Act
In principle, none of the directors have any permanent conflict of interests with the company, pursuant to the aforesaid legal provision, that would prevent them from performing their duties. Whenever business has been transacted that particularly affects a given director or the company represented by a given director, the director in question has abstained, according to legal and regulatory requirements.
C.6. Mechanisms established to detect and regulate possible conflicts of interest between the Company and/or its Group, and its directors, executives or significant shareholders
Pursuant to the Regulations of the Board, directors may not work in or for companies with similar objects or that are rivals of the company and that, even though these precluding conditions are not met, the director must consult the Nomination and Remuneration Committee before accepting any executive position in another company that may give rise to a conflict of interests or detract from his dedication to his duties within the company. This restriction does not affect any positions held in Group companies, shareholders forming the Stable Core established for privatisation of the company and any other cases in which the Board, in view of a report issued by the Nomination and Remuneration Committee, considers that the company’s interests are not at risk. The Regulations of the Board, getting ahead of the Transparency Act on this point, establish a number of prohibitions and limitations on directors regarding their professional and commercial transactions with the Company, use of corporate assets, taking up a business opportunity of the company, and any similar actions that might adversely affect their objectiveness and independence. Iberia has also approved its Internal Code of Market Conduct, which, among other obligations, contains detailed regulation of any situations of conflict that may arise.
C.7. Is more than one company of the Group listed in Spain?
YES -- NO X Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 187
D) RISK CONTROL SYSTEMS
D.1. Risk policy and control systems established for each type of risk
The Iberia Group is very active in Risk Management and Control, establishing systems to pinpoint, assess, manage and reduce the principal risks to which the different Group activities are exposed. The actions taken in respect of risks affect the key parameters and aspects of the Group management, such as: the Statement of Income, debt, investments, divestments and development of the Director Plan, to optimise the Statement of Income and debt, adopt balanced decisions on yield and risk for new investments and/or divestments and achieve the growth targeted in the Director Plan with controlled flexibility. The impact of the risks affecting each of the aforesaid fields of action is analysed and calculated and the necessary monitoring and management measures adopted as frequently as is considered necessary to achieve the intended purpose: daily for market risks, monthly for management and budget control, as and when necessary for new investments or divestments, and as required in respect of the current Director Plan. The Iberia Group also strives constantly to guarantee all its activities and respond expediently to any emergency situation that may arise, aeronautical or otherwise.
Risk Management System
During 2009 Iberia continued the development of its Risk Management System, structured around the model described below, which includes aspects concerning continuous enhancement, outer wheel and, in pursuance of the recently published ISO 31000, inner wheel. IBERIA representatives participated in the drafting of this new standard Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 188
As a result of its implementation, Iberia not only has its risk exposure under control, but moreover it now also has a systematic risk management, with the following features:
Each risk has a proprietor, the person ultimately responsible for its management. The Risk Map is reviewed every six months at the top executive level, pinpointing any new risks. There are defined procedures of approval, management and information. Active participation of all those responsible for the System.
The information aspect is particularly important, with the Business Risk Management Portal, which has several different levels of access, one public, to which any company employee can have access, containing official information and reference documents, and one private, containing specific information for risk proprietors and has a Working Area that enables on-line updating of risks:
As far as internal control is concerned, both risks controlled within the company’s management processes and one-off risks are subject to the Internal Audit Annual Plan, which is essentially established on the basis of the Risk Map. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 189
The following diagram depicts the relationships between the company’s objectives and the risk control established to guarantee meeting them:
All these aspects, management system, information system and internal control, are part of a set of criteria whose compliance has been checked against the risk management recommendations made in the Unified Good Governance Code in Listed Companies of 22 May 2006, the system in place having been found adequate. In fact, the recommendations are incorporated among the principal references in the internal regulations of the System.
Risks Covered by the System
The Risk Management System covers all types of risks to which the company is exposed and all areas of its organisation. For this purpose, risk means any potential event or circumstance that may affect fulfilment of the objectives marked for the different processes of the company and, consequently, achievement of the strategic objectives of the organisation. The Risk Map pinpoints the risks and, within the specific information on each risk, includes the most important checks made to reduce the risk, and their respective strengths, as well as the initiatives planned to reduce their impact should they materialise.
Risk Assessment
The different tests run, based on the perspective of their use from the outset, have established that the most convenient method for risk assessment is considering the arithmetic mean of the following three variables:
Impact on income, when the risk in question actually occurs, Probability of occurrence of the risk, and Time horizon for it to be produced.
The same metrics have been established for all the risks identified in the System. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 190
Risk Classification
The different risks have been grouped into the following categories, according to their nature and the different control systems used to reduce or mitigate them:
I. New Projects: risks associated with the development of new, important projects for the company. II. Strategic Objectives: risks associated with the achievement of the strategic objectives defined in the Group’s Director Plan. III. Internal Control: risks associated with activities relating to asset protection and custody services, the truth and accuracy of the accounting information and compliance with applicable legislation. IV. Environment: risks deriving from the environment in which the company moves, including variables on the different markets on which it operates and entities regulating commercial air traffic. V. Emergencies: fires, natural disasters, air accidents and terrorist attacks, etc.
Control systems to assess, mitigate or reduce the principal risks
I.- New Projects
The activities of all areas involved in a new project are coordinated internally to ensure that it is developed on adequate operating and economic terms, minimising risk exposure.
II.- Strategic Objectives
The Strategic Objectives are established in the Director Plan and developed through initiatives and controls in each area of the company to ensure fulfilment of the objectives and control risks. The Plan overall and the initiatives contemplated therein are monitored closely and are the principal referent for the different management committees. Moreover, by virtue of the management by objectives implemented, part of the variable remuneration of the executives responsible for risk management is made subject to achievement of the objectives. The interrelation of these risks derives from their association with each of the strategic objectives.
Financial risks Iberia has a blanket management programme for its Financial Risks, in which it defines the maximum targets for fluctuations and the hedging programme required to control and minimise any potentially adverse effect of fluctuations in exchange rates, interest rates and fuel prices. The Hedging Programme, effected within the time and in accordance with the targets set in the company’s Director Plan, covers the following risks:
Foreign exchange risk Deriving from the denomination of income and expense accounts in currencies other than the euro. The greatest risk lies in revaluation of the US dollar against the euro, since the company has larger payments than revenues in dollars. This risk is basically managed by combining two types of instruments: strategic hedges (up to 5 years) using currency swaps, options and other derivatives in an amount covering a given percentage of the position; and tactical hedges with a time horizon of less than three years to adapt to market trends, which are linked to real movements of dollar payments by the company. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 191
Interest risk Owing to the company’s net debtor position (including aircraft leasing transactions), Iberia is exposed to rises in interest rates of the currencies in which its debt is denominated. To manage this risk, the company keeps a minimum percentage of its debt at fixed rates or protected. It reduces its exposure to a general rise in interest rates through diversification of loan currencies (US dollar, euro).
Fuel price risk Iberia controls the cost of aviation fuel by applying active risk management policies. The company’s policy is to directly hedge the price of kerosene. The broad outlines of the hedging policy are based on a set of strategic hedges, with which Iberia can hedge a given percentage of the estimated consumption through long-term contracts; and on a set of tactical hedges, on a one-year basis, intended to hedge an additional proportion of the consumption.
Liquidity risk Owing to its cyclical business and the investment and financing needed for fleet renewals, Iberia’s liquidity policy consists of having a large volume of ready cash. This cash position is invested in highly liquid short-term assets, such as debt repos, euro deposits and bank commercial paper made through leading Spanish financial institutions, according to the current counterparty risk policy. Apart from short-term investments and the cash position, the company permanently has loan agreements to guarantee its liquidity requirements.
III.- Internal control
There is an internal control structure involving staff across the board, with a set of rules, means and procedures that guarantee the truth of the accounting information, the authenticity of transactions reported, protection of assets and compliance with laws and regulations. The internal audit department is responsible for seeing that these controls are made. Iberia also has Quality Guarantee Systems regulating aircraft operation and maintenance, in compliance with the international standards of the European Aviation Safety Agency (EASA) and the US Federal Aviation Administration (FAA), as well as an operational quality and safety system complying with IOSA (IATA) requirements, which is regularly audited and reveals the adequacy of existing controls. Iberia has installed ISO 9001:2008-compliant Quality Management Systems in different flight and ground operations: ramp and passenger handling, aircraft maintenance, in-flight services, cargo, infrastructure, procurements and IT systems, flight operations and claims. The Metrology Laboratory has also been certified under ISO 17025 and the Quality Management has been certified by AENOR under the “N certified service mark for quality of service and management of customer satisfaction”. The company complies with the applicable laws and standards in health and safety at work, establishing adequate internal regulations, control measures and procedures and monitoring to maintain very low rate of occurrence of these risks. Both guarantee and management systems are audited and certified by the competent official organisations or by authorised certification entities. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 192
IV.- Environment
Every year Iberia submits its candidacy for the selective Dow Jones Sustainability Index, which assesses the company’s performance in economic, social and environmental aspects. In 2009, Iberia is included in the world category of this index, up amongst the best enterprises in the world in social responsibility, environmental respect and sustainable management. In addition, in 2009 Iberia remained in the FTSE4good Ibex, in the prestigious group of FTSE4good indexes and was included in the “Kempen SNS European SRI Universe”, demonstrating the recognition of Iberia’s management in this area. With regard to its flight operations, the company draws up Action Plans to implement environmental variables in the flight renewal processes, adopt best operational practices and develop measures to combat its impact on climate change.
Its reduced CO2 emissions in the Shuttle service have been certified in this area. As regards its ground operations, environmental risks are managed through the implementation, audit and certification, where appropriate, of procedures and methods designed to guarantee compliance with prevailing environmental laws, minimising the environmental impact of the company’s operations. Iberia has obtained certification under standard ISO 14001 for its environmental management systems in the ramp and passenger handling areas at all the airports in the national network, and in the aircraft maintenance and engineering done in the industrial area of Madrid. There are also more specific procedures, contemplating the cargo activities, the medical service installations in Madrid and the contracting of goods and services. These certificates cover all material environmental aspects of Iberia’s ground operations. Finally, through its participation in different national and international working groups of the sector (CEOE -Spanish Confederation of Business Organisations -, AEA and IATA), the company is able to identify and adapt to the emerging requirements in this matter.
V.- Emergencies
Aviation emergencies Deriving from its business as an air carrier, including damage to aircraft, civil liability to third parties, passengers, ground assistance, maintenance and cargo, among others. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 193
These risks are managed firstly through prompt compliance with all relevant aviation directives in force and secondly through insurance policies taken out with leading Spanish insurance companies and reinsurance with high financial standing on the international markets to ensure that all the insurance limits contracted by the company are in line with best practices on the world air transport market and in all cases exceed the minimum cover required under the Spanish Air Navigation Act and International Conventions.
Non-aviation emergencies Iberia has developed a Business Continuity Programme for all areas of the company, which assesses the potential impact of interruption of each activity within the company’s operations and defines the actions to be taken to restore normal activity within a minimal time. It has assessed the risks and vulnerabilities existing in the different areas, including the interruption of normal activity due to natural disasters or other causes, and the necessary security measures have been established to reduce both the likelihood of their occurrence and the consequences for the company’s operations if the risk were to occur. In addition to the economic cover of risks deriving from its business as a carrier, Iberia has a very broad insurance programme, covering more generic risks, such as damage to its equity, its fleet of vehicles and equipment, merchandise and nuclear risks, with policies covering general civil liability, life and accident insurance, among others.
Risks associated with the possible interruption of computer applications, some of which are vital to provide the service. Compensatory controls include the Image Centre and the Data Storage and Back-Up Network, along with the General Security Plan and the Disaster Recovery Plan, all designed to prevent the interruption of operations due to potential faults relating to the computer systems:
The Image Centre is an alternative data processing centre, capable of guaranteeing operation of the critical operating systems (essentially the passenger, flight dispatch and monitoring, and airport systems) within a minimal time in the event of a failure at the main data processing centre. The Data Storage and Back-Up Networks enable data recovery so that the service can be continued in the event of incidents in the surrounding area. The General Security Plan sets out the security requirements for the new IT systems and, where appropriate, adjusts the criticality assessment for those in production or retired. These data provide the input for the Disaster Recovery Plan. The Disaster Recovery Plan establishes the technical and organisational procedures to be carried out in order to restore the service in the least possible time in the event of a disaster in the Data Processing Centre, guaranteeing correct operation and ensuring at all times that it is adjusted to the corporate technological platform.
Risks associated with the logical security of systems and the information they contain. The main compensatory controls for this type of risk are:
The Security Policy, which includes, inter alia, mechanisms for identification, authentication and data access control, password complexity control mechanisms, back-up creation and management and recovery procedures and log-in and integrity control mechanisms on a tamper-proof platform in the systems so requiring. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 194
Security Audits, such as anti-hacking controls, or those required by prevailing laws and regulations on personal data protection. The continual designing and implementing of plans to adjust to legal requirements in place from time to time on personal data protection and e-commerce and information society services. In April 2009, Iberia obtained ISO 27001 certification for its Information Security Management System (SGSI), in the processes of its electronic sales Web platform, known as Iberia.com, which supports the following business activities:
Availability of seats and electronic bookings and sales of tickets. Generation of boarding cards, consultation of departure and arrival times and other services. Access to Iberia Plus and to suppliers of hotel bookings and car-hire services.
This certification also covers the Employee Portal, a web platform supporting business activities for management of the information on services and obligations inherent in the employment relations of Iberia with its ground and flight staff. The necessary actions are currently being taken to extend the scope of this ISO 27001 certification to its Data Processing Centres. Moreover, with a view to minimising the risk of fraud in our clients’ credit card transactions, Iberia is working on a PCI DSS ( Payment Card Industry Data Security Standard) Adequacy and Compliance Project with the aim of obtaining the corresponding certification.
D.2. Risk materialisation, underlying circumstances and functioning, if appropriate, of the established control systems
Risks associated with the economic crisis
When updating the Risk Map in 2009, a number of risks directly related with the economic crisis were pinpointed in respect of the situation of the air transport sector worldwide, a possible increase in payment arrears and potential difficulties for obtaining certain goods and services. More precisely, risks materialised during 2009 associated with overbooking in the transport market and, although actually produced in 2010, the bolivar devaluation risk partly materialised in 2009. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 195
Iberia set up a rigorous Contingency Plan aiming to maintain its financial strength, cut costs and defend its principal markets. This also involved scaling down investments that it had initially planned, except those intended to enhance customer service. Iberia presented its new Strategic Plan in October. This Plan 2012 aims to recover the level of profitability in the core air transport business to guarantee the company’s viability and return to a profit-making situation.
D.3. Bodies of the company responsible for establishing and supervising the control systems
The principal risk management and decision-making bodies are:
Executive Committee, responsible for directing Risk Management. Risk Proprietors, normally members of the Management or Top Management, having the utmost responsibility for managing the risks within their area of competence and for developing and monitoring action plans to control those risks. Internal Audit and Quality Manager, who is responsible for coordinating Risk Management and checking the controls. The Audit and Compliance Committee of the Board regularly monitors the development and results of the Risk Management System.
D.4. Identification and description of processes for compliance with the different regulations affecting the Company and its Group
Each section of the company Management is responsible for compliance with the legislation applicable to its particular sector of activity. The Secretary of the Board, Chief Finance Officer and Internal Audit and Quality Manager are specifically responsible for ensuring compliance with the good governance rules and recommendations, in the aspects assigned to each of them in the company regulations.
E) GENERAL MEETING
All aspects referring to the General Shareholders’ Meeting of Iberia (quorum, holding of meetings, adopting of resolutions) are regulated in the Bylaws, the Regulations of the General Meeting and the applicable legal provisions. The company’s Regulations of the General Meeting were approved at the AGM 2004 and subsequently modified at the AGM of 30 May 2006 to adjust Article 10 to the relevant amendments made to the Corporations Act by the Spanish- Domiciled European Company Act 19/2005 of 14 November. The CNMV was duly notified and they were then published on the company’s web site and recorded in the Trade Register, as required by current legislation.
E.1. Quorum for General Meetings established in the Bylaws and differences in respect of the minimums stipulated in the Corporations Act
According to the Iberia Bylaws, General Meetings are quorate on first call when attended, in person or by proxy, by shareholders holding at least 35% of the subscribed voting capital. On second call, General Meetings are quorate provided the shareholders present or represented hold at least 15% of the subscribed voting capital. The minimum quorum established in the Corporations Act is 25% on first call and unlimited on second call. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 196
A higher quorum is stipulated for General Meetings to validly resolve on debenture issues, the increase or reduction of capital, conversion, merger or demerger of the company and, in general, any alteration of the Bylaws, requiring a quorum on first call of shareholders present and represented holding at least 50% of the subscribed voting capital, the attendance of 31% of such capital being sufficient on second call. The minimum established in the Corporations Act is 50% on first call and 25% on second call.
E.2. Majorities required for adopting resolutions and differences in respect of those stipulated in the Corporations Act
Resolutions are adopted by majority vote, i.e. by shareholders representing the majority of the capital present or represented at the General Meeting. As an exception, both the Bylaws and the Corporations Act stipulate that when General Meetings are attended by shareholders representing less than 50% of the subscribed voting capital, the resolutions contemplated in the preceding section may only be validly adopted with the favourable vote of two-thirds of the capital present or represented at the General Meeting.
E.3. Shareholders’ rights in respect of General Meetings differing from those established in the Corporations Act
Right to attend
All shareholders who hold 400 shares, individually or through pooling, are entitled to attend and vote at General Meetings, provided their shares are entered in the corresponding Register five days prior to the date of the meeting. Any shareholders so entitled may attend the meeting using electronic, telematic or other means of distance communication, provided that this is technologically possible, it is so resolved by the Board and they use the procedure specified by the Board. In any case, shareholders exercising their voting rights through the means of distance communication contemplated in the Bylaws and Regulations of the General Meeting shall be considered present for the purpose of the quorum. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 197
Right to representation
Any shareholder entitled to attend may be represented at the General Meeting by any director or by another shareholder entitled to attend, using the proxy form issued by the Company for each General Meeting, including the appropriate indication on the attendance card. The letter of proxy must be received by the company prior to the date of the General Meeting, no later than the date specified in the notice of call. The conditions and requisites for exercising this right to representation are set out in the Regulations of the General Meeting. In any case, the proxy may be granted in writing through delivery of a power of attorney, or through postal, electronic or telematic communication, or whatsoever other means of distance communication, provided the proxy granted and the identity of the represented shareholder are duly guaranteed. This proxy right does not affect the legal provisions regarding representation by a member of the family, public requests for representation and the granting of general powers of attorney.
Right to information
Up to the seventh day prior to the General Meeting, shareholders may request such reports or explanations, or submit such written questions, as they may consider necessary concerning the items on the agenda, and concerning the information available for the public supplied by the company to the National Securities Market Commission (CNMV) since the previous General Meeting. The directors are obliged to provide such information in writing up to the date of the General Meeting. During the General Meeting, shareholders may orally request such information or explanations as they may consider necessary concerning the items on the agenda. If it is not possible to provide this information or give the necessary explanations at that time, the directors are obliged to provide the information in writing within seven days after the end of the General Meeting. The directors are obliged to provide the information requested, except when, in the opinion of the Chairman, publicising of that information may jeopardise corporate interests. This exception is not valid when the request is seconded by shareholders representing at least one-quarter of the paid-up capital. Moreover, as from the date of call to the AGM, any shareholder may obtain from the company, immediately and free of charge at the registered office, copies of all the documents to be laid before the General Meeting and of the auditors’ report. The directors’ obligations regarding information may be met through any technical, computer or telematic means that offers the necessary security guarantees. The company has a web page setting out the corresponding information for this purpose. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 198
Duties of the General Meeting
Notwithstanding section 129 of the Corporations Act and apart from deciding with sovereign power on all corporate business, the General Shareholders’ Meeting has the following powers:
A. Approve its own Internal Regulations and any subsequent modifications thereto. B. Examine and approve the separate and consolidated annual accounts of each financial year, resolve on the proposal for application of profits and review the management of corporate affairs. C. Appoint and reappoint the auditors, and remove them in the events permitted by law. D. Appoint, re-elect and remove members of the Board, examine and approve their management of corporate affairs, and ratify or revoke any provisional appointments of board members made by the Board by virtue of its right to cooptation. Exercise of the right of proportional representation will be respected at all times, if exercised by shareholders under section 137 of the Corporations Act. E. Approve the overall maximum amount of the annual remuneration payable to the directors, in pursuance of Article 47 of the Bylaws. F. Increase or reduce the capital stock in accordance with the Corporations Act, delegating to the Board, if appropriate, the power, inter alia, to decide on the date or dates of such increases or reductions, within the maximum time stipulated in the Act. The Board may exercise this power, altering Article 5 of the Bylaws accordingly, or abstain from doing so, in view of prevailing circumstances, reporting to the first General Meeting held after the time stipulated for such actions, for the General Meeting to decide as appropriate. G. Authorise the Board to increase the capital stock under section 153.1.b) of the Corporations Act. When the General Meeting delegates this power, it may also authorise the Board to exclude the right of preferential subscription in any issues of shares covered by the delegation, subject to the terms and requisites established in the Act. H. Delegate its powers to the Board of Directors, subject to the limits established in the Corporations Act, where appropriate, and particularly the power to change the par value of the shares in the capital stock, altering Article 6 of the Bylaws accordingly. I. Alter the company Bylaws and confirm or rectify the interpretation of the Bylaws made by the Board. J. Resolve on the winding-up, merger, demerger and conversion of the company. K. Authorise the company to purchase treasury stock on the terms established in law. L. Approve remuneration systems consisting of the delivery of shares or stock option rights, and any other system of remuneration linked to the value of the shares, regardless of the beneficiary, on the terms stipulated in the Corporations Act. M. Decide on any business submitted by the Board, which is obliged to inform the General Meeting whenever exceptional or extraordinary circumstances or events arise that may affect the company, its bodies or shareholders, its market projection or strategy, its programmes and policies, in which case it must call the shareholders to discuss the measures to be taken, which are submitted to the General Meeting to decide within its full, sovereign powers. N. Decide on any other business reserved to the General Meeting by law or the bylaws.
Logically, the Bylaws list the rights which, although perhaps less systematically, are contemplated in the Corporations Act. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 199
E.4. Measures adopted, if any, to encourage the participation of shareholders at General Meetings
Since the company was privatised, it has made an effort to boost the areas of the organisation responsible for investor relations, creating a Shareholders’ Office within the Financial Division, which aims primarily to maintain a channel of communication to guarantee existing and potential shareholders clear, sufficient information on the company. This Office can be contacted at the registered office, calle Velázquez, 130 - 28006 Madrid, on telephone no. 91 587 75 74 or by e-mail [email protected]. The company has, for this purpose, extended its web page for investors and shareholders, containing all the corporate and financial information on the Group and the presentations regularly made for analysts and/or the media (www.iberia.com). Moreover, before each General Meeting, all information concerning the items on the agenda is offered to shareholders and published on the company’s web site, and any requests for information received from shareholders at the Shareholders’ Office regarding the items on the agenda are answered. In pursuance of the Corporations Act and Company Bylaws, shareholders are also entitled, as from publication of the call to the General Meeting, to obtain immediately and free of charge copies of all the documents that are to be laid before the General Meeting, particularly the auditors’ report. At the AGM 2004 an alteration of the Bylaws was approved to enable the installation of a distance voting system, by electronic vote, taking advantage of the facilities offered by the new technologies. This system was used at the AGM held on 26 May 2005, 30 May 2006, 30 May 2007, 29 May 2008 and 3 June 2009, with a high level of participation by shareholders in all five years. At the AGM 2005, of 1,020 shareholders attending the AGM, 738 did so by distance, either by post or through electronic means. The company received 138,979 electronic votes. At the AGM 2006, the proportion of distance participation increased and 150,398 electronic votes were received. At the AGM 2007, 79,886 electronic votes were received. The participation increased again to 118,697 electronic votes at the AGM 2008 and at the AGM 2009, a total of 65,706 shares voted electronically. These measures, together with the facilities already offered for proxies and proxy votes, are intended to encourage shareholders to participate in General Meetings well-informed, to ensure that the General Meeting effectively performs its duties under the law and the bylaws. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 200
E.5. Are General Meetings presided by the Chairman of the Board and what measures, if any, are taken to guarantee the independence and proper functioning of the General Meeting?
YES X NO --
General Meetings are to be presided by the Chairman of the Board, or in his absence by the Vice-Chairman, or otherwise by the oldest director present at the General Meeting in question. The AGM 2009 was presided by the Chairman of the Board, at that time Mr. Conte.
E.6. Modifications, if any, made during the year to the Regulations of the General Meeting
The Regulations of the General Meeting were not modified during 2009. These Regulations, approved at the AGM on 24 June 2004, were altered during 2006 to adapt them to the amendments to the Corporations Act made by virtue of the Spanish-Domiciled European Company Act 19/2005 of 14 November. Accordingly, the AGM of 30 May 2006 resolved to alter Article 10 of these Regulations concerning the notice of call to general meetings.
E.7. Attendance of General Meetings held during the year
Only one General Meeting was held in 2009, the AGM, on 3 June.
Annual General Shareholders Meeting of Iberia, Líneas Aéreas de España, S.A. held on 3 June 2009
The AGM 2009 was held on second call and attended by:
% distance % present % represented TOTAL votes AGM 3 June 2009 44.4868% 6.420% 0.5452% 51.452%
In addition to the capital attending the AGM, a further 27,898,271 shares are held in treasury stock, representing a nominal capital of 21,760,651 euro. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 201
E.8. Resolutions adopted at the General Meetings held during the year and percentage of votes with which each resolution was passed
All the items on the Agenda for the AGM of 3 June 2009 were approved:
1. Examination and approval, if appropriate, of the separate and consolidated Annual Accounts and Directors’ Report of Iberia, L.A.E. for the year ended 31 December 2008. 2. Proposal for application of profits from 2008. 3. Review and approval of the management of corporate affairs by the Board in 2008. 4. Reappointment of the Auditors of the Company and its Consolidated Group for 2009. 5. Approval of the maximum overall amount of directors’ emoluments. 6. Authorisation of the Board to buy back shares in Iberia, L.A.E., directly or through subsidiaries, within 18 months from the resolution adopted by the General Meeting, rendering void the authorisation granted at the AGM of 29 May 2008. 7. Delegation of powers to the Board, including the powers to delegate, to evidence in a public instrument, remedy, register, interpret, develop and implement the resolutions adopted.
Votes cast at the AGM of 3 June 2009
Agenda Votes for % Votes against % Abstentions %
Item 1 456,125,273 98.63 101,187 0.02 6,264,361 1.35 Item 2 462,255,559 99.95 177,507 0.04 57,755 0.01 Item 3 426,279,445 99.95 124,541 0.03 86,835 0.02 Item 4 455,602,478 98.51 6,770,125 1.46 118,218 0.03 Item 5 462,129,900 99.92 236,805 0.05 124,116 0.03 Item 6 461,946,955 99.88 439,974 0.10 103,892 0.02 Item 7 462,324,599 99.97 97,459 0.02 68,763 0.01
The resolutions adopted can be consulted on the company’s web site, "www.iberia.com".
E.9. Number of shares required to attend General Meetings, indicating whether any restrictions are established in the bylaws
400 shares are required to attend and vote at General Meetings. The bylaws do not establish any limits for exercising voting rights.
E.10. Company policies on proxy votes at General Meetings
The right to proxy and proxy votes is regulated in detail in the Regulations of the General Meeting approved at the AGM on 24 June 2004. Shareholders entitled to attend and vote at General Meetings may be represented at any General Meeting by any director or by another shareholder entitled to attend, using the proxy form issued by the company for each General Meeting, as indicated on the attendance card or any other ad hoc document, in accordance with the Corporations Act and without prejudice to the provisions of the Act on legal and family representation. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 202
The proxy may also include any items which, although not included on the agenda, may be dispatched at the general meeting, being so permitted by law. In order for a proxy granted to another shareholder to be valid, it must be accepted by the named proxy. A proxy issued in favour of the Chairman of the Board or another director is presumed to be accepted. In all cases, the proxy must be granted especially for each General Meeting. This requisite is not applicable when the representative is the spouse, ancestor or descendant of the represented shareholder, or when the representative has a general power of attorney, granted in a public document with the power to administer all the assets of the principal in national territory. The proxy may be granted in either of the following ways:
A. By the delivery on paper of the signed proxy letter or the attendance card contemplated in Article 13 of the Regulations, duly completed and signed by the shareholder, on the terms established by the company. B. Through postal, electronic or telematic communication, or whatsoever other means of distance communication, provided the proxy granted and the identity of the represented shareholder are duly guaranteed. In particular, a proxy granted by electronic or telematic means of communication will be accepted when the electronic document through which it is granted includes the recognised electronic signature used by the principal, or whatever other kind of signature the Board may consider, in a resolution adopted beforehand, offers adequate guarantees of authenticity and identification of the shareholder granting the proxy. Proxies granted by these means must be sent to the company through the procedure and by the deadline specified by the Board in its resolution to call the General Meeting. Proxies granted in accordance with the specifications established by the company will be fully effective, unless a cause of force majeure prevents their valid receipt.
The letter of proxy must be received at the Shareholders’ Office or by the services assisting the Presiding Board of the General Meeting prior to the date of the relevant General Meeting, no later than the deadline stated in the notice of call. Individual shareholders who are deprived of all or any of their civil rights and corporate shareholders may be represented by the person(s) exercising their legal representation, provided this is duly evidenced. In these cases and if any shareholders voluntarily delegate their right to attend, each shareholder may have only one representative at the General Meeting. Voluntary proxies may be revoked at any time. The proxy or proxy vote will be revoked, regardless of the date on which it has been issued, if the represented shareholder attends the general meeting, in person or through any of the means of distance communication, or votes through such means. Otherwise, the revocation must be made expressly, received by the Shareholders’ Office prior to the commencement of the General Meeting and meet any other requisites that may be stipulated by the company. If the company directors, depositaries of the shares or the entities keeping the record of book entries request a proxy for themselves or for another and, in general, whenever such a request is made publicly, the agenda, the request for voting instructions and indication of how the proxy is to vote in the absence of precise instructions must be incorporated in or attached to the printed or electronic document containing the power of attorney. In the same cases, if the proxy has been validly granted, in accordance with the Corporations Act and these Regulations, but do not include the voting instructions or if any doubts arise as to the intended proxy or scope of the proxy, the delegation will be deemed made in favour of the Chairman of the General Meeting, referring to all the proposals on the agenda and to vote for such proposals. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 203
If the directors or another person have made a public request for representation, the director or person obtaining such representation may not exercise the voting right corresponding to the shares represented in respect of any items on the agenda in which that person may fall into a conflict of interest, and in any case in respect of the following decisions:
his/her appointment or ratification as director his/her removal, dismissal or forced retirement as director the bringing of a corporate liability action against him/her approval or ratification, as the case may be, of transactions between the company and the director or person in question, companies he/she controls or represents, or persons acting on his/her behalf.
The same rule is applicable when the proxy also includes matters which, although not on the agenda, may lawfully be put to the vote at the General Meeting. In these cases, the shareholder granting the proxy may authorise the proxy to nominate a director or another shareholder to substitute him or her whenever faced with a conflict of interest. If a shareholder who has previously delegated his voting rights then transfers shares such that he/she no longer holds a minimum of four hundred (400) at the time of closing the attendance list for the General Meeting, the proxy will be considered void, without prejudice to the rights of the shareholder acquiring the shares.
E.11. State whether the company is aware of the policies of institutional investors regarding their participation or otherwise in company decisions
The institutional shareholders participate in the decisions of the company and the General Meeting through the ordinary channels. The company is not aware of any strategies materially different from other shareholders.
E.12. Address and access to the corporate governance contents on the company’s web site
Enter the web site "www.iberia.com", select “Investor Relations”. Select language, then, in the “Corporate Governance” menu, access information on the “Annual General Meeting” (Notice of Call, Agenda, Documents –including the Annual Report on Corporate Governance– and Resolutions Adopted), “Bylaws” and “Regulations” (Regulations of the Board of Directors, Regulations of the General Meeting, Internal Code of Market Conduct and Internal Regulations of the Audit and Compliance Committee). Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 204
F) DEGREE OF COMPLIANCE WITH THE CORPORATE GOVERNANCE RECOMMENDATIONS
The 58 recommendations of the Unified Good Governance Code are set out below, with a brief indication of the degree of compliance by the company with those recommendations.
1.- The Bylaws of listed companies should not limit the number of votes held by an individual shareholder or impose other restrictions on the company’s takeover via the market acquisition of its shares.
Compliance X Explanation --
2.- When both the parent company and a subsidiary are listed, they should both publish a document specifying exactly: a) The types of activity they are respectively engaged in and any business dealings between them, and between the listed subsidiary and other group companies b) the mechanisms in place to solve any conflicts of interest.
Compliance X Partial Compliance -- Explanation -- Not applicable --
3.- Although not expressly required in company law, any operations involving a structural alteration of the company should be submitted to the General Shareholders’ Meeting for approval, especially the following: a) Conversion of listed companies into holdings, through spin-off of “subsidiarisation”, or reallocating to subsidiaries of core activities thereunto performed by the company, even though the latter may retain full ownership of its subsidiaries; b) Acquisition or disposal of key operating assets, if this involves an effective alteration of its objects; c) Any operations producing effects equivalent to liquidation of the company.
Compliance X Partial Compliance -- Explanation --
4.- Detailed proposals of the resolutions to be adopted at a General Shareholders’ Meeting, including the information contemplated in Recommendation 28, should be published simultaneously with the notice of call to the General Meeting.
Compliance X Explanation -- Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 205
5.- Substantially independent items shall be voted separately at General Meetings to enable shareholders to express their preferences separately. This rule is particularly applicable: a) To the appointment or ratification of directors, which should be voted individually; b) In the case of Bylaw alterations, to each article or substantially independent group of articles.
Compliance -- Partial Compliance -- Explanation X
This has not been considered necessary up to now.
6.- Companies should allow split votes, so that financial intermediaries on record as shareholders but acting on behalf of different clients can vote according to the latters’ instructions.
Compliance X Explanation --
7.- The Board should perform its duties with unity in proposal and independent criteria, affording all shareholders the same treatment and guided by corporate interests, which shall mean maximising the value of the company over time. It shall also ensure that the company complies with the applicable laws and regulations in its relations with stakeholders; fulfils its contracts and obligations in good faith; respects good customs and practice in the sectors and territories in which it operates; and upholds any other social responsibility principles that it may have subscribed to voluntarily.
Compliance X Partial Compliance -- Explanation --
8.- The Board should undertake, as its principal mission, to approve the company’s strategy and the organisation required to put it into practice, and to oversee and ensure that Management meets the targets marked out and respects the objects and corporate interest of the company. For this purpose, the full Board shall approve the following: a) General policies and strategies of the Company, particularly: I) The strategic or business plan, management objectives and annual budgets; II) Investment and financing policy; III) Definition of the structure of the corporate group; IV) Corporate governance policy; V) Corporate social responsibility policy; VI) Policy on the remuneration and performance assessment of senior officers; VII) Risk management and control policy and the regular monitoring of internal information and control systems; Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 206
VIII) The dividend policy and treasury stock policy, particularly regarding limits. b) The following decisions: I) Upon recommendation by the chief executive, the appointment and possible removal of senior officers, and corresponding severance clauses. II) Directors’ emoluments and, for executive directors, supplementary remuneration for their executive duties and any other terms and conditions to be included in their contracts. III) The financial information that listed companies are obliged to disclose periodically. IV) Any investments or transactions considered strategic by virtue of their amount or special characteristics, unless approval corresponds to the General Meeting; V) Creation or acquisition of shares in special purpose vehicles or companies domiciled in countries or territories considered tax havens, and any transactions or operations of a similar nature which could, by virtue of their complex structure, impair the group’s transparency. c) Transactions between the company and its directors, significant shareholders or shareholders with representatives on the Board, or persons related thereto (“related-party transactions”). However, this authorisation will not be necessary for related-party transactions that meet all of the following three conditions: 1 Made under contracts with standard terms and conditions applied across the board to large numbers of clients; 2 Made at the general prices or rates established by the person supplying the good or service; 3 Made for a sum not exceeding 1% of the company's annual earnings. The Board is recommended to make approval of related-party transactions dependent on a favourable report by the Audit Committee, or such other committee as may be assigned this duty. Apart from not exercising or delegating their vote, the affected Directors shall leave the room during the corresponding discussion and voting by the Board. It is recommended that these competences of the Board be non-delegable, except those contemplated in paragraphs b) and c), which may be adopted by the Executive Committee in an emergency, subject to subsequent ratification by the full Board.
Compliance X Partial Compliance -- Explanation --
9.- The Board should have an adequate size to secure efficient, participative performance of its duties. The recommended size is between five and fifteen members.
Compliance X Explanation -- Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 207
10.- Non-Executive Proprietary and Independent Directors should have an ample majority on the Board, while the number of Executive Directors should be kept to a minimum, taking account of their equity ownership and the complexity of the corporate group.
Compliance X Partial Compliance -- Explanation --
11.- If any Non-Executive Director cannot be considered Proprietary or Independent, the company should explain this circumstance and his/her ties with the company or its executives, or with its shareholders.
Compliance X Partial Compliance -- Not applicable --
12.- Among the non-executive directors, the ratio of Proprietary to Independent Directors should reflect the proportion between capital represented and not represented on the Board. This strictly proportional distribution may be relaxed so that Proprietary Directors have a greater weight than that corresponding to the total percentage of capital they represent: 1 In companies with a high capitalisation with few or no shareholdings considered significant by law, but in which certain shareholders have interests with a high absolute value. 2 In companies with a plurality of unrelated shareholders represented on the Board.
Compliance X Explanation --
13.- The total number of Independent Directors should represent at least one-third of the total Directors.
Compliance X Explanation --
14.- The Board should explain the nature of each Director at the General Shareholders’ Meeting at which an appointment is to be made or ratified. The type of director should be confirmed or altered, as the case may be, in the Annual Corporate Governance Report, following verification by the Nomination Committee. The reasons why Proprietary Directors have been appointed at the request of shareholders with an interest of less than 5% in the capital shall be explained in that Report, as well as the reasons, where appropriate, for not meeting formal requests for presence on the Board from shareholders with an interest equal or greater than others at whose request proprietary directors have been appointed.
Compliance X Partial Compliance -- Explanation -- Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 208
15.- When there are few or no female directors, the Board should explain the reasons for this situation and the steps taken to correct it. In particular, when vacancies arise on the Board, the Nomination Committee should ensure that: a) There is no hidden bias against women candidates in the selection procedures; b) The company makes a conscious effort to include women with the target profile among the candidates.
Compliance -- Partial Compliance -- Explanation X Not applicable --
At present there are no female directors on the Board of the company. All Board members are selected objectively, in view of their prestige, expertise and professional experience, with no implicit bias in the selection procedure to hamper the appointment of women as directors. Iberia has had a female non-director Secretary of the Board since 2001. Her duties include, among others, ensuring compliance with good governance rules and recommendations.
16.- The Chairman, being responsible for the effective operation of the Board, should make sure that directors receive sufficient information in advance; stimulate debate and active participation by directors at all Board meetings, protecting their free stand and expression of opinion on any issues; and organise and coordinate periodic assessment of the Board, and the Managing Director or CEO, if any, with the chairmen of the principal committees.
Compliance X Partial Compliance -- Explanation --
17.- When the Chairman of the Board is also the chief executive officer of the company, one of the Independent Directors should be authorised to request the calling of a Board meeting or the inclusion of new items on the agenda; coordinate and express the concerns of the Non-Executive Directors; and direct the assessment by the Board of its Chairman.
Compliance -- Partial Compliance -- Explanation X Not applicable --
The company has not expressly authorised one of its Independent Directors to take these initiatives, although Article 9.1 of the Regulations of the Board does allow a minimum of four directors to request the calling of a Board meeting. Bearing in mind that there are four Independent Directors on the Board, this measure contemplated in the Board Regulations is an adequate counterweight for the powers of the Chairman/Chief Executive Officer. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 209
18.- The Secretary of the Board should especially ensure that the Board’s actions: a) Conform to the text and spirit of the laws and regulations, including those adopted by the market watchdogs; b) Conform to the company’s Bylaws and the Regulations of the General Meeting, the Board and any other internal regulations of the Company; c) Take account of the good governance recommendations contained in this Unified Code endorsed by the Company. To guarantee the independence, impartiality and professionalism of the Secretary, his/her appointment and removal should require a report by the Nomination Committee and approval by the full Board; and the procedure for appointment and removal should be set down in the Regulations of the Board.
Compliance X Partial Compliance -- Explanation --
19.- The Board should meet as often as may be necessary to secure efficient performance of its duties, following the calendar and business established at the beginning of the year, although any director may propose other items not initially contemplated to be included on the agenda.
Compliance X Partial Compliance -- Explanation --
20.- Non-attendance of Board meetings should be limited to inevitable cases and stated in the Annual Corporate Governance Report. If a director is forced to grant a proxy for any Board meeting, the appropriate instructions shall be issued.
Compliance X Partial Compliance -- Explanation --
21.- When the Directors or the Secretary express concern over a proposal, or, in the case of Directors, the Company’s performance, those concerns should be put on record, at the request of those expressing them.
Compliance X Partial Compliance -- Explanation -- Not applicable --
22.- The full Board should assess once a year: a) The quality and effectiveness of the Board’s actions; b) Based on the report issued by the Nomination Committee, the performance by the Chairman of the Board and Chief Executive Officer of their respective duties; c) The performance of its Committees, based on the reports issued by each one.
Compliance X Partial Compliance -- Explanation -- Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 210
23.- All the Directors should be entitled to obtain such supplementary information as they may consider necessary on business within the competence of the Board. Save otherwise stipulated in the Bylaws or Board Regulations, their requests should be addressed to the Chairman or Secretary of the Board.
Compliance X Explanation --
24.- All Directors should be entitled to call on the company for specific guidance in the performance of their duties, and the company should provide adequate means for exercising this right, which in special circumstances may include external assistance, at the company’s expense.
Compliance X Explanation --
25.- Companies should establish an induction programme to give new Directors a rapid, sufficient insight into the company and its rules on corporate governance. Directors should also be offered refresher courses in the appropriate circumstances.
Compliance -- Partial Compliance X Explanation --
The different divisions of the company provide all new Directors with sufficient information to give them a rapid, sufficient insight into the company.
26.- Companies should require Directors to devote the necessary time and efforts to perform their duties efficiently. Accordingly: a) Directors should inform the Nomination Committee of any other professional obligations they may have, in case they may interfere with the required dedication; b) Companies should limit the number of directorships that its Directors may hold.
Compliance -- Partial Compliance X Explanation --
All the Directors report promptly to the Nomination and Remuneration Committee on any other professional obligations they may have, their membership of other Boards and any conflicts of interest that may arise. The Company has not considered it necessary to lay down any rules regarding the number of directorships of its Directors. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 211
27.- Proposals for the appointment or re-appointment of Directors submitted by the Board to the General Shareholders’ Meeting and the provisional appointment of Directors by cooptation should be approved by the Board: a) At the proposal of the Nomination Committee, in the case of Independent Directors. b) Subject to a report by the Nomination Committee for other Directors.
Compliance X Partial Compliance -- Explanation --
28.- Companies should publish on their web sites and regularly update the following information on their directors: a) Professional and biographical profile; b) Other directorships held, in listed or unlisted companies; c) Type of Director, indicating in the case of Proprietary Directors the shareholders they represent or are related with. d) Date of first and subsequent appointments as company Director; and e) Company shares and stock options held.
Compliance X Partial Compliance -- Explanation --
29.- Independent Directors should not remain on the Board as such for more than 12 years in succession.
Compliance X Explanation --
30.- Proprietary Directors should resign when the shareholder they represent disposes of its entire shareholding in the company. They should also resign in the corresponding number when the shareholder disposes of part of its shares to an extent requiring a reduction in the number of Proprietary Directors.
Compliance X Partial Compliance -- Explanation --
31.- The Board should not propose the removal of any Independent Director before the end of the period for which he or she was appointed, unless there are just grounds for doing so, as appreciated by the Board subject to a report by the Nomination Committee. Just grounds are deemed to exist when the director has acted in breach of his duties or when he or she falls into any of the circumstances described in point III.5, definitions, of this Code. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 212
The removal of Independent Directors may also be proposed as a result of takeover bids, mergers or similar corporate operations producing a change in the capital structure of the company, whenever those changes in the structure of the Board correspond to the principle of proportionality established in Recommendation 12.
Compliance X Explanation --
32.- Companies should establish rules obliging Directors to report and, if necessary, resign in any cases that may jeopardise the company’s reputation. In particular, Directors should be obliged to inform the Board of any criminal proceedings brought against them and the subsequent development of the proceedings. If a Director is tried for any of the offences contemplated in section 124 of the Corporations Act, the Board should study the case as soon as possible and, in view of the specific circumstances, decide whether or not the Director should remain in office. A reasoned account should be included in the Annual Corporate Governance Report.
Compliance X Partial Compliance -- Explanation --
33.- All the Directors should clearly express their opposition whenever they consider that any proposed decision submitted to the Board may go against corporate interests. The Independent and other Directors not affected by the potential conflict of interest should also do so when the decisions may be detrimental to shareholders not represented on the Board. And when the Board adopts significant or reiterated decisions regarding which a Director has expressed serious reservations, the latter should reach the appropriate conclusions and, if he or she opts to resign, explain the reasons in the letter contemplated in the following recommendation. This recommendation also affects the Secretary of the Board, even if he or she is not a Director.
Compliance X Partial Compliance -- Explanation -- Not applicable --
34.- If a Director resigns or retires from office on whatsoever other grounds before the end of his or her term of office, he or she should explain the reasons in a letter sent to all the Board members. Regardless of whether the retirement is announced as a significant event, the reason shall be indicated in the Annual Corporate Governance Report.
Compliance -- Partial Compliance X Explanation -- Not applicable -- Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 213
The retirements produced during the year were voluntary, the reasons having been explained at the board meetings at which the respective resignations were tendered. These were notified as significant events and are mentioned within the Annual Corporate Governance Report.
35.- The remuneration policy approved by the Board should regulate at least the following aspects: a) Amount of fixed items, specifying the amount of attendance fees, if any, for Board and Committee meetings and estimating the fixed remuneration for the year; b) Variable pay items, including, in particular: I) Types of Director to which they are applicable and an explanation of the relative weight of the variable pay items to the fixed items; II) Criteria for assessment of results on which any right to remuneration in shares, stock options or any other variable component is based; III) Essential parameters and basis for any system of annual bonus payments or other non-cash benefits; IV) An estimate of the aggregate sum of variable remunerations deriving from the proposed remuneration plan, according to the degree of fulfilment of the reference hypotheses or objectives. c) Principal terms of the welfare schemes (e.g. supplementary pensions, life assurance and similar), estimating the amount or equivalent annual cost. d) Conditions to be respected in top management and Executive Director contracts, including: I) Term; II) Notice; and III) Any other clauses concerning golden hellos or golden parachutes for early termination of the contractual relationship between the company and the Executive Director.
Compliance X Partial Compliance -- Explanation --
36.- Remunerations in the form of shares in the company or group companies, stock options or instruments linked to the value of the share, variable remuneration linked to the company’s performance or welfare schemes should be limited to Executive Directors. This recommendation shall not be applicable to the delivery of shares when subject to the condition that the Directors keep them up to their retirement from the Board.
Compliance X Explanation -- Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 214
37.- The remuneration of Non-Executive Directors should be sufficient to remunerate their dedication, qualifications and responsibilities, but not so high as to compromise their independence.
Compliance X Explanation --
38.- Earnings-linked remuneration should take account of any qualifications in the external auditor’s report that may reduce such earnings.
Compliance -- Explanation -- Not applicable X
39.- In the case of variable remuneration, the pay policies should contemplate such precautions as may be necessary to ensure that such remuneration is related to the professional performance of its beneficiaries, not merely deriving from general trends on the markets or in the company’s sector of business or other similar circumstances.
Compliance X Explanation -- Not applicable --
40.- The Board should submit to an advisory vote at the General Shareholders’ Meeting, as a separate item on the agenda, a report on the directors’ remuneration policy. This report should be made available to shareholders, as a separate document or in whatsoever other form the company may deem fit. The report should focus especially on the remuneration policy approved by the Board for the current year and that established, if any, for future years. It shall address all the issues contemplated in Recommendation 35, except those points that could entail disclosure of commercially sensitive information. It shall stress the most significant changes in such policies in respect of that applied during the previous year to which the General Meeting refers. It shall also include a global summary of implementation of the remuneration policy in the previous year. The Board should also inform on the role played by the Remuneration Committee in defining the remuneration policy and, if external assistance has been used, the identity of the external advisers who provided such assistance.
Compliance -- Partial Compliance -- Explanation X
Shareholders and investors are issued with the Corporate Governance Report, which informs amply on the directors’ emoluments, each year at the Annual General Meeting. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 215
41.- The individual remunerations of directors during the year shall be disclosed in the Annual Report, including the following details: a) Breakdown of the remuneration of each director, including, where applicable: I) Attendance fees and other fixed sums payable to directors; II) Additional compensation for being Chairman or member of one of the Committees of the Board; III) Payments made under profit-sharing or bonus schemes and the reasons for their accrual; IV) Contributions on behalf of the director to defined-contribution pension schemes; or increase in the director’s vested rights in contributions to defined-benefit schemes; V) Any indemnities agreed or paid upon termination of their duties; VI) Compensation received as director of other group companies; VII) Remuneration received by Executive Directors as payment for their senior management duties; VIII) Any sums paid other than those listed above, regardless of the nature or the group company paying them, especially when it may be considered a related-party transaction or omission would distort the true and fair view of the total remuneration received by the Director. b) Breakdown for each director of any deliveries of shares, stock options or whatsoever other instrument linked to the value of the company’s share, specifying: I) Number of shares or options granted during the year and conditions for exercising the options; II) Number of options exercised during the year, indicating the corresponding number of shares and the exercise price; III) Number of options pending exercise at year end, indicating their price, date and other conditions for exercise; IV) Any modification during the year of the conditions for exercising options granted earlier. c) Information on the ratio during the previous year of remuneration received by the Executive Directors and the company’s profits or any other measure of its earnings.
Compliance -- Partial Compliance X Explanation --
The company provides detailed information in its Annual Corporate Governance Report on directors’ remuneration, according to the following principles:
Payments corresponding to directors as members of the Board (fixed payments, attendance fees, payment in kind, insurance, etc.) Remuneration by types of Director. Remuneration of Executive Directors for their duties as Senior Officers of the company: there are two Executive Directors, the Chairman and the CEO. The information on their remuneration as senior officers of the company is stated individually in this report. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 216
42.- When there is an Executive Committee, the balance between the different types of Director should roughly mirror that of the Board. The Secretary of the Board should be Secretary of the Executive Committee.
Compliance X Partial Compliance -- Explanation -- Not applicable --
43.- The Board should be informed at all times of the business transacted and decisions made by the Executive Committee and all Board members should receive a copy of the minutes of Executive Committee meetings.
Compliance X Explanation -- Not applicable --
44.- In addition to the Audit Committee which is mandatory under the Securities Market Act, the Board shall set up a Nomination and Remuneration Committee, or two separate Committees. The rules on composition and procedure of the Audit Committee and the Nomination and Remuneration Committee or Committees should be set out in the Regulations of the Board, including the following: a) The Board should appoint the members of these Committees, taking account of the directors’ knowledge, expertise and experience and the duties corresponding to each Committee and discuss their proposals and reports. The Committees should report to the Board on their actions at the first full Board meeting after each Committee meeting, being accountable for the work done. b) These Committees should have a minimum of three members, who should be exclusively Non-Executive Directors. This notwithstanding, Executive Directors or senior officers may attend their meetings when expressly so decided by the Committee members. c) The Committees should be chaired by Independent Directors. d) They may obtain external assistance whenever this is considered necessary for the performance of their duties. e) Minutes should be issued of Committee meetings and a copy sent to all members of the Board.
Compliance -- Partial Compliance X Explanation --
The Audit and Compliance Committee is chaired by Mr. Fernández Norniella, classified as “Other Non-Executive Directors”. The Nomination and Remuneration Committee is chaired by Mr. Pont, Proprietary Director. Both are non-executive directors appointed chairmen of the respective committees by virtue of their experience and track record. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 217
45.- The Audit Committee, Nomination Committee or, if separate, the Compliance or Corporate Governance Committee(s) should be responsible for overseeing compliance with internal codes of conduct and corporate governance rules and regulations.
Compliance X Explanation --
46.- All members of the Audit Committee, particularly its Chairman, should be appointed in view of their knowledge of and experience in accounting, auditing or risk management.
Compliance X Explanation --
47.- Listed companies should have an internal audit department, supervised by the Audit Committee, to guarantee the effectiveness and efficiency of the internal reporting and control systems.
Compliance X Explanation --
48.- The chief audit officer should submit an annual work programme to the Audit Committee, reporting directly on any irregularities arising during its implementation and submitting an activity report at each year end.
Compliance X Partial Compliance -- Explanation --
49.- The risk management and control policy should define at least: a) The different types of risk (operating, technological, financial, legal, reputational…) to which the company is exposed, including under financial or economic risks any contingent liabilities or other off-balance-sheet exposure; b) The level of risk that the company considers acceptable; c) The measures envisaged to soften the effects of the risks identified, should they materialise; d) The internal reporting and control systems to be used to control and manage those risks, including contingent liabilities or off-balance-sheet risks.
Compliance X Partial Compliance -- Explanation -- Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 218
50.- The Audit Committee should: 1. In connection with the internal reporting and control systems: a) Supervise the preparation and integrity of the financial information on the company and, where appropriate, the group, checking for compliance with applicable legal provisions, adequate definition of the consolidated group and correct application of accounting standards. b) Check internal control and risk management systems on a regular basis to ensure that the principal risks are adequately identified, managed and disclosed. c) Oversee the independence and effectiveness of the internal audit department; propose the nomination, appointment, reappointment and removal of the chief audit officer; propose the budget for this department; receive periodical information on its activities; and check that the top management heeds the conclusions and recommendations set out in its reports. d) Establish and supervise a “whistle-blowing” procedure so employees can confidentially or, where appropriate, even anonymously report any irregularities they observe in the company's conduct, especially in financial and accounting aspects. 2. In connection with the external auditor: a) Submit proposals to the Board on the nomination, appointment, reappointment and replacement of the external auditor and its terms of engagement. b) Receive regular information from the external auditor on the audit plan and findings and make sure the senior management acts on its recommendations. c) Guarantee the independence of the external auditor, and for this purpose: I) The company should inform the CNMV as a significant event whenever the auditor is changed, attaching a declaration on any disagreements that may have arisen with the outgoing auditor and their content, if any. II) The company and the auditor should be ensured to respect all rules and regulations in place regarding the provision of services other than auditing services, limits on concentration of the auditor’s services and any other rules established to guarantee the auditors’ independence; III) Investigate the circumstances giving rise to resignation of any external auditor. d) In groups, encourage the auditor of the group to audit the group companies.
Compliance -- Partial Compliance X Explanation --
This recommendation is met, except regarding the existence of a whistle-blowing procedure, which has not been considered necessary.
51.- The Audit Committee may call any employee or executive of the company into its meetings, even ordering their appearance without the presence of any other senior officer.
Compliance X Explanation -- Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 219
52.- The Audit Committee should report to the Board on the following matters from Recommendation 8 before the latter adopts the corresponding decisions: a) The financial information that listed companies are obliged to disclose periodically. The Committee shall ensure that intermediate financial statements are drawn up under the same accounting principles as the annual statements, requesting a limited external audit if necessary. b) Creation or acquisition of shares in special purpose vehicles or companies domiciled in countries or territories which are considered tax havens, and any transactions or operations of a similar nature which could, by virtue of their complex structure, impair the group’s transparency. c) Related-party transactions, unless this prior reporting duty has been assigned to another supervision and control committee.
Compliance X Partial Compliance -- Explanation --
53.- The Board should endeavour to avoid a qualified auditor’s report on the accounts laid before the General Meeting, and in exceptional circumstances when such qualifications exist, both the Chairman of the Audit Committee and the auditors shall clearly explain to the shareholders their content and scope.
Compliance X Partial Compliance -- Explanation --
54.- The majority of the members of the Nomination Committee – or Nomination and Remuneration Committee if there is just one – should be Independent Directors.
Compliance -- Explanation X Not applicable --
The Nomination and Remuneration Committee consists of three Directors, one Proprietary, one Independent and one classified as “Other Non-Executive Directors”. This composition is considered adequate to guarantee the effectiveness of the Committee.
55.- Apart from the duties specified in preceding Recommendations, the Nomination Committee should: a) Assess the expertise, knowledge and experience of Board members; define the duties and skills required of candidates to fill vacancies; and determine the time and dedication considered necessary for them to adequately perform their duties. b) Study or organise as appropriate the succession of the Chairman or Chief Executive Officer and, if necessary, make recommendations to the Board to secure an orderly, well-planned handover. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 220
c) Report on any appointments and removals of senior officers proposed by the Chief Executive Officer. d) Report to the Board on the gender issues contemplated in Recommendation 14.
Compliance X Partial Compliance -- Explanation -- Not applicable --
56.- The Nomination Committee should consult the Chairman and Chief Executive Officer, especially on matters concerning Executive Directors. And any Director may request the Nomination Committee to consider potential candidates they consider suitable to fill vacancies on the Board.
Compliance X Partial Compliance -- Explanation -- Not applicable --
57.- Apart from the duties indicated in the preceding Recommendations, the Remuneration Committee should: a) Submit proposals to the Board on: I) The remuneration policy for directors and senior officers; II) The individual remuneration of Executive Directors and other terms of contract. III) The basic conditions of senior executive contracts. b) Ensure compliance with the pay policy established by the company.
Compliance X Partial Compliance -- Explanation -- Not applicable --
58.- The Remuneration Committee should consult the Chairman and Chief Executive Officer, especially on matters concerning Executive Directors and senior executives.
Compliance X Explanation -- Not applicable --
G) OTHER INFORMATION
This section contains information that is to be included in the company’s Directors’ Report under section 116 bis of the Stock Market Act and has not been discussed in the previous sections:
G.1. Powers of the members of the Board, particularly powers to issue or buy back shares
The Board of Directors has the powers assigned to it in Article 3 of the Regulations of the Board. These powers have been permanently delegated to the Chairman of the Board and the Executive Committee, except those which the Board is obliged by law or the bylaws to exercise directly. In particular, the Iberia Board members have no powers to issue or buy back shares. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 221
G.2. Significant agreements made by the company that enter into force or are amended or terminated in the event of a takeover of the company by virtue of a public tender offer, and the effects thereof, except when disclosure could be seriously detrimental to the company. This exception will not be applicable if the company is obliged by law to disclose this information
In takeover bids, or public tender offers, certain licences and authorisations, top management contracts and some supplier or financial agreements would, as the case may be, require a novation. The most significant agreement of this nature is the one made with Amadeus. Amadeus Global Travel Distribution, S.A. (hereinafter Amadeus) is a multinational IT enterprise whose services are designed to meet the marketing, sales and distribution needs of the travel and tourism industry worldwide. Iberia has an agreement with Amadeus whereby the company uses the global distribution system (GDS) managed and operated by Amadeus for the marketing of its flights. The Amadeus GDS is the most important of the different systems used by Iberia, in terms of volume of bookings. The standard contract signed by Iberia and Amadeus includes a clause which establishes the following: if the participant (Iberia) acquires or takes control of another entity engaged in air transport, or merges with or is acquired or becomes controlled by another person or entity engaged in air transport other than the person or entity owning or controlling the participant at the date of the agreement, then Amadeus will have the option of terminating the contract without any obligation beyond all the responsibilities undertaken assumed by each party prior to termination of the agreement. Finally, the exchange and interest rate hedging instruments used by the company include standard clauses, common in this type of international contract, that could lead to renegotiation of certain aspects of the financial instrument in the event of a change in the control of the Company. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 222
ANNEX
ACTIVITY REPORT OF THE AUDIT AND COMPLIANCE COMMITTEE OF THE BOARD OF DIRECTORS OF IBERIA, L.A.E.
2009
I.- Regulation
In response to the growing demands regarding Corporate Governance, the Bylaws of Iberia, L.A.E., approved in April 2001, contemplated the creation of an Audit and Compliance Committee to assist the Board of Directors in supervising the financial statements and the control of the company. The Board created the Audit and Compliance Committee on 5 April 2001, consisting exclusively of Non-Executive Directors. It was set up as an internal consultative body of the Board, without executive duties but with powers of information, advice and proposal. The Board approved the Regulations of the Audit and Compliance Committee on 28 February 2002, setting out the principles of the Committee’s actions and the basic rules of organisation and procedure. Subsequently, the entry into force of the Financial System (Reform Measures) Act 44/2002 of 22 November 2002 (“Finance Act”) made it compulsory for listed companies to have Audit Committees and laid down the basic duties of that Committee. Iberia then had to adapt its Bylaws to the new requirements stipulated in the Finance Act for the Audit and Compliance Committee. This was accomplished at the Annual General Meeting (AGM) held on 12 June 2003, at which shareholders resolved to alter Articles 53 and 54 of the Bylaws and extend the Committee’s duties. After altering the Bylaws and upon recommendation by the Audit and Compliance Committee, the Board resolved on 24 July 2003 to adapt the Internal Regulations of the Audit and Compliance Committee. These internal regulations are available for shareholders and investors on the company’s web site (www.iberia.com) Finally, towards the end of 2003, the Board of Directors of Iberia decided to increase the importance of its Audit and Compliance Committee, following the recommendations of good governance and taking account of the self-assessment made by the Committee after two years’ experience. Accordingly, the Board resolved to raise the number of Committee members from three to four, all Non-Executive Directors, and the Committee decided to increase the intensity of its work.
II.- Composition
The Audit and Compliance Committee will have no fewer than three nor more than five members, the exact number to be decided by the Board from time to time. The Board appoints the Non-Executive Directors who are to sit on the Audit and Compliance Committee, upon recommendation by the Nomination and Remuneration Committee. A reasonable balance must be maintained between Proprietary and Independent Directors. The members of the Audit and Compliance Committee must have the necessary devotion, capacity and experience to be able to perform their duties as such. The Board is also responsible for removing members of the Audit and Compliance Committee, who are in any case obliged to step down when they retire from the Board. Any vacancies are filled by the Board at its earliest convenience. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 223
The Chairman and Secretary of the Committee are appointed by the Board on the basis of a report issued by the Nomination and Remuneration Committee. According to the Regulations of the Audit and Compliance Committee, the Secretary of the Board will necessarily be the Committee Secretary. A quorum of two-thirds of the Board members is required at the meeting to appoint the Chairman, and the votes in favour of at least two-thirds of the directors. The Chairman may remain in office for a maximum of four years and may not be re-elected chairman until at least one year after his retirement from office. In the event of a vacancy, absence or illness, the Chairman will be substituted by the oldest member of the Committee present, while the substitute for the Secretary, if necessary, will be the youngest member. In May 2005, the composition of all the advisory committees, including the Audit and Compliance Committee, was modified to rotate other Non-Executive Directors in the position of Chairman of the different Committees, who had been in office for 4 years, and to renew part of their members. Subsequently, on 23 January 2008, the Board restructured all of its Committees, renewing all the members of the Audit Committee, all of them Non-Executive Directors in compliance with the corporate governance recommendations. The composition of the Audit and Compliance Committee at 31 December 2009 was as follows:
Position Members Type of Directors
Chairman Mr. José Manuel Fernández Norniella Other Non-Executive Directors Members Mr. José B. Terceiro Lomba Non-Executive Independent Mr. Alberto Recarte García-Andrade (INMOGESTIÓN Y PATRIMONIOS, S.A.) Non-Executive Proprietary Mr. Jorge Pont Sánchez Non-Executive Proprietary Secretary Mrs. Lourdes Máiz Carro Secretary of the Board
III.- Powers and Duties
The main duty of the Audit and Compliance Committee is to assist the Board in its watchdog duties through the regular checking of compliance with legal provisions and internal regulations applicable to the company in respect of financial statements and good governance. Without prejudice to any others assigned by the Board, the Audit and Compliance Committee will study, review and report on the following matters:
A. Report at General Meetings on any issues within its sphere of competence raised by shareholders. B. Propose to the Board, to be submitted to the General Meeting, the appointment of external auditors, terms of contract, scope of their commission and, where appropriate, their removal or non-reappointment. Oversee fulfilment of the audit contract, endeavouring to ensure that the opinion on the annual accounts and main contents of the auditors’ report are clear and precise. C. Keep in contact with the auditors to receive information on any issues that could jeopardise their independence and any other issues relating to the auditing of accounts, and to receive the information and exchange the communications contemplated in auditing laws and standards. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 224
D. Act as a liaison between the Board and the auditors, assess the results of each audit and the response by the management team to their recommendations, and intervene in the event of discrepancies between the auditors and the Board concerning the principles and criteria applicable in the preparation of the financial statements. E. Check the company’s accounts, ensure compliance with all legal requirements and correct application of the generally accepted accounting principles. F. Watch over the internal financial control manuals and procedures adopted by the company, ensure compliance and oversee the appointment and replacement of those responsible for them. G. Supervise the internal audit department, if any, of the company. H. Check compliance with the Internal Code of Market Conduct, the Internal Regulations of the Audit and Compliance Committee and, in general, the rules of governance of the company and make whatever proposals may be necessary to improve them. In particular, the Audit and Compliance Committee must receive information and, where appropriate, issue reports on disciplinary measures against senior executives of the company. I. Consider the suggestions submitted by the Chairman, members of the Board, senior executives or shareholders of the company and inform and submit recommendations to the Board on the measures it considers appropriate in respect of auditing and any other activities assigned to it, and on compliance with the applicable legal provisions on reporting to the markets and transparency and accuracy of the information given.
In particular, the Internal Regulations of the Audit and Compliance Committee specifically stipulate that the Committee is to ensure prompt fulfilment of the prevailing instructions on the reporting of significant events, in pursuance of the Internal Code of Market Conduct. It must also recommend such measures as it may deem fit so that the quarterly, half-year and annual reports and any other financial information to be made available to the markets are drawn up following the same principles and professional practices as those used for preparing the annual accounts and that they are equally reliable. The Audit and Compliance Commission will also propose whatever actions and measures it may consider necessary to guarantee the company’s transparency for the financial markets, ensure the free, unadulterated forming of share prices of the company and its subsidiaries, supervise the regular publishing of financial reports and perform any other duties that may be required of listed companies.
IV.- Practice and Procedure
The Audit and Compliance Committee must meet regularly at least once every three months, and whenever else it may be called by its Chairman, on his own initiative or at the request of two or more of its members. It will also meet whenever the Board requests the issuing of reports, submission of proposals or adoption of resolutions within the scope of its duties. Committee meetings are normally called by the Chairman, who is responsible for drawing up the agenda and directing the debates. The agenda must be included in the notice of call and any relevant information must be attached, adequately summarised and prepared to enable the Committee members to perform their duties. Meetings may also be held without prior call, provided all the members are present and unanimously agree to assemble in a Committee meeting. The Committee dispatches the issues on the agenda and any others decided by the Chairman or proposed by the majority of the members present or represented, even if they are not included on the agenda. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 225
The resolutions adopted by the Audit and Compliance Committee within the scope of its duties of informing, advising and proposing are valid without requiring subsequent ratification by the Board, although the Committee must report at the next succeeding Board meeting on all business transacted and decisions adopted at each Committee meeting. Committee members are fully authorised to obtain information on any aspect of the company, examine its books, registers and documents and inspect all its installations and premises whenever this is considered necessary to perform their duties and meet their obligations. The Audit and Compliance Committee may also request the attendance of its meetings by the company’s auditors, any member of Management or any other employee, who are obliged to attend and collaborate, allowing access to all and any information they may have. The Committee may also propose to the Board the contracting by the company of any legal, accounting, technical, financial, commercial or other advisers it may consider necessary to assist it in the performance of its duties whenever it has to deal with specific major or complex problems. The powers contemplated in the preceding two paragraphs are exercised through the Chairman or Secretary of the Board, who endeavour to meet the requests of the Committee, directly providing the necessary information, offering the appropriate contacts, or taking such measures as may be necessary to secure the information requested or the collaboration of the appropriate advisers.
V.- Activities in 2009
The Audit and Compliance Committee held thirteen meetings in 2009. Committee meetings are regularly attended by the managers of the accounting and internal auditing departments, and any other company executives responsible for or having a knowledge of the business included on the agenda whenever considered necessary by the Chairman of the Committee. The Secretary of the Board and the Committee is responsible for overseeing compliance with the rules and recommendations on corporate governance. The afore-mentioned executives have provided the Committee with adequate information on the issues to be dispatched. Most Committee meetings are also attended by the company’s external auditors, whose relations with the Board are channelled through the Audit and Compliance Committee.
Financial Information
The Committee has been particularly engaged in checking the annual accounts of the company and its group before they are authorised for issue by the Board. The Control and Administration Manager, who is responsible for the company’s accounting and bookkeeping, has provided the Committee with timely information, through documents and meetings, on the preparation and consolidation of the financial statements and individual and consolidated annual accounts, to enable the Committee to check compliance with the applicable accounting principles and standards and that those accounts and statements give a true and fair view of the equity and financial position of the company and its group. At meetings held in the first quarter of 2009, the Committee examined the 2008 financial statements of the company, assisted by the auditors, and resolved to submit to the Board in March the draft balance sheet, profit and loss account, notes to the accounts and directors’ report for 2008 of Iberia, L.A.E. and its Consolidated Group, to be authorised for issue by the Board, together with the proposal for application of profits, to be laid before the AGM on 3 June 2009. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 226
As a result of the company’s rigorous preparation of its financial statements and scrupulous compliance with the applicable accounting standards and principles, the auditors have issued an unqualified report, indicating that the accounts give a true and fair view of the real situation of the company, contain all necessary information for an adequate comprehension thereof, clearly explain any contingencies and were prepared in accordance with the general accepted accounting principles and standards. After examining the corresponding documents at several meetings held during 2008 and 2009, assisted by the company’s auditors, the Committee resolved to submit the consolidated balance sheet, profit and loss account, statement of changes in equity, statement of cash flows and notes to the accounts and directors’ report of Iberia, L.A.E. and its Consolidated Group for 2008 to the Board for authorisation of the accounts. The auditors’ report on these accounts was, once again, unqualified. In February and March 2009, the Committee analysed the Annual Report on Corporate Governance and Corporate Social Responsibility Report for 2008, expressing a favourable opinion on both these reports.
External Auditors
The Committee proposed reappointing the company’s external auditors (Deloitte, S.L.), whose previous term of appointment expired in 2009. The Board resolved to submit this proposal to the AGM held on 3 June 2009, which approved their reappointment for one year. The Committee held nine meetings with the auditors during 2009, during which it obtained detailed information on the planning and progress of their work. It also made a thorough analysis, jointly with the auditors, of their audit report on the 2008 and 2009 accounts. In particular, on 25 August 2009 the Board authorised the accounts of the first half of the year, which were audited according to certain pre-established procedures. The auditors informed the Committee that they saw no need to modify the consolidated abridged financial statements for the first half of 2009, in view of which the Audit and Compliance Committee unanimously resolved to issue a favourable report on the abridged Interim Financial Statements and Interim Directors’ Report for the six-month period ended 30 June 2009. The fees for audits made by Deloitte, S.L. of the company and group accounts amounted to €528,684. The fees for other professional services provided for Iberia by the main auditors and related firms during the period are stated in the Annual Report 2009. Those professional services do not conflict with the general auditing duties and the rules on incompatibility established in the Finance Act have been strictly heeded. The services in question consisted mainly of collaboration in analysing corporate transactions. The non-audit work was done by a different partner to the one responsible for the audit.
2009 Other Group Iberia, L.A.E. Total companies Fees charged for non-audit work (€ thousand) 351 - 351 Fees for non-audit work / Total invoiced by auditors (%) 42.73% - 39.,87%
The Audit and Compliance Committee considers that there are no objective reasons to question the independence of the company’s external auditors. Iberia Group / Consolidated Management Report / Annual Corporate Governance Report 227
Internal Audit Department
In December 2003, upon recommendation by the Audit and Compliance Committee, the structure and duties of the internal audit department were reorganised to give it greater weight within the organisation, making the department manager directly accountable to the company Chairman. The Internal Audit Regulations were approved in May 2004, defining the internal audit function as an independent, objective control and advisory activity, designed to add value and improve the company’s operations, helping it to meet its strategic objectives through a systematic, disciplined approach. This is achieved by assessing and improving the efficiency of risk management and internal control processes and corporate governance, in collaboration with the Secretary of the Board. The Internal Audit and Quality Manager attended five meetings of the Audit and Compliance Committee, at which he submitted the updated Risk Map of the company and the Risk Management Procedure, reported on fulfilment of the 2008 Audit Plan and presented the Audit Plan for 2009. The Annual Audit Plan includes the following activities, among others:
Review of the different areas of the company to ensure their compliance with the applicable internal regulations and procedures. Checking and analysis of the internal accounting and operations control systems. Review of the control procedures designed to protect the company’s assets. Pinpointing of room for improvement, if detected during routine audits. Oversight of compliance with internal corporate governance rules and regulations.
Compliance with the Corporate Governance rules
The Committee permanently checks compliance with the rules and recommendations on corporate governance, making whatever suggestions it considers necessary. During 2005 electronic voting and proxies were introduced for General Meetings. In view of the extensive use thereof by shareholders, this electronic voting and proxy system was made available once again for the AGMs 2006, 2007, 2008 and 2009. The Committee has also studied the Unified Code of Good Governance, with a view to adjusting company practices to its recommendations. As a result of this study and following a proposal by the Nomination and Remuneration Committee, the Board amended its Regulations in May 2008 to adjust them to those recommendations. The Committee considers that the degree of compliance by the Company with the rules and recommendations on good governance is very high.
This Report was unanimously approved by the Audit and Compliance Committee on 18 February 2010. IBERIA, LÍNEAS AÉREAS DE ESPAÑA, S.A. Iberia, L.A.E., S.A. / Auditor's Report 229
Financial Statements
IBERIA, LÍNEAS AÉREAS DE ESPAÑA, S.A. Iberia, L.A.E., S.A. / Financial Statements / Balance Sheet 232
BALANCE SHEET AT 31 DECEMBER 2009 AND 2008 Millions of euros ASSETS Notes 31-12-09 31-12-08 LIABILITIES Notes 31-12-09 31-12-08
NON-CURRENT ASSETS: 2,338 2,438 EQUITY: 10 1,504 1,525 Intangible assets 4.1 50 53 OWNERS' EQUITY
Property, plant and equipment 5 1,031 1,111 Share capital 743 743 Aircraft 713 773 Share premium 120 120 Other property, plant and equipment 318 338 Reserves 1,058 1,058 Investments in subsidiaries and associates 7 130 44 Treasury shares (64) (64) Equity instruments 124 44 Loans to companies 6-Profit (loss) for the year (281) 25 Non-current financial assets 6.1 490 635 VALUATION ADJUSTMENTS Equity instruments 267 245 Available-for-sale financial assets (62) (80)
Loans to third parties 76 93 Hedging transactions 8 (10) (277) Derivatives 470 NON-CURRENT LIABILITIES: 1,758 1,791 Other financial assets 143 227 Non-current provisions 11 1,235 1,309 Deferred tax assets 13 637 595 Non-current payables 12 301 403 CURRENT ASSETS: 2,682 3,176 Deferred tax liabilities 13 71 Non-current assets held for sale 5 19 21 Non-current accruals and deferred income 4.10 215 78 Inventories 4.7 215 224 Aircraft spare parts 170 176 CURRENT LIABILITIES: 1,758 2,298 Other inventories 45 48 Current payables 12 295 639
Trade and other receivables 9 480 589 Borrowings from subsidiaries and associates 16 10 9 Current financial assets 6.2 1,085 1,748 Customer prepayments 4.10 390 394 Loans to companies 31 34 Trade and other payables 1,062 1,243 Derivatives 8 55 79 Trade payables 774 942 Other financial assets 999 1,635 Suppliers, subsidiaries and associates 23 19 Current prepayments and accrued income 10 13 Cash and cash equivalents 4.5 873 581 Remuneration payable 147 158 Cash 40 58 Payables to public authorities 13 118 124 Cash equivalents 6.2 833 523 Current accruals and deferred income 1 13 TOTAL ASSETS 5,020 5,614 TOTAL EQUITY AND LIABILITIES 5,020 5,614 Notes 1 to 20 in the accompanying notes to the financial statements are an integral part of the balance sheet at 31 December 2009. Iberia, L.A.E., S.A. / Financial Statements / Income Statement 233
INCOME STATEMENT FOR 2009 AND 2008
Millions of euros
Notes 2009 2008
CONTINUING OPERATIONS: Revenue 15.1 4,212 5,188 Work performed by the entity and capitalised 14 15 Procurements 15.3 (1,409) (1,864) Other operating income 15.2 158 233 Ancillary income and grants 154 198 Other non-recurring operating income 435 Employee costs 15.4 (1,339) (1,313) Wages, salaries and similar expenses (1,041) (995) Employee benefit cost (298) (318) Other operating costs 15.5 (1,988) (2,133) Depreciation and amortisation charge 4.1 and 5 (175) (198) Overprovisions 11 55 44 Impairment losses and net gains on disposal of non-current assets 5 (3) 24 Impairment and losses 1(3) Gains/losses on disposals and other gains and losses (4) 27
PROFIT (LOSS) FROM OPERATIONS (475) (4)
Finance income 15.6 64 137 Finance cost 15.7 (40) (52) Change in fair value of financial instruments 4 (28) Exchange differences 14 (17) (1) Impairment and net gains on disposal of financial instruments 7 21 (26)
NET FINANCE INCOME 32 30
PROFIT (LOSS) BEFORE TAX (443) 26
Income tax 13 162 (1)
PROFIT (LOSS) FROM CONTINUING OPERATIONS (281) 25
PROFIT (LOSS) FOR THE YEAR (281) 25
Notes 1 to 20 of the accompanying financial statements are an integral part of the income statement for 2009 Iberia, L.A.E., S.A. / Financial Statements / Statement of Changes in Equity 234
STATEMENT OF CHANGES IN EQUITY FOR 2009 AND 2008
A) STATEMENT OF RECOGNISED INCOME AND EXPENSE
Millions of euros Notes 2009 2008
PROFIT (LOSS) FOR THE YEAR (I) (281) 25
Income and expense recognised directly in equity: From measurement of financial instruments Available-for-sale financial assets 6.1.1 25 (114) From cash flow hedges 8 - (335) Tax effect (7) 135
TOTAL INCOME AND (EXPENSE) RECOGNISED DIRECTLY IN EQUITY (II) 18 (314)
Transfers to the income statement: From cash flow hedges 8 382 66 Tax effect (115) (20)
TOTAL AMOUNTS TRANSFERRED TO INCOME STATEMENT (III) 267 46
TOTAL RECOGNISED INCOME AND (EXPENSE) (I+II+III) 4 (243)
Notes 1 to 20 of the accompanying financial statements are an integral part of the 2009 statement of recognised income and expense Iberia, L.A.E., S.A. / Financial Statements / Statement of Changes in Equity 235
B) COMPREHENSIVE STATEMENT OF CHANGES IN EQUITY
Millions of euros Profit Share Share Legal Other Treasury Revaluation (loss)for Total capital premium Reserve reserves shares adjustments the year
BALANCE AT 1 JANUARY 2008 743 120 148 745 (19) 323 (89) 1,971
Total recognised income and (expense) - - - - - 25 (268) (243) Distribution of 2007 profit To reserves - - 1 164 - (165) - - To dividends - - - - - (158) - (158) Transactions with treasury shares (net) - - - - (45) - - (45)
BALANCE AT 31 DECEMBER 2008 743 120 149 909 (64) 25 (357) 1,525
Impact of changes in accounting policy - - - (25) - - - (25)
ADJUSTED BALANCE AT 1 JANUARY 2009 743 120 149 884 (64) 25 (357) 1,500
Total recognised income and (expense) - - - - - (281) 285 4 Distribution of 2008 profit To reserves - - - 25 - (25) - -
BALANCE AT 31 DECEMBER 2009 743 120 149 909 (64) (281) (72) 1,504
Notes 1 to 20 of the accompanying financial statements are an integral part of the 2009 comprehensive statement of changes in equity Iberia, L.A.E., S.A. / Financial Statements / Cash Flow Statement 236
CASH FLOW STATEMENT FOR 2009 AND 2008
Millions of euros
2009 2008
CASH FLOWS FROM OPERATING ACTIVITIES: (273) 40
Profit (loss) before tax (443) 26 Adjustments for: 157 120 Depreciation and amortisation 175 198 Impairment losses (3) 25 Changes in provisions 72 52 Gains (losses) on retirements and disposal of property, plant and equipment 4 (24) Gains (losses) on retirements and disposal of financial instruments (21) - Finance income (64) (137) Finance cost 39 52 Exchange differences 17 - Change in fair value of financial instruments (4) 5 Other income and expenses (58) (51)
Changes in working capital 74 (50) Inventories 17 (26) Trade and other receivables 98 133 Other current assets 3 (35) Trade and other payables (68) (181) Other current liabilities (6) 11 Other non-current assets and liabilities 30 48
Other cash flows from operating activities (61) (56) Interest paid (16) (26) Dividends received 11 Interest received 104 136 Corporate income tax expense 14 (30) Other receipts (payments) (164) (137)
CASH FLOWS FROM INVESTING ACTIVITIES: (174) (381)
Payments on investments (276) (533) Subsidiaries and associates (65) (56) Intangible assets (17) (20) Property, plant and equipment (107) (127) Other financial assets (53) (425) Other assets (34) 95
Proceeds from disposals 102 152 Property, plant and equipment 37 106 Other financial assets 61 46 Non-current assets held for sale 4-
CASH FLOWS FROM FINANCING ACTIVITIES: 39 (301)
Proceeds from and payments for equity instruments - (45) Acquisition of own equity instruments - (46) Disposal of own equity instruments -1
Proceeds from and payments for financial liabilities 39 (98) Proceeds from bank borrowings 125 56 Repayments of bank borrowings (86) (154)
Dividends paid and payments on other equity instruments - (158) Dividends - (158)
EFFECT OF EXCHANGE RATE CHANGES (6) -
NET INCREASE/DECREASE IN CASH AND CASH EQUIVALENTS (414) (642)
Cash and cash equivalents at the beginning of the year (*) 2,160 2,802 Cash and cash equivalents at the end of the year (*) 1,746 2,160 Notes 1 to 20 in the accompanying financial statements are an integral part of the cash flow statement for 2009 (*) The Company counts as cash and cash equivalents not only the balance under "Cash and Cash Equivalents" in the balance sheet but also deposits, fixed-term deposits and promissory notes recognised under "Other Financial Assets - Current Financial Assets" (see Note 6.2). Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 237
IBERIA, LÍNEAS AÉREAS DE ESPAÑA, S.A. NOTES TO THE ACCOUNTS FOR 2009
1. COMPANY DESCRIPTION
The main business of Iberia, Líneas Aéreas de España, S.A., is the air transport of passengers and cargo but it also carries out complementary activities, the most important of these being support services for passengers and planes in airports and aircraft maintenance. As a passenger and cargo air transport group it operates an extensive network serving three core markets: Spain, Europe and the Americas. Iberia, Líneas Aéreas de España, S.A. is a full member of the oneworld alliance, one of the world's leading airline groupings, which allows it to extend its air transport business worldwide. The registered office of Iberia, Líneas Aéreas de España, S.A. is in Madrid and, since April 2001, its shares have been listed on Spain's four stock markets. Iberia, Líneas Aéreas de España, S.A. is the parent company of a group of subsidiaries and is therefore legally obliged to prepare separate consolidated financial statements. The consolidated financial statements for the Iberia Group in 2008 were prepared by the Company's directors and approved at the Board of Directors meeting of 26 February 2009. The consolidated financial statements for 2008 were approved by shareholders at the General Shareholders' Meeting of Iberia, Líneas Aéreas de España, S.A., held on 3 June 2009 and placed on record at the Madrid Mercantile Registry.
2. BASIS OF PRESENTATION OF THE ANNUAL FINANCIAL STATEMENTS
2.1 True and fair view
The financial statements for 2009 were prepared using the accounting records of the Company and are presented in accordance with Royal Decree 1514/2007 approving Spanish financial reporting principles, to give a true and fair view of the Company's equity, financial position, profit or loss and cash flows during the year. These financial statements were prepared by the Company's directors for approval at the General Shareholders' Meeting and are expected to be approved without any modification.
2.2 Critical issues concerning the measurement and assessment of uncertainty
The financial statements for 2009 made use of estimates by the Company's directors to measure and record some assets, liabilities, income, expenses and obligations. These estimates related basically to the following:
The assessment of possible impairment losses on certain assets. The assumptions used in the actuarial calculation of obligations to employees. The useful lives of property, plant and equipment and of intangible assets. The criteria used to measure certain assets. The value of travel tickets and documents sold but never used. The estimate of the liability accrued at year-end in respect of outstanding points granted to holders of "Iberia Plus" loyalty cards. Measurement of provisions and contingencies. The fair value of certain financial instruments. Measurement of the terms of leases. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 238
The estimates were made on the basis of the best information available at 31 December 2009 on the events analysed. It is however possible that future events may lead to a modification of these estimates in coming years. Any such changes would have a prospective effect.
Loss for the year
The Company made a EUR 281 million loss in 2009. The loss was basically a result of a fall in demand and reduction in average income. The Company's 2010 budget forecasts a return to profit and the 5-year projections drawn up by the Company's management envisage a rising trend in profits. The implementation of the current merger with British Airways Plc, described in Note 6.1.1, should improve this profit outlook thanks to the resultant synergies. As a result, the directors do not consider it necessary to recognise provisions for impairment of the Company's assets beyond those recorded in the financial statements for 2009 and explained in the corresponding notes.
2.3 Comparative information
Iberia, Líneas Aéreas de España, S.A. has changed the criteria for classification and measurement of points in the "Iberia Plus" scheme. Until the year-ended 31 December 2008, points were measured as a cost under "Other Operating Costs" in the income statement and a provision for the estimated value of outstanding points at the end of each year was booked under "Trade and Other Payables Suppliers and Other Payables". At 31 December 2008, the related provision stood at EUR 115 million. As from 2009, the value assigned to points is recognised as an identifiable component of the sale of flight tickets at fair value and the value measured is initially recognised as deferred income under "Non-Current Accrued Expenses and Deferred Income" on the liability side of the balance sheet. Iberia, Líneas Aéreas de España, S.A. applied this criterion prospectively from 1 January 2009 as it was impossible to measure all the effects of retrospective application. The impact at that date gave rise to a charge against "Reserves" of approximately EUR 36 million. The corresponding tax impact was recognised as a credit to the same item of approximately EUR 11 million.
3. DISTRIBUTION OF LOSS
The Company's directors will propose to shareholders at the General Shareholders' Meeting that the entire loss for 2009 should be taken to the "Loss from Prior Years". Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 239
4. ACCOUNTING POLICIES
The main recognition and measurement bases used in preparing the 2009 financial statements, in accordance with Spanish financial reporting principles, are as follows:
4.1 Intangible assets
Intangible assets include computer software which was mainly acquired from third parties. The Company recognises costs incurred to acquire or develop software programmes under this heading. Maintenance costs of computer applications are recognised in the income statement for the year in which they are incurred. Computer software is amortised on a straight-line basis over five years. In 2009 the charge for this item was EUR 19 million (compared to EUR 18 million in 2008).
4.2 Property, plant and equipment
Property, plant and equipment are carried at historical cost, net of the related accumulated depreciation and impairment losses, if any, in accordance with the criteria explained in Note 4.3. Improvements to items of property, plant and equipment leading to increased capacity, efficiency, or to a lengthening of the useful lives of the assets are capitalised. The Company depreciates the depreciable cost of its property, plant and equipment using the straight-line method at annual rates based on years of estimated useful life. The estimated useful life of property, plant and equipment items are as follows:
Years
Aircraft 18 - 22 Buildings and other structures 20 - 50 Machinery, fixtures and tools 10 - 15 Surface transport equipment 7 - 10 Furniture and fixtures 10 Computer hardware 4 - 7 Spare parts for property, plant and equipment 8 - 18 Flight simulators 12 - 14
The estimated residual value of rotatable fuselage parts (those assigned to specific types or families of aircraft), which is recognised under "Spare Parts for Property, Plant and Equipment", ranges from 10% to 20% of acquisition cost, depending on the type of aircraft to which the parts are assigned. The estimated residual value of repairable fuselage parts, included in the same item, is 10% of acquisition cost. The Company depreciates in full the acquisition cost of other items of property, plant and equipment. When consolidating owned aircraft and aircraft operated under a finance lease, the Company strips out from the cost of the aircraft the cost of components that will be replaced during the scheduled overhauls that take place every four to seven years. This cost is depreciated on a straight-line basis over the period from the acquisition of the aircraft to the first scheduled overhaul. The cost of the repairs made during these overhauls is capitalised to property, plant and equipment and depreciated over the period until the next scheduled overhaul. For each aircraft operating under an operating lease, based on the terms of the related leases, the Company recognises an allowance for the total cost to be incurred in scheduled overhauls and allocates this cost to the income statement on a straight-line basis over the period between two consecutive overhauls (see Note 11). Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 240
Maintenance costs of property, plant and equipment and the cost of minor repairs to aircraft operated by the Company are recognised in the income statement as incurred.
4.3 Impairment of property, plant and equipment and intangible assets
When there is an indication of decline in value, the Company performs an impairment test to estimate the possible loss of value that may reduce the recoverable amount of the assets to below their carrying amount. Recoverable amount is the higher of fair value less costs to sell and value in use. If the recoverable amount of an asset is estimated to be less than its carrying amount, the Company recognises an impairment loss in the income statement. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to a maximum of the original carrying amount that would have been recognised had no impairment loss been recognised.
4.4 Leases
Leases are classified as finance or operating leases depending on the substance and the nature of the transaction. The main leases entered into by the Company are for aircraft and do not include automatic transfer of ownership at the end of the lease term. Leases are classified as finance leases whenever their terms include an option for the lessee to acquire the asset (purchase option) and Company management has decided to exercise the option. Other leases, with or without a purchase option, are classified as operating leases unless their terms and conditions make the transaction equivalent to an acquisition (based on the following indicators: purchase option, lease term and present value of the payment obligations).
Finance leases
For finance leases, the Company recognises the cost of leased assets in the balance sheet by the nature of the leased asset and, simultaneously, a liability for the same amount. This amount is calculated as the lower of the fair value of the leased asset and the present value, at the beginning of the lease term, of the minimum payments agreed upon, plus any purchase option, when there is no reasonable doubt as to its exercise. The calculation does not include contingent payments, service costs or taxes that can be passed on by the lessor. The total finance charge on the lease is allocated to the income statement for the year in which it is incurred, using the effective interest rate method. Contingent payments, if any, are recognised as an expense for the year they are incurred. The assets recognised for these types of transactions are depreciated on the basis of their nature using similar criteria to those applied to other items of property, plant and equipment.
Operating leases
Costs from operating leases are recognised in the income statement for the year when they are incurred. Any receipt or payment made on contracting an operating lease is treated as an advance receipt or payment and recognised in the income statement over the lifetime of the lease as the benefits of the leased asset are received or given. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 241
4.5 Financial assets
The financial assets held by the Company are classified as follows:
A. Loans and receivables: financial assets arising from the sale of goods or the rendering of services in the ordinary course of the Company's business, or financial assets which did not arise from the ordinary course of business but are not equity instruments or derivatives, have fixed or determinable payments and are not traded in an active market. B. Financial assets held for trading: those acquired with the purpose of selling them in the near term or part of a portfolio of identified financial instruments for which there is evidence of a recent actual pattern of short-term profit-taking. This category includes financial derivatives except for those that constitute financial guarantee contracts (such as pledges) or have been designated as hedging instruments. C. Equity investments in subsidiaries, associates and jointly controlled entities: subsidiaries are considered to be companies linked to the company by a relationship of control and associates those over which the Company exercises significant influence. D. Available-for-sale financial assets: these include debt securities and equity instruments of other companies that are not classified in any of the previous categories.
Loans and receivables are initially measured at the fair value of the consideration given plus directly attributable transaction costs and, thereafter, at amortised cost. The Company has recognised provisions to cover non-payment risks. These provisions are calculated according to the probability of recovering the debt based on its age and the debtor's solvency. Financial assets held for trading are measured at fair value through profit and loss in the income statement. Investments in subsidiaries and associates are measured at cost less any accumulated valuation adjustment for impairment. The adjustments are measured as the difference between carrying amount and recoverable amount, recoverable amount being the higher of fair value less costs to sell and the present value of future cash flows deriving from the investment. Barring better evidence of the recoverable amount, the equity of the investee company is used, adjusted for any unrealised capital gains at the measurement date (including any goodwill). Exceptionally, the acquisition cost of the holdings in the Iberbus companies (Note 6.1.1) are not adjusted to fair value as under agreements in force the other investor, Airbus, has guaranteed the whole of Iberia, Líneas Aéreas de España, S.A.'s investment. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 242
Applying the consolidation criteria required under the international financial reporting standards adopted by the European Union to the investments where the Company has a controlling stake or significant influence, would increase the assets and reserves shown in the financial statements by EUR 26 million and EUR 36 million, respectively, and would reduce the loss for the year by EUR 8 million. Finally, available-for-sale financial assets are measured at fair value with any changes being recognised directly in equity until the asset is disposed of or has become permanently impaired, at which time the cumulative gains or losses previously recognised in equity are recognised in the income statement. An asset is considered to have been permanently impaired if its market value has fallen by over 40% or has fallen and failed to recover for a year and a half. At least at each reporting date the Company tests its financial assets not measured at fair value through profit or loss for impairment. Objective evidence of impairment is considered to exist when the recoverable amount of the financial asset is lower than its carrying amount. When this occurs, the impairment loss is recognised in the income statement. The Company derecognises financial assets when the rights to receive the asset's cash flows have expired or are sold and substantially all the risks and rewards of ownership have been transferred. However, the Company does not derecognise financial assets which it sells while retaining substantially all the risks and rewards of ownership, instead recognising a financial liability equal to the consideration received. The Company generally invests its temporary cash surpluses in short-term financial assets, which are recognised under "Current Financial Assets" and "Cash Equivalents" in the balance sheet at the amounts invested. The interest income associated with these transactions is recognised as income when accrued while unmatured interest is presented as an addition to the corresponding balance sheet items.
Cash and cash equivalents
This includes cash and short-term highly liquid investments maturing in less than three months that are readily convertible to cash and where the risk of change in value is insignificant. The interest income associated with these transactions is recognised as income when accrued while unmatured interest is included in the corresponding balance sheet item. "Cash Equivalents" in the balance sheet at 31 December 2008 includes all investment maturing in less than three months from that date, irrespective of the original term of these investments. If 2009 criteria were applied to the 2008 financial statements "Cash Equivalents" would be reduced by EUR 104 million, and this amount would instead be recognised as an increase to "Current Financial Assets - Other Financial Assets".
Treasury shares
Treasury shares are recognised at the value of the consideration paid and are deducted from equity. Gains and losses on the acquisition, sale, issue or cancellation of treasury shares are included in equity. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 243
4.6 Financial liabilities
Financial liabilities include payables owed by the Company that arose from the purchase of goods and services in the normal course of its business, or non-commercial payables that cannot be considered to be derivative financial instruments. These payables are initially recognised at the fair value of the consideration received, adjusted for directly attributable transaction costs. They are subsequently measured at amortised cost. The Company derecognises financial liabilities once the resulting obligations have been extinguished.
4.7 Inventories
Inventories are measured at the lower of acquisition cost (weighted average cost) or market value (net realisable value) and include mainly aircraft spare parts, repairable aircraft engine parts and fuel. The Company makes the appropriate valuation adjustments, and recognises them as an expense in the income statement when the net realisable value of the inventories is lower than their acquisition cost.
4.8 Balances and transactions in currencies other than the euro
Transactions in currencies other than the euro and the resulting receivables and payables are recognised at their equivalent euro value at the transaction date.
Receivables and payables denominated in currencies other than the euro are translated into euros at the exchange rates prevailing at 31 December each year. However, following customary airline practice, the balance of the liability for unused traffic documents is recognised in the balance sheet at the exchange rate prevailing in the month of the sale, as set by the International Air Transport Association (IATA). The IATA exchange rate for each month is the average exchange rate for the last five bank working days prior to the 25th, inclusive, of the preceding month. Changes in value arising from differences between the official exchange rates at year-end and the exchange rates at which the receivables and payables in non-euro currencies were originally recognised and those arising at the date of collection or payment of receivables and payables denominated in non-euro currencies are allocated to "Exchange Differences" in the income statement. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 244
4.9 Income tax
Since 1 January 2002, the Company and certain subsidiaries file consolidated tax returns under the consolidated tax system provided for by Chapter VII of Title VII of Spain's Consolidated Corporation Tax Law. Income tax expense or income consists of both current and deferred expense or income. Current tax is the amount that the Company pays in settlement of the income tax returns for that year. Tax credits and other tax benefits applied to the taxable profit, excluding withholdings, prepayments and tax loss carryforwards effectively offset during the year, are deducted from the current tax amount. Deferred tax expense or income relates to the recognition and derecognition of deferred tax assets and liabilities. These include the temporary differences between the carrying amounts of assets and liabilities and their tax bases, measured at the amount expected to be payable or recoverable, as well as tax loss and tax credit carryforwards. These amounts are measured at the tax rates that are expected to apply in the period when the asset is realised or the liability is settled. Deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are only recognised to the extent that it is considered probable that the Company will have sufficient taxable profits in the future against which the deferred tax asset can be utilised. Deferred tax assets and liabilities arising from items directly charged or credited to equity accounts are also recognised with a charge or credit, respectively, to equity. Recognised deferred tax assets are reassessed at the end of each reporting period and the appropriate adjustments are made where there are doubts as to their future recoverability. Also, unrecognised deferred tax assets are reassessed at the end of each reporting period and are recognised where it has become probable that they will be recovered through future taxable profits.
4.10 Income and expense recognition
Income and expenses are recognised on an accrual basis, i.e. when the actual flow of the related goods and services occurs, regardless of when the resulting monetary or financial flow arises. Ticket sales and sales of the traffic documents for cargo and other services are initially credited to "Customer Advances" in the balance sheet. This shows the estimated liability for ticket sales and traffic documents sold before 31 December 2009 but not yet used at that date. The related revenue is recognised when the transport or service actually happens. The Company runs the "Iberia Plus" card scheme to promote customer loyalty. Cardholders accumulate points for taking certain flights, using the services of entities participating in the programme or making purchases with credit cards signed up to the programme. The points can be exchanged for free tickets or other services offered by participating companies. Points are measured at fair value which is initially recognised as deferred income. The fair value of unused points at 31 December 2009 of EUR 156 million was recognised under "Non-Current Accrued Expenses and Deferred Income" on the liabilities side of the balance sheet. Iberia, Líneas Aéreas de España, S.A. bases its measurement of the fair value of points granted on the fares for its own flights and the terms of agreements with other companies participating in the "Iberia Plus" programme. These agreements state the prices that they can recover from Iberia, Líneas Aéreas de España, S.A. for Iberia Plus points redeemed against their services. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 245
When programme users redeem the points against services provided by Iberia, Líneas Aéreas de España, S.A. it is recognised as income in the income statement. Income recognised for redeemed points includes not only the value of the points themselves but also a percentage estimated to represent the number of points that will be left unredeemed by Iberia Plus beneficiaries. It is currently estimated that 18% of points will never be redeemed, based on the experience of the Company over the lifetime of the programme. In general, any incentives, bonuses or discounts received in cash or in kind by the Company relating to aircraft coming into service under operating leases are recognised in the income statement either on a straight-line basis over the term of the lease or when the incentive, bonus or discount is used. "Non-Current Accruals and Deferred Income" in the liabilities side of the balance sheet includes the amounts not yet recognised as income at each year end. Interest income from financial assets is recognised using the effective interest method and dividend income is recognised when the shareholder's right to receive payment is established. Interest and dividends from financial assets accrued after the acquisition date are recognised as income in the income statement.
4.11 Non-Current Provisions
In preparing the financial statements, the directors drew a distinction between:
A. Provisions: credit balances covering present obligations arising from past events, the settlement of which is likely to cause an outflow of resources, but which are uncertain as to their amount and/or timing. B. Contingent liabilities: possible obligations that arise from past events and whose existence will be confirmed only by the occurrence of one or more future events not wholly within the Company's control.
The financial statements include all the provisions with respect to which it is considered that it is more likely than not that the obligation will have to be settled. Contingent liabilities are disclosed in the notes to the financial statements, unless the possibility of an outflow in settlement is considered to be remote. Provisions are measured at the present value of the best possible estimate of the amount required to settle or transfer the obligation, taking into account the information available on the event and its consequences. Where discounting is used, adjustments made to provisions are recognised as a finance cost on an accrual basis. The Company reverses these provisions, fully or partially, when the obligations cease to exist or are reduced. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 246
Provisions for restructuring costs
In December 2001 the Company obtained authorisation from the employment authorities for a collective redundancy procedure to be applied to various employee groups. This was extended by further authorisations (the last granted in November 2007) and remains in force until 31 December 2010 for ground staff and cabin crew. On 20 April 2009, the Company approved an extension to the term and scope of the redundancy procedure until 31 December 2013 to include pilots on the same terms and conditions. The procedure provides for payments until the statutory retirement age to employees who meet certain conditions and decide to request early retirement. The actuarial studies used to determine the liability to employees who have opted for early retirement under these conditions are based on similar assumptions to those described in the section on "Provision for Obligations to Employees". The successive payments resulting from these commitments are deducted from the provisions recorded. Also, a collective redundancy procedure for handling staff on the ground associated with the process for the assignment of resources by way of subrogation was approved in 2006 which will remain in force until 2014. The accompanying balance sheet at 31 December 2009 does not include any provision for this second collective redundancy procedure, since there was no related cost commitment.
Obligations to Employees
Under the collective labour agreements in force, on reaching the age of 60 flight crew cease to discharge their duties and are placed on reserve, although their employment relationship remains in place until their statutory retirement age. Since May 2009, pilots, on reaching the age of 60, have had the option of remaining active, subject to restrictions on certain aspects of their work. The Company recognises the costs of staff placed on reserve throughout the active working life of each employee based on the related actuarial studies. The collective labour agreements in force also provide that flight crew who meet certain conditions may take early retirement (special leave of absence and voluntary termination). The Company is required to pay certain amounts of remuneration to these employees until they reach the statutory retirement age. The Company recognises the provision required to meet the future payment obligations to the employees concerned, based on actuarial studies, with a charge against the income statement in the year that this happens. At present, 165 employees are on special leave and 257 employees have opted for voluntary termination. Liabilities arising from these agreements are recognised as "Non-Current Provisions - Provisions for Employee Benefits" (Note 11). These liabilities were calculated on the basis of actuarial studies by independent actuaries using the projected unit credit method and based on a discount rate of 3.5% and PERM/F-2000 P mortality tables, assuming 2% growth in CPI.
4.12 Montepío de Previsión Social Loreto
The main purpose of the Montepío de Previsión Social Loreto is to pay retirement pensions to its members (who include the Company's employees) and other welfare benefits in certain circumstances (death or permanent disability). Under the current collective labour agreements, the Company and its employees make the statutory contributions (defined contributions) to the Montepío, as established in these labour agreements. The Montepío's bylaws limit the Company's liability to the payment of the statutory contributions established. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 247
The Company's contributions in 2009 and 2008 were EUR 24 million and EUR 22 million, respectively, which were recognised under "Employee Costs - Social Security Costs" in the income statement.
4.13 Related-party transactions
The Company carries out all transactions with related parties at market value. Also, transfer prices are adequately documented, so the Company's directors consider that there are no significant risks that could give rise to material tax liabilities in the future.
4.14 Non-current assets and disposal groups held for sale
The Company classifies a non-current asset or disposal group as held for sale when it has taken the decision to sell it and the sale is expected to be completed within twelve months or as stated in a signed sale agreement. These assets or disposal groups are measured at the lower of carrying amount and fair value less costs to sell. Non-current assets classified as held for sale are not depreciated, but rather at the date of each balance sheet the related valuation adjustments are made to ensure that the carrying amount is not higher than fair value less costs to sell.
Income and expenses arising from non-current assets and disposal groups held for sale which do not qualify as discontinued operations are recognised under the corresponding heading in the income statement by nature.
4.15 Derivative financial instruments and hedging transactions
The derivatives held by the Company relate mainly to foreign currency, interest rate and fuel price hedges, the purpose of which is to significantly reduce these risks in the underlying hedged transactions. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 248
Financial derivatives are initially recognised at cost in the balance sheet, and the required valuation adjustments are subsequently made to reflect their fair value at all times. Increases in value are recognised under "Non-Current or Current Financial Assets - Derivatives" and reductions in value under "Non-Current or Current Liabilities - Derivatives" in the balance sheet. Gains and losses from these changes are recognised in the income statement, unless the derivative has been designated as a hedging instrument and the resulting hedge is highly effective, in which case the recognition criteria are as follows:
1. Fair value hedges: the hedged item and the hedging instrument are both measured at fair value, and any changes in their fair values are recognised in the income statement, netting their effects under the same heading. 2. Cash flow hedges: changes in the fair value of derivatives are recognised under "Equity - Valuation Adjustments, Hedging Transactions". The cumulative gain or loss recognised in this heading is transferred to the income statement to the extent of the impact on the underlying (resulting from the risk hedged) thereby netting off the effect under the same income statement heading.
The fair value of the various derivative financial instruments is measured by discounting the expected cash flows based on spot and futures market conditions at year-end.
4.16 Activities with an environmental impact
Environmental activities are generally considered to be those aimed at preventing, reducing or repairing damage to the environment. Accordingly, investments deriving from environmental activities are measured at cost and capitalised as an increase to property, plant and equipment in the year they are carried out, in line with the criteria described in Note 4.2. Costs arising from environmental protection and improvements are taken to the income statement for the year in which they are incurred, irrespective of when the associated monetary or financial flows take place. Provisions for contingencies or liabilities, litigation in progress and indemnities or obligations of undetermined amount related to the environment that are not covered by insurance polices are made as soon as the contingency or liability giving rise to the indemnity or payment occurs. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 249
5. PROPERTY, PLANT AND EQUIPMENT
The variations in 2009 and 2008 in deferred tax assets for property, plant and equipment were as follows:
Millions of euros Additions or 2009 31-12-08 Transfers Retirements 31-12-09 provisions Cost: Aircraft 1,541 46 25 (161) 1,451
1,541 46 25 (161) 1,451
Other property, plant and equipment Land 3 - - - 3 Buildings and other structures 157 - - (3) 154 Machinery, fixtures and tools 449 16 4 (4) 465 Surface transport equipment 31 1 - - 32 Furniture and fixtures 20 2 - - 22 Computer hardware 110 6 - (2) 114 Spare parts for property, plant and equipment 216 22 - (29) 209 Flight simulators 3 - - - 3 Work in progress 21 18 (12) (16) 11
1,010 65 (8) (54) 1,013
Depreciation: Aircraft (729) (105) - 113 (721)
(729) (105) - 113 (721)
Other property, plant and equipment Buildings and other structures (118) (4) - 1 (121) Machinery, fixtures and tools (328) (22) - 4 (346) Surface transport equipment (22) (3) - - (25) Furniture and fixtures (15) (1) - - (16) Computer hardware (80) (11) - 2 (89) Spare parts for property, plant and equipment (105) (10) - 18 (97) Flight simulators (1) - - - (1)
(669) (51) - 25 (695)
Provisions: Aircraft (39) (2) - 24 (17) Other property, plant and equipment (3) - - 3 -
(42) (2) - 27 (17)
Total, net 1,111 1,031 Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 250
Millions of euros Additions or 2008 01-01-08 Transfers Retirements 31-12-08 provisions Cost: Aircraft 2,072 137 (303) (365) 1,541
2,072 137 (303) (365) 1,541
Other property, plant and equipment Land 3---3 Buildings and other structures 159 - - (2) 157 Machinery, fixtures and tools 463 10 1 (25) 449 Surface transport equipment 35 - - (4) 31 Furniture and fixtures 20 1 - (1) 20 Computer hardware 99 15 - (4) 110 Spare parts for property, plant and equipment 207 18 - (9) 216 Flight simulators 3 - - - 3 Work in progress 8 21 (6) (2) 21
997 65 (5) (47) 1,010
Depreciation: Aircraft (1,129) (128) 258 270 (729)
(1,129) (128) 258 270 (729)
Other property, plant and equipment Buildings and other structures (116) (4) - 2 (118) Machinery, fixtures and tools (329) (22) - 23 (328) Surface transport equipment (23) (3) - 4 (22) Furniture and fixtures (13) (2) - - (15) Computer hardware (72) (11) - 3 (80) Spare parts for property, plant and equipment (99) (10) - 4 (105) Flight simulators (1) - - - (1)
(653) (52) - 36 (669)
Provisions: Aircraft (139) - 54 46 (39) Other property, plant and equipment (3) - - - (3)
(142) - 54 46 (42)
Total, net 1,145 1,111 Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 251
5.1 Aircraft
Additions
The additions in each year related to:
Millions of euros
2009 2008
Aircraft 15 73 Engines 12 44 Refurbishment 19 20
46 137
In 2009, the Company bought an aircraft for the A-320 fleet with two engines that were subsequently sold (see section on retirements). The Company also bought one engine for the A-319 fleet and one for the A-340/600 fleet. The additions to the fleet in 2008 consisted of two A-320s, which were sold the same year (see section on retirements), and two A-340s which had been operated under operating leases. A finance lease was arranged for one and the purchase option exercised on the other.
Transfers
Transfers for 2009 mainly concerned deposits previously put down for the acquisition of aircraft and engines, recognised in "Non-Current Financial Assets - Other Financial Assets" (Note 6.1.3), and transfers of work in progress. In 2008, the Company reclassified the aircraft in the MD fleet, which it no longer uses and which are under contract of sale to be delivered in the next few years, to "Non-Current Assets Held for Sale", in amounts of EUR 333 million of costs, EUR 258 million of cumulative depreciation and EUR 54 million of impairment provisions. The other transfers mainly concerned deposits previously put down for the acquisition of aircraft and engines, recognised in "Non-Current Financial Assets - Other Financial Assets".
Retirements
The retirements in each year related to:
Millions of euros 2009 2008 Fleet Accumulated Accumulated Cost Provisions Cost Provisions depreciation depreciation A-320 32 (8) - 47 (10) - MD-87 - - - 152 (130) (18) A-340 3 (3) - 15 (9) - B-747 126 (102) (24) 148 (120) (28) MD-88 - - - 3 (1) -
161 (113) (24) 365 (270) (46) Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 252
A-320 aircraft In 2009, the Company sold an A-320 that it had previously bought in the same year and had not brought into service. The sale of this aircraft generated a profit of EUR 2 million under "Gains (Losses) on Disposals and Other Gains and Losses" in the income statement. An engine damaged during the year was also derecognised, with the Company recovering EUR 1 million from the insurer. This gain was recognised under "Gains (Losses) on Disposals and Other Gains and Losses". The Company also derecognised the cost of overhauls carried out under the scheduled maintenance programme for these items which had been fully depreciated. In 2008, the Company sold two A-320s which it had bought earlier the same year and not brought into service. The aircraft were sold to financial institutions and gains from the sale recognised under "Gains (Losses) on Disposals and Other Gains and Losses" in the income statement for 2008. The Company also derecognised the cost of overhauls carried out under the scheduled maintenance programme for these aircraft which had been fully depreciated. MD-87 aircraft Retirements from the MD-87 fleets in 2008 refer to the sale of eight MD-87s and twenty engines. These retirements generated a profit for the Company of EUR 5 million, recognised under "Gains (Losses) from Disposals of Assets and Other Gains and Losses". B-747 aircraft In 2008, the Company derecognised two aircraft and two engines from the B-747 fleet with a net carrying amount of zero. Also in 2009 the Company derecognised another two aircraft from the same fleet which were grounded at 31 December 2008, also with zero net carrying amount.
Provisions on aircraft
The changes in each year were as follows:
Millions of euros Balance at Balance at Balance at Fleet Retirements Transfers Additions Retirements Transfers 01-01-08 31-12-08 31-12-09 B-747 63 (28) - 35 - (24) - 11 B-757 3 - - 3 - - (3) - MD 72 (18) (54) - - - - - A-320 - - - - 2 - 3 5 Other 1 - - 1 - - - 1
139 (46) (54) 39 2 (24) - 17
Commitments and other guarantees on the fleet
The Company has given an undertaking to subscribers to a bond issue that it will continue using 20 planes subject to operating or finance leases for periods of between 9 and 14 years. At 31 December 2009, the amount of the bond outstanding was USD 86 million and EUR 120 million (compared to USD 101 million and EUR 120 million at 31 December 2008). The Company is carrying out an aircraft renewal programme under various agreements with Airbus, covering the A-320 and A-340 fleets. Following updates to the Airbus agreement, the aircraft not yet delivered at 31 December 2009 and the years when they are scheduled to join the fleet are as follows: Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 253
Number of aircraft
Fleet 2010 2011 2012 2013 Total
A-320 - 3 - 7 10 A-340/600 2 - - - 2
23-712
The terms of this renewal programme oblige the Company to post EUR 188 million in deposits, of which it had already delivered EUR 119 million at 31 December 2009 (Note 6.1.3). The following table shows the schedule for delivery of the outstanding amounts:
Millions of euros
2010 21 2011 18 2012 29 2013 1
69
Based on the basic prices in the agreements, the total cost of the aircraft subject to outright purchase commitments not yet delivered at 31 December 2009 was approximately EUR 719 million. The Company also has options on 14 A-320 aircraft, and has made a prepayment of EUR 3 million, recognised under "Other Financial Assets" in the balance sheet (see Note 6.1.3) The details above also exclude two A-319s, one A-320 and two aircraft from the A-340/600 fleet which were awaiting formal delivery. The prepayments made for these aircraft total EUR 114 million, recognised under "Current Financial Assets - Loans and Receivables" in the balance sheet at 31 December 2009 (Note 6.2).
Aircraft in service
The Company had the following aircraft in service at 31 December 2009:
Number of aircraft Under operating Fleet Owned Under finance lease Total lease A-319 - - 22 22 A-320 2 6 28 36 A-321 - 4 15 19 A-340/300 6 1 13 20 A-340/600 - - 12 12
8 11 90 109
The foregoing table excludes one B-747 aircraft owned by the Company which was grounded at 31 December 2009 because it was to be sold or scrapped and which has a carrying amount of zero. It also excludes the MD aircraft discussed in Note 5.7 on "Non-Current Assets Held for Sale". Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 254
Also excluded from the table above, are eight A-320s owned by the Company, which the Company temporarily grounded in 2009 because of the falloff in air traffic. Nor does the table include one aircraft from the A-340/600 fleet whose operating lease was signed in 2009 but which had not yet come into service at 31 December.
Aircraft operated under operating and wet leases
In 2009, wet lease were cancelled on three A-340/300s which were moved onto operating leases. The expiry dates for operating leases on aircraft that the Company has in service are as follows:
Year No. of Fleet Aircraft 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
A-319 1 1 4 8 4 1 - - - 3 22 A-320 1 1 2 6 2 2 5 - - 9 28 A-321 - - - 1 - 2 3 2 1 6 15 A-340/300 3 1 3 2 3 1 - - - - 13 A-340/600 - - - - - 3 2 3 4 - 12
Total 5 3 9 17 9 9 10 5 5 18 90
As well as the aircraft shown in the table above, the Company has operating leases on a B-757 which at 31 December 2009 was sub-leased to another airline, an A-340/600 which was out of service on 31 December 2009 and an A-340/300 and an A-320 which at 31 December 2009 were out of service pending return to their respective lessors. Certain of the operating leases include a purchase option on the aircraft that can be exercised during the lease term, and the possibility of extending the lease for periods ranging from one to nine years. At the date of preparation of these financial statements, the Company's directors did not intend to exercise the purchase options or to request or avail themselves of the extensions provided for in these leases where these would entail the use of the aircraft for periods exceeding 16 years. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 255
Operating lease costs
The lease payments accrued in 2009 and 2008 for aircraft under operating and wet leases amounted to EUR 331 million and EUR 357 million, respectively, and are included under "Other Operating Costs" in the income statement (Note 15.5). The approximate total for operating lease payments payable for these aircraft, calculated based on the interest rates and exchange rates prevailing at 31 December 2009 and 2008, is as follows:
Millions of euros
Year 31-12-09 31-12-08
2009 - 292 2010 256 267 2011 242 252 2012 228 239 2013 177 190 2014 and beyond 606 588
1,509(*) 1,828
(*) Equivalent to USD 2,174 million at the year-end exchange rate. The exchange rate and interest rate risks on these lease payments are partially hedged with derivatives (Note 8).
5.2 Other property, plant and equipment
The carrying amount of the buildings and facilities built on state-owned land, mainly at Spanish airports, was EUR 33 million and EUR 32 million, respectively, at 31 December 2009 and 2008. The Company's directors do not expect any material losses to arise as a result of the reversion process since the maintenance programmes ensure that the items are always in good operating condition.
5.3 Assets held under finance leases
At 31 December 2009 the total cost of property, plant and equipment acquired under finance leases, mainly aircraft, was EUR 408 million with EUR 127 million of accumulated depreciation (EUR 408 million and EUR 104 million at 31 December 2008). The schedule for lease payments outstanding at 31 December 2009, including any purchase options, is shown in Note 12.2. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 256
5.4 Fully depreciated items
At 31 December 2009 and 2008, the cost of the Company's fully depreciated items of property, plant and equipment amounted to EUR 405 million and EUR 353 million, respectively, the detail being as follows:
Millions of euros
31-12-09 31-12-08
Aircraft 29 24 Buildings and other structures 62 58 Machinery, fixtures and tools 228 195 Furniture and fixtures 88 Computer hardware 65 56 Other assets 13 12
405 353
5.5 Insurance coverage
The Company has taken out insurance policies on its property, plant and equipment and intangible assets which provide adequate cover for their carrying amount at 31 December 2009. It also has insurance policies to cover aircraft leased to third parties.
5.6 Non-current assets not in service
The Company keeps certain property, plant and equipment assets that are not in service in the balance sheet, basically aircraft and engines. The cost of these assets, EUR 78 million (EUR 204 million at 31 December 2008), is covered by the related depreciation and provisions recognised. These amounts do not include the aircraft which were temporarily grounded in 2009 (see Note 5.1 "Aircraft in service").
5.7 Non-current assets held for sale
All balances recognised under this heading in the balance sheet relate to the Company's MD aircraft and engines which are to be sold in the next few years under the sale contracts for this fleet. At 31 December 2009 these aircraft were not in service. In 2009, 11 engines from this fleet with a carrying amount of EUR 2 million were sold with the Company recognising a EUR 2 million gain under "Gains (Losses) from Disposals of Assets and Other Gains and Losses" in the income statement. A damaged engine from the same fleet was also derecognised. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 257
6. FINANCIAL ASSETS
6.1 Non-current financial assets
The detail of “Non-Current Financial Assets” at 31 December 2009 and 2008 is as follows:
Millions of euros Equity Loans Derivatives Other financial 31 December 2009 Total instruments to third parties (Note 8) assets Loans and receivables 10 76 - 143 229 Available-for-sale financial assets: - At fair value 243 - - - 243 - At cost 14 - - - 14 Derivatives - - 4 - 4
Total 267 76 4 143 490
Millions of euros Equity Loans to third Derivatives Other financial 31 December 2008 Total instruments parties (Note 8) assets Loans and receivables 12 93 - 233 338 Available-for-sale financial assets: - At fair value 219 - - - 219 - At cost 14 - - - 14 Derivatives - - 70 (6) 64
Total 245 93 70 227 635
6.1.1 Equity instruments
Movements in equity instruments and the corresponding provisions recognised in the balance sheet for 2009 and 2008 were as follows:
Millions of euros % Ownership Balance at Exchange Valuation Balance at 2009 Additions Retirements at 31-12-08 differences adjustments 31-12-09 31-12-09 Loans and receivables: Iberbus companies 40.00-45.00 12 - (2) - - 10 Available-for-sale financial assets: - At fair value British Airways Plc 9.99 217 - - - 25 242 Other 2 - (1) - - 1 - At cost Servicios de Instrucción de Vuelo, S.L 19.90 9 - - - - 9 Wam Acquisition, S.A. 11.57 5 - - - - 5
245 - (3) - 25 267 Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 258
Millions of euros % Ownership Balance at Exchange Valuation Balance at 2008 Additions Retirements at 01-01-08 differences adjustments 31-12-08 31-12-08 Loans and receivables: Iberbus companies 40.00-45.00 25 - (9) (4) - 12 Available-for-sale financial assets: - At fair value British Airways Plc 9.99 - 331 - - (114) 217 Other 1 - - - 1 2 - At cost Servicios de Instrucción de Vuelo, S.L. 19.90 9 - - - - 9 Wam Acquisition, S.A. 11.57 5 - - - - 5
40 331 (9) (4) (113) 245
Iberbus companies
Airbus, the controlling shareholder of the Iberbus companies, has guaranteed the recovery of all the financial investments and loans made by Iberia, Líneas Aéreas de España, S.A. to these companies. For this reason, no provisions were taken against the stakes in these companies and they continue to be carried at their acquisition cost.
British Airways Plc
In 2008 the Company acquired shares giving it a 9.9% ownership stake in British Airways Plc for EUR 331 million. At year-end they had been valued at EUR 217 million. At 31 December 2009 the fair value of these shares was EUR 242 million and the EUR 89 million fall in value from their original cost was charged directly to equity, net of tax effects, under "Valuation Adjustments - Available-for-sale Financial Assets" in the balance sheet. In 2009, the boards of directors of Iberia, Líneas Aéreas de España, S.A. and British Airways Plc approved the signature of a binding agreement setting the terms for a merger between the two companies, in order to create one of the world's leading airline groups. The agreement recognised the principle of parity on the board of directors and management bodies of the new Group. The planned merger involves the creation of a new holding company that will own the two current airlines and whose shareholders will be the current shareholders of Iberia, Líneas Aéreas de España, S.A. and British Airways Plc. Under the terms of the planned merger, after cancellation of the Company's treasury shares and before the cancellation of the two companies' current cross-shareholdings, the shareholders of Iberia, Líneas Aéreas de España, S.A. will own 45% of the holding company with British Airways Plc shareholders owning the other 55%. In the first quarter of 2010, once the various stages in the process have been completed and the requisite authorisations obtained, it is planned to formalise a definitive merger agreement that will then be submitted to shareholders for approval.
Wam Acquisition, S.A.
The investment in Wam Acquisition S.A. was acquired in part exchange for the sale of Amadeus, S.A. and is structured as ordinary and preference shares, the latter being convertible into ordinary shares if the subsidiary is floated on the stock market. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 259
On this point, Wam Acquisition, S.A. is currently in the process of obtaining a listing. Once this process is complete and it is officially listed, the Company will remeasure its stake in Wam Acquisition, S.A. at fair value, which is likely to result in a significant increase in the value of the investment.
Other available-for-sale financial assets measured at fair value
The Company sold its stake in Opodo Ltd. in 2009, for its carrying amount.
6.1.2 Loans to third parties
The changes in this balance sheet heading in 2009 and 2008 were as follows:
Millions of euros Balance at Exchange Balance at 2009 Transfers 31-12-08 differences 31-12-09 Loans to Venezolana Internacional de Aviación, S.A. (a) 26 - - 26 Loans to Iberbus companies 54 (1) (15) 38 Loans to Aerolíneas Argentinas, S.A. (a) 36 - - 36 Loans to Iberlease 2004 Ltd. 38 (1) - 37
Total cost 154 (2) (15) 137
Provisions (61) - - (61)
Total, net 93 76
Millions of euros Balance at Exchange Balance at 2008 Transfers 01-01-08 differences 31-12-08 Loans to Venezolana Internacional de Aviación, S.A. (a) 26 - - 26 Loans to Iberbus companies 78 4 (28) 54 Loans to Aerolíneas Argentinas, S.A. (a) 36 - - 36 Loans to Iberlease 2004 Ltd. 36 2 - 38 Other loans 2 - (2) -
Total cost 178 6 (30) 154
Provisions (61) - - (61)
Total, net 117 93
(a) The loans granted to Venezolana Internacional de Aviación, S.A. (VIASA) and Aerolíneas Argentinas, S.A. arose in prior years and had been provisioned in full at 31 December 2009 and 2008.
Iberbus companies
The Company has granted loans to each of the six Iberbus investees with which it has aircraft operating leases in force. The principal on these loans ranges from USD 11 million to USD 20 million. The loans were granted for a period equal to the term of the operating lease for the related A-340/300 aircraft and earn annual interest ranging from 4% to 6%. They are repayable in a one-off lump sum on maturity, which will take place in the period from 2010 to 2012. The loans maturing in 2010 were reclassified to "Current Financial Assets - Loans to Companies" (Note 6.2). Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 260
The non-current amounts outstanding, by maturity, are as follows:
Millions of euros
31-12-09 31-12-08
Matures in: 2010 - 29 2011 8 8 2012 30 17
38 54
Iberlease 2004 Ltd.
Iberlease 2004 Ltd., a company from which Iberia, Líneas Aéreas de España, S.A. acquired four aircraft under finance leases, is also the recipient of four loans granted by Iberia, Líneas Aéreas de España, S.A. with the same term as the finance leases and repayable in a single payment in December 2014. The principal of these loans is USD 54 million and interest is an annual 6% to 6.5% paid quarterly.
6.1.3 Other financial assets
Movements under this balance sheet heading in 2009 and 2008 were as follows:
Millions of euros Balance at Exchange Balance at 2009 Additions Retirements Transfers 31-12-08 differences 31-12-09 Deposits for acquisition of aircraft 216 40 (33) (98) (3) 122 Measurement of hedging transactions (6) - (9) - 15 - Other deposits 17 1 (3) 6 - 21
227 41 (45) (92) 12 143
Millions of euros Balance at Exchange Balance at 2008 Additions Retirements Transfers 01-01-08 differences 31-12-08 Deposits for acquisition of aircraft 201 81 (31) (50) 15 216 Measurement of hedging transactions 3 4 - - (13) (6) Other deposits 16 2 - (1) - 17
220 87 (31) (51) 2 227 Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 261
The amounts included in "Deposits for Acquisition of Aircraft" relate to reimbursable advances paid for the acquisition of aircraft and engines (Note 5.1), as follows:
Millions of euros 2009 2008
Under option/right to Under option/right to Outright purchase Outright purchase acquire acquire A-320 family 62 3 70 3 A-340 family 55 - 137 - Engines 2 - 6 -
119 3 213 3
Based on scheduled aircraft deliveries, the Company considers that deposits of EUR 65 million will be taken to income in 2010.
6.2 Current financial assets
The detail of "Current Financial Assets" at 31 December 2009 and 2008 is as follows:
Millions of euros
Balance at 31-12-09 Balance at 31-12-08
Loans and receivables: Loans to companies 31 34 Other financial assets 999 1,635 Derivatives (Note 8) 55 79
Total 1,085 1,748
"Other financial assets" at 31 December 2009 includes deposits for aircraft acquisition totalling EUR 114 million (EUR 24 million at 31 December 2008) (Note 5.1). Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 262
At 31 December 2009 and 2008 the Company had EUR 873 million and EUR 1,579 million, respectively, placed in current financial assets. These were mainly deposits, fixed-term deposits and promissory notes and yielded an average return of 3.22% in 2009 and 4.74% in 2008. The average return on the investments recognised under "Cash Equivalents" in the balance sheet was 1.08% in 2009 and 4.70% in 2008.
7. INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES
The changes under this balance sheet heading in 2008 and 2009 were as follows:
Millions of euros Equity instruments Loans to companies Total Cost Provisions Net (Note 16) 2008: Balance at 1-1-08 41 (27) 14 - 14 Additions and retirements 56 (26) 30 - 30
Balance at 31-12-08 97 (53) 44 - 44
2009: Additions or provisions 169 - 169 6 175 Retirements or use (139) 50 (89) - (89)
Balance at 31-12-09 127 (3) 124 6 130 Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 263
7.1 Equity instruments
Key information on the group's main subsidiaries and associates at the end of 2009 and 2008, based on unaudited financial statements, is as follows:
2009 Millions of euros
% Profit/(Loss) Carrying amount Ownership Name Address Share Other Total (direct Cumulative Corporate purpose capital equity equity Impairment and Operating Net Cost impairment for the year indirect) 31-12-09
Group Subsidiaries:
Compañía Auxiliar al Cargo Exprés, S.A.. Centro de Carga Aérea Parcela 2 p.5 nave 6, Madrid Cargo transport 75.00 - - - 5 5 1 - -
Cargosur, S.A. Velázquez, 130; Madrid Air cargo transport 100.00 6 - - - 6 9 - (3)
Iber-America Aerospace, LLC Miami, Florida Trading in aircraft parts and engines 65.33 1 - - - 1 1 - -
Iberia Tecnología, S.A. Velázquez, 130; Madrid Maintenance and consultancy services 100.00 1 - - - 1 1 - -
Associates:
Serpista, S.A. Marcelo Espínola, 10; Madrid Maintenance of airport equipment 39.00111461- -
Sociedad Conjunta para la Emisión y Gestión de Medios de Pago EFC, S.A. José Ortega y Gasset, 22; Madrid Issue and management of payment cards 43.50 6 2 1 13 20 4 - -
Air Miles Avda. Bruselas 20, Alcobendas; Madrid Multi-sector loyalty scheme 33.33 - (1) (1) 3 2 1 - -
Vueling Airlines, S.A. Parque de Negocios Mas Blau; Barcelona Passenger transport 45.85 30 40 28 89 147 109 - -
127 - (3) Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 264
2008 Millions of euros
% Profit/(Loss) Carrying amount Ownership Name Address Share Other Total (direct Cumulative Corporate purpose capital equity equity Impairment and Operating Net Cost impairment for the year indirect) 31-12-08
Group Subsidiaries:
Compañía Auxiliar al Cargo Exprés, S.A. Centro de Carga Aérea Parcela 2 p.5 nave 6; Madrid Cargo transport75.00-11561- -
Cargosur, S.A. Velázquez, 130; Madrid Air cargo transport 100.00 6 - - - 6 9 - (3)
Iber-America Aerospace, LLC Miami, Florida Trading in aircraft parts and engines 65.33 1 - - - 1 1 - -
Iberia Tecnología, S.A. Velázquez, 130; Madrid Maintenance and consultancy services 100.00 1 - - - 1 1 - -
Associates:
Serpista, S.A. Marcelo Espínola, 10; Madrid Maintenance of airport equipment39.,00111351- -
Sociedad Conjunta para la Emisión y Gestión de Medios de Pago EFC, S.A. José; Ortega y Gasset, 22; Madrid Issue and management of payment cards 43.50 6 2 1 11 18 4 - -
Clickair, S.A Parque de Negocios Mas Blau; Barcelona Passenger transport 20.00 12 (46) (33) 48 27 80 (26) (50)
97 (26) (53)
Vueling Airlines, S.A. / Clickair, S.A.
In 2009, the Company increased its stake in Clickair, S.A. to 91.70%. This increase was accomplished by further contributions to its share capital and by buying out the ownership stakes of three of the other four shareholders. Disbursements by Iberia, Líneas Aéreas de España, S.A. as a result of all these transactions totalled approximately EUR 60 million. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 265
In July 2009, Iberia, Líneas Aéreas de España, S.A. contributed all its Clickair, S.A. shares to the capital increase by Vueling Airlines, S.A., in return for a 45.85% stake in the company's share capital, measured at EUR 109 million. The transaction resulted in a EUR 21 million gain for the company, recognised under "Impairment and Gains (Losses) on Disposal of Financial Instruments". At 31 December 2009, the Company's stake in Vueling Airlines, S.A., based on its stock market price, was measured at EUR 169 million.
8. DERIVATIVE FINANCIAL INSTRUMENTS
8.1 Qualitative information
The Company has in place procedures and systems that allow it to identify, measure, manage and mitigate the main risks affecting its various business lines. Risk management is integrated within the Company's key management parameters and tools, including the income statement, gearing levels, investments and disposals and the development of the "Master Plan". This approach to risk allows the Company to optimise the income statement and gearing and take balanced decisions on the risk/return offered by new investments. As for financial risks, the Company has a management programme to control and reduce the potential impact of fluctuations in exchange rates, interest rates and fuel prices on earnings and to preserve sufficient cash for its operations and investments.
Foreign exchange risk
Due to its international business, the Company generates payments and receipts in non-euro currencies. The main risk is a strengthening of the US dollar against the euro as the Company has more expenses than income in dollars. This risk is basically managed by a combination of two approaches: strategic hedges (with terms of up to 5 years) using currency swaps as well as options or other derivatives to cover a particular percentage of the positions, and shorter-term tactical hedges (up to 1 year) which can be adapted to market trends and which are matched to real dollar payment flows. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 266
Interest rate risk
The Company's position as a net borrower (including aircraft operating leases) means it is exposed to a rise in the interest rates of the currencies in which its borrowings are denominated. To manage this risk the Company keeps at least a percentage of its borrowings at fixed rates or hedged. Also, by diversifying the currencies it uses to raise finance (US dollar, euro, Swiss franc and pound sterling) it reduces the risk of a rise in interest rates affecting all the Company's borrowings.
Fuel-price risk
The Company manages the cost of aviation fuel through active risk-control policies and has a policy of directly hedging the price of kerosene (JET Kero CIF-NWE). This risk is usually mitigated using swaps and options.
Liquidity risk
Due to the seasonal nature of its business and the need for investment and finance to renew its aircraft, the Company applies a liquidity policy of maintaining substantial amounts of cash and current financial assets. This cash position is invested in highly liquid short-term instruments such as debt repos, eurodeposits and bank promissory notes from leading financial institutions, in accordance with the policy on counterparty risk. Besides these current assets and cash position, the Company also has permanent credit lines in place that guarantee its cash requirements.
Credit risk
The Company's main financial assets are cash, equity instruments and other financial instruments, and trade and other receivables. These last two categories carry most of the insolvency and bad debt risk. In general, the Company manages its bad debt and insolvency risks by setting credit limits and applying strict conditions on collection periods. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 267
Trade and other receivables are mainly the amounts pending collection from travel and cargo agencies for the transport of passengers and goods as well as handling and maintenance services provided to customers. In transactions with national airlines and travel agencies the Company has an established policy of requiring bank guarantees that hedge part of the credit extended to counterparties. Also, with some national travel agencies, the Company has a policy of requiring insurance cover for part of the credit offered. In general, the Company manages its bad debt and insolvency risks by setting credit limits and applying strict conditions on collection periods. The Company has no significant concentration of credit risk with third parties as its commercial risk is spread across a high number of entities and levels of non-payment in the industry have historically been very low. In 2009, the charge for impaired trade credit was EUR 12 million (EUR 4 million in 2008) and cumulative provisions for impaired trade credit at 31 December 2009 and 2008 were EUR 35 million and EUR 28 million, respectively.
8.2 Quantitative information
In line with the risk management policy described in Note 8.1 above, the Company arranges derivative transactions, mainly foreign exchange, interest rate and aviation fuel hedges. The most-used exchange rate derivatives are cross currency swaps, forwards and options. For interest rate derivatives the most used are interest rate swaps. Fuel price derivatives used are mainly swaps and options. The Company classifies its derivatives into three types in accordance with International Financial Reporting Standards (IFRS):
1. Derivatives designated as cash-flow hedges: these mainly hedge the cash flows from operating leases, ticket sales in non-euro currencies and fuel procurement. 2. Derivatives designated as at fair value: these hedge the market value of assets and liabilities recognised in the balance sheet. 3. Other derivatives: those that have not been designated as a hedge or which fail to meet IFRS criteria for a hedge. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 268
Foreign exchange hedges
At 31 December 2009, derivatives that hedged exchange differences, but were not specifically designated as a hedge under IFRS (being automatically offset in the income statement), and the underlying assets and liabilities that they hedge, are as follows:
Millions of US dollars
Currency Amount
Underlying: Assets: Loan to Iberbus companies USD 112 Prepayments on aircraft & engines USD 332 Guarantees given USD 1 Venezuela funds USD 52 A-320 equity USD 54 Liabilities: Borrowings 4 A-320/321 USD (153) Borrowings 5 A-340 USD (101)
Total underlying 297
Derivative: Cross currency swap USD (7) Fx Swaps USD 302
Total derivatives 295
The fair value of these derivatives at 31 December 2009 was a negative EUR 200,000 and the change in their value since 31 December 2008 of EUR 6 million was recognised as revenue for the year after being netted with the fall in value of the corresponding asset and liability items. At 31 December 2009, the total notional value of cash flow hedges against exchange risks is as follows:
Millions of US dollars Cash flows hedged (millions of US dollars) Underlying Type of hedge Expected cash outflows 2010 2011 2012 2013 2014
Foreign currency cost 1,041 Cross currency swaps 206 171 153 95 40 Options: USD "Four Ways" ----- USD "tunnels" 435 - - - - Fx Forwards 165 - - - - New aircraft 160 Fx Forwards 40 - - - - Insurance 14 Fx Forwards 7 - - - -
The market value of exchange rate derivatives (FX forwards and options) at 31 December 2009 was a positive EUR 6 million (EUR 23 million positive in 2008). This net amount is derived from EUR 26 million recognised under "Non-Current Financial Assets - Derivatives" and "Current Financial Assets - Derivatives" and EUR 20 million recognised under "Non-Current Borrowings" and "Current Borrowings" on the liabilities side of the balance sheet. These hedges are related to cash flows that will take place in 2010. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 269
The changes in fair value of the ineffective portion of forward contracts, a negative EUR 200,000, were recognised as a cost in the income statement for 2009. The change in the fair value of the exchange rate derivatives that are effective as cash-flow hedges was a negative EUR 17 million before considering tax effects, which was deferred and taken to equity, net of its tax effect. Exchange rate and interest rate risks on aircraft leases were managed using "Cross Currency Swaps" (CCS) which transform an original US dollar payment into euros. The effect of a 10% increase in the EUR/USD exchange rate on the value of the Company's hedging positions at 31 December 2009 is approximately a negative EUR 70 million. In the event of a 10% decline the change in value of the hedging position at 31 December 2009 would be approximately a positive EUR 75 million.
Cash-flow hedges at 31 December 2009
Millions (*) Nominal at Nominal at Nominal at Nominal at Nominal at Instrument Company Company 31-12-09 31-12-10 31-12-11 31-12-12 31-12-13 Cross currency swaps: Floating to fixed Receive USD Pay EUR 340 305 244 172 40 Floating to floating Receive USD Pay EUR 343 126 - - - Floating to floating Receive EUR Pay USD 386 77 - - - Fixed to fixed Receive USD Pay EUR 246 124 116 87 44
(*) Figures in the currency paid by the Company.
The fair value of cross currency swaps entered into at 31 December 2009 was a negative EUR 41 million. The net amount for 2009 is composed of EUR 8 million in assets and EUR 49 million in liabilities. These hedges are related to cash flows that will take place between 2010 and 2014.
Interest-rate hedges
The Company uses cross currency and interest rate swaps to manage its exposure to fluctuations in interest rates arising from its aircraft financing activities, as follows:
Nominal (millions of US dollars)
Instrument Currency 31-12-09 31-12-10 31-12-11 31-12-12 31-12-13
Interest Rate Swaps: Floating to floating (*) USD 256 235 212 63 -
(*) The Company pays floating interest rate with a cap and floor and receives floating interest rate.
The fair value of interest rate swaps entered into at 31 December 2009 was a negative EUR 6 million, recognised as a liability. These hedges are related to cash flows that will take place between 2010 and 2012. The cumulative change in value by the effective portion of the swaps used for cash-flow and interest rate hedges, a total inflow of EUR 3 million, was recognised in equity, net of its tax effect. The cumulative change in value of the ineffective portion, a gain of EUR 1 million, was recognised in profit for the year. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 270
The effect of a change of +50bp in the euro yield curve on the value of the Company's hedging positions at 31 December 2009 is approximately a positive EUR 5 million. A change of -50bp would produce a change in value of the hedging position at 31 December 2009 of approximately a negative EUR 5 million. A movement of +/-50bp on the US dollar yield curve would have the following impacts: +50bp would increase the value of the hedges by approximately EUR 2 million. A movement of -50bp would reduce their value by approximately EUR 2 million. For the purposes of these calculations, the Company considers a change of this magnitude in the interest rate curves to be the most likely scenario during 2010. However, for the sake of simplicity, it was assumed that the change in interest rates would take place at 2009 year-end and would then remain stable in 2010.
Fuel price hedges
Metric tonnes Underlying Commodity Metric tonnes Type of hedge Nominal at 31-12-09
Purchases of JET Kerosene fuel JET Kero CIF-NWE 1,814,000 SWAPS 1,146,000
Fuel price risk is hedged with swaps that protect against changes in financial flows due to changes in the price of fuel. The market value of fuel price derivatives was a positive EUR 25 million at 31 December 2009 (negative EUR 373 million in 2008). This EUR 25 million was recognised under asset items and just EUR 30,000 under "Current Borrowings" on the liabilities side of the balance sheet. The cumulative change in value of the effective portion of fuel hedges was a positive EUR 395 million before tax effects and was recognised under equity, net of its tax effect. The cumulative change in value of the ineffective portion, a gain of EUR 3 million, was recognised in profit for the year.
The impact of a +10% change in the price of fuel on the value of hedges at 31 December 2009 would be a positive EUR 51 million. A change of -10% would reduce the value of the hedging position at 31 December 2009 by EUR 51 million. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 271
9. TRADE AND OTHER RECEIVABLES
This heading in the balance sheet at 31 December 2009 and 2008 mainly includes receivables from customers for sales made either directly by the Group or by passenger and cargo agents. It also includes receivables from airlines, mainly for services provided by the Company on tickets sold through other airlines, and, finally, tax receivables (Note 13.1). Provisions recognised by the Company following its analysis of the recoverability of receivables, considering the age and specifics of each case, are also included under this heading.
10. EQUITY
10.1 Share capital
At 31 December 2009 and 2008 the Company had share capital of EUR 743 million, represented by 953,103,008 shares of par value EUR 0.78 each, all of the same class, fully subscribed, paid and held using the book entry system. The shares of the Company are listed on the Continuous Market of the Spanish stock exchanges and all confer the same voting and dividend rights. The owners of the Company, at the end of 2009 and 2008, were as follows:
2009 2008
Number of shares % Ownership Number of shares % Ownership
Caja de Ahorros y Monte de Piedad de Madrid 219,098,519 22.99 219,098,519 22.99 British Airways Plc 125,321,425 13.15 125,321,425 13.15 Chase Nominees Ltd. 49,594,518 5.20 - - Sociedad Estatal de Participaciones Industriales 49,212,526 5.16 49,212,526 5.16 The Bank of New York Mellon 38,072,751 3.99 - - El Corte Inglés, S.A. 32,151,759 3.37 32,151,759 3.37 B. Metzler seel. Sohn & Co - - 28,458,106 2.99 Other 439,651,510 46.14 498,860,673 52.34
953,103,008 100 953,103,008 100
10.2 Legal reserve
Under the Revised Spanish Companies Law, 10% of net profit for each year must be transferred to the legal reserve until the balance of this reserve reaches at least 20% of the share capital. The legal reserve may be used to increase capital provided that the remaining reserve balance does not fall below 10% of the increased share capital amount. Otherwise, until the legal reserve exceeds 20% of share capital, it can only be used to offset losses, provided that sufficient other reserves are not available for this purpose. At 31 December 2009 and 2008 this reserve represented 20% of the share capital.
10.3 Share premium
The Revised Spanish Companies Law expressly permits the use of the share premium balance to increase capital and establishes no specific restrictions as to its use. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 272
10.4 Treasury shares
The changes during 2009 and 2008 to "Treasury Shares" in the balance sheet were as follows:
2009 2008
Number of shares Millions of euros Number of shares Millions of euros
At the beginning of the year 27,898,271 64 8,050,000 19 Additions - - 20,255,916 46 Reductions - - (407,645) (1)
At year-end 27,898,271 64 27,898,271 64
The treasury shares held by the Company at 31 December 2009 represented 2.93% of the share capital, with an aggregate par value of EUR 22 million and an average acquisition price of EUR 2.31 per share. The average selling price of treasury shares by the Company in 2008 was EUR 2.69 per share. As part of the merger process described in Note 6.1.1 these treasury shares will be cancelled.
11. NON-CURRENT PROVISIONS
The detail of these provisions at year-end 2008 and 2009 and the main changes during the year are as follows:
Millions of euros Balance at Balance at Additions Provisions used Transfers Overprovisions 31-12-08 31-12-09 Provisions for employee benefits 669 49 (20) (55) (45) 598 Provisions for restructuring costs 433 51 (114) 55 - 425 Provisions for major repairs (Note 4.2) 74 24 (2) - (10) 86 Other provisions 133 3 (10) - - 126
1,309 127 (146) - (55) 1,235
11.1 Provisions for Employee Benefits
The additions to "Provisions for Employee Benefits" include the annual provision for the normal cost and for interest payments on provisions previously recognised, which are classified, respectively, under "Employee Costs - Social Security" (EUR 26 million) and under "Finance Cost" (EUR 23 million) in the income statement for 2009. Disbursements in this connection are amortised on an approximately straight-line basis. The EUR 55 million reduction due to "Transfers" relates to the provisions accrued at 31 December 2008 for benefit obligations to employees who took part in the collective redundancy programme in 2009 (Note 4.11). These EUR 55 million were transferred to "Provisions for Restructuring Costs" which includes all provisions related to the collective redundancy procedure. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 273
The EUR 45 million reversed as "Overprovisions" in 2009 relates to the option to remain active which was offered from May 2009 to pilots turning 60 as from that year (Note 4.11). Until then, "Provisions for Employee Benefits" had included the estimated provisions for the future earnings of pilots on reserve (aged between 60 and 65). Since there is now an option to remain active, this provision is no longer necessary as remuneration of those who continue to fly will come under "Employee Costs" for the corresponding year. Since this is a new situation, with no precedents to indicate how many pilots will take up the option, the company opted to monitor take-up over the next two years and compare the actual results with assumptions made in the corresponding actuarial studies. It can then gradually adjust the remaining provision for this item in the balance sheet at 31 December 2009. The EUR 45 million derecognised from this provision was booked as income under "Overprovisions" in the income statement for 2009.
11.2 Provisions for restructuring costs
"Provisions for Restructuring Costs" relate to the present value of the liabilities arising from the voluntary collective redundancy procedure (Note 4.11) approved in 2001 and extended until 2010 (3,832 employees at 31 December 2009). On 20 April 2009, the Company approved an extension to the term and scope of the redundancy procedure until 31 December 2013 to include pilots on the same terms and conditions. The payments related to this provision will continue over the next seven years in accordance with the age of the employees who have availed or will eventually avail themselves of the procedure.
11.3 Other provisions
"Other Provisions" includes the estimated amount required for probable liabilities of a diverse nature related mainly to litigation and unresolved tax assessments (Note 4.11). Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 274
12. NON-CURRENT AND CURRENT PAYABLES
The detail of "Non-Current payables" and "Current payables" at 31 December 2009 and 2008 is as follows:
Millions of euros 31-12-09 31-12-08
Current Non-current Total Current Non-current Total
At amortised cost: Bank borrowings 221 27 248 115 75 190 Finance leases 30 224 254 55 223 278 Other financial liabilities 17 2 19 21 2 23 At fair value: Derivatives (Note 8) 27 48 75 448 103 551
Total 295 301 596 639 403 1,042
12.1 Bank borrowings
The detail, by maturity, of bank borrowings, in the form of loans and credit lines, at 31 December 2009 and 2008 was as follows:
Millions of euros 31-12-09
Maturity Currency 2015 and 2010 2011 2012 2013 2014 Total beyond Euros 145 6 4 5 4 8 172 US dollar76-----76
221 6 4 5 4 8 248
Millions of euros 31-12-08
Maturity Currency 2014 and 2009 2010 2011 2012 2013 Total beyond Euros 5734 4 4 7 79 US dollar 58 53 - - - - 111
115 56 4 4 4 7 190
These loans and credit lines bore weighted average annual interest of 4.99% and 5.23% in 2009 and 2008, respectively, for the euro-denominated borrowings and 4.70% and 4.86%, respectively, for dollar-denominated borrowings. The Company arranged credit lines with limits of EUR 193 million in 2009 and EUR 201 million in 2008 against which EUR 28 million remained undrawn at 31 December 2009. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 275
12.2 Obligations under finance leases
At the end of 2009 and 2008 the Company was contracted to pay the following lease payments (including purchase options where applicable) under agreements in force:
Millions of euros EUR borrowings USD borrowings
2009 2008 2009 2008
Within one year 13 38 17 17 Between two and five years 100 90 110 124 Beyond five years 8 3 6 6
Total present value 121 131 133 147
Borrowings contracted by the Company are benchmarked to interest rates such as the Euribor or Libor.
13. TAX
13.1 Tax receivables and payables
Details of tax receivables at 31 December 2009 and 2008 are as follows:
Millions of euros
2009 2008
Non-current: Deferred tax assets 637 595
637 595
Current: Foreign tax receivables 57 Value added tax 717 ther tax receivables 63
18 27
Details of tax payables at 31 December 2009 and 2008 are as follows:
Millions of euros
2009 2008
Non-current: Deferred tax liabilities 71
71
Current: Take-off and security charges at airports 35 35 Foreign tax payables 33 35 Social Security taxes 20 21 Personal income tax withholdings 30 29 Other tax payables -4
118 124 Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 276
13.2 Reconciliation of accounting profit to taxable income and income tax expense or (income)
The reconciliation of accounting profit for 2009 and 2008 with the taxable income and the amount recognised under "Income tax" in the income statement for 2009 and 2008, is as follows:
Millions of euros
2009 2008
Receivable/(payable) Expense/(income) Receivable/(payable) Expense/(income)
Accounting profit for the year before tax (443) (443) 26 26 Permanent differences: Increase 2 2 2 2 Decrease (1) (1) (10) (10) Temporary differences: Arising in the year Increase (a) 151 - 116 - Decrease (b) (57) - - - Arising in prior years Increase 1 - - - Decrease (c) (222) - (210) -
Taxable income (569) (442) (76) 18
Tax rate of 30% (171) (132) (23) 5 Tax credits (6) (6) (5) (5)
Deferred tax assets - tax credits (177) - (28) -
Income tax expense/(income) - (138) - -
Adjustment to income tax (Note 13.4) - (24) - 1
Total income tax expense/(income) - (162) - 1
(a) Relating mainly to provisions for obligations to employees and other provisions for contingencies and charges and amounts received during the year in relation to memorandum credits and other deferred incentives. (b) Relating mainly to the use of the provision generated by the contribution of Clickair, S.A. shares to the capital increase of Vueling Airlines, S.A. (Notes 7.1 and 13.7) and the deductible expense for the year arising from the restatement of "Iberia Plus" liabilities following the change in accounting policy detailed in Note 2.3. (c) Relating mainly to the use of provisions recorded in previous years for obligations to employees and the recognition in profit for the year of memorandum credits and other incentives received in previous years. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 277
Current corporate income tax law provides certain tax incentives for investment and contributions to employee mutual funds. The Company has taken advantage of certain tax credits of this type, and plans to justify tax credits of EUR 4 million in the income tax return for 2009. The Company also plans to justify tax credits of EUR 2 million in its 2009 income tax return for domestic and international double taxation. The Company also took advantage of certain tax credits available on the reinvestment of extraordinary gains. The amounts reinvested and corresponding tax credits are as follows:
Millions of euros
Reinvestment Tax credit
2005 825 129 2006 1- 2007 123 16 2008 -- 2009 81
13.3 Tax recognised in equity
The detail of tax recognised directly in equity in 2008 and 2009 is as follows:
Millions of euros Effect of change in Balance at Balance at Balance at Increase Reduction accounting Reduction 01-01-08 31-12-08 31-12-09 policy (Note 2.3) Hedging instruments 38 101 (20) 119 - (115) 4 Available-for-sale financial assets - 34 - 34 - (7) 27 "Iberia Plus" programme - - - - 11 (11) -
Total 38 135 (20) 153 11 (133) 31 Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 278
13.4 Detail of income tax expense / (income)
The detail of income tax expense or (income) for 2009 and 2008 is as follows:
Millions of euros
2009 2008
Current tax: Continuing operations -- Deferred tax: Continuing operations (138) - Adjustments to income tax (24) 1
Total (162) 1
Adjustments to income tax mainly relate to income tax rebates from the Spanish tax authorities and differences between the income tax expense estimated at end 2008 and the expense in the income tax return filed (Note 13.5).
13.5 Recognised deferred tax assets and liabilities
Deferred tax assets and liabilities are recognised in the balance sheet under "Deferred Tax Assets" and "Deferred Tax Liabilities" as follows:
Millions of euros 2009 2008
Deferred tax Deferred tax Deferred tax assets Deferred tax assets liabilities liabilities Temporary differences 422 7 567 1 Tax loss carryforwards 199 - 23 - Unused tax credits 16 - 5 -
Total 637 7 595 1 Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 279
Movements in "Deferred Tax Assets" in 2008 and 2009 are as follows:
Millions of euros Deferred tax assets
Temporary Tax loss Unused tax Total differences carryforwards credits Balance at 1 January 2008 483 - - 483 Additions 149 23 5 177 Reductions (65) - - (65)
Balance at 31 December 2008 567 23 5 595
Effect of change in accounting policy (Note 2.3) 11 - - 11
Balance at 1 January 2009 578 23 5 606
Additions 45 171 6 222 Reductions (201) - - (201) Positive adjustment to income tax (Note 13.4) - 5 5 10
Balance at 31 December 2009 422 199 16 637
Deferred tax assets were mainly generated by provisions recorded to meet obligations to employees and other provisions, which will be deductible against tax in coming years, as well as income from memorandum credits and other deferred incentive income related to the aircraft. Also included are taxes recognised directly in equity (Note 13.3). At year-end 2009, based on estimated income tax for the year, the detail of the tax loss carryforwards and the maximum term for their recovery is as follows:
Millions of euros
Year of origin Taxable profit Tax effect Recoverable until
2008 94 28 2023 2009 569 171 2024
663 199
The deferred tax assets at 31 December 2009 are expected to be recovered as follows:
Millions of euros
Year of recovery
2010 82 2011 36 2012 and beyond 519
637
These deferred tax assets were recognised in the balance sheet since the Company's directors consider that, based on the best estimates of the Company's future results, it is likely that these assets will be recovered. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 280
13.6 Tax audits
As a result of various tax audits, the tax authorities issued certain assessments for 1993 to 1997 (relating mainly to personal income tax withholdings), which were signed on a contested basis and appealed against by the Company. Also, the Company filed an appeal against the assessments issued in connection with customs duties for 1998 (second half), 1999 and 2000 (first five months). During the audit performed in 2007 and 2008, the authorities issued assessments in relation to income tax for the period 2002 to 2004, and VAT for the period 2003 and 2004, both uncontested. The authorities also issued assessments in relation to non-resident tax and personal income tax for 2003 and 2004, which the Company appealed against. The Company's directors and tax advisors consider that no tax liabilities additional to those recognised under "Non-Current Provisions - Other Provisions" will arise from the resolution of the various appeals described above (Note 11). In relation to the tax periods for which the limitation period has not expired, all years since 2005 for income tax and since 2006 for all other taxes applicable to the Company, the Company's directors do not expect any liabilities to arise in addition to those recognised which might have a material effect on the financial statements.
13.7 Deferred tax liabilities
In compliance with Article 93 of the Spanish Consolidated Corporation Tax Law (Royal Decree Law 4/2004, of 5 March), it is stated that information about the Company's merger with Aviación y Comercio, S.A. is included in Note 19 to the 2000 financial statements. Also, in 2004 a non-cash contribution was made to Servicios de Instrucción de Vuelo, S.L. in respect of which, in accordance with Article 84 of the Spanish Consolidated Corporation Tax Law, part of the resulting tax credit entitlements were waived. Information on this transaction is included in Note 18 to the 2004 financial statements. Also, in compliance with Article 84 of the Spanish Consolidated Corporation Tax Law (Royal Decree Law 4/2004, of 5 March), in 2009 the Company took part as shareholder in the merger of Vueling Airlines, S.A. and Clickair, S.A., and the resultant capital gain of EUR 21 million was considered applicable for tax purposes and therefore gave rise to deferred tax of EUR 6 million. Information on this transaction is included in Note 7.1. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 281
14. TRANSACTIONS IN NON-EURO CURRENCIES
The detail of the most significant transactions in non-euro currencies, measured at the average exchange rates, is as follows:
Millions of euros
2009 2008
Sales 1,207 1,450 Services provided 198 234 Purchases 894 1,034 Services received 590 629
The most significant balances in non-euro currencies mainly relate to prepayments on aircraft, receivables from ticket sales and maintenance services provided as well as payables for purchases of fuel and aircraft parts. As a result of the devaluation of the bolivar in the first few days of 2010 following a decision by the Venezuelan government, the Company remeasured those assets and liabilities affected by the move and recognised a resulting expense of EUR 6 million under "Exchange Differences" in the 2009 income statement. Other exchange differences recognised in profit for the year, by category of financial instrument, basically related to derivatives and bank borrowings.
15. INCOME AND EXPENSE
15.1 Revenue
The breakdown of the Company's revenue in 2009 and 2008 is as follows:
Millions of euros
2009 2008
Passenger revenue (a) 3,325 4,218 Cargo revenue 224 309 Handling (aircraft dispatching and services in airports) 266 275 Technical assistance to airlines 310 297 Other income 87 89
4,212 5,188
(a) Including other income (recovery of unused tickets, commercial agreements, etc.) totalling EUR 188 million and EUR 327 million in 2009 and 2008, respectively.
The breakdown of passenger revenue excluding "Other Income", by network, is as follows:
Millions of euros
2009 2008
Domestic 709 929 Medium-haul 890 1,124 Long-haul 1,538 1,838
3,137 3,891 Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 282
15.2 Other operating income
The breakdown by item of this heading in the income statement for 2009 and 2008 is as follows:
Millions of euros
Items 2009 2008
Ancillary income, grants and other current management costs: Commissions 64 80 Rental income 15 18 Other income 75 100
154 198
Other non-recurring income 435
158 233
The income from commissions relates basically to the commissions on the sale of tickets for other airlines, the commissions arising from the franchise agreement with Air Nostrum and the sale of tickets for Clickair, S.A. and Vueling Airlines, S.A. under Iberia's code. "Other Non-Recurring Income" for 2008 notably includes EUR 15 million received in settlement of an insurance claim.
15.3 Procurements
The detail of "Procurements" in the income statement for 2009 and 2008 is as follows:
Millions of euros
2009 2008
Consumption of: Aircraft fuel 1,184 1,666 Aircraft spare parts 191 160 Catering materials 19 21 Other purchases 15 17
1,409 1,864
The breakdown of this heading by purchases and changes in inventories is as follows:
Millions of euros
2009 2008
Purchases 1,404 1,890 Changes in inventory 14 (26) Impairment of inventory (9) -
Consumption 1,409 1,864 Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 283
The detail by origin of purchases by the Company in 2009 is as follows:
Millions of euros
2009 2008
Spain 383 777 EU 127 79 Imports 894 1,034
1,404 1,890
15.4 Headcount
In 2009 and 2008, the number of employees, measured as average headcount, by professional category, was as follows:
Number of employees 31-12-09 31-12-08
Senior executives 10 10
Ground staff: Managers and other line staff 1,136 1,113 Clerical staff 5,290 5,587 Ancillary services 4,574 4,986 Aircraft maintenance technicians 2,930 2,875 Other 1,160 1,207
15,090 15,768
Flight staff: Technical crew 1,590 1,644 Cabin crew 3,745 3,923
5,335 5,567
20,435 21,345 Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 284
At 31 December 2009 and 2008, the distribution of the workforce by gender and by professional category was as follows:
31-12-09 31-12-08
Women Men Women Men
Senior executives 1 9 1 9
Ground staff: Managers and other line staff 431 676 430 714 Clerical staff 3,657 1,853 3,982 1,966 Ancillary services 457 4,576 479 4,941 Aircraft maintenance technicians 32 2,891 31 2,894 Other 520 640 552 679
5,097 10,636 5,474 11,194
Flight staff: Technical crew 60 1,580 60 1,608 Cabin crew 2,935 975 3,084 1,070
2,995 2,555 3,144 2,678
8,093 13,200 8,619 13,881
15.5 Other operating costs
The detail of "Other Operating Costs" in the income statement for 2009 and 2008 is as follows:
Millions of euros
2009 2008
Air traffic services 342 361 Aircraft lease payments (Note 5.1): Dry lease 315 324 Wet lease 16 33 Cargo 11 16 Other 713 Navigation charges 252 258 Aircraft maintenance 202 228 Commercial expenses 151 201 Booking system expenses 134 137 Other rent 72 75 In-flight services 66 72 Other maintenance 46 49 Stopover expenses 34 37 Indemnities for passengers, luggage and cargo 22 33 Fees 24 24 Incident costs 22 16 Other operating costs 272 256
1,988 2,133 Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 285
"Aircraft Maintenance" includes the expenses for subcontracted maintenance work and the provision for major repairs of aircraft operated under operating leases (Note 4.2). The fees for financial audit services provided to Iberia, Líneas Aéreas de España, S.A. and Group subsidiaries by the principal auditor were EUR 529,000 in 2009 and EUR 611,500 in 2008. Fees for non-audit services provided to Iberia, Líneas Aéreas de España, S.A. by the principal auditor and related companies in 2009 and 2008 were EUR 350,600 and EUR 428,000, respectively.
15.6 Finance income
The detail of "Finance income" in the income statement is as follows:
Millions of euros
2009 2008
Interest on short-term deposits 56 122 Interest on loans to associates 67 Other finance income 28
64 137
15.7 Finance cost
The detail of "Finance cost" in the income statement is as follows:
Millions of euros
2009 2008
Interest on loans 26 Interest on finance leases 14 15 Interest on employee liabilities 23 25 Other finance costs 16
40 52 Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 286
16. RELATED PARTY TRANSACTIONS
Related party transactions
The following transactions took place between the Company and related parties in 2009 and 2008:
Millions of euros 2009 2008
Revenue and Costs Group Group Significant Significant subsidiaries and Total subsidiaries and Total shareholders shareholders associates associates Costs: Finance costs 2 - 2 4 - 4 Management or collaboration contracts 6 - 6 8 - 8 Leases 24 - 24 29 - 29 Services received 22 56 78 24 61 85 Goods purchased 4 - 4 4 - 4
58 56 114 69 61 130
Revenue: Finance income 29 - 29 22 - 22 Dividends received - 1 1 - - - Services provided 24 107 131 37 122 159
53 108 161 59 122 181
Millions of euros 2009 2008
Other transactions Directors Significant Directors and Significant Total and Total shareholders management shareholders management Purchase of PP&E, intangible or other assets 3 - 3 9 - 9 Finance arrangements: borrowings and capital contributions (borrower) 128 - 128 88 - 88 Guarantees and deposits received 50 - 50 51 - 51 Other transactions - 6 6 - 6 6
The following transactions took place between the Company and related parties in 2009 and 2008:
Millions of euros 2009 2008 Significant shareholders: Collected from Iberia Paid to Iberia Collected from Iberia Paid to Iberia
British Airways Plc 13 24 16 37 El Corte Inglés Group 23 - 29 - Caja Madrid 26 29 33 22
62 53 78 59 Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 287
The transactions with British Airways Plc relate mainly to commissions on passenger tickets collected from and paid to this company, for tickets issued by one company with the related flight being flown by the other, collections and payments arising from loyalty programmes, and collections and payments for handling services provided, among others. The main transactions with the El Corte Inglés Group relate to the supply of uniforms for flight staff, commissions and incentives for passenger ticket sales and computer software and hardware development. Lastly, the transactions with Caja Madrid relate mainly to the interest on aircraft financing transactions, guarantees provided on aircraft, aircraft lease payments and returns on financial investments.
Balances with related parties
Balances outstanding in the balance sheet at 31 December 2009 and 2008 in the balance sheet are as follows:
Millions of euros 31-12-09 31-12-08
Group Group Significant Significant subsidiaries and Total subsidiaries and Total shareholders shareholders associates associates Non-current investments Equity instruments - 124 124 - 44 44 Loans to companies - 6 6 - - - Trade receivables 12 31 43 18 36 54 Current investments 372 - 372 537 - 537 Cash 6 - 6 13 - 13 Current borrowings 14 10 24 - 9 9 Trade payables 1 23 24 4 19 23
Accordingly, at 31 December 2009 and 2008, the Company was committed to making aircraft lease payments to companies from the Caja Madrid Group of EUR 194 million and EUR 224 million, respectively.
17. REMUNERATION AND OTHER BENEFITS TO DIRECTORS AND SENIOR EXECUTIVES
The detail of remuneration received in 2009 and 2008 by directors of Iberia, Líneas Aéreas de España, S.A. is as follows:
Thousands of euros
2009 2008
Fixed remuneration 783 780 Attendance fees 783 774 Payments in kind 111 85
Total 1,677 1,639
The Company also incurred expenses relating to the performance of non-executive directors' functions of EUR 6,000 and EUR 5,000 in 2009 and 2008, respectively. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 288
Two of the Company's directors also have executive positions (one director in 2008), for which they were paid the following amounts:
Thousands of euros
2009 2008
Fixed remuneration 550 693 Variable remuneration - 503 Payments in kind 311 Social security and other expenses 57 128
610 1,335
In 2009, the previous chairman (a director of the Company until his departure) received remuneration of EUR 838,000 and the company also paid expenses for social security and other items of EUR 57,000. He also received EUR 3,167,000 on leaving the company, of which EUR 277,000 was a cost for the Company and the rest was covered by an insurance policy. Also, contributions were made to an insurance policy in 2009 and 2008 of approximately EUR 1 million and EUR 300,000, respectively. In 2009 and 2008, no advances or loans were granted to directors.
Remuneration of senior executives
Remuneration received by members of senior management of the Company in 2009 and 2008, excluding those who serve on the board of directors (see above), is as follows:
Thousands of euros
Item 2009 2008
Salaries (fixed and variable) 2,919 3,010 Indemnities 1,467 - Payments in kind 126 112
4,512 3,122
Also, contributions were made to an insurance policy and pension schemes in 2009 and 2008 of EUR 167,000 and EUR 151,000, respectively In 2009 and 2008, no advances or loans were granted to the members of the Executive Committee of Iberia, Líneas Aéreas de España, S.A. Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 289
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
Pursuant to Article 127 ter. 4 of the Spanish Companies Law, introduced by Law 26/2003, of 17 July, which amends Securities Market Law 24/1988, of 28 July, and the Spanish Revised Companies Law, in order to reinforce the transparency of listed corporations, the table below details the activities carried on by the different directors that are identical, similar or complementary to the corporate purpose of Iberia, Líneas Aéreas de España, S.A.:
Name Company Activity Type of arrangement Position/Function
Rafael Sánchez-Lozano British Airways Plc Air transport Employee Director Roger Maynard British Airways Plc Air transport Employee Director of Investments and Alliances British Airways CityFlyer Ltd. y British Airways European Ltd. Air transport Employee Executive director Keith Williams British Airways Plc Air transport Employee CFO/Director Jorge Pont Sánchez Vueling Airlines, S.A. Air transport Employee Director
Also, pursuant to the same Law, it is stated that the only directors who own any equity interests in companies engaging in an activity that is identical, similar or complementary to the corporate purpose of Iberia, Líneas Aéreas de España, S.A. and subsidiaries are Roger Maynard, who has a 0.0004994% ownership interest in British Airways Plc and Keith Williams who has a 0.00286% ownership stake in British Airways Plc. Lastly, directors (or persons acting on their behalf) have not entered into transactions other than ordinary business transactions on normal market conditions with Iberia, Líneas Aéreas de España, S.A. or with other Iberia Group companies.
19. ENVIRONMENTAL INFORMATION
Within the framework of its environmental policy, Iberia, Líneas Aéreas de España, S.A. continued to undertake various activities and projects in 2009 in order to guarantee the proper management of the main environmental impacts of the air transport business as a whole. During 2009 and 2008 the Company incurred environmental expenses of EUR 5 million and EUR 4 million respectively, the detail being as follows:
Millions of euros
2009 2008
Environmental repair and maintenance 21
Employee Costs relating to environmental management 1 1
Environmental taxes and other 22
54
At 31 December 2009, the acquisition cost and accumulated depreciation of the environmental assets, which include, inter alia, water-treatment plants, hazardous waste storage facilities, gas recharge and filter systems and water recycling infrastructure, amounted to EUR 78 million and EUR 57 million, respectively (2008: EUR 77 million and EUR 52 million, respectively). Iberia, L.A.E., S.A. / Financial Statements / Notes to the Accounts for 2009 290
With respect to its aircraft, the Company has a renewal policy in which the environment (minimising the impact of noise and atmospheric emissions) is an important factor. Accordingly, the Company is continuing to add new aircraft models that reduce fuel consumption by approximately 20% compared to earlier generation aircraft. In its ground operations, the Company achieved certification under the ISO 14001/AENOR Environmental Management System including the Company's aircraft maintenance facilities at Barajas airport in Madrid. As a result of this certification, together with the existing ones in handling and the Company's other maintenance facilities, all of the Company's significant environmental issues are covered by external certification
Since 2009, the Company has been a member of the European SESAR programme to reorganise European air space with the aim of reducing aircraft congestion and environmental impacts. The Company considers that any possible environmental contingencies that might arise are covered sufficiently by its third-party liability insurance policies and by the provisions relating to probable or certain third-party liability, litigation in progress and outstanding indemnity payments or obligations of undetermined amount. Lastly, environmental investments were EUR 1 million in each of 2009 and 2008.
20. EXPLANATION ADDED FOR TRANSLATION TO ENGLISH
These financial statements are presented on the basis of accounting principles generally accepted in Spain. Certain accounting practices applied by the Company that conform with generally accepted accounting principles in Spain may not conform with generally accepted accounting principles in other countries. Management Report
IBERIA, LÍNEAS AÉREAS DE ESPAÑA, S.A. Iberia, L.A.E., S.A. / Management Report / Key Data 292
KEY DATA
IBERIA 2009 2008 % Change
Revenue and results (millions of euros) Recurring operating revenue 4,389 5,415 (18.9) EBITDAR (1) 60 496 (87.7) Recurring EBIT (464) (88) nm Profit (loss) from operations (2) (475) (4) nm Profit (loss) before tax (443) 26 nm Profit (loss) after tax (281) 25 nm Basic earnings per share (euro cents) (3) (30.4) 2.7 nm Passenger traffic: operating statistics and revenue Available seat kilometres (ASK) (millions) 62,158 66,098 (6.0) Revenue passenger kilometres (RPK) (millions) 49,612 52,885 (6.2) Load factor (%) 79.8 80.0 (0.2 p.) Passenger revenue (millions of euros) 3,137 3,891 (19.4) Passenger revenue / RPK (euro cents) 6.32 7.36 (14.1) Passenger revenue / ASK (euro cents) 5.05 5.89 (14.3) Finance indicators and ratios Equity (millions of euros) 1,504 1,525 (1.4) In-balance sheet net debt (millions of euros) (4) (1,401) (1,782) (21.4) Adjusted net debt (millions of euros) (5) 1,244 1,034 20.4 Recurring EBIT margin (%) (1) (10.6) (1.6) (8.9 p.) Profit (loss) after tax margin (%) (6.4) 0.5 (6.9 p.) Operating revenue / ASK (euro cents) (1) 7.06 8.19 (13.8) Operating cost / ASK (euro cents) (1) 7.81 8.32 (6.2) Operating cost (non fuel) / ASK (euro cents) (1) 5.90 5.80 1.7 Resources Average headcount (FTEs) 20,435 21,345 (4.3) Operating revenue per employee (thousands of euros) (1) 215 254 (15.3) Productivity (thousands of ASK / employee) 3,042 3,097 (1.8) Number of aircraft at year-end 109 119 (8.4) Fleet utilisation (block hours / aircraft / day) 10.3 10.0 3.7
IBERIA GROUP 2009 2008 % Change
Revenue and results (millions of euros) Recurring operating revenue 4,409 5,450 (19.1) EBITDAR (1) 61 500 (87.8) Recurring EBIT (464) (79) nm Profit (loss) before tax (435) 36 nm Profit (loss) after tax (273) 32 nm Finance indicators and ratios Equity (millions of euros) 1,551 1,564 (0.8) Adjusted net debt (millions of euros) (5) 1,229 1,012 21.4 EBITDAR margin (%) (1) 1.4 9.2 (7.8 p.) Recurring EBIT margin (%) (1) (10.5) (1.5) (9.0 p.) Profit (loss) after tax margin (%) (6.2) 0.6 (6.8 p.) nm: Not meaningful (1) EBITDAR (earnings before interest, tax, depreciation, amortisation and aircraft rentals), margins over recurring revenue, unit revenue and costs exclude non-recurring items. (2) Profit (loss) from operations includes recurring and non-recurring profit / loss. (3) Weighted average number of shares outstanding (in thousands): 925,205 in 2009 and 929,348 in 2008. (4) Negative balance means cash equivalents in excess of interest-bearing debt (without including the measurement of hedges at year-end 2009 Iberia, L.A.E., S.A. / Management Report / Highlights 293
1. HIGHLIGHTS
Iberia, Líneas Aéreas de España, S.A. (hereinafter, Iberia) is one of Europe's largest passenger and cargo airlines. It operates an extensive network of scheduled flights. Its main hub is Madrid-Barajas airport where the carrier operates flights connecting with 83 international destinations across Europe, the Americas, Africa and the Middle East. Iberia carries the highest number of passengers between Europe and Latin America of any airline. Iberia also engages in other businesses, with the aircraft maintenance and ground handling services standing out. In addition, over the years it has set up or invested in a series of companies that comprise the Iberia Group, and whose business activities complement or are related to those of the parent company. All of the company's services are provided under the umbrella of its commitment to satisfy its customers' expectations and to create shareholder value on an ongoing basis. The company manages its businesses based on the principles of respecting and protecting the environment, while actively engaging in community work. Iberia is part of the DJSI World and FTSE4Good IBEX sustainability indexes, which track leading sustainability companies in terms of their economic, social and environmental strategies and management. Iberia is a fully-fledged member of the oneworld alliance, one of the biggest airline alliances in the world. Iberia's shares have been listed on Spanish Stock Exchange since April 2001. Its main shareholders are Caja de Ahorros y Monte de Piedad de Madrid, with a 22.99% shareholder interest, and British Airways, which owns 13.15% of the company. In November 2009, Iberia and British Airways signed a binding agreement setting the foundations for a merger of equals between the two companies.
IBERIA. BREAKDOWN OF RECURRING OPERATING REVENUE IN 2009
Economic climate
In 2009, the global economy suffered the worst recession since the 1930s. The economic contraction began mid-2008, reflecting the knock-on effects of the international financial crisis, with economic conditions rapidly deteriorating thereafter. The dramatic contraction in industrial output, paralysed financial markets, rising unemployment, and highly leveraged households, increased the risk of a deeper and more prolonged recession, which was sidestepped thanks to unprecedented intervention by governments and central banks, which rolled out a concerted battery of monetary and fiscal stimulus measures. The International Monetary Fund (IMF) estimates that global gross domestic product (GDP) narrowed by 0.8% in 2009, compared to growth of 3.0% in 2008. Iberia, L.A.E., S.A. / Management Report / Highlights 294
Real GDP growth (a) 2009 2008
Global (b) (0.8) 3.0 US (2.5) 0.4 Eurozone (b) (3.9) 0.6 Japan (5.3) (1.2) Latin America and Caribbean (b) (2.3) 4.2 Spain (3.6) 0.9
Source: IMF, World Economic Outlook (January 2010). (a) Annual percent change in gross domestic product, constant prices. (b) Global and regional growth aggregates reflect average GDP weighted according to purchasing power parity.
During the third quarter of 2009 certain economic indicators began to show signs of turnaround. Fourth-quarter economic figures confirmed the recovery in the main European economies and Japan, while the US economy posted its first quarter of growth since entering into a recession. Although uncertainty lingers as to the sustainability of this recovery, as it is heavily underpinned by economic stimulus measures, car purchase incentive schemes and inventory cycle factors, there is broad consensus that the international economy is set to improve. The expected pace of this recovery, however, varies significantly depending on the economic situation of each country. Members of the European Union are slated to post weak growth, while emerging and developing economies are expected to prove more dynamic, spearheaded by Asia, most notably China and India. Turning to Spain, the combination of the global financial crisis with the collapse of the real estate market has had far-reaching economic consequences. In 2009, household spending and the construction sector, the drivers of the protracted economic boom that terminated abruptly in 2008, contracted sharply. Faced with slumping demand, inventory levels rose, prompting losses, bankruptcies and a significant drop in investment in capital goods. Most notably, the crisis has had a profound impact on unemployment in Spain, where the jobless rate as a percentage of the economically-active population stood at 18.8% at year-end. Spain's GDP fell sharply during the first three quarters of 2009, albeit easing in the last quarter of the year to leave the annual year-on-year contraction at 3.6% according to the latest IMF estimates, for a decline of 4.5 points on the rate of growth registered in 2008. The global economic crisis also had significant adverse ramifications for the Spanish tourist industry, which accounts for 11% of national GDP. Last year some 5.1 million fewer tourists visited Spain, a drop of 8.7% on 2008. However, the pace of year-on-year declines eased as the year progressed, having registered very high levels during the first half (down 16.3% in 1Q09 and by 11.4% in 2Q09). The majority of international tourists visiting Spain last year flew: 40.2 million visitors arrived by plane (77.1% of the total), 9.3% fewer than in 2008.
Airline sector performance
The global recession had significant repercussions for the airline sector, one of the industries hardest hit by the cutbacks in household and corporate spending. Overall, in 2009 the airline industry suffered the largest declines in passenger and cargo traffic and revenue in its entire history. International passenger traffic across the global airline sector had begun to gradually wane in 2008, resulting in a moderate year-on-year contraction in the last quarter of that year. The situation worsened during the early months of 2009, when demand began to slacken at a record pace, reaching rates of over 10% in the months of February and March, easing gradually thereafter. During the last four months of 2009 international passenger traffic rose year-on-year, boosted by the incipient economic recovery, although also helped by an easier comparison. For the full year, international passenger travel, measured by revenue passenger kilometres (RPK), fell by 3.5% on 2008, according to International Air Transport Association (IATA) data, decreasing in virtually all regions of the world. Iberia, L.A.E., S.A. / Management Report / Highlights 295
The European network carriers similarly sustained sharp drops in passenger traffic in the first months of 2009. Although the sharp pace of decline eased somewhat during the second half, the rebound in demand in Europe continues to lag that of other regions. According to the Association of European Airlines (AEA), the number of revenue passenger kilometres on scheduled flights fell 4.5% in 2009, underpinned by widespread declines in traffic that affected European routes as well as most long-haul routes. Faced with weak demand, AEA carriers began cutting capacity at the end of 2008, cuts that were sustained throughout 2009. This meant that load factors began to improve year-on-year from July 2009. For the full year, the number of AEA available seat kilometres (ASK) narrowed 4.2%, yielding a load factor of 76.0%, 0.3 points below the 2008 figure. Overall, the industry managed capacity astutely in 2009. However, unit revenue fell sharply.
SCHEDULED TRAFFIC AT AEA AIRLINES IN 2009 % YEAR-ON-YEAR CHANGE
The March-April figures are presented in aggregate to prevent the distortion arising from the fact that the Easter travel period was concentrated in different months in 2009 versus 2008.
In 2009, international air cargo traffic plummeted 10.1% on the back of the global trade crisis. Cargo traffic began to fall before passenger traffic, in mid-2008, and also fell more sharply (in December 2008 and January 2009 cargo traffic plunged by over 24%). This metric began to stage a gradual recovery mid-2009, underpinned by the improvement in the outlook for emerging Asian economies, registering positive growth from October on. Specifically, at AEA airlines, cargo traffic measured in revenue tonne kilometres (RTK) transported narrowed 16.5% year-on-year. In addition to the significant drop in traffic volumes, the airline sector also suffered a sharp decline in unit passenger and cargo revenue in 2009. According to IATA estimates, the average decline in passenger fares on international flights in 2009 ranged between 10% and 15% compared to the previous year. At AEA carriers meanwhile, revenue per RPK narrowed 14.4% during the first nine months. One of the key drivers of this deterioration in unit revenue was the sharp drop in first and business class travellers, where traffic narrowed 17.1% through November according to the IATA. Iberia, L.A.E., S.A. / Management Report / Highlights 296
Throughout 2009 the airlines intensified their cost cutting efforts, reduced flight frequency and took aircraft out of operation. However, new aircraft deliveries also took place, driving overall fleet utilisation lower across the industry. This did not benefit unit costs. On the other hand, fuel costs fell significantly on 2008 levels although kerosene prices rose sharply from mid-March 2009, climbing from $400/metric tonne to around the $670 mark by year-end. Escalating fuel prices also took their toll on the airlines' earnings, already hit very hard by the slump in revenue. As a result, the most recent IATA figures point to net losses across the entire sector last year to the tune of 11 billion dollars. For its part, the AEA estimates its members will have notched up between 3 and 3.5 billion euros in losses in 2009. Faced with these circumstances, many airlines were forced to scale back capacity and jobs. And some airlines, particularly smaller operators, also had to deal with liquidity issues. Merger and acquisition activity intensified as a result. Logically, the Spanish airline sector was not immune to the effects of the economic crisis, as well as having to tackle the major roll out of railroad infrastructure, notably the consolidation of the Madrid-Barcelona high speed rail connection which started to operate in February 2008. According to the Spanish Public Business Entity Aena, passengers travelling through Spanish airports fell 8.0% in 2009 in relation to the previous year. The monthly declines narrowed as the year progressed, partly reflecting the gradual weakening in traffic in 2008, climbing 2.1% year-on-year in December, the first positive reading since May 2008.
TOTAL PASSENGERS AT SPANISH AIRPORTS IN 2008 AND 2009 % YEAR-ON-YEAR CHANGES
In short, air traffic volumes in the airline sector, having contracted sharply in the last quarter of 2008 and in early 2009, began to stage a gradual recovery during the second half of the year, equalling or bettering 2008 levels at the end of 2009.
Iberia operating and financial performance
Capacity and demand The adverse climate affecting the overall airline industry in 2009 naturally took its toll on Iberia's business performance. Weak demand and the sharp drop in unit passenger and cargo revenues had a profound effect on the company's profitability, pushing recurring operating result (EBIT) into the red by EUR 464 million. Recurring operating revenues narrowed 18.9% on 2008, albeit partially offset by an 11.8% reduction in recurring operating costs, thanks to cost control measures rolled out by the company and the drop in fuel prices. Iberia, L.A.E., S.A. / Management Report / Highlights 297
Throughout 2009, Iberia adjusted its flight capacity to the evolving and complex market conditions. The company reduced capacity, measured in available seat kilometres, by 6% with respect to 2008, while demand narrowed 6.2%. By maintaining capacity in line with demand, the company managed to keep its passenger load factor at 79.8%, very close to the 2008 level, remaining towards the top end of the range among full service European carriers.
TREND IN ANNUAL LOAD FACTOR. TOTAL NETWORK
Analysing Iberia's entire network, capacity cutting was fairly consistent throughout the year, while the best performance in terms of load factor came in the fourth quarter.
IBERIA PASSENGER CAPACITY AND DEMAND QUARTERLY TREND. YEAR-ON-YEAR PERCENTAGE CHANGES Iberia, L.A.E., S.A. / Management Report / Highlights 298
The capacity adjustment was less pronounced in the long-haul segment (-3.3%), which once again increased its weight in the company's overall demand mix, accounting for 63.9% of total revenue passenger kilometres. All year demand in this segment was lower than in 2008, contracting 5.4% over the full year, albeit showing signs of recovery in the fourth quarter. The load factor in the long-haul segment was 83.4% in 2009, 1.8 points lower than in 2008, but improved 0.6 points the last quarter. Iberia, with a market share of 20.1% in 2009, held onto the leadership spot in the Europe-Latin America market, which shrank by 8.8% on aggregate for all carriers. In medium-haul international flights, the load factor improved by 2.5 points on 2008, reaching an average for the year of 75.6%, on the back of a 9.2% capacity adjustment, as the company fine-tuned its flight schedule in response to the challenging European market conditions. Demand was 6% lower in 2009, registering the largest drop in the first quarter (-10.7%), although slipping monthly by less than capacity from April onwards. The company continued to prioritise optimising connections through its Madrid-Barajas hub. Indeed, analysing medium-haul international flights departing from or landing at Madrid airport, the year-on-year decline in traffic narrows to 2.3% with respect to the previous year. In accordance with strategic planning, Iberia continued to cut capacity on its domestic routes: this strategy resulted in an 11% reduction in ASK relative to 2008, pushing the load factor 0.4 points higher to 71.7%. Twenty per cent of capacity was taken off the Madrid-Barcelona route in 2009; capacity on this route was slashed by 36.5% during the first quarter and by 11.7% during the next three quarters. Iberia began restructuring its flight schedule on this route in April 2008, primarily by introducing smaller aircraft following the start-up of the high speed train in February of that year. This explains the higher percentage decrease during the first quarter of 2009. Since 9 September 2009 all Iberia and associate airline flights operate from the new Terminal 1 at Barcelona airport. This new location saves time for shuttle passengers, while the new and extended installations have enabled the airline to raise customer service levels. The global economic recession had an especially strong impact on business travel, which fell sharply in all markets. On Iberia's long-haul flights, the number of passengers travelling in the Business Plus class fell 13.3% on 2008. Nonetheless, the company held on to its leadership of the business travel segment in the Europe-Latin America market, commanding a market share of 23.6%.
Operating revenue Passenger revenue from flights operated by Iberia in 2009 were EUR 754 million lower than in 2008, which translates into an annual decline of 19.4%, driven by a 14.1% drop in passenger revenue per RPK and, to a lesser extent, slumping demand. The decline in unit revenue reflected the adverse trend in the class mix, more intense fare pressure in most markets, and the impact of the (4.4%) increase in the average passenger stage length. Iberia, L.A.E., S.A. / Management Report / Highlights 299
The economic crisis had even greater ramifications in the air cargo segment. The airline's cargo traffic began to fall mid-2008, earlier than passenger demand, while the recovery also took place early: in the fourth quarter, cargo traffic climbed 10.5% higher year-on-year, although contracting 11.6% for the full year in terms of revenue tonne kilometres. The drop in demand, combined with a sharp drop in unit cargo revenue, resulted in a 27.5% decline in cargo revenues. Iberia's revenue from handling services, despite the lower volume of airlines' handled, narrowed moderately (easing 3.3% on 2008). Meanwhile, technical assistance revenue rose 4.2%, extending this business' healthy earnings performance. In all, the company's operating revenues (including non-recurring items) were 19.0% lower in 2009, at EUR 4,439 million.
Operating costs Last year fuel costs fell a noteworthy 28.9% to EUR 1,184 million, a reduction of EUR 482 million, due mainly to the sharp drop in average market prices and lower consumption (6.6% measured in litres) as a result of lower business volumes and increased fleet efficiency. The prices for oil and refined products, including aviation kerosene, flirted with historical highs throughout 2008, proving highly volatile, hindering the risk management function. In July 2008, kerosene prices (according to the Jet CIF NWE index) surpassed $1,400/metric tonne. They then changed tack, unpredictably, falling sharply through March 2009. Since then kerosene prices have responded to the successive upward revisions to economic forecasts, rising in tandem with the growing perception that economic recovery was underway. By year end 2009, kerosene prices had rallied 51% from January levels. However the average price for the year in dollars was 44% below the average 2008 level.
JET CIF NWE - PERFORMANCE 2008 - 2009 Iberia, L.A.E., S.A. / Management Report / Highlights 300
In 2009 non-fuel operating costs (recurring) narrowed 4.4% to EUR 3,668 million. During the second quarter of 2009 Iberia began execution of its Contingency Plan in a bid to mitigate the profound impact the economic crisis was having on earnings. Under this program, the company scaled back capacity and personnel and general costs, selectively pruning planned capital expenditure. Thanks to its flexible fleet management approach, Iberia was able to cut capacity more quickly and more significantly than its competitors. The company has temporarily taken out of operation eight owned short and medium haul aircraft (four since May, a fifth since June and the remaining three since October). In addition, mid-year it took back three long-haul aircraft operated under wet leases at the start of the year; these aircraft were accordingly operated using in-house resources during the second half. The company also agreed with Airbus to defer receipt of four aircraft to 2010, delivery of which was originally slated for 2009. At year-end, Iberia's operating fleet comprised 109 aircraft, with an average age of 7.2 years, giving it one of the most modern fleets in the global airline industry, thanks to the strategic renovation pursued in recent years. This process has also resulted in significant aircraft standardisation: Iberia exclusively operates two families of Airbus aircraft, the A340 on long-haul flights and the A320 on short and medium-haul flights. This enables it to optimise the deployment of technical crews while providing operating management and cost control benefits. In 2009, average fleet utilisation continued to improve, rising 3.7% on 2008 to 10.3 block hours per aircraft per day. In 2009, Iberia put in place a series of measures to bring its employee costs in line with the economic environment and the slump in volumes and revenues. These measures included: a salary freeze applicable to the management team and all personnel not included in the collective bargaining agreements; a cut in certain variable pay components; a hiring freeze and the non-renewal of temporary contracts; and application of early retirement, contract renegotiation and leave with guaranteed job security formulae under its workforce restructuring plan (hereinafter ERE for its initials in Spanish). In 2009 a total of 1,012 Iberia employees opted for one of these options. In April the company signed the VII collective bargaining agreement for technical crew workers, valid from 2005 to 2009, providing for wage moderation and a series of measures designed to raise flexibility and productivity. The agreement also allows pilots to continue to work half-time between the ages of 60 and 65. This last measure lowered the net present value of the estimated technical crew pension fund provision, with a positive impact on 2009 earnings. Iberia's recurring employee costs narrowed 1.8% year-on-year to EUR 1,288 million, thanks to wage control measures and, above all, a 4.3% reduction in the average headcount to 20,435 full-time equivalents (FTEs). In addition, in 2009 Iberia topped up its provision for workforce restructuring by EUR 51 million (non-recurring) to reflect the extension of its prevailing program. Most of the other cost headings registered year-on-year declines due to lower volumes, fine-tuned procedures, consumption rationalisation and contract renewal with goods and service suppliers. In all, operating costs narrowed 10.8% on 2008 to EUR 4,911 million, a figure that includes EUR 58 million of non-recurring costs. Profit from operations amounted to a loss of EUR 475 million in 2009 compared to a profit of EUR 4 million in 2008. Iberia, L.A.E., S.A. / Management Report / Highlights 301
Net finance income The merger between airlines Vueling and Clickair closed in July 2009 with Iberia taking a 45.85% stake in the merged entity. The transaction generated near EUR 21 million in gains for Iberia. Net finance income from other headings amounted to EUR 11 million in 2009, down EUR 19 million on 2008, due mainly to lower interest rates.
Net profit (loss) and balance sheet health In 2009 the company posted a pre-tax loss in its individual financial statements of EUR 443 million compared to profit in 2008 of EUR 26 million. In all, the company's loss after tax was EUR 281 million in 2009, compared to profit of EUR 25 million the previous year. The year-end statement of financial position illustrates the company's healthy financial position. At EUR 1,504 million, equity was broadly similar year-on-year.
ANNUAL TREND IN IBERIA'S EQUITY
The adjusted liquid balance (current financial investments plus cash and cash equivalents and excluding the measurement of derivatives) stood at EUR 1,904 million at 31 December 2009, down 15.4% on the 2008 year-end balance. Adjusted net debt, including the capitalisation of operating lease costs, stood at EUR 1,244 million, up 20.4% on 2008. Leverage, measured as the ratio of adjusted net debt to total capital employed (the sum of equity and borrowings), stood at 45.3% at the end of 2009, up 4.9 percentage points on year end 2008.
Plan 2012
In 2009 Iberia put in action an initial Contingency Plan with the aim of mitigating the significant slump in revenues sustained as a result of weak demand. This plan prioritised capacity cuts in a bid to match supply to demand, although also focusing on scaling back costs and capital expenditure. Although the plan was on target, the greater than initially forecast fallout from the recession prompted the company to design what it has termed Plan 2012. The overriding goal of this plan is to maintain and even improve Iberia's leadership position in its core markets. The plan extends to franchisees and investees. The idea is to enhance the airline's strategic positioning as both an independent company and against the backdrop of sector consolidation. Iberia, L.A.E., S.A. / Management Report / Highlights 302
Plan 2012 is designed to transform Iberia, boosting its long-haul business and shaping Group companies and/or associates to compete competitively in the short and medium haul segments going forward. Accordingly, the plan calls for growth in transcontinental routes and gradual capacity cuts on domestic and European routes. Plan 2012 also calls for significant employee cost savings, and therefore includes a wage freeze in 2010 and 2011. Other cost cutting measures will drive annual savings of EUR 37 million in 2011. Finally, the program calls for enhanced productivity across the company's entire workforce. Capital expenditure under Plan 2012 amounts to EUR 200 million, EUR 120 million to upgrade business class on long-haul flights and EUR 80 million to extend the workforce restructuring measures already underway, which will result in the departure of around 325 employees.
Service quality
At the Iberia Group, customer orientation and service quality are core components of its strategic vision and competitive positioning. The company has prioritised investments that improve service quality based on its understanding that this yardstick sets it apart from its competitors. The airline takes a segmented approach to customer service. In 2009, Iberia launched its Total Customer Care Program. This is a multi-year plan designed to achieve excellence in customer service and quality. It is a cross-departmental plan in which all management disciplines are engaged. It takes a three-pronged approach: (i) enhancing product and service levels; (ii) overhauling all operational processes that affect the customer; and (iii) a structured approach to systematically improving staff's attitude towards customers via both training initiatives and selective hiring. Based on feedback from its ongoing customer satisfaction evaluation systems and procedures, Iberia has been able to verify that customers indeed perceive an improvement in service quality, thanks to the host of initiatives rolled out during the year. In 2009 Iberia embarked on a project to transform Business Plus cabins on its long-haul aircraft with a view to increasing passenger legroom and comfort. By the end of 2010 all its Airbus A340 aircraft will have been upgraded and business class customers will be able to enjoy up to 2.20 metres of personal space as well as the option of putting their modern seats into a fully reclined bed position. The new configuration of the business class cabin is rounded out with best of class communication and entertainment systems. In addition, the company is collaborating with prestigious chefs, sommeliers and renowned companies to update the broad range of Spanish cuisine and fine wines offered on board and in its VIP lounges. Iberia, L.A.E., S.A. / Management Report / Highlights 303
Iberia passengers can choose from a total of 65 VIP lounges, which are especially designed and fitted out to make the time spent in the airport by Iberia's Business Plus and Business Class passengers and oneworld alliance business class passengers more pleasant. Holders of Iberia Platinum, Gold and Fiesta Club cards are also entitled to use these facilities. Notably, the company has fully remodelled its VIP lounges in Madrid-Barajas airport's Terminal 4: passengers can now enjoy a total of 4,600m2 equipped with meeting rooms, relaxation zones, showers, computers and internet connections, among other services and comforts. As part of its Total Customer Care Program, the company also upgraded its VIP lounges in Valencia, Bilbao, Santo Domingo and Frankfurt. A very significant percentage of the tickets issued and passenger revenues booked by the company is generated by members of its Iberia Plus frequent flyer program, which the Iberia Group views as a valuable tool for interacting with and acknowledging the loyalty of its best customers. At the end of 2009 Iberia Plus had 4.2 million members, growth of 10.5% for the year, located across 200 countries worldwide. Over half of these have signed up for Iberia Plus online, a direct channel accessed via the Iberia website. Throughout its 18-year history, the frequent flyer program has been incorporating leading companies from a range of sectors. In December 2009 the number of corporate affiliates totalled 89, following the addition of 12 new members last year, including: Fiesta Hotels, Rusticae, Heineken, Mutua Madrileña, Cortefiel and Vueling. Iberia Plus is the best-rewarding frequent flyer program. According to a report carried out by international consultant IdeaWorks on how easy it is to find reward seats and other services online, querying ten US and European airlines' websites, Iberia's frequent flyer program topped the chart on seat availability.
IBERIA PLUS MEMBERS
Iberia's punctuality (industry standard, flights departing within 15 minutes of schedule) was 81.2% for the overall network in 2009, similar to the 2008 figure (81.4%). The company's punctuality performance was negatively impacted in January and December of last year by adverse weather conditions at Madrid-Barajas airport. Iberia, L.A.E., S.A. / Management Report / Highlights 304
Innovation and technology
Iberia has always prioritised innovation, viewing this driver as a value that encompasses all the important business elements: strategy, processes, services and products. The company has pioneered the use of cutting-edge technologies, viewing them as essential tools for raising competitiveness and quality in the airline industry. This innovation is reflected in the company's investment in technology. Specifically, in 2009, Iberia received recognition for 34 innovation projects through certification or independent appraisals from public bodies such as the Ministry of Industry, Tourism and Commerce, the Ministry of Science and Innovation and the Centre for the Development of Industrial Technology, among others, spanning different areas relating to information technology and aircraft and engine maintenance and engineering. iberia.com, the company's website and online marketing tool, is one of the most comprehensive and innovative e-commerce sites in Spain, as evidenced by the numerous prizes it has received in recognition of its quality and design. In Spain it is the highest grossing e-commerce site. Outside Spain 42 country-specific websites are available in seven different languages. Average daily visits in 2009 amounted to 343,000. Passengers can reserve flights and book tickets at www.iberia.com. Thanks to agreements in place with other companies, customers can also purchase other products and services, such as hotel bookings, car rental, tour packages, travel insurance, excursions, airport transfers and even Business Plus wines.
In 2009, revenue from online flight bookings (tickets and fees) approached EUR 588 million, up 10% on 2008. Iberia's international websites registered the highest growth: ticket issuance via these sites jumped 21.0% compared to growth of 10.2% in Spain. Adding in other products and services purchased, total revenue from online purchasing amounted to EUR 600 million. The company provides a wide range of information on its website (flight schedules, fares, arrivals and departures, weather conditions at destination) as well as other services, including, notably, self check-in online from any computer, allowing passengers to go straight to the boarding gate without passing by a check-in desk if not checking in luggage. In 2009, Iberia passengers issued around 14,500 boarding passes via the website each day. Iberia has also added new functionality such as the ability to download boarding passes onto a mobile phone or PDA for scanning at the gate. This innovative system was available at 13 of Iberia's airports at year end. New destinations will be added as the airports are fitted out with the enabling technology. Iberia, L.A.E., S.A. / Management Report / Highlights 305
The company continually renews and extends the functionality of its website in a bid to provide an increasingly interactive and efficient service. Noteworthy developments and upgrades added in 2009 include: a destination map featuring special offers; the ability to buy tickets from any city in all markets; last minute availability information; access to detailed and personalised flight information, enabling reservation changes, seat selection and special requests; adaptation for access and use by the visually or hearing impaired; a new tool for advance payment of excess baggage; family discounts; lost luggage enquiries; and integration of ticketing and billing for Vueling flights, among others. Last year the company created a new portal, iberiacorporate.com, to provide an open channel enabling travel staff at over 1,300 companies to access all the information relating to the agreements in place with Iberia. The new portal includes exclusive offers and provides practical information on all aspects of business travel, among other features. Iberia has joined the most recent tool for introducing electronic ticketing for interline travel of airline staff, myIDTravel, which enables Iberia employees to self-issue tickets on any airline associated with this program. Iberia's cargo management team and the International Air Transport Association (IATA) continued to implement the IATA e-Freight initiative in Spain. e-Freight, or paperless electronic cargo documentation, is a series of electronic records that store all information relating to each dispatch, eliminating the need to send as many as 13 paper documents, thereby shaking up process, improving speed and reliability and lowering costs. In 2009 the e-Freight system was rolled out in new European and US destinations. Iberia's airport management team implemented a new baggage handling and control system in Madrid which significantly raises passenger service levels and reduces the costs incurred by the company in relation to lost luggage incidents. This initiative, developed with the Orión-BRS/SAMB group, is an innovative solution for automatically reconciling luggage with its owner and his or her corresponding flight.
Corporate transactions
Agreement with British Airways On 12 November 2009 the boards of Iberia and British Airways approved a binding agreement that sets the foundations for a merger between the two airlines, theoretically allocating equal participation on the enlarged group's board and other governing bodies. Iberia, L.A.E., S.A. / Management Report / Highlights 306
The merger agreement contemplates the creation of a newco, TopCo, owned by both Iberia and British Airways, under which each company will continue to operate existing brands and rights, remaining responsible for daily operations management. TopCo will be owned by the current shareholders of Iberia and British Airways. Under the terms of the planned merger, the shareholders of the British company will receive one ordinary share in TopCo for every share currently owned in British Airways, while Iberia shareholders will receive 1.0205 ordinary shares in TopCo for every common share held in the Spain airline. Based on this exchange ratio, and following cancellation of Iberia's treasury shares and prior to cancellation of the current cross shareholdings between British Airways and Iberia, Iberia shareholders will own 45% of Topco's equity, with British Airways shareholders holding the remaining 55%. TopCo's registered business address will be Madrid and it will be a tax resident of Spain, while the financial and operational head office will be in London where the group's main functions will be located, although the necessary Madrid offices will be maintained. There will be 14 seats on the Board of Directors of TopCo, to be appointed in equal proportion by both airlines. Antonio Vázquez will chair the new group while Martin Broughton will serve as vice-chair. The two companies are continuing to make progress, having set a deadline of one year from signature of the letter of intent to close the merger which will create one of the world's biggest airlines. The merger will benefit both airlines' shareholders and employees who will be partners in a more robust, global company. Meanwhile, the carriers' passengers will have more flight and destination options, among other benefits under the deal.
Merger between Vueling and Clickair The publicly notarised deeds to the merger of Clickair and Vueling (with the former merging into the latter) were filed with the Barcelona Companies Register on 16 July 2009, having been ratified by both companies' shareholders in general meeting on 5 May. Registration of the merger deeds resulted in the official dissolution of Clickair (an Iberia investee) and the transfer en bloc of its assets and liabilities to Vueling, which acquired all the rights and obligations of Clickair by universal succession. In accordance with the terms of the merger, and after receipt of the pertinent waiver from the securities market regulator exempting Iberia from having to launch a tender offer, Clickair converted outstanding privileged shares into common shares, leaving a single series of shares with a face value of EUR 10 each. Subsequently, Clickair increased capital by EUR 25 million and Iberia bought out the remaining Clickair shareholders, except for Nefinsa, at the updated acquisition price. Vueling also increased capital by enough to cover the share exchange in a rights issue reserved exclusively for Clickair shareholders. As a result of the merger and agreed exchange ratio, Iberia is now the largest shareholder and strategic partner in Vueling, with a 45.85% shareholding.
Changes in Iberia's governing bodies
On 9 July 2009 the Board of Directors of Iberia accepted the voluntary resignation of its Chairman, Mr. Fernando Conte García, agreeing to name Mr. Antonio Vázquez Romero Chairman of the Board and Chief Executive Officer of the company. At the same meeting, the Board of Directors agreed to appoint Mr. Rafael Sánchez-Lozano Turmo, who had served on the airline's Board since 2007 as representative of Valoración y Control, S.L., as Chief Operating Officer. At the Iberia Board of Directors' meeting held on 17 December 2009, Mr. Keith Williams was appointed director at the proposal of British Airways. At the end of August 2009 Iberia shook up its top management, simplifying the management structure with a view to reinforcing the company's competitive positioning. As a result, two major areas have been set up within the transport business: a Sales and Customer Department focused on revenue generation and run by Mr. Manuel López Aguilar, former managing director of Maintenance and Engineering, and the Production Department, oriented towards enhancing operations and raising productivity, and headed by Mr. Juan Manuel Bujía Lorenzo. This restructuring led to the elimination of the Airline Department under the stewardship of Mr. Enrique Donaire Rodríguez. Iberia, L.A.E., S.A. / Management Report / Highlights 307
A Purchasing and Services Department was also set up and entrusted to Mr. José María Fariza Batanero, former Head of Control and Administration, with the overriding task of streamlining costs. The administrative and control functions have been brought under the remit of the Finance Department; the Chief Financial Officer is still Mr. Enrique Dupuy de Lôme Chávarri. Lastly, Mr. José Luis Ruíz de Castañeda de la Llave was appointed Managing Director of Maintenance and Engineering.
Events after the statement of financial position date
At Iberia's Board of Directors' meeting held on 12 February 2010, Mr. Rodrigo de Rato Figaredo was appointed member of the Board at the proposal of Caja Madrid, to fill the vacancy left following the voluntary resignation of Mr. Miguel Blesa de la Parra. As such, he will act as Vice Chairman of Iberia and will be a member of the Executive Committee of the company's Board of Directors. There were no other significant events subsequent to year-end. Iberia, L.A.E., S.A. / Management Report / Financial and Operating Performance 308
2. FINANCIAL AND OPERATING PERFORMANCE
2.1. Business
The 2009 Group Management Report provides a more detailed description of Iberia's operating performance in relation to the transport and other core businesses.
2.1.1. Transport
Passenger transport
In the early months of 2009 the global airlines sector sustained a sharp drop in demand, followed by a pronounced contraction in unit revenue, reflecting the fallout from the global economic recession. According to International Air Transport Association (IATA) data, during the first half of 2009 international passenger traffic, measured by revenue passenger kilometres (RPK), fell by 7.5% in comparison to the previous year. During the second half, demand recovered substantially, so that the overall year-on-year contraction in traffic in 2009 narrowed to 3.5%. In the case of the European network carriers, RPK narrowed 4.5% on 2008. In addition, the dip in business class travel was proportionately higher than the headline figure in virtually all markets, exacerbating airlines' losses. The recession hit the Spanish airline industry particularly hard. Domestic air travel in Spain was also faced with having to tackle the competition posed by the development of the nation's high speed rail network. According to the Public Business Entity Aena, commercial traffic passing through Spain's airports (measured in passengers) fell 8.0% in 2009. Nonetheless, Spanish air traffic similarly improved as the year progressed, so that the pace of contraction eased gradually, narrowing to a decline of 0.7% year-on-year in 4Q09. The table below depicts the key passenger transport metrics for Iberia for across all segments:
Passenger transport 2009 2008 % Change
ASK (millions) 62,158 66,098 (6.0) RPK (millions) 49,612 52,885 (6.2) Load factor (%) (a) 79.8 80.0 (0.2 p.) Block hours 432,590 466,645 (7.3) Yield (euro cents) 6.32 7.36 (14.1) Revenue per ASK (euro cents) 5.05 5.89 (14.3) Passenger revenue (millions of euros) (b) 3,137 3,891 (19.4)
(a) Year-on-year difference expressed in percentage points. (b) Revenue includes only that generated on flights operated during the year (i.e., excludes other passenger revenue from the cancellation of customer deposits and other accounting adjustments).
Iberia attained a passenger load factor at 79.8% in 2009, very close to the prior year's level and once again one of the highest levels seen at any European full service carrier. Throughout the year the company fine-tuned its flight schedule in order to bring capacity in line with weakened demand. Available seat kilometres (ASK) fell 6.0% on 2008, while traffic (measured in RPK) narrowed 6.2%. Iberia's total passenger fleet production, measured in block hours, narrowed 7.3% on 2008, with a significant 66.9% correction in block hours operated under wet lease arrangements. Iberia, L.A.E., S.A. / Management Report / Financial and Operating Performance 309
Iberia's passenger revenue for the entire network was 19.4% lower than in 2008, at EUR 3,137 million. In 2009 the yield (revenue per RPK) narrowed 14.1% due to the significant deterioration in the class mix, more intense fare pressure in most markets, and the impact of the (4.4%) increase in the average passenger stage length. The lower yield, combined with a slight drop in load factor, drove a 14.3% decline in passenger revenue per ASK. The impact of exchange rate movements on unit revenue accounted for a slight 0.8 percentage point increase in this metric. In 2009 Iberia carried 20.9 million passengers across its entire network, of which 4 million corresponded to long-haul flights. The long-haul segment suffered the smallest adjustment to capacity (-3.3%); in this segment RPK contracted by 5.4% on 2008 so that the load factor deteriorated by 1.8 points to 83.4%. Extending the trend of recent years, the contribution of long-haul to total network traffic increased 0.6 percentage points to 63.9%. The North American market sustained the narrowest contraction in business volumes: capacity was cut by 2.9% while demand eased by 3.7%. In Central America, capacity contracted 5% on 2008 while traffic narrowed 6.5%, driven mainly by lower traffic on Mexican routes, hit by the outbreak of swine flu from the end of April. In South America, capacity was trimmed a slight 0.3%, while demand narrowed 4.1%. In the long-haul segment, the yield fell 11.6% in 2009 as a result of more intense competition on the back of slumping demand. Revenue per ASK narrowed 13.5% on 2008, compounded by the drop in the load factor. The 13.3% year-on-year drop in business class passengers had a significant adverse effect on unit revenue. However, business class traffic has been staging a recovery since the summer, in part stirred by sales and marketing efforts. Business class traffic slid 6.0% during the second half compared to a drop of 20.4% in the first half. Long-haul passenger revenues declined 16.4% on 2008 to EUR 1,538 million, to account for 49% of total network passenger revenues in 2009 (1.8 points higher than the 2008 contribution).
BREAKDOWN OF REVENUE Iberia, L.A.E., S.A. / Management Report / Financial and Operating Performance 310
In short and medium haul flights, capacity and traffic narrowed by 9.8% and 7.6%, respectively, while the load factor rose 1.8 points on 2008 to 74.2%. In the international medium haul segment the load factor climbed 2.5 points to 75.6% (this increase widens to 3.2 points considering European flights only). The company cut capacity on international medium haul flights by 9.2%, reflecting the streamlining planned on certain point to point routes and additional cuts made to match capacity to falling demand (-6.0% on 2008). Analysing medium-haul international flights originating or landing at Madrid airport, the drop in capacity was 5.0% compared to a 2.3% decline in traffic to leave the load factor 2.1 points higher at 75.7%. The yield across the overall medium-haul segment declined 15.7% in 2009 due to the collapse in business class travel at all airlines operating in the Spain-Europe market (off 32.0%), mirroring fierce competition on European routes and the impact of the (3.2%) increase in the average passenger stage length. The improvement in the load factor meant that revenue per ASK fell by almost three points less than the yield (-12.8%). Passenger revenues in this segment fell 20.8% on 2008 to EUR 890 million. The load factor in the domestic segment rose 0.4 points to 71.7% in 2009, driven by an 11.0% capacity cut. These cuts were higher in the first quarter of 2009 (-20.9%) than in the rest of the year (-7.3% between April and December) due in part to the capacity restructuring initiated on the Barcelona-Madrid route in April 2008 in response to the start-up of the high speed rail connection. In relative terms, the routes connecting these two cities sustained the most significant contractions in capacity and traffic, down last year by 20.0% and 27.6%, respectively. The yield on domestic flights fell 14.6% year-on-year due to a 3.3% increase in the average stage length in this segment, the sharp deterioration in the class mix, and the reduction in fuel surcharges, while revenue per ASK narrowed 14.2%. Passenger revenues from the domestic segment narrowed 23.6% to EUR 709 million.
Cargo
At Iberia, freight and mail revenue tonne kilometres (RTK) totalled EUR 1,021.5 million in 2009, a drop of 11.6% on 2008, driven by the significant fallout from the economic slump on global air cargo traffic. In line with the broader sector trend, Iberia's cargo traffic registered steeper declines in the first half (24%), gradually recovering during the second half. RTK climbed 1.2% higher year-on-year in 2H09. Iberia cut available tonne kilometres (ATK) by 1.8% in 2009. As a result, the load factor deteriorated by 6.8 percentage points to 60.7% with respect to the 2008 annual average, albeit with a 7.9 point improvement during the last quarter. 94.4% of total cargo traffic was carried in the Iberia passenger aircraft holds, a slight increase on the 2008 balance (93.5%). In 2009, revenue from freight and mail transport at Iberia fell 29.9% to EUR 208 million, although, driven by the gradual recovery in demand, this decline narrowed to 19.7% in the last quarter, compared to 33.4% during the first nine months. The yield (revenue per RTK) stood at 20.4 euro cents, a drop of 20.6% on 2008, due to three factors: (i) widespread price cuts across the sector as a result of surplus capacity, (ii) the drop in fuel prices, and (iii) the decision to maximise utilisation of Iberia's holds by pursuing a very aggressive price strategy. Iberia, L.A.E., S.A. / Management Report / Financial and Operating Performance 311
The key performance indicators for this business are as follows:
Cargo 2009 2008 % Change
ATK (millions) 1,683.9 1,714.2 (1.8) RTK (millions) 1,021.5 1,156.1 (11.6) Load factor (%) (a) 60.7 67.4 (6.8 p.) Revenue/RTK (euro cents) 20.37 25.67 (20.6) Cargo transport revenue (millions of euros) (b) 208 297 (29.9)
(a) Year-on-year difference expressed in percentage points. (b) Revenue from freight and mail transport (i.e., does not include excess baggage fees).
2.1.2. Handling
Iberia Airport Services provides ground handling services at Spanish airports to both third party carriers and Iberia itself. In 2009, the company continued to act as ramp handling agent at 36 airports by virtue of 21 concessions in effect since 2007. The company also operates in Barcelona, Lanzarote and Fuerteventura airports through its interests in the joint venture concessionaires (holding 32% of the Barcelona JV and 30% of the Canary Island airport JVs). Since July 2008 the company also provides meet and greet services to persons with reduced mobility (PRM) under concession, operating directly at the airports where Iberia is the sole ground handler and in JV in Madrid, Palma de Mallorca and Alicante (with shareholdings of 51%, 50% and 50%, respectively). This business line made a EUR 2.5 million contribution to lberia Airport Services' income statement. 2009 will go down in history for the widespread fallout on productive sectors from the economic crisis. This fallout was particularly harsh in commercial aviation and related businesses. The overall Spanish ground handling market, measured in aircraft operations, shrank 10.8% on 2008, although the volumes handled by Iberia Airport Services fell by a narrower 7.8% (including handling for Iberia and measured in terms of notional aircraft handled). The number of passengers handled by Iberia Airport Services narrowed 8.7% in 2009 to 73 million. Iberia, L.A.E., S.A. / Management Report / Financial and Operating Performance 312
In 2009, third party handling operations accounted for 56.6% of total production, measured in terms of the number of equivalent notional or standard aircraft handled, slightly above the 2008 level (56.2%). Despite the adverse economic climate and the handling market conditions, the company managed to pick up market share from 30.7% in 2008 to 31.5% in 2009 by shoring up its customer portfolio with 22 new airlines adds. Handling revenues (including the JVs and services provided to Iberia itself) tapered off 2.5% on 2008 to EUR 478 million, owing to the drop in volumes. Unit revenue rose 2.7%.
2.1.3 Maintenance
Iberia Maintenance provides engine, aircraft and part maintenance, repair and overhaul (MRO) services for the company and other aircraft operators. In 2009 this unit carried out a total of 220 C and D inspections, weighted for value, which marks a drop of 2.3% on last year. Of these, 56.6% were performed for third parties (2008: 59.7%). In engine maintenance, production (Iberia and third party) declined 11.9% to 214. Total operating revenue from third party maintenance (which includes, in addition to technical support services, other work undertaken by the company, rental income and sales) rose 4.1% to EUR 322 million in 2009. A number of important sales agreements were signed last year with various operators and manufacturers. The following agreements stand out for their economic or strategic significance:
Line maintenance agreement for the B757 fleet operated by DHL Air in Spain. The agreement expands the scope of the existing maintenance agreement signed in May 2008 covering Rolls Royce RB211-535 C37 engines. Component support agreement with Finnair Technical Services for the provision of spare components and related repair services for Finnair's Airbus A330 and Airbus A340 aircraft. Exclusive contract from SAS for the provision of major maintenance operations (C and D checks) for the MD80s and Airbus A330s and A340s operated by the Scandinavian airline. Two new contracts to repair and maintain Rolls Royce aircraft engines, one for the provision of MRO services on Rolls Royce RB211-535E4 engines belonging to Russian airline Yakutia, and an MRO contract on the engines powering the B757/200 aircraft owned by India's Blue Dart Aviation Ltd. Renewal of the contract with Xiamen Airlines for the overhaul of the RB211-535E4 engines installed in its B757/200 fleet. Overhaul contract with Federal Express (Fedex) for its RB211-535E4 engines. Binding agreement with SR Technics for component maintenance for different aircraft. Agreement with Airbus Military for the conversion of A330 passenger aircraft to Multi-Role Tanker Transport (MRTT) configuration with in-flight refuelling capacity.
With respect to the RB211-535 engine, Iberia is one of the few MRO support centres in the world, and the only one in Europe. Also the engine subdivision is the only centre in Spain and one of just three in Europe equipped to provide maintenance on General Electric's CF34 engine. Iberia Maintenance's customer portfolio includes nearly all the Spanish carriers, where it is market leader, as well as a significant number of international companies. Noteworthy customers include Air Europa, Airbus, Alitalia, Audeli, Eurofly, European Air Transport, Finnair Technical Services, Gestair, Iberworld, ILFC, Interjet, MAeS, Meridiana, Olympic Airways, Pluna, Presidencia Mexicana, Pullmantur, Spanair, SR Technics, Swiftair, Tunisair, Varig and Vueling. Iberia, L.A.E., S.A. / Management Report / Financial and Operating Performance 313
On 19 May 2009 Iberia Maintenance, together with ST Aerospace, inaugurated its landing gear maintenance repair workshop for Airbus' A320, A330 and A340 aircraft in Madrid. The new venture, called MAeS (Madrid Aerospace Services) marks an important strategic milestone, opening the door to new markets in Europe, Africa and the Middle East Iberia Maintenance invested a total of EUR 14 million to upgrade its facilities and services in 2009. Within the capex program the following initiatives stand out: development of technology to handle compressors in the engine workshop and the installation of a new vertical vacuum furnace; the upgrade and remodelling of Hangar 5, dedicated to the A330 MRTT project, and of the Hangar 4 painting booths; and kitting out of a component test bench. In addition, in a joint venture with the Barcelona free trade consortium, a hangar is being built at Barcelona's El Prat airport which will entail investment of an estimated EUR 24 million.
2.2. Resources
2.2.1. Fleet
At the end of 2009, Iberia had a total of 109 passenger aircrafts in operation, 32 for long-haul travel, with the remaining 77 airplanes earmarked for short and medium haul flights. The table below breaks down the fleet by aircraft type and ownership regime:
Owned Finance Operating Total Aircraft type (a) (b) Wet lease outright lease lease operated A340/300 6 1 13 20 A340/600 12 12 Largo radio 6 1 25 32 A319 22 22 A320 2 6 28 36 A321 415 19 Short/medium-haul 2 10 65 77
TOTAL 8 11 90 109
(a) The number of passenger jets in operation by Iberia at 31 december 2009, excluding aircraft temporarily grounded or grounded pending sale. (b) In addition, at 31 december 2009, Iberia had leased one Boeing B757 to another carrier.
At the end of 2008, Iberia had a total of 119 passenger aircraft in operation. Operating fleet additions and retirements during 2009 are listed below:
Additions
One A320 under operating lease (leased out at the end of 2008).
Returns
Two A320s under operating lease. One A340/300 under operating lease
Grounded
Eight owned A320s (temporarily grounded).
In February, Iberia added one A320 to its short/medium haul fleet under an operating lease arrangement. This plane had formerly been leased out to another carrier. Iberia, L.A.E., S.A. / Management Report / Financial and Operating Performance 314
One of the measures contemplated under the Contingency Plan is to cut capacity to match declining market demand. As a result, in the short and medium haul fleet, the company has temporarily grounded eight owned A320s (four since May, a fifth since June and the other three since October). In April and October, the company ceased operating two A320s leased under operating lease arrangements (see returns). In the long haul fleet, the company retired one leased A340 in October. Also throughout the course of the year, fleet ownership and lease arrangements shifted considerably. The three A340/300s that Iberia was operating under wet lease at the start of 2009 were switched to operating lease regimes, two in the first half and the third at the end of August. The number of block hours operated under wet lease wet lease declined 66.9% in 2009. At present over 80% of the passenger fleet is held under operating lease, providing the company with greater flexibility to match capacity to unfolding market circumstances without jeopardising its financial health. One of the company's greatest achievements in recent years has been to standardise its fleet into two families of aircraft: the Airbus A340 for long haul flights, with an average age of 8.8 years, and the Airbus A320 (which includes the A319, A320 and A321 models) for short and medium haul flights, where the average age of the fleet is 6.6 years. One of the highlights of 2009 is the improvement in average fleet utilisation: this metric improved 3.7% on 2008. Considering only the aircraft operated by Iberia crew (namely, excluding wet lease), the year-on-year increase is 4.5%.
BH / aircraft/ day 2009 2008
Average fleet utilisation, short and medium haul 8.8 8.4 Average fleet utilisation, long haul 14.3 14.5 Average fleet utilisation, Iberia crew 10.3 9.8 Average fleet utilisation, wet lease (a) 14.5 13.4 Average fleet utilisation, total 10.3 10.0
(a) In 2009 three A340/300s were operated under wet lease for Iberia. These contracts ended in June and August.
TREND IN FLEET UTILISATION AT IBERIA Iberia, L.A.E., S.A. / Management Report / Financial and Operating Performance 315
2.2.2. Personnel
Headcount
Iberia's average headcount fell 4.3% to 20,435 full time equivalents (FTE) in 2009. At 31 December 2009, 38% of total company employees were female. The table below depicts the headcount mix by business segment during the last two years:
GROUND IN-FLIGHT TOTAL
2009 2008 2009 2008 2009 2008
TRANSPORT 2,959 3,090 5,335 5,567 8,294 8,657 HANDLING 7,132 7,769 7,132 7,769 MAINTENANCE 3,845 3,767 3,845 3,767 OTHER (*) 1,164 1,152 1,164 1,152
TOTAL IBERIA 15,100 15,778 5,335 5,567 20,435 21,345
Year-on-year change (%) (4.3) (4.2) (4.3)
(*) Includes Corporate staff and IT. Iberia's senior officers (ten in both years) are included in "Ground".
Iberia ground staff (FTEs) fell 4.3% in 2009, with headcount reductions in Spain (-4.4%) and abroad (-2.6%). The drop in headcount at Iberia Airport Services, 637 FTEs or 8.2%, is noteworthy, leaving the average headcount at 7,132 FTEs in 2009 (including the 515 transferred to the Barcelona JV concession). Iberia's average in-flight headcount stood at 5,335 FTEs in 2009, accounting for 26.1% of the company total. By union member categories, the average technical crew headcount narrowed 3.3% on 2008, while passenger cabin crew was 4.5% fewer. Iberia continued to execute its workforce reduction program in a bid to bring its human resources into line with the sector's difficult situation. Most of last year's employee departures came under the company's workforce restructuring programs (EREs for their initials in Spanish) which are voluntary on the part of both employee and employer. The labour authorities authorised the extension of ERE 72/01 covering ground and cabin crew staff to 31 December 2010. The rollover of ERE 35/05, specific to Iberia handling staff, to 31 December 2014 was similarly authorised. Iberia, L.A.E., S.A. / Management Report / Financial and Operating Performance 316
In April 2009 representatives of the company's management and of the pilot union SEPLA agreed to request inclusion of pilots under the framework of extended ERE 72/01, in this particular instance extending validity until 31 December 2013. Once authorised, a total of 236 technical crew members over 60 years of age, on reserve, left the company in 2009. In 2009, 185 passenger crew employees and 591 Iberia ground staff opted for one of the options afforded under ERE 72/01, with most choosing early retirement or leave with guaranteed job security. A further 44 ground staff left the company, 16 under the Spanish employment plan, while the remaining 28 worked abroad and will not be replaced. The table below provides a breakdown of employee departures from the company under the auspices of its workforce restructuring programs:
Technical Passenger Iberia workforce. Departures in 2009 Ground TOTAL crew cabin crew Early retirement 236 16 342 594 Leave with job security - 98 190 288 Paid leave - 1 14 15 Contract renegotiation - 70 45 115
Total ERE 72/01 236 185 591 1,012
ANE (National Employment Agreement) - - 16 16 Personnel located outside Spain - - 28 28
TOTAL 236 185 635 1,056
These come on top of the 462 employees that left the company in 2008 (339 ground staff and 123 cabin crew), mostly during the second half of the year, just over half of which took early retirement under the scope of ERE 72/01. In April 2009, management of Iberia and the company section of pilot union SEPLA signed the VII technical crew workers' collective bargaining agreement which was valid through 31 December 2009. The XV passenger cabin crew agreement, initially valid from 2005 to 2007, was extended to 31 December 2008. Meanwhile, the XVIII collective bargaining agreement covering Iberia ground staff (signed in July 2008) ended on 31 December 2008. Talks are currently underway to hammer out new agreements with all three of the company's union groups.
Productivity
Iberia's workforce productivity was 3.04 million ASK per employee in 2009, an annual decline of 1.8%. This reflects the decline in capacity (ASK down 6.0% vs. 2008) in response to slumping demand, which was only partially offset by the reduction in average headcount. In the case of handling staff (which accounted for 34.9% of the total headcount in 2009), the number of man-hours worked declined in line with production, so that employee productivity held steady (measured in block hours per equivalent aircraft handled), despite the higher number of incidents sustained in 2009 (cancellations and delays due to cabin crew strike actions, adverse weather conditions, etc.). In the maintenance segment, workforce productivity rose 3.2% on 2008. Iberia, L.A.E., S.A. / Management Report / Financial and Operating Performance 317
The table below shows the trend in productivity broken down by segment and by staff group:
Iberia workforce productivity 2009 2008 % Change
Total workforce (‘000 ASK per employee) 3,042 3,097 (1.8) Ground staff (‘000 ASK per employee) 2,101 2,139 (1.8) Technical crew (BH per crew member) 267.3 270.9 (1.3) Auxiliary crew (BH per crew member) 115.3 118.8 (3.0) Handling (man hours per notional aircraft) (a) 32.68 32.75 0.2 Maintenance (operating revenues per employee) (€, ‘000) 19,052 18,457 3.2
(a) A lower number of man-hours per equivalent aircraft handled implies an improvement in productivity.
2.3. Company earnings performance
Since 2008 Iberia has drawn up its individual financial statements in accordance with the new Spanish general chart of accounts (Spanish GAAP) enacted by Royal Decree 1514/2007. The changes introduced by new Spanish GAAP mark a milestone in the process of harmonising national EU member accounting standards, specifically bringing them significantly closer to international reporting requirements, the basis upon which the Iberia Group has been preparing its consolidated financial statements since 2005.
2.3.1. Profit from operations
As a result of the global recession, 2009 was one of the worst years in aviation history. The entire airline sector suffered an unprecedented contraction in traffic and a significant drop in revenue. Against this backdrop, Iberia’s revenue fell 19.0% on 2008. The impact was partially cushioned by continual rationalisation of capacity in response to unfolding market weakness and the introduction of new cost cutting measures. Iberia posted a loss at the operating level of EUR 475 million in 2009 (including non-recurring items). The loss narrows to EUR 464 million if we strip out non-recurring items, compared to a loss of EUR 88 million in 2008. Iberia generated positive EBITDAR (earnings before interest, taxes, depreciation, amortisation and aircraft rentals) of EUR 60 million in 2009. Iberia, L.A.E., S.A. / Management Report / Financial and Operating Performance 318
Below is Iberia's income statement for 2009 and 2008, including the breakdown of the most significant revenue and cost headings:
Millions of euros IBERIA 2009 2008 % Change
PROFIT (LOSS) FROM OPERATIONS (475) (4) nm
OPERATING REVENUE 4,439 5,480 (19.0)
REVENUE 4,212 5,188 (18.8) Passenger revenue 3,325 4,218 (21.2) Cargo revenue 224 309 (27.5) Handling revenue 266 275 (3.3) Technical assistance to airlines 310 297 4.2 Other revenue 87 89 (1.1) OTHER OPERATING INCOME (a) 227 292 (22.3) Recurring 177 227 (21,8) Non-recurring 50 65 (24.1)
OPERATING COSTS 4,911 5,508 (10.8)
PROCUREMENTS 1,409 1,864 (24.4) Aircraft fuel 1,184 1,666 (28.9) Aircraft spare parts 191 160 19.0 Catering materials 19 21 (6.8) Other purchases 15 17 (12.7) EMPLOYEE COSTS 1,339 1,313 2.0 Of which: non-recurring 51 1 nm DEPRECIATION AND AMORTISATION 175 198 (11.6) OTHER OPERATING COSTS 1,988 2,133 (6.8) Aircraft leases 349 386 (9.5) Other rentals 72 75 (4.5) Aircraft maintenance 202 228 (11.5) Commercial costs 151 201 (24.9) Traffic services 399 415 (3.9) Navigation charges 252 258 (2.3) In-flight services 66 72 (7.3) Booking systems 134 137 (2.7) Other costs 363 361 0.5 Of which: non-recurring 7 4 74.9
IMPAIRMENT LOSSES AND NET GAINS ON DISPOSAL OF NON-CURRENT ASSETS (3) 24 nm
RECURRING EBIT (464) (88) nm
Operating revenue (recurring) 4,389 5,415 (18.9) Operating costs (recurring) 4,853 5,503 (11.8)
EBITDA (289) 110 nm
EBITDAR 60 496 (87.7) nm: Not meaningful (a) Includes overprovision, work performed by the entity and capitalised and other operating income. Iberia, L.A.E., S.A. / Management Report / Financial and Operating Performance 319
Operating revenue
In 2009 operating revenues were 19.0% lower than in 2008. Excluding non-recurring items, the drop in operating revenue was 18.9%, due mainly to the slump in passenger and cargo transport revenue (-21.6%), hit hard by the drop in unit revenue and traffic. The limited decline in handling revenue (-3.3%) should be viewed against the backdrop of the sharp contraction in airport flight volumes. Aircraft maintenance revenue rose yet again last year, climbing 4.2% on 2008. Total passenger revenues fell 21.2% on 2008 to EUR 3,325 million. This income statement heading includes passenger revenues from actual flights every year (as reflected in the "Key Data" table at the beginning of this report and in the tables in the "Transport" section 2.1.1.) and revenue from expired unused tickets, revenue from frequent flyer programs and adjustments of an accounting nature. Passenger revenue from used tickets totalled EUR 3,137 million, down 19.4% on 2008, driven by price erosion (which accounted for a 12.6% decline in revenue) and, to a lesser extent, lower traffic volumes. All three segments (long haul, international medium haul and domestic) were affected by the drop in yield, especially European flights, due to competitive pressure and the deterioration in the class mix. The slump in traffic was also widespread, with the domestic segment contracting the furthest in relative terms. Iberia cut capacity by 11% in response to this. Other passenger revenue, which in aggregate accounted for 5.6% of total passenger revenue in 2009, declined 42.6%, in part due to the application of the new accounting treatment for frequent flyer points from 2009 on (this change also entails a reduction in commercial costs). Iberia's cargo revenue (which includes invoicing of freight and mail transport services, fuel and security charges or top-up charges and excess baggage fees) fell 27.5% in 2009 to EUR 224 million, driven by the decline in traffic and the sharp drop in yield, partly caused by lower fuel surcharges. Revenue from third party ground handling (passengers and aircraft) declined by EUR 9 million on 2008, due to the drop in ramp handling for third party airlines (-7.3% measured in equivalent notional aircraft), partially mitigated by an increase in unit revenue (2.1%) and higher revenue from other airport handling services, notably from services provided under concession to persons with reduced mobility. During the second half of 2009, handling revenue climbed 1.0% on 2H08, as the drop in third party handling was stemmed at 2.9% following the addition of Vueling to the customer portfolio. Although the recession also drove aviation maintenance prices lower, revenue from technical assistance to airlines at Iberia rose EUR 12.6 million to EUR 310 million in 2009, in part due to dollar appreciation relative to the average 2008 exchange rate. The growth in third party invoicing was driven mainly by engine inspections (particularly on the CFM56), maintenance work performed for the Spanish department of defence and landing gear MRO work. "Other revenue" narrowed by 1.1% on 2008. Revenue from the use of booking systems, where Amadeus stands out, fell 7.4% to EUR 59 million. This was partially offset by higher revenue from other sales. "Other operating income - Recurring" (fees, deferred revenue, income from assigning employees to JV concessions, rental income, own work capitalised and sundry other items) fell on aggregate by 21.8% on 2008, with the decline in passenger fees and sundry revenue items standing out. Iberia, L.A.E., S.A. / Management Report / Financial and Operating Performance 320
In 2009, the company booked one-off revenue of EUR 50 million, most of which (EUR 45 million) corresponds to the reversal of a portion of the provisions recognised to cover pension obligations vis-à-vis technical crew members as a result of actuarial studies completed following execution of the VII Collective Bargaining Agreement, which gives pilots the chance to keep flying until the age of 65. In 2008 the company recognised EUR 65 million in non-recurring revenue related mainly to the reversal of a number of provisions and an aircraft insurance settlement.
Operating costs
In 2009 Iberia's operating costs, including non-recurring items, amounted to EUR 4,911 million, down 10.8% on 2008. Stripping out non-recurring expenses recognised in both years, the reduction in operating costs rises to 11.8%, with a noteworthy 28.9% year-on-year drop in fuel costs. Other cost headings also declined on the back of lower business volumes (capacity - ASK - down by 6.0%) and the raft of cost savings initiatives rolled out by the company under the umbrella of its Contingency Plan. Unit recurring operating cost narrowed 6.2% on 2008 to 7.81 euro cents per ASK.
IBERIA'S RECURRING OPERATING COST COMPONENTS % YEAR-ON-YEAR CHANGES
Cost control efforts proved satisfactory in 2009: during the first half of the year recurring operating costs narrowed 9.4% year-on-year, intensifying sharply during the second half, as evidenced by a 14.1% decline on 2008. Iberia's fuel cost, which accounted for 24.4% of total recurring operating costs in 2009, narrowed EUR 482 million to EUR 1,184 million last year, driven by a significant drop in market fuel prices and lower consumption (down 6.6% in litres), as a result of reduced business volumes and enhanced fleet efficiency. Iberia, L.A.E., S.A. / Management Report / Financial and Operating Performance 321
The table below breaks out last year’s fuel savings by component drivers:
Millions of euros Drivers of reduction in fuel spend Total change on
2008 Price (*) Volume Exchange rate (*) Fleet efficiency
Iberia (368) (90) (17) (7) (482)
(*) The changes in prices and exchange rates include the effect of hedges.
The market price of aviation kerosene (CIF NWE) rose steadily throughout the first half of 2008, registering heady levels and peaking at an all-time high in the summer of 2008. Prices then corrected sharply during the second half of 2008 and throughout the first quarter of 2009, bottoming out at around $400 per metric tonne in March 2009. From that point on prices escalated rapidly, rising to over $600 per tonne by June. Prices stabilised at around $600 in the third quarter, heading higher once again during the last quarter to around $665. Despite rising steadily throughout most of 2009, average market kerosene prices in dollars were 44% lower year-on-year. The company benefited from this trend only partially, due to hedges arranged mid-2008. As a result, the unit fuel cost fell 24.4% on 2008 to 1.91 euro cents per ASK.
ANNUAL TREND IN IBERIA'S UNIT FUEL COST
Iberia's recurring employee costs, which represent 26.5% of total operating costs, narrowed 1.8% year-on-year to EUR 1,288 million, thanks to wage control measures and a 4.3% reduction in the average equivalent headcount, primarily on account of voluntary redundancy formulae provided for under the company's workforce restructuring initiatives. Ground staff costs narrowed 1.5% on 2008 on the back of a 4.3% reduction in the average headcount. The number of in-flight staff (technical and passenger cabin crews) fell by a similar amount (-4.2%), while related employee costs narrowed 2.1% in aggregate on 2008. Total salaries, wages, severance and similar items amounted to EUR 990 million in 2009, down 0.5% on 2008, including the impact of wage drift and compensation deals struck with in-flight staff. Social security and other social benefit payments totalled EUR 298 million, down 5.9% on 2008, in part due to the adjustment to crew member pension plans. Iberia, L.A.E., S.A. / Management Report / Financial and Operating Performance 322
Non-recurring employee costs amounted to EUR 51 million in 2009 (2008: EUR 1.4 million), corresponding to a one-off provision to recognise the impact of management's updated estimate of restructuring expenses upon authorisation of the program's extension. The depreciation and amortisation charge was 11.6% lower last year, at EUR 175 million. Almost 60% of this balance corresponds to fleet equipment, for which the depreciation charge was 18.2% lower due to the lower number of in-balance sheet aircraft in operation, mainly due to the process of retiring the MD87/88 fleet, which concluded in the last quarter of 2008. Aircraft lease costs narrowed 9.5% on 2008 to EUR 349 million. This marks an annual saving of almost EUR 37 million and was driven by all heading components. Passenger aircraft operating lease cost was EUR 315 million, EUR 9 million lower due, in part, to lower interest rates, as well as a slight reduction in the average number of aircraft in operation. The cost of renting seats on other airline operated flights fell by EUR 6 million on 2008 to EUR 7 million. The biggest component drop was sustained in wet lease cost which stood near EUR 16 million in 2009 compared to EUR 33 million in 2008, due to the drop in the number of aircraft and block hours operated, which were down 66.9% on volumes leased in 2008. Lastly, cargo aircraft lease costs fell almost EUR 5 million to EUR 11 million, due to a 32.5% decline in block hours leased as the company responded to the sharp drop in demand for cargo transport by scaling back capacity. Unit lease cost narrowed 3.8% on 2008 to 0.56 euro cents per ASK. Aggregate recurring aircraft maintenance costs (which include outsourced external services, provisions for major repairs and spare parts) amounted to EUR 393 million in 2009, up 1.1% on 2008. The increase reflects growth of 19.0% in expenditure on spare parts, mainly due to the appreciation of the dollar against the euro, as well as higher volumes of maintenance work performed in-house. The increase in spare parts cost was partially offset by an 11.5% reduction in spending on outsourced services. In 2009 commercial cost was EUR 50 million, or 24.9%, lower than in 2008. Aggregate commissions, promotional costs and development expenditure narrowed by 47 million euros on 2008 (by 26.7%) due, in part, to the impact of first-time application of IFRIC 13 (affecting measurement of points or miles associated with the frequent flyer program) from January 2009. In 2008 close to EUR 23 million was recognised as commercial cost in connection with the measurement of the points earned by the company's frequent flyers under the Iberia Plus program. In 2009, under the new standard, the value of points earned was recognised as a deduction from revenue. Advertising costs fell EUR 3 million (by 12.2%). Iberia, L.A.E., S.A. / Management Report / Financial and Operating Performance 323
Traffic services costs narrowed 3.9% in 2009 due mainly to the reduced number of flights operated (11.8% fewer take-offs than in 2008), which had an impact on the items included under this heading: landing fees, as well as fees for the use of jet bridges and other airport services fell by EUR 5 million on 2008. Aircraft dispatch, Tariff H and other traffic services dropped by EUR 9 million. Aircraft cleaning and catering equipment handling services were down by EUR 5 million, while flight staff accommodation costs fell by EUR 3 million on 2008. Costs for flight disruptions, missed connections and baggage reclaim, on the other hand, increased by EUR 6 million, essentially due to operational difficulties caused by labour disputes involving cabin crew and by adverse weather conditions. Navigation charges fell by 2.3% on 2008, mainly as a result of reduced business volumes during that period. This impact was partially mitigated by the appreciation of the dollar, and above all, by price increases. In-flight navigation assistance charges were 0.9% lower in 2009, at EUR 208 million. Airport approach fees fell 8.5% on 2008 to EUR 44 million, due primarily to reduced flight traffic. Unit approach fees at Spanish airports rose 3.0% on 2008. The aggregate cost of in-flight services and catering materials was just over €85 million in 2009, down 7.2% on 2008. This was primarily due to reduced traffic and more specifically a drop in the number of business class passengers, together with savings unlocked as a result of renegotiating supplier contracts. Reservation system costs fell 2.7% to EUR 134 million, due to lower booking volumes as a product of the decline in traffic. This was again partially eroded by the appreciation of the dollar and an increase in average prices. “Other costs – recurring” amounted to EUR 356 million in 2009, down 0.4% on 2008. The main components of this heading are severance revenues, ground equipment maintenance charges, other mechanization expenses, security services, levies and transport services. In 2009 the company recognised EUR 7 million of non-recurring costs, mainly comprising a series of provisions and fines. In 2008 non-recurring costs, which also included sundry provisions, amounted to EUR 4 million. “Impairment losses and gains (losses) on disposal of non-current assets” came to a net loss of EUR 3 million in 2009, compared to a net gain of EUR 24 million in 2008, almost all of which came from aircraft sales. Iberia, L.A.E., S.A. / Management Report / Financial and Operating Performance 324
2.3.2. Other income and costs
The table below shows the rest of the Iberia's income statement headings:
Millions of euros IBERIA 2009 2008 % Change
PROFIT (LOSS) FROM OPERATIONS (475) (4) nm
NET FINANCE INCOME 32 30 8.2
Finance income 64 137 (53.7) Finance cost (40) (52) (24.5) Exchange differences (17) (1) nm Change in the fair value of financial instruments 4 (28) nm Impairment and gains (losses) on disposal of financial instruments 21 (26) nm PROFIT (LOSS) BEFORE TAX (443) 26 nm INCOME TAX 162 (1) nm PROFIT (LOSS) AFTER TAX (281) 25 nm
nm: Not meaningful
Net interest amounted to EUR 24 million in 2009, EUR 61 million less than in 2008, reflecting a 53.7% drop in finance income due to a lower average balance of short term investments and lower interest rates on deposits. Finance costs declined by a narrower 24.5% due to lower interest on loans. Net exchange losses were EUR 17 million in 2009, EUR 16 million wider than in 2008. Due to a 50% devaluation of the Venezuelan currency (the Bolivar) against the US dollar, Iberia was forced to recognise a EUR 6 million provision at year end 2009 to cover the impact on local currency deposits related to revenue generated in Venezuela pending receipt. "Change in the fair value of financial instruments" includes the measurement of hedging instruments, resulting in a gain of EUR 4 million in 2009, compared to a loss of EUR 29 million in 2008. The 2008 loss primarily reflects the decline in value of the inefficient portion of fuel hedges (loss of EUR 23 million). In 2009, "Impairment and gains (losses) on disposal of financial instruments" includes the gains on the Clickair and Vueling share exchange as part of the merger between the two companies (EUR 20.5 million). In 2008 this heading included changes in the impairment provisions on investments in Group companies and associates for a net loss of EUR 26 million, mostly related to the company's shareholding in Clickair. In 2009 the company posted a loss before tax of EUR 443 million due mainly to the erosion in revenue, driven by the fallout on the airline sector from the recession. In 2008 the company recognised profit before tax of EUR 26 million. In 2009 tax income included recognition of the tax credit corresponding to the tax loss for the year, as well as restatements of amounts paid in prior years. This left a loss after tax of EUR 281 million in 2009 compared to a profit of EUR 25 million in 2008. Iberia, L.A.E., S.A. / Management Report / Financial and Operating Performance 325
The chart below reflects the company's key margins during the past four years:
IBERIA. PROFIT MARGINS AS A % OF RECURRING OPERATING REVENUE
2.4. Balance sheet
Iberia's equity stood at EUR 1,504 million at 31 December 2009, 1.4% below the 2008 balance. The impact of the loss for the year (EUR 281 million) was almost fully mitigated by the remeasurement to fair value of hedge arrangements and, to a lesser extent, the impact of the revaluation of the company's British Airways shares. There were no transactions in treasury shares in 2009. As a result, at 31 December 2009 the company's statement of financial position registered a gain of EUR 64 million on the 27,898,271 treasury shares (2.927% of equity) recognised, with an overall nominal value of EUR 22 million and at an average acquisition price of EUR 2.313 per share. Non-current provisions for contingencies and charges stood at EUR 1,235 million at year end 2009, a drop of 5.7% on the year end 2008 balance. This balance breaks down as follows: EUR 598 million in provisions for employee commitments (down 10.6% on 2008) including the provision recognised for flight personnel put on reserve; EUR 86 million in provisions for major fleet repair work; and EUR 551 million for other obligations, including workforce restructuring initiatives. Current and non-current interest-bearing borrowings (bank loans and finance lease obligations) stood at EUR 502 million at the end of 2009, up 7.2% on the year earlier balance. The adjusted liquid balance (current financial investments plus cash and cash equivalents and without including the derivative measurement impact) stood at EUR 1,904 million at 31 December 2009, EUR 347 million less than at year-end 2008. Iberia continued to present a net cash balance surplus at year-end: i.e., the balance of current assets (excluding hedge measurement) was greater than interest-bearing borrowings by EUR 1,401 million at 31 December 2009, compared to a net cash balance of EUR 1,782 million twelve months earlier. Adjusted net debt, including the capitalisation of aircraft lease cost (and adjusting for interest on the loans to the Iberbus companies), stood at EUR 1,244 million, up 20.4% on 2008. Iberia, L.A.E., S.A. / Management Report / Financial and Operating Performance 326
Million of euros
Balance sheet situation 2009 2008 % Change
Adjusted liquid balance (a) 1,904 2,250 (15.4) In-balance sheet interest-bearing borrowings 502 468 7.2
In-balance sheet net debt (1,401) (1,782) (21.4)
Aircraft lease capitalisation (×8) (b) 2,646 2,816 (6.0)
Adjusted net debt 1,244 1,034 20.4
(a) Current financial assets and cash and cash equivalents, excluding the measurement of hedge arrangements. (b) Leases capitalised over eight years and adjusted for the interest capitalised on the Iberbus company loans.
2.5. Outlook
2.5.1. Business outlook
In the wake of the severest recession in recent history, the global economy is beginning to come back to life, driven largely by extensive intervention by governments and central banks worldwide, whose actions have diminished financial market uncertainty and stimulated demand. The most recent International Monetary Fund (IMF) estimates point to global gross domestic product (GDP) growth of 3.9% on average in 2010, compared to a contraction of 0.8% in 2009. However, growth is expected to prove very uneven geographically; economic performance could even vary significantly among countries in the same economic region depending on pre-recession circumstances, structural imbalances and policy measures implemented. In most developed economies, the recovery looks set to be slower than following earlier episodes of recession: GDP growth is forecast at 2.1% in 2010, while economic expansion is expected to be relatively buoyant in many emerging economies, at around 6.0%. The IMF forecasts scant growth of around 1% for the eurozone in 2010, compared to around 3.7% in Latin America. The Spanish economy remained recessionary in 2009, although performing slightly better than forecast in recent months, underpinned by a stronger than anticipated trend in consumption and gross fixed capital formation. Based on this recent relative improvement in national and international indicators, the IMF (as of January 2010) estimates that the Spanish economy will contract by 3.6% in 2009 and by a further 0.6% in 2010. Although Spanish households have deleveraged, debt remains high. This, combined with very high unemployment, will curtail the scope for any consumption-led recovery. This potential will be further undermined by the ongoing credit crunch: lending is not expected to flow freely until the banks and savings banks, also embroiled in deleveraging and absorbing losses on real estate loan books, shore up their balance sheets. This factor will also curtail scope for expansion in corporate spending for some time. In addition, the need to clean up the state accounts will result in restrictive fiscal policy over the coming years, further limiting the Spanish economy's growth potential. The fate of the airline sector is directly tied to economic growth. Accordingly, following the sharp contraction sustained during the first half of 2009, global air traffic began to stage a gradual recovery during the second half, with cargo traffic rebounding first, followed by passenger traffic. However, the recovery is proving uneven across the various economic regions. Indeed, demand has rebounded sharply in Asia-Pacific, Latin America and the Middle East, in line with the healthy growth in these regions' emerging economies. Meanwhile in Europe and the US traffic is staging a more tentative recovery. The latest International Air Transport Association (IATA) forecasts call for growth in global traffic (domestic and international) in 2010, measured in TKP (passenger and cargo), of 5.2%. Iberia, L.A.E., S.A. / Management Report / Financial and Operating Performance 327
Unit revenue fell drastically across the airline sector during the first half of 2009, similarly staging a relative recovery in long-haul flights since mid-2010. For the European full service airlines traffic continues to improve slowly, lifting load factors. The airlines are expected to continue to scale back capacity in their ongoing search for equilibrium vis-à-vis demand in an attempt to drive unit margins higher. The recovery in corporate spending, which will lead any recovery in consumer spending, should drive the recovery in business travel, which is already showing signs of strengthening. The business travel segment on transatlantic routes is forecast to be the first to recover. Meanwhile, oil prices are expected to continue to firm, in line with recovering demand on the back of the economic rebound. Higher fuel prices could offset the effect on earnings of airlines' efforts to cut costs and capacity. As a result, IATA forecasts (as of December 2009) that the global airline sector will see revenue rise by 4.9%, but that this will not be enough to eliminate the red ink: the airline association is forecasting net losses of $5.6 billion in 2010. In 2009, Iberia took some important decisions that it believes will be decisive to its performance. On 12 November 2009 the boards of Iberia and British Airways approved a binding letter of intent that sets the foundations for a merger between the two airlines, in a bid to create Europe's third largest carrier by revenue. The merger is expected to close at the end of 2010. Both British Airways and Iberia will preserve their respective brands and operations; however, the combination of the two airlines will improve their strategic position in the global aviation industry. The merged airline's growth potential will be underpinned by optimisation of their two main traffic hubs, Madrid and London, unlocking synergies medium term. Elsewhere, Iberia expects the US and European authorities to approve application for anti-trust immunity (submitted in August 2008) for the combined marketing, together with British Airways and American Airlines, of flights on routes between Europe and the US, during the first half of 2010. This is a multilateral project that will improve all three carriers' competitive position in this important market. Faced by a deteriorating operating climate, slumping demand and falling profitability, in October 2009 Iberia approved its Plan 2012. The new business plan prioritises revenue generation and the search for cost efficiency in order to ensure the company's sustainability and strength. The company's management is focused on tackling the economic crisis and reinforcing the airline's leadership in strategic markets. To this end, Iberia plans to continue to focus its efforts and investments on raising quality and customer service levels by executing the measures drawn up under the Total Customer Care Program. The airline will continue to strategically increase its network of intercontinental flights. In addition, Plan 2012 calls for a radical shift in operating strategy in the short and medium haul segments where the company is less competitive since the advent of low cost carriers and the rollout of the high speed rail network. In 2010 Iberia expects overall network capacity to be reduced by a further 1.8% on 2009. However, it has the flexibility to adapt to market trends, specifically to respond to higher than forecast demand if necessary. In 2010 Iberia will continue to renew its fleet, adding two new narrow-body and as many as five wide-body aircraft. Meanwhile the company plans to consolidate its position in the maintenance and handling businesses, by leveraging any new opportunities to increase revenue and raise productivity, while maintaining an iron grip on costs.
2.5.2. Overview of main risks and uncertainties
The current outlook for global economic growth remains hostage to significant risk factors. On the bright side, it is possible that resolution of the confidence crisis and reduced uncertainty will continue to underpin a stronger than forecast improvement in financial markets, and higher than anticipated growth in capital flows, trade and private demand. Iberia, L.A.E., S.A. / Management Report / Financial and Operating Performance 328
On the down side, the clearest risk factor is that a premature withdrawal of public stimulus measures will drag down global growth. Another important risk is that the deterioration in the financial systems and housing market, or spiralling unemployment in most advanced economies, will curtail the forecast recovery in household spending. In addition, growing concerns over the budget deficits of certain countries could destabilise the financial markets and snuff out recovery by increasing the cost of household and corporate debt. Another downside risk is that the spike in commodity prices could erode the recovery in developed economies. Uncertainty over the recovery in demand for business class travel is key. The loss of business class passengers was very significant in 2009, and had a devastating impact on yields.
Similarly, the industry is facing fuel price uncertainty in terms of absolute price levels and volatility. Oil prices climbed steadily throughout 2009 and are expected to extend this pattern in response to the brightening perception of the economic situation. The International Air Transport Association (IATA) estimates that the average price per barrel of Brent crude oil will be $75 in 2010. Medium term, the outlook for oil and the attendant risk of renewed price escalation will depend on the balance between supply and demand. Demand for oil is expected to grow sharply in emerging economies while remaining stable across developed economies. The outlook for the US dollar is another source of uncertainty. The analyst community believes that the euro is overvalued relative to the dollar and expects the trend over the coming months to be one of depreciation. Dollar appreciation would increase both revenue and expenses at Iberia, as around 41% of the company's costs and 22% of revenues are tied to the greenback. Iberia has in place a global financial risk management program designed to control and diminish the potential impact of swings in fuel prices, exchange rates and interest rates on its income statement. Specifically, the fuel price hedges in place at the start of 2010 should cover 65% of estimated consumption for the year. In 2010, Iberia's management team will work towards reaching agreement with its union members on renewal of their respective collective bargaining agreements; the pertinent negotiating committees have already been appointed. On 20 April 2009, management of Iberia and of the company section of pilot union SEPLA signed the VII technical crew workers' collective bargaining agreement which was valid through 31 December 2009. The XV passenger cabin crew agreement was extended to 31 December 2008. The XVIII ground staff collective bargaining agreement similarly ended in December 2008. Iberia, L.A.E., S.A. / Management Report / Financial Risk Management 329
3. FINANCIAL RISK MANAGEMENT
As for financial risks, Iberia has a management programme to control and reduce the potential impact of fluctuations in exchange rates, interest rates and fuel prices on earnings and to preserve sufficient cash for working capital and investments. The derivatives arranged to this end are designed to partially or fully mitigate price risk; the idea is to write highly effective hedges in accordance with the risk management strategy documented at hedge inception for each instrument in order to quality for hedge accounting under IFRS and the new Spanish accounting standards. The next three sections deal with the company's hedging program.
3.1. Foreign exchange risk
Due to the nature of its activities, Iberia is exposed to exchange rate risk at both the operating (cash flows) and balance sheet levels. The main dollar hedges are detailed below.
Flows The company had US dollar exposure of around EUR 1,417 million in 2009. This short position reflects the fact that revenues denominated in this currency (22% of the total) were lower than dollar expenses (41% of the total). Under the hedge program, this position is hedged as follows:
Up to 50% of the short position is hedged with strategic hedges with durations of up to five years using swaps into euros to cover aircraft rentals denominated in dollars. The remaining exposure is managed via tactical hedges with a time horizon of between one and three years. This enables risk officers to adapt to market conditions and to respond to actual payments flows in dollars.
At year-end 2009, Iberia had hedged 77% of forecast dollar flows in 2010.
Balance sheet The company has EUR 551 million of dollar-denominated assets. The most notable are the loans extended to the Iberbus companies, advance payments to aircraft and engine suppliers, the capital in the A340 and guarantees. The dollar denominated liability balance meanwhile is EUR 254 million which helps neutralise the impact of translation differences, in addition to the hedges arranged.
3.2. Interest rate risk
Although Iberia enjoys a net cash surplus, adding in the notional debt corresponding to its operating leases (by multiplying aircraft lease obligations by a factor of 8), total adjusted net debt (in the individual financial statements) stands at EUR 1,244 million. At 31 December 2009, 49% of adjusted net debt carried fixed rates, another 6% carried floating rates that have been hedged, and the remaining 45% was freely floating. Sensitivity to a percentage point increase in euro interest rates is a positive EUR 11 million, due to the company's cash balance. However, sensitivity to a percentage point increase in dollar interest rates is a negative EUR 6.1 million. Iberia, L.A.E., S.A. / Management Report / Financial Risk Management 330
Liquidity risk
As per Iberia's individual financial statements, at 31 December 2009, the company had cash and cash equivalents (cash and liquid assets plus short term financial investments redeemable in less than three months and not including derivatives or loans to companies) amounting to EUR 1,746 million. These balances are invested in highly liquid, short term instruments such as debt repos, euro deposits and commercial paper at top rated Spanish banks in accordance with the company's prevailing risk management policy which stipulates that counterparties have a short term credit rating of at least P1.
3.3. Fuel price risk
Iberia controls its aviation fuel costs, which are directly linked to fluctuations in oil prices, using active risk management policies to mitigate the impact of fluctuations in kerosene prices on the international market and minimise budget deviations in this significant cost heading. The company has pursued a policy of directly hedging kerosene prices using a combination of financial instruments such as swaps and zero-cost option structures. Following the price shock in 2008, oil prices climbed steadily higher throughout the first half of 2009, rebounding from $40 a barrel during the first quarter to stabilise in the range of $65-75 a barrel, fuelled by brightening expectations for economic recovery. In the fourth quarter prices hovered around the $70-80 mark. Hedges locking in fuel prices covered around 60% of fuel consumption levels for the year, curtailing cash flow volatility, while enabling the company to benefit from market prices to some extent. Iberia consumes virtually two million metric tonnes of kerosene a year, a volume it expects to repeat in 2010. At 31 December 2009, Iberia had hedged approximately 65% of its fuel position. These hedges could give rise to gains or losses for the company depending on trends in fuel prices throughout 2010. Iberia, L.A.E., S.A. / Management Report / Environmental Responsibility 331
4. ENVIRONMENTAL RESPONSIBILITY
In 2009 Iberia continued to work on a number of initiatives aimed at improving the company's environmental track record on an ongoing basis, as a core component of its Corporate Responsibility Policy. As regards flight operations, measures such as the renewal of less fuel-efficient aircraft, the adoption of new operational measures and matching the flight program to evolving demand enabled the company to cut gas emissions and noise once again last year, especially the greenhouse gas emissions associated with climate change.
In 2009, Iberia received AENOR certification for cutting CO2 emissions on the Puente Aéreo (Barcelona-Madrid shuttle). This certification, the first in its class in Spain, testifies that Iberia has cut CO2 emissions on the Madrid-Barcelona shuttle thanks to fleet renewal and new cabin interiors.
The company collaborates on various national and international taskforces that analyse, promote and disseminate best environmental practices in the airline sector. Here it is worth noting the airline's participation in the pan-European SESAR (Single European Sky ATM Research) R&D program, an initiative sponsored by the European Commission and Eurocontrol with a view to easing air traffic congestion and make flying more environmentally friendly. The new air traffic management system will reduce fuel consumption, thereby slashing carbon emissions by between 6% and 12%.
Also notable was Iberia's collaboration last year with the Public Business Entity Aena and INECO on research conducted at Barajas airport to verify the environmental benefits in the airport area of the use of continuous descent approach in takeoff and landing, particularly in relation to the reduction of noise levels and air pollution. In terms of its activities on the ground, in 2009 Iberia continued to implement environmental protection measures via the certified environmental management systems in place in the handling and maintenance divisions. In September 2009 Iberia was selected, for the fourth year running, for inclusion in the prestigious Dow Jones Sustainability Index, which tracks the performance of the companies with the world's best records on economic, social and environmental practice. This puts the airline in select company as only three airlines belong to this index. This year, in its DJSI assessment Iberia obtained the highest marks for its environmental dimension. Also, for the second year running, the company was included in the FTSE4Good index. Iberia's inclusion in these two stock market indices demonstrates that Iberia is objectively rated as a yardstick in terms of sustainable business best practices. More detailed information on the company's sustainability management is included in the Corporate Responsibility Report. Iberia, L.A.E., S.A. / Management Report / Annual Corporate Governance Report 332
5. ANNUAL CORPORATE GOVERNANCE REPORT
In accordance with the amendments made to article 49 of the Spanish Code of Commerce and article 202 of the amended Companies Act by virtue of Law 16/2007 on reforming and adapting the accounting aspects of commercial law for the purposes of international harmonisation based on European Union regulations, companies whose securities have been admitted to trading on a regulated European Union exchange are obliged to include their corporate governance reports in a separate section to their management reports. It is hereby noted that the 2009 Corporate Governance Report of Iberia, Líneas Aéreas de España, S.A. is included in section 6 of the company's 2009 Group Management Report. Annual Report on Corporate Responsibility Contents / Corporate Responsibility 334
CONTENTS GUIDE OF THE ANNUAL REPORT ON CORPORATE RESPONSIBILITY 2009 0. Introduction (Pg. 335) 6. Suppliers (Pg. 393)
6.1 Procurement Management System (Pg. 393) 1. Corporate Responsibility in Iberia 6.2 Responsible procurement (Pg. 394) (Pg. 339) 6.3 Supplier payment tools (Pg. 395)
1.1 Corporate Responsibility Framework (Pg. 339) 7. Employees (Pg. 396) 1.2 Impact analysis (Pg. 343) 1.3 External assessment (Pg. 344) 7.1 Workforce and labour relations (Pg. 396) 1.4 Prizes and recognitions obtained in 2009 (Pg. 345) 7.2 Satisfaction, internal communication and motivation (Pg. 398) 2. Stakeholder engagement (Pg. 347) 7.3 Training and development (Pg. 400) 7.4 Employee services: IBpersonas (Pg. 404) 2.1 Public positions (Pg. 351) 7.5 Ethics and Codes of Conduct (Pg. 404) 7.6 Equality opportunity and diversity (Pg. 406) 3. Environment (Pg. 354) 7.7 Work and family reconciliation policies (Pg. 406) 7.8 Health and safety at work (Pg. 407) 3.1 Environmental management in Iberia (Pg. 354) 7.9 Welfare benefits (Pg. 409) 3.2 Flight operations: Climate Change (Pg. 358) 7.10 Corporate citizenship (Pg. 410) 3.3 Flight operations: Local Air Quality (Pg. 363) 7.11 Employment of disabled workers (Pg. 412) 3.4 Noise in the vicinity of the airport (Pg. 364) 3.5 Ground operations: Greenhouse gas emissions (Pg. 366) 8. Society (Pg. 413) 3.6 Ground operations: Consumption of resources (Pg. 369) 3.7 Ground operations: Waste (Pg. 370) 8.1 Millennium development goals (Pg. 414) 3.8 Nature protection (Pg. 371) 8.2 Participation in Associations and Foundations (Pg. 416) 8.3 Responsible investment (Pg. 418) 4. Customers (Pg. 373) Annexes (Pg. 421) 4.1 Iberia passengers: the essence of our existence (Pg. 373) 4.2 Iberia Cargo customers (Pg. 382) 4.3 Iberia Maintenance customers (Pg. 382) 4.4 Iberia Airport Services customers (Pg. 382) 4.5 Guarantees for all our customers (Pg. 383)
5. Shareholders (Pg. 385)
5.1 Performance of the different Iberia businesses in 2009 (Pg. 385) 5.2 Risk management (Pg. 387) 5.3 Fraud prevention and anti-corruption measures (Pg. 388) 5.4 Good Governance (Pg. 388) 5.5 Innovation management (Pg. 389) 5.6 Brand management (Pg. 390) Corporate Responsibility / Introduction 335
0. INTRODUCTION
About this Report
The Corporate Responsibility Report of Iberia, L.A.E., S.A. – hereinafter Iberia or the company – is published every year to meet the reporting demands of the different stakeholders in respect of its economic, social and environmental impacts. This Report supplements the financial and corporate governance reporting laid before the General Shareholders’ Meeting, which can be downloaded from Iberia’s web site: (http://grupo.iberia.es), where previous years’ reports can also be consulted. To assist comprehension, the information is structured into chapters dedicated to the different stakeholders of Iberia, applying the Corporate Responsibility Policy and Framework adopted by the company, which are described in section 1.1 of this Report. The information contained in this report has been approved by the senior management and the board of directors of the company and verified externally by AENOR, recognised certification body, according to the Global Reporting Initiative, GRI 3.0 (G3) guidelines and principles (see assurance report in the Annex hereto).
Self-declaration of A+ application level of the G3 guidelines Both the external checking of this report and the contents and indicators set out herein correspond to the highest degree of compliance (A+) with the recommendations made in the Global Reporting Initiative
Profile of Iberia, Líneas Aéreas de España, S.A.
Iberia is the leading airline in Spain and on the Europe-Latin America market. It is the 18th company in the world in terms of passenger transport. It flies to more than 120 destinations all over the world, and operates in 45 countries throughout Europe, America, Africa and the Near East. It has one of the most modern fleets in the sector, with more than 109 aircraft. It has a human capital of over 21,293 employees. Iberia has been listed on the Spanish stock exchange since 2001 and is included in the selective IBEX 35. In 2009-10, it is a member of the Dow Jones Sustainability Indexes, World and Stoxx, and the FTSE4Good IBEX.
Founding member of oneworld, a worldwide airline alliance covering the entire planet. Ninth company worldwide in Maintenance, Repair and Overhaul services (MRO), providing services for more than 100 customers all over the world. Leading operator in Airport services – ground assistance for passengers and aircraft – in Spain, operating at almost all Spanish airports.
Progress in the Iberia – British Airways merger
An agreement was announced in November 2009 between British Airways PLC and Iberia LAE SA for a merger between equals in 2010, with a view to creating one of the largest air transport groups in the world, with significant benefits for the stakeholders of both companies, especially their customers. Corporate Responsibility / Introduction 336
The air transport sector
Air transport is a global strategic sector, with an economic impact estimated at 3 trillion dollars, equivalent to 8% of the world GDP. It generates 29 million jobs worldwide, including direct, indirect and induced employment. The sector accounts for only around 2% of the CO2 emissions. The infrastructure uses only a small area of land, estimated at 1% for the European Union. For more information on the economic, social and environmental impacts caused by air transport, see: www.atag.org/files/ATAG%20brochure-124015A.pdf
The air transport market currently faces the following challenges:
The economic crisis was behind the widespread drop in traffic in 2009, especially among business passengers, denting airline profits. The expansion of low cost carriers and alternative means of transport, such as the high speed train, is causing a loss of market share on the domestic markets of traditional network carriers. In Europe, network carriers are tending to amalgamate. There have been sharp fluctuations in fuel prices in recent years, cutting into airline profit margins. The congestion of air traffic, especially in Europe, curbs growth of the business. The emerging markets of Asia – especially India and China – and the Middle East will make competition tougher on long haul routes.
In Iberia, the passenger and cargo air transport business is supplemented with another two businesses:
MRO: Maintenance, Repair & Overhaul, and Airport Services: Ground assistance (handling) for passengers and aircraft.
Each of these businesses has its own market characteristics and stakeholders, which are described elsewhere in this Report. Corporate Responsibility / Introduction 337
A year of changes for Iberia
A number of very important events occurred within the company in 2009, some of which particularly affected its main stakeholders:
In view of the repercussions of the crisis, the company implemented a rigorous Contingency Plan right from the beginning of the year, intended to maintain its financial strength, cut costs and defend its revenues on the principal markets. Planned investments were slowed down, except those designed to improve customer service. The VII Collective Agreement for Pilots was signed in April, ensuring stability in a critical year for the company. In July, the Board of Directors passed a resolution to relieve the former Chairman, Fernando Conte, of his duties, appointing Antonio Vázquez Executive Chairman of the Board and CEO and Rafael Sánchez-Lozano Managing Director. The merger between Vueling and Clickair also took place in July, with Iberia as majority shareholder and industrial partner; the agreement included an undertaking to remain in the capital of the merged company. The new Iberia Strategic Plan, Plan 2012, was presented in October, with the goal of recovering profitability in the core business of air transport, to guarantee the company’s viability and turn it round. The company’s organisation was restructured to bring it in line with this strategy:
Iberia in the sector: oneworld
Iberia belongs to one of the largest three airline alliances worldwide, oneworld, along with American Airlines, British Airways, Cathay Pacific, Finnair, Japan Airlines, Lan Chile, Malev, Mexicana, Qantas and Royal Jordanian. 2009 has been especially significant for oneworld, as it celebrated the tenth anniversary of its creation, 10 years in which it has become the most profitable alliance of the three that exist. Corporate Responsibility / Introduction 338
oneworld has a total fleet of 2,250 aircraft. It operates at 700 airports in 150 countries, with over 9,000 flights a day, which means a take-off or landing every five seconds, and directly employs more than 300,000 people, distributed throughout the world. Since its foundation, its maxim has been customer service quality, since this enables the associated airlines to increase and improve the range of products and services they offer their customers, enabling them to travel practically anywhere in the world and benefit from the services provided jointly by all the airlines. A new member joined oneworld in November 2009, Mexicana de Aviación. Iberia acted as sponsor of the Mexican airline, leading the process for its incorporation in the alliance for a year and a half. In other words, Iberia planned and coordinated the process and guaranteed that Mexicana would meet all the requirements to join oneworld. The Russian airline S7 Airlines is expected to join the alliance in 2010, which will add 54 destinations and eight new countries to the oneworld network.
Iberia in the sector: associations
Iberia is also a member of national and international air transport organisations committed to a responsible development of the air industry worldwide:
IATA: International Air Transport Association
AEA: Association of European Airlines
ALA: Association of Airlines operating in Spain
ACETA: Association of Spanish Air Transport Companies
ATAG: Air Transport Action Group, whose members include representatives from all sectors of the industry: airlines, airports, air navigation service providers, airline pilot and air traffic controller unions and travel and tourism associations. It aims to foster sustainable development of infrastructures and air services worldwide. ATAG has created a web site, www.enviro.aero, to announce and inform on these principles, backed and financed by the commercial aviation industry. Corporate Responsibility / Corporate Responsibility in Iberia 339
1. CORPORATE RESPONSIBILITY IN IBERIA
1.1 Corporate Responsibility Framework
Iberia regularly updates its Corporate Responsibility – hereinafter CR - management framework to adjust it to current trends and brings it in line with current strategic guidelines. The framework defines the responsibilities of the areas with constant relations with Iberia stakeholders and that coordinate the CR-related management systems:
These responsibilities have been updated according to the changes made in the organisation structure in October 2009. One of the new aspects of this new organisation is the creation of the Corporate Responsibility unit within the Internal Audit and Quality management, having as its main duties:
Coordinate preparation of the Annual Corporate Responsibility Report and the necessary documents for presenting Iberia’s candidacy for the sustainability indexes. Promote the Corporate Responsibility Policy approved by the Board of Directors, supporting actions to be developed by the areas of the organisation involved and adapting the relevant information on Intranet and Internet. Monitor and constantly assess the effectiveness of the CR Framework in respect of best practices, recommending and proposing any necessary adjustments. Corporate Responsibility / Corporate Responsibility in Iberia 340
In compliance with the recommendations of the Spanish Unified Good Governance Code and pursuant to the Regulations of the Board approved on 22 May 2008, the Board is responsible for approving the company’s CR Policy. The review process culminated in an agreement on the common Corporate Responsibility Framework, consisting of:
Concept of Corporate Responsibility: what the company understands by CR. CR Instruments: the bases for effective CR management in Iberia. Corporate Responsibility Policy: the principles and objectives of CR and how they are developed and applied in the different management areas of the company. Scopes of application of CR: the principle CR-related management issues. Spheres of influence: the stakeholders and their relationship with the company. International standards: what international CR initiatives the company supports and applies.
Concept of Corporate Responsibility:
In Iberia, CR is the shared commitment to create economic and social value, respecting the environment and taking into account the expectations of stakeholders at all times.
Corporate Responsibility Instruments
The bases for ensuring adequate CR management and reporting in Iberia are:
Corporate Responsibility Policy
Iberia acts in accordance with a set of principles that enable it to continue growing in line with the services demanded by its customers, within a framework of respect and preservation of the environment, while collaborating actively in welfare actions, thus contributing to the development of the societies in which it operates. Corporate Responsibility / Corporate Responsibility in Iberia 341
These principles are summed up in the mission, vision and values of the company, shared across the board:
OUR MISSION
Iberia’s mission is to offer air transport, airport services and aircraft maintenance services that come up to our customers’ expectations and create sustainable economic and social value.
OUR VISION
Iberia aims to be leader in customer satisfaction, innovation and economic and social performance: - Perceived as leader on the domestic, European and Latin American markets. - Preferred by customers for the best possible value for money - Distinguished by shareholders for its sustained returns - Recognised for its transparency and its social and environmental commitment - Desired by people for their professional development
OUR VALUES
Focus on customers, creation of value, search for excellence in management, social commitment, importance of people, leadership, team work, constant improvement, adaptation to change and innovation.
The relations between Iberia and its different stakeholders are kept as direct as possible in order to be able to respond to their concerns and incorporate their suggestions in projects to enhance the company’s processes, products and services. Corporate responsibility is incorporated in the different management systems in the company: Strategic Plan, Risks, Internal Control, Safety, Quality and Environment, Occupational Health, Procurement, etc. They all incorporate assessment and continuous improvement and establish measures to guarantee sustainable management of the company’s business activities. This policy is specified in the following goals: General corporate responsibility goals in Iberia Goal 1: Maintain its leadership in return on assets (ROA), safety and reliability. Goal 2: Obtain recognition within society for its transparency, social commitment and defence of human rights. Goal 3: Apply the best environmental practices in its businesses activities, making a rational use of natural resources. Goal 4: Respond to the major concerns of the company’s stakeholders:
4.1 Guarantee the best service to its customers in terms of quality and responsibility, respecting the protection of their rights. 4.2 Create value for its shareholders, fostering respect for the environment and distribution of wealth. 4.3 Support any humanitarian projects and initiatives promoted by its employees, involving other stakeholders. 4.4 Encourage the personal, labour and social development of its employees within a framework of equal opportunities. 4.5 Promote sustainable development and good management practices among its suppliers of goods and services. 4.6 Work together with institutions, public administrations and other companies in the sector in any initiatives considered of interest. 4.7 Participate in cultural, educational, sports, social and economic development projects wherever it operates. Corporate Responsibility / Corporate Responsibility in Iberia 342
Goal 5: See that these goals are met, with permanent monitoring to pinpoint opportunities to further the company’s continuous improvement in CR management.
Scopes of application of Corporate Responsibility
In general, CR contemplates the following aspects in Iberia, all across the board, that is, all of the company’s management areas are responsible for them:
Spheres of influence
The company has identified and analysed its different stakeholders to classify them according to their importance in meeting objectives and their capacity to influence the company or be influenced by it. Corporate Responsibility / Corporate Responsibility in Iberia 343
Iberia’s stakeholders are classified below:
Strategic:
Customers and consumer associations Shareholders and investors Employees and their representatives: SEPLA, SITCPLA, STAVLA, UGT, CCOO, USO, CTA, etc. Suppliers and subcontractors
Regulatory and institutional:
Public administrations, AENA (Aeropuertos Españoles y Navegación Aérea), Civil Aviation Authority, ICAO, IATA, national and local governments
Market:
Transport sector: airline associations, rivals, alliances Tourism and business sector: tour operators, travel agencies, accommodation, etc. Maintenance & engineering sector: rivals, alliances Airport services sector: rivals, alliances
Social and airport vicinity:
Media Communities in vicinity of airports NGOs
Special in this Report: Iberia and Latin America Iberia is involved in the development of the local communities of the countries in which it operates and, for strategic and cultural reasons, it is particularly involved in Latin America. Actions and initiatives proving that historic commitment can be consulted throughout this Report.
International standards
Iberia has joined the following international initiatives, which are used as a constant benchmark in the implementation of Iberia’s RC policy:
United Nations Global Compact International Labour Organisation Fundamental Conventions Millennium Development Goals.
1.2 Impact analysis
Based on the company’s Risk Map and the Global Compact principles, in 2009 Iberia studied and prioritized its main sustainability impacts, reaching the following conclusions:
The greatest impact by the company is environmental, caused by the volume of emissions associated with climate change in its flight operations. Other environmental impacts, produced in its ground operations, are less significant. Corporate Responsibility / Corporate Responsibility in Iberia 344
Being a mean of transport, the safety and quality with which the company provides its services to customers have enormous repercussions in the public opinion. The risks concerning the ethics of its business, such as incidents of discrimination, corruption or fraud, are very small and duly controlled. The company has no significant impacts in labour, in aspects such as freedom of association, the right to collective bargaining or equal opportunities in access to employment. Owing to the nature of its business, there is no impact in respect of abuse of human rights, such as forced or child labour.
This analysis has guided the preparation of this Report, which is structured in the order of importance of the impacts analysed.
1.3 External assessment
Iberia attaches great importance to the performance assessments it receives regularly from independent third parties. They are an excellent instrument for measuring the effectiveness of its CR actions and are used as the basis for preparing the action plan and sustainability enhancement plan, in line with the company’s Corporate Responsibility Policy.
Iberia included in the Dow Jones Sustainability Index and FTSE4Good IBEX
Iberia has been included in the selective Dow Jones Sustainability World Index for the fourth year in succession. For the first time this year, the company has achieved the top score in the environmental sector.
In May 2009, Iberia was also confirmed in the FTSE4Good IBEX, the other prestigious international sustainability index.
Iberia was also included during 2009 in the KEMPEN SNS - SRI Universe index, which analyses mix-cap and small-cap European companies in three evaluation blocks: business ethics, environmental performance and social performance.
Iberia’s inclusion in these indexes is an important recognition of the efforts it has made to encourage and manage corporate responsibility. Corporate Responsibility / Corporate Responsibility in Iberia 345
In fact, the company has incorporated the information it receives from these assessments in its annual report preparation process, as shown in the following flow chart:
The information required for inclusion in these indexes is also related with the GRI standard used in this Report, presenting the company’s performance indicators in full (see the Annexes to this Report).
1.4 Prizes and recognitions obtained in 2009
Prize for Best Environmental Management: Iberia’s airport services business was awarded the prize for Best Environmental Management 2009, awarded at the Environmental Conference held by Mallorca Airport. This prize acknowledges the good work performed by Iberia, which has an Integrated Quality and Environment Management System for its ground operations, certified under international standards ISO 9001:2008 and ISO 14001:2004. Corporate Responsibility / Corporate Responsibility in Iberia 346
PREVER 2008 Prize for occupational hazard prevention: In April 2009, the Prize-Awarding Committee for the Occupational Hazard Prevention National, PREVER 2008, of the General Council for Labour and Industrial Relations and the Health and Safety at Work Authorities of the Andalusian regional government awarded Iberia the prize in the category of Undertakings and Institutions, for its work in favour of publicising and implementing risk prevention in Spanish society and work places. Condé Nast Traveller Prizes: Iberia was elected the best airline in the first edition of these prizes awarded by the prestigious travel magazine, based on readers’ votes. Those readers elected the best airlines in the tourist sector in 2008, divided into 15 categories. In addition, Vueling was elected best new generation low-cost airline. Travelranking Prizes: Iberia received the prizes for the best airline on South American routes and the airline with the best promotion, awarded by 'Agenttravel' based on the opinion of 720 travel agents throughout Spain. AMPE Prizes: The Spanish Advertising Media Association awarded prizes to Iberia in the categories of cinema, television and multimedia with three Silver Ampes for its Christmas 2008 advertising campaign. The campaign was rewarded on the basis of the following criteria: idea, creativity, quality, public awareness and correct adaptation to the advertising media. The 100 Best Ideas of the Year prizes: In the 31st edition of these prizes, the magazine Actualidad Económica selected the most outstanding innovations launched on the market in 2008 by Spanish enterprises, including the new functions for customers on the web site Iberia.com.
Iberia and Latin America Iberia received the Special Prize of the Government of Costa Rica, in recognition of the “pioneer airline in opening up the European tourist market to Costa Rica”, according to the Costa Rica Institute of Tourism. 55% of the passengers flying with Iberia to Costa Rica were from European countries other than Spain, which reflects the importance of the Spanish company in connecting the European market with the Central American country. Corporate Responsibility / Stakeholder Engagement 347
2. STAKEHOLDER ENGAGEMENT
Iberia has procedures in place for obtaining information on the expectations of its stakeholders, through well-established communication channels. The following table shows channels of communication and a summarises the main activities performed in 2009 and in progress for 2010 related with the expectations detected among stakeholders and the objectives marked out in Iberia’s CR Policy:
Expectations STAKEHOLDERS Communication channels Actions 2009/10 CR Policy Goals detected
Permanent: PISAC: Integral Customer www.iberia.com Service Plan www.iberiacorporate.com (new) AENOR Certified Service N Mark for Service Quality www.iberia.com/atencionalcliente and Customer Satisfaction www.iberia.com/iberiaplus/ Management Serviberia: 24H service Mobile Boarding Pass Direct sales offices Total compliance with EU Customer services department regulations of Internet Punctuality Iberia Plus frequent flyer programme and ticket sales CUSTOMERS: Service quality individual monitoring using CRM tools ISO 27001 Certification for Passengers Transparent Quality perceived opinion polls Information Security on prices Reports by chief flight attendants Iberia.com Special measures for Publications: Swine Flu Ronda Iberia Magazine Actions following closure of Air Comet IB Plus Magazine (new: online) Goal 1 Actions to involve Excelente Magazine Goal 4.1 customers in welfare projects (see Society Goal 4.6 chapter) More information in Customers chapter Aircraft Maintenance Business: Maintenance hangar www.iberiamaintenance.com construction project in [email protected] Barcelona (in progress). Customer satisfaction surveys, according to Punctuality GAUDI handling ISO 9001:2008 Reliability management optimisation CUSTOMERS: Quality Airlines Airport services business (handling): project (in progress). Safety http://handling.iberia.es Informes de calidad por Sustainability aeropuerto [email protected] Certification under IATA Customer satisfaction surveys, according Operational Safety Audit – to ISO 9001:2008 IOSA.
www.iberia-cargo.com E-FREIGHT: electronic Safety [email protected] cargo ticket project (in CUSTOMERS: Punctuality Cargo agents Customer satisfaction surveys, according to progress). Sustainability ISO 9001:2008 IOSA Certification. Corporate Responsibility / Stakeholder Engagement 348
Expectations STAKEHOLDERS Communication channels Actions 2009/10 CR Policy Goals detected
Permanent: Crisis: Contingency Plan Department of the company dedicated 2009 and Plan 2012 (in exclusively to shareholder and investor progress) relations: [email protected] IB-BA Merger Agreement Specific section of the Iberia web site for and commercial investors and shareholders: agreement with AA (in http://grupo.iberia.es progress) Specific, punctual information on all Vueling-Clickair merger significant events, also through the Participation in the Large Spanish National Securities Market Cap Tax Forum (in Commission (CNMV) progress) Goal 1 Stock exchange evolution and analyst Web cast: Live Goal 2 recommendations Profitability transmission on Internet of Goal 4.2 Information on structure of the capital Good events to maintain regular SHAREHOLDERS contacts with investors More information Presentations of results and strategic Governance in the plans of the company Transparency Shareholders Corporate Governance information chapter
Regular: Shareholders’ Newssheet Monthly Stock Exchange reports Annual Reports and General Shareholders’ Meeting Monthly traffic statistics & quarterly earnings reports Investors and Analysts Day Web casts (new)
Permanent: Electronic invoicing project Negotiation for suppliers and contractors (in progress). Contracting Goal 3 Feedback Permanent inclusion of Monitoring Goal 4.5 Ethics Global Compact SUPPLIERS More information Fostering of sustainability clauses in Ariba Sourcing Tool in the Suppliers good practices contracts. chapter Internal customer satisfaction surveys, AERCE workshop: fostering according to ISO 9001:2008 social responsibility in SMEs (in progress).
Permanent: VII Collective Agreement Intranet / Extranet: IBPróxima for Pilots Employee Portal: IBPersonas Collective bargaining for the 3 Agreements (in Suggestion boxes in IBPróxima and progress) IBPersonas Stability Professional development Notice boards, both online and physical Continuous plans Programme for recognition of proposals training Muscular-skeletal disorder for improvement Goal 2 Health & safety and Swine Flu prevention at work campaign (in progress) Goal 3 Regular: Combination ISO 27001 Certification of Goal 4.3 Works Councils for bargaining and EMPLOYEES of work and Information Security Goal 4.4 monitoring of Collective Agreements, of family life Equality Plans (in progress) both ground and flight staff More information Equal Actions to involve in the Employees Informative meetings to report to opportunities employees in welfare chapter management on results and objectives Welfare projects (see Society Satisfaction surveys on training received benefits & chapter) Opinion polls on services offered on assistance IBPróxima
Publications: Internal magazines: Iberiavión, Despega, OPS. Mantenimiento and Together. Corporate Responsibility / Stakeholder Engagement 349
Expectations STAKEHOLDERS Communication channels Actions 2009/10 CR Policy Goals detected
Permanent: With Spanish Ministerio Direct relations with any of the areas, de Fomento: Special case-specific. measures for Swine Flu Goal 2 and closing of Air Comet Sponsorship Agreements with Goal 3.6 With Spanish Ministerio Institutions: Spanish International Goal 4.6 INSTITUTIONS & Cooperation Agency (AECID) Collaboration de Economía y Hacienda: These and other PUBLIC CSR Participation in the Large collaborations ADMINISTRATIONS Regular: Promotion Cap Tax Forum (in progress) with institutions are described in Meetings with the Spanish Ministerio de • With AENA: Study to this Report Fomento, Civil Aviation Authorities, AENA check the environmental benefit of continuous descent approach
Permanent: IB-BA Merger Agreement www.moretravelchoices.com and commercial Goal 1 agreement with AA (in Iberia Plus. progress) Goal 4.1 Serviagencias. Vueling-Clickair merger Goal 4.2 MARKET: TOURISM Attendance at congresses, trade fairs and Growth Entry of Mexicana in Goal 4.6 & TRANSPORT forums in the sector. Integration SECTORS oneworld See Shareholders: Regular: Entry of new members in the Iberia Plus points Business Visits to Iberia ticket sales points system development Brand management
Permanent: Application of air On corporate web site: navigation, approach, http://grupo.iberia.es>CSR> landing and take-off Goal 3 Environment operating procedures to SOCIETY: Compliance reduce noise pollution (in More COMMUNITIES IN Regular: with the law progress). information in VICINITY OF Collaboration Collaboration with the the Environment AIRPORT Annual Corporate Responsibility Report authorities to define and chapter oversee new measures to reduce noise and air pollution (in progress).
Permanent: Madrid 2016 Promotion [email protected] Xacobeo 2010 Promotion Press Room at http://grupo.iberia.es (in progress) Subscriptions service Promotion of the Millennium Development “Iberia Solidarity” section in the Ronda Goals (in progress) Goal 2 magazine Transparency Promotion of customer Sponsorship agreements (Annexes) Reliability Goal 4.7 service enhancements More SOCIETY: MEDIA Rigour (specific reports in Regular: information in Speed media) the Society Press releases Credibility Specific CSR advertising chapter Press conferences campaigns Advertising campaigns Sustainability Congresses & Trade Fairs Visits ans presentations Interviews and travel with media Corporate Responsibility / Stakeholder Engagement 350
Expectations STAKEHOLDERS Communication channels Actions 2009/10 CR Policy Goals detected
Permanent: Setting-aside of space in Department of the company dedicated to the bellies of aircraft for Goal 2 social investments. transporting humanitarian Goal 3 aids “Iberia Solidarity” section in the Ronda Collaboration Goal 4.7 SOCIETY: magazine Facilities in passenger NGOs Commitment transport More information Regular: Commitment to the in the Society chapter Annual Report on Corporate Millennium Development Responsibility Goals
In addition to the information and communication channels focusing on each type of stakeholder, Iberia provides an on-line opinion poll where stakeholders can rate their assessment of this Report, at http://grupo.iberia.es, the results of which are taken into account and used to improve the information further. Any comment or suggestion on the aspects contemplated in this Report can also be sent to the suggestion box [email protected] The company is also a candidate for the GRI Readers’ Choice Awards 2010, organised by Global Reporting Initiative, the institution that publishes the guidelines used to prepare this Report. By participating, it has an opportunity to find out how effective the report is from the point of view of the needs and expectations of its readers.
Iberia in the social networks:
The following initiatives were created on Internet during 2009:
Blog: http://iberiairlines.blogspot.com/ Twitter: http://twitter.com/Iberiairlines YouTube: http://www.youtube.com/user/iberiairlines
Technological breakthroughs make communication increasingly easy and social networks on Internet are being widely developed in response to people’s natural need to contact others. Iberia, aware of this need, has decided to be present in the social networks. Iberia also created an Internet Presence Observatory in 2009, through which it:
Analyses the effects of its activities having the greatest important on internet. Confirms whether the expectations detected among its stakeholders are correct. Detects what comments are most repeated in respect of its actions, what means are used (opinion forums, blogs, etc.) and what average assessment is expressed in the comments. Finds out which stakeholders are most active. Examines the repercussions of its advertising campaigns and new products and services launched. Obtains information to control risks to its reputation. Contributes towards pinpointing opportunities to improve in CSR: Goal 5. Corporate Responsibility / Stakeholder Engagement 351
During 2009, the company participated actively, among others, in the following forums for stakeholders to exchange experiences (multi-stakeholder events):
Annual Corporate Reputation Conference, called “Reputation in the Profit and Loss Account”, organised and coordinated by the Corporate Reputation Forum in collaboration with IESE and the Reputation Institute, at which Iberia made a presentation on the Dialogue with Stakeholders. III Spanish Congress of Minority Shareholders, organised by the Spanish Association of Minority Shareholders in Listed Companies (AEMEC), at which Iberia suggested the possibility of introducing new systems for shareholder participation. Conference on Corporate Volunteer Work by companies and their employees, organised by Nuevo Lunes and Caja Duero, with the participation of representatives from companies such as Telefónica, Grupo VIPs, Iberdrola and Iberia and spokesmen and women from Cáritas, Cruz Roja, Ayuda en Acción, Manos Unidas and Intermon Oxfam. Annual Seminar of the Spanish Association of Corporate Travel Agents (AEGVE), at which Iberia presented its Corporate Responsibility Framework.
Iberia also promotes collaboration and interaction among different stakeholders, acting as official carrier for numerous national and international Fairs, Congresses and Events, the participants at which are granted special rates on Iberia flights.
2.1 Public positions
Iberia, as part of the society for which it provides its services, has taken into account the principal concerns of that society during 2009:
Economic recession: The company firmly believes that the solution to some of the causes that led to the crisis can be found in Corporate Social Responsibility. In times of crisis, sustainable management should increase and all social partners should be committed to innovation, knowledge and training as keys to competitiveness. In declarations made by the former Chairman of Iberia, Fernando Conte, to Nuevo Lunes on 23 February 2009: “It is just as important to come out of the recession as it is to come out of it well. In other words, we should take advantage of the current situation to restructure the economy; put an end to underground economy flows, with irregularities and speculative movements; develop new growth models based on the strengths of our country; and take advantage of the smaller offer of employment to increase the offer of training, for both young people and the unemployed, preparing them for the new needs on the market”. The present Chairman, Antonio Vázquez, made the following declarations to the daily newspaper Público on 29 September 2009: “When we come out of this recession, the air transport sector will be totally different and airlines will have reinvented our approach to economic and business agents for their business trips, and to individual customers for their leisure trips. This is the challenge we face and those of us who get it right will come out of the current situation much stronger”.
Iberia and the closing of Air Comet:
As soon as the Spanish Ministerio de Fomento established a mechanism for transporting those stranded at Christmas, Iberia expressed its willingness to cooperate in this emergency situation, to enable those thousands of people to return home. Iberia transported over 3,800 people, including some fifty babies. Of these, more than 2,150 travelled on special flights put on by Iberia and over 1,600 on the airline’s scheduled flights. Corporate Responsibility / Stakeholder Engagement 352
Iberia also offered special rates for the remaining stranded passengers to return, on routes to Lima, Bogotá, Havana, Buenos Aires and Quito/Guayaquil, maintaining these rates until 31 January and with discounts of 25% on average. The company sent a message out all its employees thanking them for the huge efforts they had made to mitigate the effects of the closure of Air Comet for those affected.
Climate change: Once again, Iberia has implemented its fleet renewal plans as a strategy for cutting fuel consumption and reducing its greenhouse gas emissions. In November 2008 the European Union approved a Directive to include aviation activities in the scheme for greenhouse gas emission trading within the Community. All airlines operating flights which arrive at or depart from an aerodrome situated in the territory of a Member State will be included in that scheme as from 2010.
Iberia is in favour of a system that rewards companies that adopt measures to reduce their CO2 emissions and defends a global system, coordinated by the International Civil Aviation Organisation (ICAO) not limited only to the EU, as otherwise it will generate competitive disadvantages, and that also includes mechanisms to encourage manufacturers to use the best technologies and implementation of the most efficient infrastructures, such as the Single European Sky. Iberia participates in the European SESAR programme, which aims to achieve a modern management system for European air space, focusing on customer needs. This would reduce air traffic congestion in Europe and mitigate its impact on the environment. The SESAR [Single European Sky ATM Research Programme], through which progress will be made towards the creation of the Single European Sky, was set up by the European Commission and EUROCONTROL. The most important companies and organisations in the European air sector are represented in it. The new operating procedures deriving from the SESAR will be applicable as from 2010. Iberia will contribute its knowledge and experience in the area of flight operations. With the combined efforts of airlines, companies and aeronautical enterprises, Europe will have a safe, high capacity network with a substantial increase in automated processes, including satellite navigation from take-off to landing and optimising air routes and corridors. It will thus be possible to cut flying times and fuel consumption by 6-12%. More information in the Environment chapter.
Protection of Human Rights and Humanitarian Aid: As a responsible company, Iberia incorporates and contemplates respect for human rights in its operations, based on the principles established in the Universal Declaration of Human Rights, the eight Fundamental Conventions of the International Labour Organization and the United Nations World Compact, which Iberia joined in 2004. Iberia is committed to the Millennium Development Goals through economic contributions and the donation of other resources for social action projects, especially those promoted by its employees. The company runs promotion campaigns to encourage its stakeholders to become involved in the achievement of these goals. More information in the chapter on Employees and Annexes.
Regional development and integration: Together with the franchise Iberia Regional/Air Nostrum and its subsidiary Vueling, the company covers practically all destinations on the Spanish mainland and the Balearic and Canary Islands. Air Nostrum was set up in 1994 in response to the needs for flights between the different regions of Spain. It currently offers flights to almost 60 national destinations. Corporate Responsibility / Stakeholder Engagement 353
The new Vueling has a fleet of 35 aircraft to fly to 45 destinations in Spain, Europe and North Africa, which enables Iberia to offer more direct routes to several European destinations, greater frequencies and, in short, to increase its capacity. Iberia has undertaken to remain in the capital of Vueling for at least two years and upholds an independent, profitable Vueling. Since the appearance of low-cost carriers in Spain, Iberia has always adopted a position of responsibility, advocating streamlining of the domestic market and the creation of a Spanish low-cost carrier that could be competitive, with long-term sustainable profitability. This is why it backed the talks between Clickair and Vueling in 2008 with a view to their merger. As regards the development of the High Speed Railway (AVE) Network in Spain, Iberia supports the integration of both forms of transport, building AVE stations at international airports to enable citizens to combine the two forms of transport conveniently. In fact, Iberia participates in the AEROAVE project along with RENFE, ADIF and other organisations aiming to integrate air transport with the long-distance railway networks, supported by the Spanish Ministerio de Fomento and Ministerio de Ciencia e Innovación: www.aeroave.es
Growing need to travel: Through commercial agreements with different airlines and the oneworld alliance, which is constantly gaining new members, the company offers its customers the possibility of flying almost anywhere in the world. In this regard, American Airlines, British Airways and Iberia have presented a joint business agreement to cooperate more closely on flights between Europe and North America. Together with Finnair and Royal Jordanian, they have applied to the US Department of Transportation (DOT) for antitrust immunity. The agreement also needs approval from the European Union. Iberia believes that the granting of immunity would bring considerable benefits, enabling oneworld to compete more effectively with the SkyTeam and Star alliances, which already have immunity. Customers will benefit, since the agreement will increase connection options, making it easier to travel on the combined route offered by the three airlines, having access to flight times better suited to their needs. The alliance will have a network of 400 destinations in 100 countries and more than 5,000 flights a day. The employees and shareholders of these companies will also benefit from the agreement, since the airlines will be able to enhance the quality of the products and services they offer, making them more competitive. These companies have made a web site available for their stakeholders to obtain information on this agreement: www.moretravelchoices.com, which highlights its benefits and gives stakeholders an opportunity to participate by signing a declaration supporting the application for antitrust immunity. The DOT has in fact received numerous letters from consumer associations, business organisations, airports and political representatives requesting its approval. Corporate Responsibility / Environment 354
3. ENVIRONMENT
Environmental protection has been a constant feature in Iberia for many years and is singled out as one of its corporate priorities. For this reason, the company strives unceasingly to maintain a balance between development of its business activities and their impact on the environment.
3.1 Environmental management in Iberia
In its endeavour to develop the best environmental practices, Iberia defines and regularly updates a set of measures which, based on the company’s Corporate Responsibility Policy - see Chapter 1 of this Report -, include the implementation of environmental management systems, training, motivation and awareness of its employees, regular checks, controls and audits, as well as the cooperation with its stakeholders in environmental issues. The most important environmental impacts of the company are summarised below: Corporate Responsibility / Environment 355
Environmental management systems
Environmental management systems enable organisations to develop their environmental policies and meet pre-established management objectives. The following diagram shows the main phases of a management system, in this case an environmental management system:
For its flight operations, the company establishes action plans to implement the environmental variables in the fleet renewal processes and adopt the best practices in flight operations. Iberia’s participation in national and international task forces that address these issues enables the company to adapt its policy on this matter, keeping it permanently up to date.
Iberia pinpoints and assesses the environmental aspects of its ground operations to rate the extent to which they affect the environment. It then defines its management strategy according to that rating. The company’s environmental management systems have been certified externally and its internal management systems and specific procedures cover all the activities having any environmental impact. Iberia’s airport services have been awarded the AENOR certificate for its Integrated Quality and Environment System, under the ISO 9001:2008 and ISO 14001:2004 standards, respectively. This is particularly impressive since it umbrellas under a single Integrated System the operations of around thirty stations in the national airport network, with 7,926 employees. Corporate Responsibility / Environment 356
Iberia also has an integrated Management System for its MRO business in Madrid. This is one of the broadest certifications awarded by AENOR in terms of area, variety and quantity of environmental aspects and number of persons affected, 3,824 employees.
In 2009 Iberia’s industrial areas in Madrid obtained Integrated Environmental Authorisation (AAI), which means that both the industrial installations and the procedures performed there to eliminate all kinds of pollutants (waste, effluent and air emissions) comply with the guidelines and good practices established in the EU "Integrated Pollution Prevention and Control" (IPPC) Directive. One of the most important aspects of this directive is the new focus on the industrial environment. The introduction of the single permit (Integrated Environmental Authorisation), use of Best Available Techniques and Reporting Transparency are some of the elements of this new focus.
Environmental audits
Internal audits were conducted in 2009 in the areas of Iberia with significant environmental impacts. These audits were made in the areas of Airport Services, MRO, Cargo and Medical Service. In addition and with a view to having Iberia’s environmental management checked through an external body, the sites whose Environmental Management Systems have been certified under ISO 14001:2004 were audited by AENOR in 2009. Corporate Responsibility / Environment 357
A total of 38 internal environmental audits were made in Iberia during 2009, in which 93 actions for improvement were pinpointed in the audited areas.
DISTRIBUTION OF ENVIRONMENTAL AUDITS IN 2009 IN THE DIFFERENT AREAS OF IBERIA
Parallel to this process, in 2009 the Internal Audit Department audited the process Treatment and Recycling of Vehicles at the end of their useful life. It should be remembered that Airport Services entails the maintenance and renovation of a large park of vehicles (around 1000 vehicles), management of which must comply with the applicable legal recommendations. This audit checked compliance with the applicable laws and regulations, recommending a number of good practices, which the company has already adopted.
Environmental awareness and training
Continuous training in the application of different internal environmental procedures is common practice in the company. Continuous training and awareness campaigns are provided for the technical staff on the best practices in flight operations, with the aim of reducing noise and fuel consumption, the latter being directly proportional to CO2 emissions. Furthermore, in 2009 the company continued implementing some of the proposals received through the process conducted in 2008 asking employees for ideas on how to further cut fuel consumption, an initiative seeking collaboration through Intranet IBPróxima, focusing on cost-savings and environmental awareness. With regard to the training given during the year in respect of ground operations, 50 courses were given in the Airport services area, during which the Environment Officers informed 4,070 employees on good environmental practices. In the area of MRO, courses on good practices were provided for all new employees and a Manual on the correct management of urban waste was distributed among all the relevant employees in this area. Finally, the Cargo area ran 172 courses for 1,025 employees on the correct handling of hazardous goods, a 20% increase year on year in the number of courses and participants. An energy saving campaign was also run in 2009, reminding all employees of the benefits of doing the following, among other measures:
Reducing the time that individual air-conditioning/heating equipment in offices, with a potential annual saving
of 1,400 tonnes of CO2 . Corporate Responsibility / Environment 358
Making efficient use of vehicles: turn off engines when they are not moving, maintain a constant speed adequate for each situation, etc. They could thus reduce fuel consumption up to 10% and save around 1,000
tonnes of CO2 a year. Turning off the computer, monitor and printer at the end of the day, which would give an estimated annual
saving of 1 tonne CO2 per employee.
Environmental accounting
Environmental accounting compiles financial information with a view to combining the company’s economic and environmental policies so as to achieve a more sustainable company. In Iberia, economic accounting assists decision- making in matters concerning environmental actions (See Annual Reports of the Iberia Group and Iberia L.A.E.).
3.2 Flight operations: Climate Change
According to the Intergovernmental Panel on Climate Change (IPCC), the aviation sector contributes only 2% of the total CO2 emissions generated by the consumption of fossil fuels. Nevertheless, in view of air traffic growth forecasts the sector ought to take measures to minimise the increase in these emissions.
Over the past 10 years, aviation has reduced its specific emissions of CO2 by 10% through the introduction of more efficient engines, lighter aircraft and enhanced aerodynamics. However, there is no technology available to cut emissions drastically in the short term: tests are commencing with biofuels, but as a medium-term objective.
IATA Strategy : Zero Growth in CO2 Emissions in 2020
In June 2009, Iberia and the other airlines represented on the IATA Management Committee approved the future Strategy for limiting greenhouse gas emissions by the sector. This Strategy contemplates the following goals: This Strategy contemplates the following goals:
Zero growth in CO2 emissions by 2020, i.e. the sector will continue to grow, although its CO2 emissions will not.
Enhance fuel efficiency by 1.5% p.a. on average from 2009 to 2020, since CO2 emissions are directly proportional to fuel consumption. 50% reduction of total emissions by the sector by 2050 compared to 2005. Corporate Responsibility / Environment 359
En el gráfico anterior se representa cómo estos objetivos pueden llegar a alcanzarse a través de la renovación de las flotas, la adopción de nuevas medidas operacionales, la mejora de las infraestructuras aeroportuarias y de navegación, la instalación en los aviones de mejoras tecnológicas, la utilización de biocombustibles y las normativas sobre mecanismos de mercado.
Measures taken by Iberia against climate change
Iberia’s main goal for dealing with climate change is to reduce its emissions, achieving sustained, efficient growth. The measures comprising this strategy are described below:
Fleet renewal The average age of the Iberia fleet at the end of 2009 was 7.3 years. According to IATA, the average fleet age of a traditional network carrier is of the order of 10-12 years, which means that the Iberia fleet is one of the most modern fleets in the world.
IBERIA FLEET UNIFICATION PROCESS 2005 - 2009 (% OF TOTAL) Corporate Responsibility / Environment 360
AVERAGE AGE OF IBERIA FLEET 2005 - 2009
These graphs show the composition and age of the Iberia fleet over the past decade. The unification and rejuvenation process is obvious. A unified fleet is easier to manage and, therefore, environmentally more efficient.
Operating measures
1. Iberia continued adopting measures in 2009 to reduce the weight of aircraft, which directly reduces
fuel consumption and, consequently, CO2 emissions. The company is revising its procedures for reassigning alternative destination airports for closer ones and is applying the 75% reduction in the quantity of drinking water carried. This measure has already been implemented in the A340 fleet and is intended to be developed in the A320 fleet in the first quarter of 2010.
2. The adjustments in cruise speed have also been maintained, which helps to reduce CO2 emissions. According to company calculations, an Airbus A340/300 on the Madrid-New York route flying at an
average speed of 745 km/h could save practically 2 tonnes of CO2 on the flight (approx. 0.5% of the total emissions) by lowering its speed to 735 km/h, while the difference in time of arrival would be no more than 5 minutes. This policy has been developed in 2009 in both the long-haul fleet (A340/600 and A340/300) and the short-haul fleet (A319/320/321). Other measures have been studied and adopted during 2009, such as changes in acceleration altitudes, reduction of standard thrust, thrust reverse or idling or using fewer engines while taxiing on ground. 3. It is planned to give the Iberia fleet in 2010 the possibility of sending automatic messages (ACARS, Aircraft Communications Addressing and Reporting System) indicating the fuel consumption and,
therefore, the CO2 emissions in each flight phase. This option will enable the company to develop exhaustive monitoring of these parameters, based on the best technology available, and to take additional measures to reduce consumption and emissions.
Iberia participates in the RETACDA Project (Reduction of Emissions in Terminal Areas using Continuous Descent Approach) to reduce emissions by using the continuous descent approach (CDA) when landing.
During 2009 Iberia participated in the European RETACDA project in collaboration with AENA. Continuous descent approaches are designed to use, in strict cooperation with air traffic control towers, constant descent routes with no interruptions or deviations that force the aircraft to steer off the ideal route for consumption and emissions, making it unnecessary to use any additional power to that supplied by taxiing. Corporate Responsibility / Environment 361
With these approaches, noise is reduced by 4-6 decibels in the area situated more than 18 km from the landing
runway and between 300 and 480 kg of CO2 is saved per aircraft. These approaches are currently being tested in Spain and it is hoped that they will be fully implemented during 2010. During the 2009 test period Iberia made a total of 892 landings using this procedure.
4. Energy efficiency was also improved in 2009 and emissions were reduced through flight scheduling, assignment of fleets for the different routes, fleet utilisation and optimisation of the load factor. In particular, the load factor was 79.8% in 2009, higher than that of other European network airlines, and fleet utilisation reached a record level for the company this year, with an average of 10.3 block hours per aircraft per day. 5. Iberia also upholds other measures which, although not directly within its scope of action, may
contribute significantly to reducing the CO2 emissions of its flights. In this regard, Iberia participated actively during 2009 in the CIDEFO Project to commence shared civil and military use of air spaces, making it possible to shorten routes (and, therefore, reduce consumption and emissions) in different parts of the Spanish mainland and Canary Islands. Iberia also participated in the FRAL project, which has made it possible to shorten the routes that fly over Lisbon, in Portugal.
Results obtained by adopting these measures
By applying the measures described above, the company has managed to reduce its CO2 emissions per unit carried by a cumulative 12% over the past 5 years.
EVOLUTION OF CO2 EMISSIONS OF THE IBERIA FLEET MEASURED IN GRAMMES PER REVENUE PASSENGER KILOMETRE
Although Iberia has operated a more efficient fleet in 2009 than in 2008, the CO2 emissions measured by unit transported have risen slightly, owing to the general decline in traffic, which has affected the entire sector
Iberia’s growth strategy focuses on the long haul, which leads to greater energy efficiency per passenger. Revenues from short-haul flights (less than 400 km) accounted for 0.6% of the total in 2009. Moreover, approximately half of the passengers on short-haul flights went on to take connecting flights, so the percentage of revenues from these routes was actually 0.3%. Corporate Responsibility / Environment 362
The calculation of CO2 emissions per unit carried includes the consumption of the cargo business, since in Iberia, which does not fly cargo aircraft, it is included in the consumption of passenger aircraft: Iberia carried a total cargo of 211,243 tonnes in 2009.
CONSUMPTION OF THE IBERIA FLEET MEASURED IN LITRES PER AVAILABLE TONNE KILOMETRE (2008 - 2009)
Thanks to the Iberia fleet efficiency, consumption measured by available unit (stripping out the effect of the general decline in traffic) was reduced by 2% year on year in 2009
Iberia in the European emissions trading scheme A regulation was passed in Spain in July 2009 to include aviation in the emissions trading scheme. In order to reduce greenhouse gas emissions, this market mechanism caps the total quantity of emissions of the sector. Consequently, any airlines that exceed the maximum emissions allowance established have to buy allowance from other operators or plants already subject to the scheme. The market thus provides economic incentive for the cleanest airlines and penalises those who pollute more. Through an internal task force created for this purpose, Iberia has adapted its procedures to the calculation established in the new rule and is ready for compliance as from 2012.
Iberia in the IAGOS air quality research project During 2009, Iberia formally expressed its interest in participating in the IAGOS air quality research project as from 2011. This project, included within the European Strategy Forum on Research Infrastructures, was established in 1993 and consists of fitting long-distance
aircraft with scientific instruments to analyse the chemical atmospheric composition (H22 O, O3, CO, CO , NOx), aerosols and cloud particles, assessing air quality. Corporate Responsibility / Environment 363
The aim is to obtain scientific data over a period of approximately 4 years for the final preparation of specialist reports for scientific use. Iberia will be the first Spanish airline to collaborate in a scientific project on this scale, with an Airbus 340-300.
In 2009 Iberia received the AENOR certificate for its reduction of CO2 emissions on its Shuttle service:
This certificate, the first of its kind, proves that Iberia has reduced its CO2 emissions on the Madrid-Barcelona Shuttle through fleet renewal and the reduced weight of its aircraft achieved with the new cabin interiors.
3.3 Flight operations: local air quality
Local air quality in and around airports may be affected by aircraft emissions, consisting mainly of: nitrogen oxides (NOx), carbon monoxide (CO) and unburned hydrocarbons (UHC). According to figures published by IATA, technological progress has reduced aircraft UHC emissions by around 90%. In an endeavour to meet the ACARE 2020 (Advisory Council for Aeronautics Research in Europe) objectives, research is currently in progress to achieve an 80% reduction of NOx in respect of 2000. These pollutants are not only generated by aircraft, but also by other activities related with airports, such as ground support equipment, auxiliary power units (APUs) or ground transport in and around the airport, including its accesses. The ICAO (International Civil Aviation Organisation) CO, NOx and UHC standards control emissions during aircraft operations in airport zones (taxiing, approach, landing and take-off).
COMPLIANCE WITH THE ICAO NOx STANDARDS (CAEP 1 & 2) BY THE IBERIA FLEET AT 31.12.2009 (CAEP 4 & 6 ARE NOT APPLICABLE TO THE COMPANY, THEY ARE INCLUDED AS A GOOD BENCHMARK)
This graph shows the situation of the Iberia fleet in 2009 in relation to the applicable NOx standards (CAEP 1 & 2), and other more restrictive standards (CAEP 4 & 6) which, although not applicable to it, reflect the advanced technology of the engines used in the Iberia fleet.
The measures taken by Iberia to reduce these emissions focus on fleet renewal incorporating less polluting engines and the development of operating measures such as application of the continuous descent approach (CDA). NOx emissions can be cut by up to 40% by this measure. Corporate Responsibility / Environment 364
At Madrid-Barajas Airport, where the bulk of the company’s operations are concentrated, the airport authority AENA has an air quality monitoring network (REDAIR) which continuously and automatically examines the levels of pollutants from emissions generated at low altitudes. The readings obtained are published daily to make sure that the equipment operating at the airport, including aircraft, does not generate pollution levels in excess of the standards set in the applicable regulations.
PERCENTEAGE REDUCTION OF IBERIA'S NOx EMISSIONS (BASE YEAR 2005)
This graph shows the cumulative reduction of total NOx emissions by the Iberia fleet over the period 2006-2009. Taking 2005 as the base year, the graph shows the cumulative reduction in each period. The cumulative reduction over the past 5 years is 28.75%.
3.4 Noise in the vicinity of the airport
Noise from aviation produces local impacts in areas around airports and is generated in flight operations at altitudes below 3,000 ft (approx. 900 metres). With the technological progress incorporated in modern engines and the improved aircraft aerodynamics, aircraft noise levels have been halved over the past ten years. Technological research anticipates achieving a further 50% cut by 2020. Although the total number of people affected by this type of pollution has been reduced by approximately 35% since 1998, Iberia still strives to reduce the noise footprints of its aircraft. Corporate Responsibility / Environment 365
The ICAO Noise Standards control noise pollution during flight operations (approach, landing, take-off and climbing):
COMPLIANCE OF THE ICAO NOISE STANDARD CHAPTER 3 BY THE IBERIA FLEET AT 31.12.2009 (CHAPTER 4 IS NOT APPLICABLE TO THE IBERIA FLEET, IT IS INCLUDED AS A GOOD PRACTICE BENCHMARK)
This graph shows the situation of the Iberia fleet in 2009 in relation to the noise standard applicable to it (Chapter 3) and the more restrictive standard (Chapter 4), which, although not applicable, reflects the advanced technology used in the company’s fleet.
The company complies with the operating procedures laid down by the Spanish civil aviation authorities, making a limited use of auxiliary engines in airports, reducing the use of brakes by using the thrust reverse technique and following the routes established by air control for arrival and departure at airports. Corporate Responsibility / Environment 366
Evolution of noise at Madrid-Barajas Airport
The airport authority AENA has been gradually restricting aircraft operations at Madrid-Barajas airport since 2000 to reduce noise pollution. In order to establish these restrictions, aircraft have been classified into “noise levels” (NL), according to their individual noise on take-off. There is a NL classification for the different decibels, covering a range from 0 to 16 (the closer to 0, the lower the noise level). The low noise level of the Iberia fleet is evidenced by the fact that the company does not operate any aircraft above NL 2.
NOISE OF THE IBERIA FLEET (NL) AND ITS SHARE IN THE TOTAL TAKE OFFS AT MADRID - BARAJAS AIRPORT IN 2008 AND 2009
The graph shows the distribution of take-offs by the Iberia fleet at Madrid-Barajas Airport in 2008 and 2009 according to the noise level classification. It can be seen that Iberia has reduced the take-offs of its noisier fleets (NL 1 & 2) in 2009 and has, consequently, increased the take-offs of its more silent fleet (NL 0.5) by 3 percentage points.
During 2009 Iberia participated in the European RETA-CDA project mentioned earlier, with which noise is reduced in each landing operation by 4-6 decibels in the area situated more than 18 km from the runway. The company has also collaborated with AENA in the Technical Route Analysis Group: this group aims to define and implement more adequate departure and arrival routes at Madrid-Barajas Airport and thus reduce noise in the built-up areas near that airport. In addition, at Madrid-Barajas Airport, where the company concentrates the vast majority of its operations, the airport authority AENA has a noise monitoring network (SIRMA) which detects, measures and associates the noise produced by aircraft when they fly over microphones installed in strategic areas around the airport. The readings obtained are published daily to make sure that the aircraft operating at the airport do not exceed the noise levels stipulated in the Environmental Declaration of this airport.
3.5 Ground operations: greenhouse gas emissions
The greenhouse gas emissions from Iberia’s ground operations account for approximately 1.52% of the total emissions of this nature generated by the company. The main sources of these emissions are the fixed industrial installations and the equipment required to provide ground services to aircraft and passengers (Scopes 1 & 2). However, in order to draw up a full inventory of this type of emissions, other indirect sources should also be considered, such as employee travel to their workplaces (Scope 3). These sources of emissions form part of the activities covered by the environmental certificate under ISO 14001:2004, awarded to Iberia by AENOR. This certificate guarantees control of emissions and the implementation of actions to reduce their generation. Corporate Responsibility / Environment 367
The following figure shows the main sources of emissions by Iberia in its ground operations:
The following graph shows the distribution of these emissions in 2009 according to Scopes 1, 2 and 3 mentioned above, following the GHG Protocol methods: Corporate Responsibility / Environment 368
PERCENTEAGE REDUCTION OF CO2 EMISSIONS IN IBERIA GROUND OPERATIONS (BASE YEAR 2005)
As the graph shows, emissions have been reduced by almost 40% over the past 5 years. In particular, in 2009 they were reduced by 18% (21,000 tonnes) year on year. These reductions have been achieved largely through renewal of the fleet of ground vehicles in the different areas of the company, replacing them with electric and other more energy-efficient vehicles. Another contribution has been the use of new technologies that improve energy efficiency in industrial MRO processes. Finally, the use of energy produced through cogeneration in the industrial zones is a decisive factor in the reduction of emissions, since this energy is very clean in comparison with others. More detailed information on this inventory can be found in the Annexes to this Report.
Volatile Organic Compounds
Maintenance hangar 7, used for painting aircraft, uses environment-friendly paint, with low levels of environment- damaging volatile compounds. As a result, products with VOC totalled 118 tonnes in 2009, a 4% growth year on year against an increase in production of 9%, in activities in which this type of emissions is produced.
TONNES OF PRODUCTS WITH VOC VS. MAN - HOURS AIRCRAFT MAINTENANCE IN MADRID (2009) Corporate Responsibility / Environment 369
The improvements to hangar 7 were also made taking into account the recommendations made by the European Airbus manufacturer. The new aircraft will be painted according to the manufacturer’s standards, since Iberia Maintenance belongs to the Airbus MRO Network.
3.6 Ground operations: consumption of resources
Electricity consumption
Apart from the measures and improvements applied through the Management Systems and innovating projects and awareness campaigns, investments were made throughout 2009 to improve the energy efficiency of the company’s installations, which have helped to reduce energy consumption in ground operations:
Installation of solar panels on the maintenance hangars. Construction of a photovoltaic solar energy plant in the Industrial Zone of Barajas. Replacement of generators.
Paper consumption
Paper consumption has been reduced every year since 2004 as a result of the continuous improvement achieved through the Environmental Management Systems, by setting reduction targets and through the innovating waste reduction projects. The company policy is to convert paper-consuming administrative processes into electronic equivalents. In 2008 this policy was applied in the following areas:
Iberia has launched its Mobile Boarding Card service, which enables its customers to download their boarding cards from Iberia.com to a mobile or PDA and board the aircraft directly, without printed cards, which makes the process more agile and dynamic while reducing the use of paper. Iberia is the first Spanish company to offer its customers this possibility.
Iberia pioneers the implementation and use of electronic cargo tickets, so that the documents required for the transport of cargo are produced electronically. On an internal level, a new catalogued items digitalization service has been introduced in the Documentation Centre, along with the self-issuing of discount tickets with other airlines, tickets for children under two and requests for transfer have been made available through IBPróxima/IBPersonas. Corporate Responsibility / Environment 370
This year, too, it has been decided to eliminate white paper for general use in offices, limiting its use exclusively to specific jobs. The paper provided for general use is recycled, which reduces costs by 6% and is more respectful of the environment.
3.7 Ground operations: waste
In the area of waste management, a new system of urban waste collection was introduced in the Engines Workshop in 2009 to encourage waste separation at source and will be gradually introduced in the other company buildings. This is a pilot project, intended to assess whether the containers, their locations and the system itself are suitable for installation in other work places, thus making further progress towards efficient waste management. The Iberia industrial zones could then be considered vanguard production areas by virtue of the sustainability of its processes. Corporate Responsibility / Environment 371
Other goals have also been achieved in 2009: the generation of electronic waste at Iberia’s installations in the La Muñoza industrial zone has been reduced by 3%; the installation of ramp carts to improve hazardous waste management and possible spillage in the maintenance areas; and the installation of an area in the industrial zone of Barajas to improve the collection, classification and delivery of hazardous waste to an authorised manager. Another of the measures begun in 2009 is the progressive installation of shared multifunction equipment (printer + photocopier + fax + scanner) in the offices, with the aim of reducing the number of personal printers and, therefore, the waste generated in ink and toner cartridges, while also reducing electricity and paper consumption. See the Annexes to this Report for information on the evolution and management of other environmental aspects in ground operations, such as water consumption, waste generation, sewage, etc.
Environmental Innovation
Many of the projects implemented to improve processes and quality of products and services within the company also lead to major savings of resources, thereby reducing the impact on the environment. One of the most important projects is the new MRO Hangar in Barcelona, due to be put into operation in 2010.
It is an environment-friendly infrastructure, designed to obtain maximum energy efficiency and the use of renewable energies. The project has incorporated ecologically advanced systems for the heating and air-conditioning of the hangar, for reuse of waste water and rainwater and for rationalising electricity consumption.
3.8 Nature protection
The company collaborates closely in the protection of endangered species. Iberia has been a member of the Convention on International Trade in Endangered Species of Wild Fauna and Flora, CITES, since 1986 and, therefore, does not permit the carriage of any of these species on its flights. Similarly, it participates actively in returning unlawfully removed animals to their natural habitats. Corporate Responsibility / Environment 372
Iberia, in collaboration with the Environmental Department of the Balearic Islands Government, transported a crocodile to Cuba on one of its aircraft. The Crocodylus Rhombifer had been at the Balearic Islands Fauna Recovery Centre (COFIB).
This species, endemic to Cuba, is included in the category of maximum international protection owing to the small number of specimens in existence (between 5,000 and 6,000 in the whole world). Once in Cuba, the crocodile was taken to the Ciénaga de Matanzas Zoo, the largest wet region in the Caribbean, declared Biosphere Reserve, where it remained in quarantine for the necessary time before being taken to a crocodile farm in a local natural space. Corporate Responsibility / Customers 373
4. CUSTOMERS
4.1 Iberia passengers: the essence of our existence
Iberia has a firm commitment to its customers to guarantee quality service at every stage of their journey. The Iberia strategy, developed through the Plan 2012, contemplates enhancement of customer service quality as one of its prime objectives, by applying an Integral Customer Service Plan. The Plan began at the beginning of 2009 and consists of over fifty measures to improve customer service, classified into three fields of action:
product and service level operating processes attitudes and conduct
Different work groups were set up to study and improve all contacts with customers, from purchase to after-sales service, including experiences at the airport or in-flight. The aim is to achieve a service level in which customers perceive an excellent treatment, attract new customers and preserve existing ones. The procedure followed is set out below: Corporate Responsibility / Customers 374
Commitment to passenger rights
The company continues committed to compliance with the European Aviation Customer Commitment, a code of conduct signed on 2 July 2002 together with the other airlines in the European Airline Association (AEA), in which obligations are established such as respecting the agreed price, providing such information as may be required on the company, notifying passengers of any incidents and providing assistance, expediting the payment of refunds and attending reduced-mobility passengers and minors, among others. Iberia deals with passenger claims in accordance with the prevailing European regulations on compensation and assistance to passengers in the event of denied boarding and of cancellation or long delay of flights (Regulation (EC) No 261/2004 of the European Parliament and of the Council of 11 February 2004). With regard to data protection, Iberia complies with the Personal Data Protection Act of 19 April 2008. It has published internal regulations on the subject and started up an Information Security Committee to guarantee the confidentiality and integrity of that information and preventing any use of such data for unauthorised purposes. In April 2009 Iberia obtained certification under ISO 27001 of the Information Security Management System, the scope of which umbrellas the processes related with Iberia.com, and the Employee Portal (IBPersonas). This means a high level of maturity has been achieved in Information Governance, to guarantee customers confidentiality (only authorised persons can have access to the information), integrity (the information and its processing methods are accurate and complete) and availability (authorised users have access to the information and its associated assets whenever they want).
Commitment to price transparency
Iberia publishes the final prices, including all the different elements comprising each price, such as surcharges for fuel, issue charges or airport taxes, such that the announced price is the final price of purchasing the ticket. In the study made by the Department of Consumption of the European Commission on compliance with EU legislation on airline ticket sales on Internet, Iberia is among the 16 European airlines that fully respect those laws and undertake to maintain that compliance in the future, for their price information transparency and consumer protection in the services offered on Iberia.com. The study consisted of simulating online ticket purchases over a period of eighteen months. In addition, a service called flex-pricer has been set up on Iberia.com, through which customers, when choosing a ticket, are offered prices for the dates before and after the date specified, so that they can choose the most favourable price. It also includes a tool that permits a flight search according to the maximum budget specified by the customer. It is thus possible to set in advance the maximum price you wish to spend on the flight, either for a particular destination or area or for a specific date. General advice for obtaining cheap prices was published in 2009 and prices have been adapted to the recession. http://www.iberia.com/consejos-para-encontrar-vuelos-baratos/ Corporate Responsibility / Customers 375
Commitment to punctuality
According to company figures, the punctuality index at level 15’ was 81.2% in 2009, a similar percentage as in the previous year. Iberia establishes numerous internal controls to improve punctuality: specific rules, watchdog committees, cause analysis and decision-making, checking of operating processes, etc.
One of the examples that show that improving punctuality is one of the company’s priorities is the campaign to increase staff awareness. In this regard, since June 2007, the main page of IBPróxima publishes daily in real time Iberia’s punctuality on the different markets in which it operates and its situation in respect of the Director Plan target: 82% punctuality.
As regards the information provided by the company in the event of delay, in 2009, within the measures contemplated by PISAC, Iberia has reviewed the reasons for delay and the messages which, coordinated with the Customer Service and Airports areas, are being used in-flight to improve the information to passengers when an incident occurs.
Commitment to quality
Iberia has several mechanisms for controlling and monitoring the quality of its processes and services, as summarised in the following figure and described below: Corporate Responsibility / Customers 376
Iberia has obtained the AENOR Certified Service N Mark for service quality and customer satisfaction management for its measurement and monitoring of service quality and customer satisfaction, communication and dissemination, claims treatment, analysis of customer expectations and Quality Plan Proving that Iberia complies with the requirements established in the “Particular Regulations of the AENOR Certified Service N Mark for Service Quality and Customer Satisfaction Management in Passenger Air Transport Operators”. To assess the Service Quality and Customer Satisfaction Management System implemented in Iberia, AENOR made an audit at the head offices in November, inspected the service provided and visited different airports. It has thus been able to verify the adequate measuring of customer satisfaction and the quality offered, as well as the reliability of the data and the transparency in their use. This new certificate supports and complements the different ISO certified Management Systems in the different areas of the company, all aimed at increasing Iberia’s focus on customers and search for excellence in the provision of its services.
Customer Satisfaction – Perceived Quality Level Customer satisfaction is sounded out in Perceived Quality Surveys (PQL, Perceived Quality Level), which measure their assessment of the quality of service received, on ground and in flight. The surveys also include a free text section for customers to make whatever suggestions they may consider necessary. The results of both numerical assessments and suggestions are processed, coded and analysed to make decisions on which aspects of the service need to improve. This model of obtaining information through online polls, with personal invitations to customers to participate in the study, was consolidated over 2009. This system offers the following advantages:
More reflective response environment. Speed in obtaining results. Easier to make improvements to the questionnaire. Larger sample size. Continuous assessment of satisfaction, eliminating the uncertainty of long periods without incoming data. Enables more adequate decision-making and better monitoring of action plans. Obtains information on the company’s position in relation to other airlines. The resulting information can be checked against that offered by the System for Measuring the Quality Obtained. Corporate Responsibility / Customers 377
The total size of the sample in 2009 was 34,279 polls answered, with a response rate of 16.3%. The overall satisfaction level reached up to the end of 2009 was 6.9 out of 10.
CUSTOMER SATISFACTION BY MARKETS AND CLASSES
During 2009 two new satisfaction indicators have been incorporated in the measuring system, the Net Recommendation Index (NRI) and the Net Loyalty Index (NLI). These indexes focus on the future behaviour of customers, measuring their propensity for recommending Iberia’s services and using them again. Being net indexes, their calculation takes into account both customers declaring themselves “promoters” of the company and “critics”, thereby obtaining a more precise idea of the effect on the company’s reputation. The overall average of both indexes in 2009 was 64.7% for the NRI and 67.7% for the NLI.
Obtained Quality Level Compliance with the service quality standards set by the company is supervised by measuring the obtained quality level (OQL). Through the method established, agents have on-line access to information on service quality obtained in over 8,500 assessments a year, analysing 300 aspects related with the service provided or customer service. Corporate Responsibility / Customers 378
As a sample of the information provided, the following graph shows the results of the measurements by services in respect of the goal set.
OQL - 2009 RESULTS BY SERVICES
For each one, the aspects related with the operating process, attention/attitude, image, physical environment, service times and the range and state of products and services are measured. Corporate Responsibility / Customers 379
Relationship with certified Management Systems Both systems for measuring quality, PQL and OQL, are part of a general quality model in the company, structured as shown in the following figure:
Dealing with claims The company considers customer claims a valuable source of information for correcting faults and bringing our services in line with their expectations and an opportunity to meet their needs. For example, in 2009 the company has altered the information provided to customers on the rates charged for its 807 telephone services for ticket changes and after-sales actions, and Iberia.com has incorporated the possibility of requesting electronic invoices for tickets, e-invoice Iberia, both of these actions introduced to meet claims from customers and consumer associations. Iberia has a Customer Relations and Quality management, whose claims management service has been certified under UNE-EN ISO 9001:2008, to centralise relations with customers throughout the network, manage the after-sales service and pass customer feed-back on to the entire organisation. Corporate Responsibility / Customers 380
Commitment to Health
In its in-flight magazine, Ronda Iberia, the company includes some practical advice on how to make the flight more comfortable and healthy. Exercises are described to prevent deep vein thrombosis, especially recommended for passengers with circulation problems on long haul flights. The Company also informs on this syndrome in a video played on all flights of over three hours. This advice can be consulted at: www.iberia.com/viajarconiberia/ All food products served in flight in the different catering services are subject to strict health and safety controls, in pursuance of prevailing laws and regulations. The company also offers different menus to suit the needs of all customers (gluten-free, vegetarian, etc.). In collaboration with CISS-Especial Directivos and Wolters Kluwer, Iberia runs courses to overcome fear of flying, with extremely high success rates: 96% of those participating in the seminars over the past ten years have conquered their fear. In these seminars, Iberia pilots inform participants about air safety and how aircraft work, while a group of psychologists teach them relaxation techniques.
Iberia allowed changes in tickets to/from Mexico for any customers wishing to postpone their trip or change their destination owing to the outbreak of swine flu in that country. The company made its price terms more flexible, allowing changes without any penalisation for tickets purchased prior to 26 April 2009 with planned date of travel up to 27 July. It also cooperated at all times with the Spanish Ministerio de Sanidad by providing information on the disease and giving advice to travellers on the precautions they should take on their trips to Mexico or other affected areas.
Dealing with passengers with special needs
Reduced Mobility Persons (RMP) receive special assistance free of charge from their arrival at the airport of departure to departure from the destination airport. All passengers with a disability or illness are accompanied to the aircraft and their wheelchair, or guide dog in the case of the blind, travels on board at no additional cost. In pursuance of the European Regulation EC 1107/06 and since 26 July 2008, AENA, as Airport Authority, is responsible for assisting Reduced Mobility Persons (RMP) at all Spanish airports. In turn, it delegates this service to the companies or joint ventures awarded the services at each airport, through competitive bidding. Iberia cooperates actively in the RMP service through its participation in the main joint ventures awarded the handling services at airports. Iberia Handling also provides this service to all the passengers of other airlines at the airports at which it operates as the sole Handling Agent. Corporate Responsibility / Customers 381
At the European airports to which Iberia flies where the EC regulation is also applicable, the corresponding airport authorities are also responsible for assisting RMP, while at other airports outside the European space, Iberia and its handling company perform the service directly. Iberia also provides RMP passengers at all airports in the network with documents containing essential information on their rights and obligations, in formats accessible to all kinds of disability. The contents of www.iberia.com are regularly updated following the WAI (Web Accessibility Initiative) guidelines.
In 2009, new functions have been included for customers on Iberia.com, in an endeavour to make the web site more accessible:
People with some kind of visual disability have been taken into account, making it possible for them to use the purchasing process. The steps for buying a ticket have been simplified: This is now done in 3 steps, instead of the 6 steps needed previously. The possibility has been created for large families to obtain a subsidy on-line. The possibility has been provided for anyone requiring assistance at the airport to indicate this need when booking their flight.
Similarly, any minors travelling alone with Iberia (UM, unaccompanied minors) are accompanied at all times and treated with special care. Iberia offers this service to any passengers aged between 5 and 17, inclusive, provided it has been expressly requested by their parents or guardians. Iberia takes all necessary measures to ensure that these UM are never left alone, from their handover by relatives or guardians to handover to the persons taking charge of them on arrival.
Passenger-geared innovation
Iberia has always been among the first to pass on to its customers any improvements offered by the new technologies for their convenience and to save time: electronic tickets; online check-in on Iberia.com; auto check-in machines at airports; one of the most modern fleets on the market and a Business Plus Class and VIP Lounges with the highest level of services. Corporate Responsibility / Customers 382
For example, in 2009 the company introduced the possibility of downloading boarding cards to customers’ mobiles or PDA and board with the mobile device at 8 network airports, including Madrid and Barcelona. For effective identification customers only have to show their mobile or PDA to the mobile boarding card reader with the image on the screen and wait a few seconds for a positive identification. Iberia is the first Spanish airline to offer customers this possibility.
4.2 Iberia Cargo customers
Iberia Cargo offers its customers capacity in the bellies of Iberia aircraft. With cutting-edge technology and using iberia-cargo.com as its e-commerce platform, it offers a modern, expeditious, efficient, secure service, guaranteeing the carriage of its customers’ goods. It www.iberia-cargo.com currently provides this service for around 100 companies. In 2009, Iberia continued leading the IATA e-FREIGHT project, the main aim of which is to eliminate most of the paper documents used in the handling of air cargo, including the freight contract or Air WayBill (AWB). This project, which eliminates the need to send the 13 paper documents of each order, thus making the processes more dynamic, enhancing speed and reliability and lowering costs, and affects all those involved in industry: hauliers, forwarding agents, ground service agents, shippers and customs authorities. Iberia and IATA have now embarked on a new phase of the project, as yet at the development stage, starting up the electronic cargo documentation system at five destinations: Amsterdam, Stockholm, Frankfurt, London and Madrid. The Canary Islands and USA are hoped to be included shortly.
4.3 Iberia Maintenance customers
Iberia Maintenance is the leading company in Spain in repair, high technology and modification of aircraft, and ninth in MRO worldwide. It serves the Iberia fleet and also more than 100 customers throughout the world: airlines on every continent, aircraft and engine www.iberiamaintenance.com manufacturers, logistic support and operational solutions for the Spanish Air Force, full maintenance services for other Spanish VIP aircraft and other types of military aircraft, among others. It is certified by national and international agencies, including the Spanish Civil Aviation Authority, European Aviation Safety Agency (EASA) and the US Federal Aviation Administration (FAA). Most of the improvements and developments made in the maintenance area are pioneer innovations on a national scale, and in some cases even on an international scale, designed for the service provided for both own and third party aircraft. As mentioned in earlier chapters of this Report, one of the most important projects under way is the building, together with Consorci de la Zona Franca de Barcelona (CZFB), of a Hangar at El Prat Airport in Barcelona. This infrastructure will largely be used for the maintenance of third-party aircraft, with maintenance capacity for the largest aircraft, which will contribute to the development of the Barcelona hub on long-haul routes from El Prat airport.
4.4 Iberia Airport Services customers
Iberia Airport Services is the leading passenger and aircraft handling operator in Spain; it is present at almost all Spanish airports with more than 80 years’ experience. It has the largest mobile fleet in Spain, with more than 8,000 units of handling equipment and a headcount of http://handling.iberia.es 7,926 professionals. It is also the only Spanish company offering its customers a global service, providing services for 228 airlines, almost 74 million passengers and 380,000 aircraft. Corporate Responsibility / Customers 383
The most important, innovative project in 2009, as recognised by external institutions, was the consolidation of the stopover handling tool, GAUDÍ - Gestión de Aeropuertos Unificada Desarrollo Integral - [Integral Development Unified Airport Management], the main features of which are:
Automated task planning, definition of the required shifts, assignment of resources to those shifts and constant update and adjustment. Real-time assignment of tasks for employees to optimise productivity, using, among other variables, the physical distance from the location of one task for assignment of the next or, in the case of ramp handling, location by GPS of the closest vehicle. Monitoring of state of services and updating of records using portable devices.
In view of the complex operations of the handling business, the service provided using this tool is much more efficient, punctual, reliable and satisfactory for customers.
4.5 Guarantees for all our customers
Ethical advertising
Iberia is a member of the Commercial Communication Self-Regulation Association (Autocontrol). Therefore, assumes an ethical commitment to responsibly exercise the freedom of commercial communication and helps to strengthen advertising self-regulation as a means to ensure respect for the rights of consumers and competitors, according to the certificate issued by the Association for the company in 2009.
Safety
Iberia has extensive, proven experience in the safety of all its operations, both ground and in-flight. The company has assurance systems that regulate the operation and maintenance of aircraft in accordance with the EASA and FAA international standards. Iberia has certified its Operating Quality and Safety Management System under the IATA Operational Safety Audit (IOSA) standards. As such, it is subject to annual audits, which reveal the strength of the company’s controls. Corporate Responsibility / Customers 384
Iberia has a broad insurance programme, taking out policies with leading Spanish insurance companies and top-ranking reinsurance on international markets to ensure that insurance cover is in keeping with the best practices on the aviation market, in all cases going beyond mere compliance with the requirements stipulated in the Spanish Aviation Act and international agreements and conventions. Thanks to the work group set up in 2007 led by the Airport Authority and with the participation of the different company managements, in 2009 the safety indicators improved considerably in Iberia’s ground operations, particularly in the prevention of impacts to aircraft and custody of cargo, both baggage in the bellies of the aircraft and hazardous cargo.
Quality certificates
Most areas of the company have now been certified under the requirements established in UNE-EN ISO 9001:2008, which include specific quality indicators relating to the processes of the different activities, subject to regular internal control, as described in section 4.1 above.
Areas certified for Quality
Airports Cargo Procurement Infrastructure Maintenance & Engineering Flight operations In-flight Service Systems Customer Services / Claims
Iberia currently has 28 employees in different areas of the company qualified as internal auditors of certified management systems. 33 internal quality audits were made in 2009 to confirm and guarantee continuous improvement. Through the audits made during the year and permanent analysis, some 566 actions for improvement were pinpointed and monitored in the certified areas, with a view to improving internal and external processes and customer satisfaction. With regard to quality-related training, preparatory courses were given for making audits, measuring customer satisfaction and dealing efficiently with customer complaints and claims. Moreover, with a view to improving the qualifications of internal auditors and their contribution towards the maintenance, improvement and operation of the different Quality Management Systems in the company, in 2008 they all did the prestigious course European Expert in Quality Management, run by the Spanish Quality Association - AEC. Corporate Responsibility / Shareholders 385
5. SHAREHOLDERS
This section contains an overview of Iberia’s business performance in 2009 and a description of the management systems established by the company to generate confidence and add value for our shareholders in aspects relating to corporate responsibility. For detailed information on the economic aspects of the company or the Group, consult the Annual Management and Corporate Governance Reports issued together with this Responsibility Report, which can also be downloaded from http://grupo.iberia.es
5.1 Performance of the different Iberia businesses in 2009
Plan 2012
The Board of Directors of Iberia approved a new Strategic Plan, “Plan 2012” in October 2009 containing measures to cope with the economic recession, drop in revenues, reduction of traffic and economic losses, and with the negative evolution of the sector, as a result of which the contingency measures implemented turned out to be insufficient. This Plan, which aims to guarantee the viability of the company and restore profits, contains measures to generate revenues, savings and cost efficiency, improve the service and change the operating model on short and medium-haul routes. More information in the 2009 Annual Report.
Progress in the British Airways - Iberia merger:
On 12 November Iberia and British Airways signed a MoU (Memorandum of Understanding) for a merger between equals, which is expected to become final during 2010. The Boards of Directors consider the main benefits of the merger for their future shareholders to be, among others:
Enhanced strategic position in the world aviation sector:
Highly complementary network combining the strong presence of British Airways in North America, Asia-Pacific and Africa with Iberia’s leadership in Latin America. The Group will offer customers connections to 205 destinations and strengthen the oneworld alliance, in which both airlines participate. Larger size and capacity to compete with the leading airlines and participate in future consolidation processes within the sector.
Larger capacity to invest in new products and services and improve existing ones, and to cut costs. Large future growth potential, optimising the two hubs in Madrid and London.
More information in the 2009 Directors’ Report and at www.cnmv.es
Passenger and cargo air transport:
Despite the difficulties encountered in the market in 2009, the company has included a new destination, Zagreb, increased the frequency of its flights to Milan, Caracas, Lima, Buenos Aires, Bogotá, Havana and Quito and offered the destinations Sofia and Sidney through code-sharing agreements with Bulgaria Air and Qantas, respectively. Corporate Responsibility / Shareholders 386
Iberia and Latin America Iberia signed an agreement in 2009 with GOL, the second most important airline in Brazil, to gain access to the entire Brazilian market. Company, the company’s capacity in Brazil has been increased by 13 destinations, which are added to the flights operated directly to Sao Paulo and Río de Janeiro: Bello Horizonte, Brasilia, Curitiba, Florianópolis, Fortaleza, Foz do Iguazú, Goiânia, Manaus, Natal, Porto Alegre, Recife, Salvador and Vitoria. In the cargo business and with a view to increasing its presence in central and eastern Europe, in 2009 Iberia chose North Air Logistics as its general cargo sales and services agent for the Czech Republic, Croatia, Hungary, Poland, Slovakia, Romania, Greece, Denmark, Sweden, Norway and Finland. Under this agreement, North Air Logistics, a professional, prestigious organisation in the sector, will provide complete customer service and support for Iberia Cargo in these countries and its extensive office network will help Iberia to grow on those markets.
Maintenance, Repair and Overhaul (MRO):
As a result of the strategy of specialising in activities that create value added, adopted by the Iberia Maintenance business in recent years to attract new customers, it has achieved a significant growth, reflected in 2009 in the following commercial agreements and contracts:
Type of contract / agreement New Customers
Engine maintenance FedEx, Yakutia Airlines, Blue Dart Aviation Ltd., Xiamen Airlines Parts maintenance Finnair Technical Services, SR Technics Integral maintenance (aircraft, engines and parts) SAS, DHL Corporate Responsibility / Shareholders 387
Airport Services
The Iberia handling business continues taking measures to increase its competitiveness, secure customer loyalty and attract new opportunities for development. During 2009, Iberia Airport Services obtained several new ramp and passenger handling contracts with the companies and at the airports indicated in the following table:
5.2 Risk Management
Iberia takes account of any potential event that could jeopardise the achievement of its objectives. The company has developed a complete Risk Management System, through which all risks are identified, assessed and controlled systematically. Further information can be found in Section D of the Annual Corporate Governance Report. In accordance with its Corporate Responsibility Policy (see Chapter 1 of this Report), Iberia adopts a focus of anticipation to guarantee the sustainability of its actions, through integral management of the following risks, which form part of the company’s Risk Map: Corporate Responsibility / Shareholders 388
Reputational: risks deriving from the perception that the different stakeholders might have of the company’s actions in the performance of its business activities. Environmental: risks deriving from compliance with current environmental laws and any new regulations that may affect the company, such as the emissions trading regulations. Social: risks relating to aspects such as competitiveness of the different professional groups within the company, attracting and retaining talent and the occupational health of its employees.
Iberia also has several specific areas that deal with the management of sustainability risks, which have established different controls described elsewhere in this Report. The Audit and Compliance Committee of the Board of Directors is regularly informed on the Risk Map and the actions taken in respect of Corporate Responsibility. Iberia participates in the Spanish task force for standardisation of the ISO 31000 Guidelines on Risk Management, which has been published in December 2009.
5.3 Fraud prevention and anti-corruption measures
Iberia’s different internal control systems - budget control, management control and auditing - take risks of fraud into account and are set up to detect such risks, both internally and externally. Iberia has been developing procedures to prevent fraud in carriage documents since 1991 and pays special attention nowadays to credit card transactions. The company has a Security Committee and a Fraud Prevention Committee, which coordinate prevention measures and study any cases that may arise, of fraud or other possible unethical or criminal conduct. The annual internal audit programme contemplates analyses of all business units and makes random checks of the company’s territorial organisation, taking these risks into consideration during the audits. Iberia also participates in the Large Cap Tax Forum, created in 2009 for the principal Spanish companies and the Spanish Ministerio de Economía y Hacienda to get together and collaborate, with a view to agreeing on a code of good practice for tax treatment of complex operations in order to avoid tax conflicts.
5.4 Good Governance
The structure and functioning of Iberia’s corporate bodies are based on the latest rules and recommendations approved in respect of Corporate Governance. As a listed company, Iberia takes the rules and recommendations of the Unified Good Governance Code into account in its corporate governance practices and reports. Corporate Responsibility / Shareholders 389
Iberia establishes several mechanisms to guarantee ethical business conduct and good governance of the company, including, among others:
Regulations of the Board. Regulations of the General Meeting. Bylaws Internal Regulations of the Audit and Compliance Committee Code of Conduct in respect of matters relating to security markets Internal Audit Regulations Statute for Company Executives Collective Agreements and Works Councils Performance assessments Suggestion boxes in Intranet / Extranet (IBPróxima), with the possibility of sending suggestions anonymously. Code of Ethics for application of the Global Compact in Iberia, published for the first time in 2008-09.
The detailed information of the Annual Corporate Governance Report may be consulted on the company’s web site http://grupo.iberia.es/.
5.5 Innovation management
Therefore, any project geared at improving processes, resource-saving and the quality of services and products developed is, for Iberia, an innovative project. Por tanto, cualquier proyecto orientado a la mejora de los procesos, ahorro de recursos y calidad de los servicios y productos desarrollados, es, para Iberia, un proyecto innovador. The complex nature of air transport makes it essential to consider innovation projects from a multi-disciplinary point of view, involving different areas of the company in each project and, consequently, strengthening cooperation between working teams and gearing towards the end customer.
Every year, Iberia implements dozens of projects of this nature and many of them are recognised as innovative by means of independent assessments or certifications by different Spanish and international official institutions. Corporate Responsibility / Shareholders 390
With regard to corporate responsibility, innovation in Iberia contributes towards:
Generating satisfaction and value added for our stakeholders. Sustainable development through efficient use of resources: many projects aim to save water, paper and fuel, among other aspects. Obtaining competitive edge in the performance of our businesses.
The Cotec Foundation, in its report “Business R+D Assessment Cases” published in 2009, in which it analysed ten cases of companies of very different sectors and sizes that owed their success to an innovation project, selected as an example an innovation project in which Iberia managed to cut costs, enhance employee safety and minimise environmental impact, namely the Automated Engine Cleaning Line improvement project, in which a process was created to provide this service also for other airlines.
5.6 Brand management
The company’s investments in communication, marketing and sponsorship are in keeping with the strategy marked out by the company and their profitability is analysed regularly, according to pre-established control procedures. Iberia constantly monitors the best practices in branding on the market to incorporate all those that conform to the company’s Strategic Plan in its decision-making processes. The brand is diversified to distinguish the different business units – Iberia Maintenance, Iberia Airport Services and Iberia Cargo -, the sales and services channels - Iberia.com, Serviberia - and the frequent flyer programme – Iberia Plus -.
In 2009 the handling business changed its brand name from Iberia Handling to IBERIA AIRPORT SERVICES to meet the following goals:
Better reflect the activity performed; Make it easier for potential customers to identify the brand; Put across the idea of modernity, service vocation and commitment to adapt to change.
The logo and brand name were introduced gradually in several phases, requesting and thanking employees for their collaboration. In 1991, Iberia was the first airline in Europe to introduce an international frequent flyer programme to reward customers’ confidence in the company, Iberia Plus, which currently has almost 4 million members in 230 countries worldwide and has over 90 associated companies. online shops, property groups and health and safety firms, among others. Through this points programme, the Iberia brand has spread beyond the aviation sector and collaborates with other sectors, especially those related with leisure and tourism; and has crossed the borders of the markets served by the company, reaching the entire world through the oneworld alliance. Corporate Responsibility / Shareholders 391
One of the most important incorporations in the Iberia Plus programme in 2009 was that of the new Vueling, following its merger with Clickair. Vueling is one of the brands with the best perception on the Spanish market, according to the poll Coolest & Gaps conducted by the strategic marketing consultant Allegro234, which valued what it puts across to its customers and the "brand experience", that is, the associated services, customer service, unity of capacity and value for money.
According to an IdeaWorks study published by The Economist, comparing the frequent flyer programmes of ten of the largest European and American airlines, Iberia Plus is the programme that gives its customers the best rewards. Iberia customers can choose easier than others the free flight they want to use their points: in 83% of cases the customer obtains a ticket on the flight and date desired, the highest percentage in the ranking and almost 20 percentage points more than its closest rival.
Iberia.com is the Spanish web site with the largest volume of sales. It has 44 different versions for 44 different countries in Africa, America, Europe and the Middle East and is translated into 7 languages. According to Market Monitor Travel, a tool designed by Havas Digital, Iberia.com was one of the most important brands in the ranking of on-line travel firms in Spain in 2009. The indexes are calculated on the basis of the combination of site audience data, brand valuation, experience and positioning in search engines. The oneworld alliance and the airlines belonging to it base their brand strategy on a global offer to customers, with special prices for travelling around the world.
Iberia and Latin America
oneworld is the global leading airline alliance in Latin America: apart from having LAN and Mexicana among its partners, Iberia heads the offer of flights from Europe and American Airlines is leader in traffic with the United States.
As regards brand assessment, Iberia considers that external assessment offers greater guarantees of unbiased valuation:
According to the report Top 50 Value of Spanish Brands prepared by the consultants Brand Finance y Coleman CBX and published in March 2009, Iberia ranks 26th with a brand value of 687 million USD, first in the Tourism and Travel sector with an acceptable potential and risk rating. According to the study “The best Spanish brands 2009”, published by Interbrand in November 2009, the Iberia is 16th in the ranking with a value of €324 million.
The valuation differences are due to the use of different measuring methods. Since 2003, Iberia has been an active member of the Association of Well-Known Spanish Brands, AMRE (www.marcasrenombradas.com), which has more than 70 well-known leading Spanish brands from different sectors, firmly established on an international scale with a vocation of permanence on foreign markets, which have joined forces to work on the development, defence and promotion of Spanish brands. With the help of AMRE, the American consultant Brand Keys has presented the index CLEI, the first Index of Loyalty and Commitment to Spanish brands, based on consumers’ opinions, in which Iberia rates highly in the airline sector. Corporate Responsibility / Shareholders 392
In 2009, Iberia and the Spanish Ministerio de Industria, Turismo y Comercio reached an agreement to jointly promote the image of Spain overseas, through a joint advertising campaign and participation by Iberia in trade fairs, professional conferences and congresses organised by Turespaña. The airline will provide promotional air transport to Spain for international journalists, tourist operators and travel agents. Iberia also regularly promotes Spanish food and wines with Designation of Origin (DO) or Registered Geographical Indication (IGP) in-flight and in its VIP lounges. In 2009 it promoted Cantabrian food and drink, in collaboration with the Grupo Sodercan, the company promoting regional development of Cantabria; and Andalusian organic olive oil, produced according to principles of ecological farming and using the best olives of small producers.
Iberia and Latin America According to the KAR (Key Audience Research) study made in 2009, which assesses the economic situation and measures the corporate reputation and social responsibility of Spanish companies and their stakeholder engagement through Ipsos polls conducted on politicians, analysts, academicians, business leaders and journalists, Iberia was elected one of the 5 companies with greatest sensitivity towards Latin America, together with Telefónica, Santander, BBVA and Repsol. In fact, Iberia operates over 100 flights a week to 17 cities in Latin America, making it the airline offering the largest number of connections from Europe.
Through its Cargo business, Iberia is a member of the Spanish Exporters and Investors Club, which defends the interests of Spanish companies in the challenge of making their business international. www.clubexportadores.org Corporate Responsibility / Suppliers 393
6. SUPPLIERS
Iberia considers its suppliers strategic stakeholders in its value chain, to obtain products and services that meet the quality, safety and environmental standards defined by the company. Moreover, Iberia upholds its commitment to society to demand responsible practices of its suppliers. During 2009, Iberia, together with Caja Navarra, Carrefour, Iberdrola, Pascual, Repsol and Telefónica, continued collaborating in the workshop analysing the role of the purchasing department in the development and consolidation of Corporate Social Responsibility (CSR) and extend the responsible policies to their suppliers. The initiative of extending CSR to suppliers was started up by the Spanish Association of Procurement Managers (AERCE), which umbrellas more than 2,000 Spanish companies. This work group is convinced that CSR will only be possible if the culture of social responsibility is publicised as a value generator in the supply chain. 75% of the expenditure of large enterprises is managed by the purchasing department, hence it is largely up to this department to transmit social responsibility to their suppliers, which are generally SMEs. This work group is stressing both the benefit to the reputation of large enterprises as they reduce risks through a responsible purchasing management, and that obtained by SMEs as they establish bonds of trust with large enterprises that are their customers.
6.1 Procurement Management System
Iberia procurement management is geared towards achieving the company’s goals, regulated by internal rules and procedures and guided by the following general principles:
Internal customer satisfaction: Procurement management aims to achieve the best procurement alternative for the internal customer, optimising the ratio of service quality to total cost, guided by economic streamlining and transparent management. The company makes a homogenous, systematic use of purchase tracking and information systems to assess fulfilment of this goal. Compliance with the law: Iberia only approves as potential suppliers those who comply with prevailing laws, regulations and standards on quality, safety and hygiene, labour, environment, tax, etc. Free competition: Competition between the different suppliers is encouraged, accessing the data bases of potential, existing or former suppliers of Iberia, its partners and commercial allies and the different virtual market places on which Iberia operates. Conditions cannot be set based on brands or specific models. Transparency and Confidentiality: A minimum of three bids must be obtained for any purchase/contracting. Iberia has electronic negotiation tools to guarantee these principles. All internal information on suppliers and contracts is kept strictly confidential. Corporate Responsibility / Suppliers 394
Caution: The company takes the necessary measures of care, diligence and protection whenever there is any kind of relationship or bond between an employee of the company and the entity or individual bidding for a contract, especially as regards negotiation and choice of the supplier.
The Quality Management System of the Iberia Procurement Department has been certified under the ISO 9001:2008, the first in Spain to incorporate internal customer satisfaction in its procedures. Its Quality System includes the procedure for handling claims from internal customers following incidents in the service provided. To centralise the monitoring of suppliers and expedite the solving of incidents, a Procurement Incidents Portal was set up in 2008 to channel claims from customers. From IBPróxima an internal user can rapidly and simply report any incidents that occur during fulfilment of a contract, supply of an order or performance of a service.
6.2 Responsible procurement
Iberia has different types of suppliers and risks throughout its different business areas which must be treated differently to achieve the quality of service demanded by the customer. The selection of suppliers, especially critical suppliers, is extremely important when seeking the best results. By definition, critical suppliers are those bearing an influence on the performance and results of the principal process and those whose product or service affects the quality perceived by customers. The Iberia Procurement Management keeps an up-to-date exhaustive data base of all its suppliers. On equal conditions, it always favours suppliers that have obtained certification for the protection of human rights, the environment and quality. Iberia also encourages all its suppliers to respect the codes of conduct and good environmental practices. Thus, when tendering contracts, it includes in both the bidding terms and conditions and the contract proper, clauses concerning:
Confidentiality Industrial property Data protection Labour commitment Environmental commitment Global compact In addition, suppliers awarded contracts for security and surveillance services undertake to impose limits on the use of force in their activities.
Compliance with these clauses is regularly assessed according to the monitoring information, the risk exposure to the company’s reputation and how critical the contract is for the value chain. Corporate Responsibility / Suppliers 395
6.3 Supplier payment tools
As established in its the control procedures, Iberia has established maximum times for the payment of invoices. Iberia’s healthy financial position guarantees payment for the products and services contracted and provided to Iberia’s satisfaction. In 2009, Iberia has continued implementing its e-invoicing project, the main aim of which is to speed up the invoicing processes of its suppliers and set up another communication channel with them. This project also achieves major savings in administrative material: paper, envelopes, etc., with the consequent benefit for the environment, and savings in management time spent on improving processes, for both Iberia and its suppliers.
Specific relationships in the air transport sector
As commonly occurs within the aviation industry, Iberia has a fluent relationship with the manufacturers of aircraft, engines and parts for its fleet and that of third parties, through its maintenance and engineering business. Iberia reports to the OEM - Original Equipment Manufacturer - any incident or irregularity occurring during maintenance or flight activities, which is studied to define all aviation safety-related aspects that might be recommended for the entire industry. Iberia also analyses the life cycle and performance of its fleet with the manufacturers. In the airport services business, Iberia has a very close relationship with the airport authorities at the airports at which it operates as handling agent, especially with AENA, since Iberia is present in almost all Spanish airports. The complex nature of ground handling services requires permanent coordination between Iberia and AENA to achieve the satisfaction of the users of air transport. Corporate Responsibility / Employees 396
7. EMPLOYEES
In accordance with its Corporate Responsibility policy, Iberia incorporates and contemplates respect for human rights in its operations, based on the standards established in the Universal Declaration on Human Rights, the eight Core Conventions of the International Labour Organization and the United Nations Global Compact. Iberia seeks to achieve the maximum development of its employees and to generate the necessary climate of confidence to face the changing needs to which the company is exposed and favour the integration and relationship of individuals working in it.
7.1 Workforce and labour relations
The composition of the Iberia workforce broken down by countries, sex, labour category, business and type of contract can be consulted in the Annexes to this Report and in the Annual Accounts of Iberia L.A.E. The company has employees in practically all the countries to which its commercial network extends. The distribution of employees by countries is shown in the following map:
Union representation and participation
Iberia has two committees, the Ground Staff Inter-Workplace Committee and the Flight Committee, which maintain continuous relations with the unions. It also has a Health and Safety Inter-Workplace Mixed Committee and a Flight Health and Safety Committee, which deal with issues concerning occupational hazard prevention. Iberia also has a Social and Economic Committee, involving trade unions. The ground staff union representatives sit on 21 Workplace Committees (works councils) nationwide, and a further 15 workplaces have workers’ delegates. Corporate Responsibility / Employees 397
Internationally, Iberia has workers’ representatives in 40% of the countries in which it has employees and there are collective agreements in: Argentina, Austria, Belgium, Brazil, Chile, France, Germany, Greece, Israel, Ireland, Italy, Mexico, Netherlands, Portugal, Sweden, United Kingdom, Uruguay and Venezuela; and union representatives in Peru (see Annexes).
Collective Agreements
The VII Collective Agreement for Pilots was signed on 20 April 2009, effective from 1 January 2005 to 31 December 2009. In accordance with the established times, Iberia gave express notice of termination to the Union Section and the Spanish Labour Authorities on 28 October 2009. The Bargaining Committee for the VIII Collective Agreement was set up on 24 November 2009 and has held regular meetings from then and throughout December. The Bargaining Committees for negotiation of the XVI Collective Agreement for Flight Attendants and the XIX Collective Agreement for Ground Staff, were set up towards the end of 2008, with regular meetings throughout 2009. During the months of October and November 2009 the unions TCP, CTA-Vuelo and SITCPLA went on strike for 4 days. After calling a further 8 days of strikes for November and December, an agreement was reached with both unions in which, among others pacts, they undertook to keep the peace during the negotiations. This agreement was ratified by majority vote in the Bargaining Committee.
Employment
Iberia has a single online access point – IberiaEmpleo - for handling job offers, made available so that anyone interested in working for the company can send in his/her CV and be a candidate for filling possible vacancies:
https://portal.iberia.es/iberiaEmpleo/ Corporate Responsibility / Employees 398
The company continues applying the two Redundancy Plans 72/01 and 35/05, which were extended by the Spanish labour authorities in 2007 up to December 2010 and December 2014, respectively. Redundancy Plan 72/01 is voluntary for employees and has been widely accepted since its approval. During 2009 a total of 342 ground staff took early retirement, 194 of whom retired under Plan 2012. The options of Deferred Reassignment, “Novations” to Stable Employment and Voluntary Redundancy were also available for both ground staff and flight assistants, 16 early retirements being granted in the latter group. Also within the aforesaid Redundancy Plan, on 30 April 2009 the Spanish labour authorities passed a Complementary Decision authorising Iberia to extend the period of voluntary acceptance and application of Redundancy Plan to 31 December 2013 for pilots over 60, on the terms stipulated in the Social Plan agreed on 20 April 2009. This Redundancy Plan was applied in 2009 to 234 pilots. The maximum number of redundancies was set at 1,074 under Redundancy Plan 35/05, established owing to the loss of business at certain network airports after the awards of handling licences in 2006. During 2009 the company continued applying the measures contemplated in the Handling Sector Collective Agreement, which regulates subrogation to the companies that obtained the new licences. The company has also signed joint venture agreements for Barcelona, Lanzarote and Fuerteventura airports. This Handling Sector Collective Agreement was denounced by the unions CCOO, UGT and USO by letter dated 25 May 2009, and the Negotiating Committee of the Second Handling Sector Collective Agreement will be formally constituted in 2010.
7.2 Satisfaction, internal communication and motivation
Employee satisfaction is mainly channelled through the suggestion boxes available in IBPróxima, through which employees can express any observation, remark or concern, even anonymously if they so wish. These suggestions are mostly assessed and answered in less than 24 hours, and those considered important are published monthly, together with the replies offered by the responsible management departments. The company makes regular polls through IBPróxima to find out its employees’ opinions on matters of general interest, many of them related with the meeting of their expectations in connection with the services offered. Employees are informed on Iberia’s goals and results – strategic plan, stock exchange performance, punctuality details, significant milestones, etc. – permanently through IBPróxima, daily on the company’s notice boards and monthly through the magazine Iberiavión. Corporate Responsibility / Employees 399
A new design of the Press Summary, one of the contents most consulted by employees every day, and a new digitalisation service for articles catalogued by the Documentation Centre were launched in 2009, with major savings in material by eliminating photocopies, with the consequent benefits for the environment. A theme portal called IB-BA Merger has also been created to provide all employees with information on the merger in progress as and when it is generated.
Iberia has established a staff recognition system for all its employees, based on individual or group suggestions and recognition of extraordinary actions. To stimulate creativity and individual and group efforts and as a basic factor in continuous improvement, reward is given for the profitability obtained as a result of a proposal for improvement. Recognition ranges from being congratulated by the Acknowledgements Committee to economic prizes, which totalled 68,636 € in 2009, with 49 employees rewarded for 33 suggestions. The company uses several forms of incentive through different variable pay items added to the salary, regulated by collective agreement and rewarding employee productivity: bonuses for attendance, shift work, duties, etc. The levels of progression and promotion are linked to the Performance Assessment, made regularly. The company has a policy of filling vacancies in senior positions (positions of responsibility) through internal promotion. Although the candidates are often previously identified and prepared through the Professional Development Plans described in section 7.3, the company regularly calls for internal applications to select employees with profiles best suited to the positions to be filled.
Integral Customer Service Plan (PISAC)
Iberia designed and developed the Plan following talks with all the stakeholders involved, especially employees, through the following tools:
Opinion poll: in a poll conducted at the beginning of the Plan, more than 60% of the company employees considered the PISAC necessary for Iberia, and over half of those employees considered it essential. A total of 4,398 replies were received in the on-line poll. Communication: all employees were openly requested to say what they thought ought to be remedied or improved in the service, since there is no-one better qualified to submit ideas than those who are constantly attending customers. Theme Portal in IBPróxima: with all the information on the Plan and the initiatives sent in by employees through a specific suggestion box, and the replies sent to those employees by the appropriate management departments after studying the feasibility of the proposals. Some of the initiatives were put into practice immediately, showing the effectiveness of the participation. Meetings with the Chairman: Antonio Vázquez had several meetings during 2009 with employees who had submitted suggestions to hear their proposals first hand and exchange opinions on the future of the company, in informal chats highly valued by those attending them. Corporate Responsibility / Employees 400
Prizes for the best suggestions, among those received between April 2009 and March 2010.
7.3 Training and Development
Iberia’s training model is based on the need for specific qualifications for the sector that are not readily available on the market and for which there are often no specific training centres. In the company’s opinion, training is the best tool for giving people the competence (knowledge, skills and attitudes) they need to do their job better, increase their productivity and capacity to respond to the challenges arising in the business. The contents of training are geared not only to developing skills associated with a particular job, but also to fostering future professional development and alignment with the company’s strategic objectives, placing special emphasis on training for the following:
Customer service Incorporation of new technologies Development of managerial skills Health and safety Commitment to quality and excellence in management Protection of the environment and human rights
In 2009 Iberia continued developing Campus Iberia, a platform for staff training, offering new generation multimedia courses to acquire essential knowledge of the business. This e-learning platform is easy to use for both students and teachers and guarantees a more accessible training, together with active communication through the different tools such as forums or e-mails. Corporate Responsibility / Employees 401
These on-line courses offer numerous advantages, especially flexibility in time and location and the ample accessibility for employees, resulting in optimisation of the training resources.
Ejemplo de curso on-line
Integration of education and business
Iberia has agreements with several Spanish and international universities and training institutions, offering to collaborate with the government and academic institutions to implement the educational system, both by adapting vocational training modules specifically for the air-traffic sector and by offering undergraduates, graduates and vocational training students an opportunity to acquire work experience. During 2009, these practices have been offered to nearly 500 students. The main objective of the Graduate Work Experience Programme is to adjust incorporations into the management and engineers group to the demand of different areas of the company according to the Strategic Plan. It also helps to detect graduates with potential, candidates for Qualified Staff Development Plans. The Graduate Work Experience Program was started up in 1996 and, so far, almost 60% of people who make up the managers and engineers group, have joined it through this Program, both by internal promotion (contract “novations”) and from outside, through postgraduate practices. Iberia also facilitates academic training for employees who are studying for official qualifications, granting Individual Training Permission to enable them to attend the corresponding commitments, releasing them from work so that they can study or go to exams. In 2009 Iberia participated in the UE Converge survey, which was presented jointly in Madrid by the Chamber of Commerce and the University-Business Foundation. This study analyses the specific knowledge associated with university qualifications to identify those that are more important for business and those with the greatest shortcomings. Corporate Responsibility / Employees 402
Iberia and Latin America In 2009 Iberia signed a collaboration agreement with Anáhuac University in North Mexico whereby the Spanish company offers its students and teaching staff preferential rates to fly to Spain and the principal destinations in Europe. As from 2010, when it celebrates the 60th anniversary of its flights to Mexico, Iberia will also award two grants a year for students of Business Management and Administration and Tourist Administration.
Attraction and retaining of talent
Iberia is constantly talent-spotting, both internally and externally, considering talent to be one of the critical factors for guaranteeing the company’s competitiveness. The company has established different selection protocols and competence profiles to detect the professionals with the greatest potential in the company. Once spotted, those professionals receive support through Personal Training Programmes, Continuous Assessment and Vocational Development and Succession Plans, through which talent is channelled towards the required field of specialisation or management, in the latter case within specialised leadership development programmes designed to guarantee a smooth take-over of all key management and executive positions at all times, having professionals capable of applying their talent to the circumstances required from time to time for the company’s business. During 2009 the following specific vocational development plans were carried out:
Development Programme for Unit Managers of the Maintenance and Engineering department: This development programme was begun on 21 April with the aim of consolidating the managerial skills and competence of the Maintenance business unit managers, as transmitters of confidence and values to their teams, so as to meet the challenges and take up the opportunities of the aircraft maintenance industry and make sure Iberia is competitive. This programme includes tools for assessing own competence, different training modules and spaces for reflecting on the duties and responsibilities of a Unit Manager from all points of view, including negotiating techniques, management, management in times of crisis, organisation and customer service quality. Human Factor Training Plan at Airports and Cargo: Investigations into air accidents have shown that 3 of every 4 accidents are due to human error. Consequently, within its Integral Safety Management System, Iberia has developed this Training Plan to develop abilities and use available resources to improve safety. On 3 February, psychologists specialising in Human Factors of Operations Management began the training of internal facilitators from different divisions of the company, who are then responsible for subsequent training of all the staff working on the air side. This continues, therefore, the development of a corporate culture promoting safety among all employees involved in the operation: crew, maintenance, handling, cargo, etc. Within the Annual In-Flight Management Training Plan, the 2009 Plan developed special modules to enhance service attitudes, in line with the PISAC. In the specific case of Chief Flight Attendants, the Plan contemplated a vast increase in communication. Corporate Responsibility / Employees 403
XV Air Transport Course
The Air Transport Course is one of the best examples of the company’s commitment to the development of human resources and management of the knowledge of its senior officers. This Course, which is now approaching its XVI edition, consists of a training programme lasting several months, in which management and experts in different fields share their know-how with persons considered to have a high potential in all areas of the company. The programme of each edition is also adapted to current trends of the industry and the challenges that the company has to meet from time to time.
As a result, Iberia has the best professionals in the sector, by tradition and vocation, with internationally recognised levels of qualification and specialisation. As proof of this, the following recognitions were made during 2009:
José Manuel Ruiz, Navigation and Route Manager, was elected member of the European Coordination Group of IATA. This group, consisting of ten experts from different airlines, counsels the Operations Committee and other management bodies of IATA to establish the needs and priorities in technical and operating issues, such as safety, airport infrastructures, navigation aids, traffic services and procedures, etc. Cora Zapico, lawyer from the Legal Department, was honoured as Best European Company lawyer in the competition category within the awards given by ILO / ACC European Counsel Awards 2009. These awards are very prestigious because they are the only ones able to identify the top lawyers in the world inside the legal departments of companies or their associates. Ricardo Génova, Operations Manager, was appointed member of the Performance Review Commission of EUROCONTROL, responsible for counselling the governing bodies of this European organisation on safety of air navigation. The purpose of this Commission is to establish independent, transparent and firm objectives to guarantee an efficient European air traffic management system, promote joint responsibilities and issue guidelines for State governments on economic regulation. The members are elected from among the nominations made by the member States of EUROCONTROL on the grounds of their capacity, competence, experience and professional reputation. Enrique Dupuy, Chief Finance Officer, was elected in the second edition of the study made by KPMG and the magazine Actualidad Económica, in which almost 2,000 companies participated, as one of the 100 chief finance officers who acted according to the best practices, best adapted to international trends and had a strategic vision like that of their international counterparts.
Iberia also gives training to third parties in the airport services, cargo, operations, in-flight services and commercial areas, especially to companies with which it has service contracts. One example is the annual training received by chief flight attendants and cabin crew of Group 45 of the Air Force, who accompany the Spanish Royal Family, President of the Spanish Government and senior authorities when they fly in official aircraft of the State of Spain, given at the Iberia Flight Attendants Training Centre, with both theoretical and practical training in safety and rescue, in-flight services and human factors. Corporate Responsibility / Employees 404
7.4 Employee Services: IBPersonas
IBPersonas is a personal management tool through which employees have permanent access to an ever-growing quantity of administrative and management information, on a self-service basis. It is divided into small channels, including especially those of training and development – management of employee training and access to CAMPUS Iberia –, employment - access to information on job vacancies, to be filled internally and/or externally -, employee self-service – performance assessment, wages & salaries, donations to charity causes deducted directly from salary, etc.–, mIBillete.free – self-issuing of tickets for employees –, occupational hazard prevention – access to documents on hazard prevention, participation and consultation, FAQ’s, etc. –, information – calendar of working days and public holidays, collective agreements, etc. – and management services for senior staff.
En el año 2009 se han producido las siguientes novedades en IBPersonas:
ISO 27001 certificate for information security Self-issuing of ZED tickets with other airlines, service called myIDTravel Self-issuing of tickets for children under 2, on mIBillete.free. Automated requests for transfers.
7.5 Ethics and Codes of Conduct
Iberia has a Code of Ethics for application of the Global Compact, published in the Annexes to this Report, designed as a direct, simple document containing a set of good practices. It lays down the bases for ethical, responsible conduct by Iberia employees in the performance of their work. The Code has been drawn up with three essential goals:
Adapt commitment to the Global Compact to the culture and values of the company, highlighting the most important conduct in Iberia so ensure that the principles are met. Have a general code of ethics that supplements the other codes of conduct of the company. Inform all employees on the Global Compact. Corporate Responsibility / Employees 405
The following campaigns were run during 2009:
“IN-OUT” Campaign, on personal image and uniform, since they affect customers’ perception of the employees dealing with the public and, therefore, of Iberia.
“Why don’t you tell them?” Campaign, on new in-flight messages, within the measures introduced by the PISAC so that customers perceive that they have chosen the best professionals.
“INFORMATION SECURITY is also YOUR business” Campaign, to make employees aware of their responsibility for protecting information, following the rules laid down by the company, with a number of general guidelines, by responding to a number of FAQ.
The company also publishes in its internal magazine Iberiavión each month some of the letters of complaint or congratulations from our customers, to give examples of errors and good conduct in the service and strengthen the commitment to quality customer service. All these innovations are supplementary to the codes of conduct and recommendations that already existed in the company, such as Disciplinary Provisions of Collective Agreements, Internal Code of Conduct in respect of matters relating to security markets or the Style Guide for customer service. Corporate Responsibility / Employees 406
7.6 Equality opportunity and diversity
Salaries in Iberia are established according to rank, seniority and position, with no distinction on grounds of sex, race or any other discrimination. In pursuance of Organic Law 3/2007, the Equality Plans are being negotiated with the different union representatives within the collective bargaining of the three Collective Agreements of the Company: Ground Staff, Flight Attendants and Pilots. The total percentage of women in the company at 31 December 2009 was 38%, 0.3 percentage points down on 2008.
AGE PYRAMID BY SEX
At the end of 2009, 418 persons held senior positions in the company, 128 of whom were women, 30.2% of the total. As regards diversity, the company has a policy of hiring local personnel, such that, apart from a few positions within the structure of some Commercial Offices abroad, which are held by people sent from Spain, 861 employees of the company are nationals of the countries in which Iberia operates as a multinational, of which 52% are women.
7.7 Work and family reconciliation policies
Reduced working hours for legal custody have been applied within the company to promote childbirth and protect maternity, paternity and care of the elderly, which benefits were taken up in 2009 by a total of 1,923 employees, 34.4% more than in 2008. The company takes account of the risks that employee’s work may entail for pregnancy and breastfeeding, especially among the flight groups, permitting different possibilities for reducing working hours, temporary suspensions of contract and the processing of benefits, all regulated by collective agreement. The latest uniform of the company has taken into account all the features of its employees, with a specific garment for pregnant employees. Corporate Responsibility / Employees 407
7.8 Health and safety at work
Iberia has its own Prevention Service with Senior Occupational Hazard Prevention Officers covering the four disciplines of prevention: Safety at Work, Industrial Hygiene, Ergonomics and Psychosociology and Industrial Health. The Maintenance & Engineering and Airports managements have established the figure of the Occupational Hazard Prevention Coordinator in their organisations, to promote and monitor the practical implementation of Prevention in their respective areas of competence. These Coordinators have continuous, close contact with the Prevention Service. In Iberia there are 21 Health and Safety Committees, with 83 Prevention Delegates distributed among the different workplaces, and a further 16 Delegates in workplaces which, because of their size, do not have a Works Council, covering 100% of the employees. There is also an Inter-Workplace Health and Safety Committee, with 6 Prevention Delegates. IBPersonas has a specific channel for occupational hazard prevention, containing necessary and useful information for all employees:
Rule SH-205 establishes how to proceed in cases of workers who, due to permanent or temporary personal circumstances, are especially sensitive to working conditions. Iberia participates in the public vaccination programmes established by the Health Authorities, including the annual flu jab campaign.
Recording and notification of occupational accidents
The entire process concerning occupational accidents is conducted in accordance with rule SH-400, which specifies the participation of each agent (management, affected employees, prevention delegates, prevention service, personnel units, among others), the documents to be completed and how they are to be kept. The Prevention Service has a computerised system for global management, connected to the company’s data bases, to which the different parties involved have access according to their authorisation level, in turn complying with the applicable data protection legislation. The lowering of the accident rate was consolidated in 2008 in all areas of the company, 9.7% down on 2008. The seriousness of accidents at work was also reduced by 8.8% on the previous year. These trends show that the measures taken in respect of prevention are adequate, encouraging the company to continue along the lines defined in the Prevention Plan. Corporate Responsibility / Employees 408
Principal occupational hazard prevention actions in 2009
The intense preventive work was further improved during the year with the following new actions:
Swine flu prevention campaign: As soon as the first news reached Spain of the outbreak of swine flu in Mexico, Iberia began to issue operating information on actions to be taken by ground staff and flight crews in connection with the disease and set up a specific portal in IBPróxima indicating the procedures and actions to be taken during stations and businesses. Iberia joined in the information campaign of the Spanish Ministerio de Sanidad, providing information through all channels of communication for its employees and customers to ensure that as many people as possible and their relatives could have as much information as they needed to be familiar with and prevent this flu. At the same time, each area of company management drew up a business continuity plan, establishing procedures to guarantee the company’s activities at all times were absenteeism caused by the flu to reach critical levels for normal operation. Skeletal muscle disorder prevention campaign: Iberia has continued with this awareness campaign, begun in 2008, to prevent these injuries, which are behind a large part of absences for sick leave within the company.
The Prevention Service set itself the target of ensuring that all employees had sufficient information to prevent this type of disorder. In 2009, the company has tackled the causes of these disorders and factors affecting their appearance, in particular:
handling of cargo and heavy loads positions when working repetitive movements straining Corporate Responsibility / Employees 409
It has stressed that if employees are aware of the risks they can be prevented by changing habits and the way in which certain daily tasks are carried out, both at work and in the personal and/or domestic environment. As in any airline, the most serious skeletal muscle disorders are produced during baggage loading and unloading operations. Iberia is on an Ad Hoc Committee together with the Spanish Ministerio de Trabajo y Asuntos Sociales, AENA and the unions CC.OO and UGT, which is taking measures to provide the loading and unloading bays with mechanical elements to reduce risk exposure in manual handling 4th review of Rule SH-203, Coordination of Business Activities, with all the documents that have to be delivered to companies within the framework of Coordination of Business Activities. New specific procedure PPRL 23 for assessing and treating psychosocial factors and review of procedure PPRL-13 for integration of occupational hazard prevention in the acquisition and commissioning of equipment and installations. Updating of prevention Technical Specifications, including:
Recommendations of minimum distances between office elements for users in wheelchairs. Recommendations for employees during pregnancy, recent childbirth and breast-feeding. Protection of employees during pregnancy, recent childbirth and breast-feeding.
7.9 Welfare benefits
The welfare benefits of the company include:
Welfare benefit Principal features
The funds are used to meet social needs, such as aids for education, aids for disabled and chronically ill children, welfare loans, expenses incurred through sickness, among others. This fund is jointly financed in equal Solidarity Fund proportions by the company and employees, except in the case of cabin crew, who contribute 0.40% of their basic wage and the company contributes a fixed sum. Ground and Flight Staff 50% financed by the company and the employee. This fund covers disability and retirement benefits. In the case Welfare Funds of flight crew, it also covers long-term temporary disability and death benefits. Group Life This assurance covers death and permanent disability. In the case of flight crew, it also covers the contingency of Assurance Policy permanent loss of licence. It is 60% financed by the company and 40% by the employee. Loans may be granted each year for up to 4% of the ground staff and flight attendants on the payroll at 31 Housing loans December of the preceding year. Medical cover Iberia takes and manages all activities and actions required for the recovery of workers who suffer accidents. Redeployment The company redeploys any employees whose capacity is reduced by illness or age to jobs more suited to their guarantee limitations. There is also a commitment to redeploy to ground staff any flight crew who lose their flying licence. Corporate Responsibility / Employees 410
The company and each employee make monthly contributions (50% each) through their salary to the pension scheme, handled by Mutualidad Montepío Loreto, set up as a private pension and welfare institution in 1970 by the workers in the aviation sector. Loreto is an independent institution, unrelated to any financial group, so its investments are made exclusively to obtain the best, most secure benefits for its members. It operates under a system of Individual Capitalisation, which means that the contributions made by the members are used to finance the benefits of each one and that the distribution of profit is equal for all participants.
www.montepioloreto.com
7.10 Corporate citizenship
Collaboration with the welfare organisations of Iberia employees Iberia employees participate in numerous volunteer activities, receiving logistic and economic support from the company. The solidarity initiatives undertaken by employees for several years now have given rise to the creation and development of two Associations, which have not been declared Public Utility Associations and are among the most important in Spain:
Iberia Employees Parents of Disabled Children Association – APMIB Set up in 1977 by company employees with children with special needs, this association focuses its activities on the protection and social integration of physically, mentally or sensorial handicapped children. Twenty years later, in 1997, the APMIB Foundation was set up for the protection and the social and educational assistance of the handicapped. The Foundation promotes and manages homes and other centres for the disabled who are orphans or in a situation of neglect, whatever their age. It also organises several training activities and promotes research to improve the lives of people with special needs. It is now the second largest association for the disabled in Spain, after the ONCE [National Association for the Blind], with six specialist centres in Barcelona, Madrid (2), Malaga, Las Palmas and Tenerife. Its work is no longer limited to relatives of Iberia employees, but is open to the whole society. It has a team of 140 professionals, including psychologists, doctors, social workers and support personnel, who assist more than 1,300 handicapped persons. It has six Special Employment Centres, which provide employment for 529 people. Their main occupations are the manufacturing of textile products, packaging & labelling, etc., computing and administrative coordination services. It has been supported by the company from the outset, with monetary contributions and work contracts. Approximately 38% of its turnover is obtained on sales to Iberia. Apart from work for Iberia, the APMIB centres perform activities and provide services for almost 60 companies, including Air Nostrum, AENA, Gate Gourmet and Renfe. Corporate Responsibility / Employees 411
Outstanding actions by APMIB in 2009:
In December 2009, the Home and Day Centre for Disabled Aged Over 45 with 33 places in Colmenar Viejo was finished in December 2009, including furniture and fittings. Completion of the Occupational Centre in Malaga Assignment of land and part of the financing by AENA to build a new building at c/ Ayerbe de Madrid (Barajas) Development and strengthening of digitalisation and documentation areas Continuation and development of the different Labour Insertion Projects: AILA Project, ECA Project, ARGOS Project, among others. Agreement with LIMPIEZAS INITIAL to provide cleaning service for customers
Mano a Mano
This NGO was founded in 1994 by Iberia employees to use the free space in the bellies of company flights to send humanitarian aid to countries hit by natural disasters or wars and deliver that aid without middlemen, i.e. “hand to hand” (“Mano a Mano” in Spanish). Since its creation it has sent more than 2,200 tonnes of humanitarian aid. It brings children from different countries, together with their families, to Spain for specialist medical attention. Once in Spain, Mano a Mano provides them with accommodation and anything else they may need. It also manages all sorts of aid projects in developing countries. Iberia donates air tickets and cargo space to Mano a Mano.
In 2009 the company offered employees the opportunity to buy surplus products from In-Flight Sales at bargain prices. The profit obtained was donated to the APMIB for the conditioning and purchase of furniture for the Home and Day Centre for Disabled Aged over 45, construction of which was recently finished in Colmenar Viejo. The Chairman of Iberia, Antonio Vázquez, visited the head offices of APMIB in September, where he was informed on their admirable work and enjoys contact with the persons training or working there. Iberia employees participate every year in the Blood Giving Campaign organised by the company together with the Transfusion Centre in the Community of Madrid. oneworld also organises humanitarian aid days for which it requests volunteers from the companies belonging to the alliance. The 2009 aid was spent on the building of a primary school, repair of a day centre for street urchins, decorating of a hospital for children with AIDS and the planting of vegetable patches in orphanages in Bangkok. Iberia’s social activity, which complements its solidarity and labour responsibility actions, also extends to areas such as leisure, sport and culture. Club Iberia and the Iberia Veterans Association are particularly active in this area.
The Veterans Association was founded in 1972, has 8 delegations in Spain and finances all its activities with the membership fees of over 7,000 members, in 51 national meeting points and more than 20 abroad. The services provided and activities organised by this Association are aimed primarily at members on retirement, disability or widowhood pensions. The activities organised are mainly cultural, touristic and recreational. Corporate Responsibility / Employees 412
Club Iberia is a non-profit association that aims to promote leisure and sports activities among company employees and their families, thereby fostering values such as the family, solidarity and teamwork. It currently has over 10,000 members and 12 delegations nationwide. The Club Iberia budget is funded mainly with the membership fees and an annual contribution from Iberia, which also provides premises for the Club’s offices and facilitates internal communication for all employees through IBPróxima.
7.11 Employment of disabled workers
In pursuance of the Disabled Persons Integration Act, Iberia must hire a number of disabled workers equivalent to no less than 2% of its headcount. Owing to the company’s complex productive nature, making it especially difficult to incorporate disabled workers in a sufficient number to meet that quota so it meets its legal obligation through the alternative measures regulated by Royal Decree 364/2005. These measures include commercial contracts with Special Employment Centres and donations and sponsorships in favour of Public Utility Associations. Therefore, in 2009, the quota established in respect of the total headcount was 448 persons, met through:
Employment of disabled persons: the company has provided direct employment for a total of 247 disabled workers in 2009. Commercial contracts with Special Employment Centres: A total of 5,759,193 € was invoiced under these contracts in 2008. This amount is equivalent to 215 workers. Donations and Sponsorships: in 2008, the donations in cash or in kind made to the two above-mentioned associations totalled 657,478 €, equivalent to 59 workers. This sum is itemised as follows:
Therefore, the number of disabled persons employed by Iberia, directly or through alternative measures, totals 521, exceeding the reserve quota by 73 workers. Corporate Responsibility / Society 413
8. SOCIETY
Iberia bases its social action strategy on supporting solidarity organisations, mainly through the provision of its regular services, such as transporting passengers requiring some kind of aid and assigning space in the bellies of aircraft for transporting humanitarian aid. The company has a control system to manage its contributions, enabling continuous assessment to adjust Iberia’s social actions to the established strategy. The company is committed in this regard to achieving the Millennium Development Goals. Some of Iberia’s main permanent collaborations are listed below:
Spanish International Cooperation Agency – AECID: Iberia cooperates through agreements, which include special discounts for passenger or cargo tickets on its flights. National Transplant Organisation: Iberia provides free transport of organs on its scheduled flights, with an annual average of over 80 organs. ‘Ilusiones’ Foundation: Iberia provides transport for sick children that the Foundation takes to different locations to make their dreams come true so that they recover their “will to live”. ‘Crecer Jugando’ Foundation and Radio Nacional de España - RNE: Iberia participates in the solidarity campaign “One Toy, One Joy”, the main aim of which is to send toys to children in third world or developing countries and to start up toy libraries at schools in those countries. The company transports material in the bellies of aircraft flying to certain destinations and in exchange, Fundación Crecer Jugando donates toy libraries to Iberia for the Mano a Mano centres in Peru, Ecuador, Guatemala, Cuba, Argentina and Equatorial Guinea. Special Olympics: This organisation aims to improve the quality of life of the mentally handicapped through sport. The company participates with donations with a coin collection scheme on its international flights. Sports Council – CSD: Iberia and Coca-Cola España collaborate with the CSD to organise the In-Flight Drawing Competitions for children under 12 travelling on Iberia flights. The aim is to encourage physical exercise among children, trying to transmit the essence of the values of sport: healthy life, clean play and determination to improve. Corporate Responsibility / Society 414
Sponsorship agreement with Madrid 2016 to support the candidature of the city for organisation of the Olympic Games. Iberia promoted the candidature of de Madrid throughout the world, enlisted support among customers and employees and took the official delegation to Copenhagen for the voting on 2 October. In September the company ran support campaigns for the candidature, directed at the over four million Iberia Plus holders, the 355,000 people who enter Iberia.com every day, the employees and all the veterans. Iberia secured backing from more than 10,300 people for the candidature, plus over 50,000 volunteers that the March 2016 organisation took to the IOC voting in Copenhagen.
All cooperations by Iberia during 2009 and their economic valuation can be consulted in the Annexes to this Report.
8.1 Millennium Development Goals
Iberia gears its social action to contribute, directly or indirectly, towards achievement of the Millennium Development Goals, through contributions of cash and resources to social action projects. The main collaborations in 2009 are summarised in the following table, classified according to the goal to which they contribute: Corporate Responsibility / Society 415
Iberia’s contribution to the UN Millennium Development Goals
Goal Target Main projects in 2009
Niños de Barro Project following the earthquake in Peru in 2007, to restore adults’ hope so that they will promote their own development, and so that the children are in Reduce by half the proportion of people good health and go to school. living on less than a dollar a day Building of a canteen for 360 children in Tablada de Lurin, one of the poorest districts of Lima, in Peru. In addition, Mano a Mano has purchased the machinery of a Goal 1: eradicate baker’s for this project. extreme poverty and Collaboration with the popular canteen project, run by Redeemer missionaries, in hunger Santa Anita, one of the poorest districts of Lima. The Emaús canteen in Lima had noodle manufacturing workshops, a bakery and a Reduce by half the proportion of people computer room. Iberia participates in this project helping to build also a games room. who suffer from hunger Cooperation to send toys, clothes and food to the population of Herat (Afghanistan), where the Spanish army base is situated.
The canteen in Tablada de Lurin will be panellable to double up as classrooms and Goal 2: achieve Ensure that, by 2015, all boys and girls give basic education as well as food. universal primary complete a full course of primary Permanent collaboration with schools and workshop in Quilmes, Argentina; and education schooling with the schools Hola-Hola, Español de Malabo, Santa Teresita, Luba and Batete, among others, in Equatorial Guinea.
Eliminate gender disparity in primary and Goal 3: promote Children’s Home Virgen del Perpetuo Socorro, in Lima (Peru), for abandoned girls, secondary education preferably by 2005, gender equality and many of whom have been raped and battered. Takes in over 170 girls aged 4-18. and at all levels of education by the end of empower women Collaboration with the Madre del Redentor Home, in Piura (north Peru) for 130 girls. 2015
Mano a Mano transports children on Iberia flights for surgery or medical treatment in Spain. Children from Cuba Project to meet the needs of sick children in Cuba who need constant medical treatment. They are regularly sent medicines. Goal 4: reduce child Reduce by two thirds, between 1990 and San Vicente de Pau Children’s Home, in Quito (Ecuador). Refuge for children mortality 2015, the under-five mortality rate without means or with no family. Offers protection and integral education for 140 children, some physically, mentally or psychomotor handicapped. Iberia was present at the Congress of the Spanish Pediatrics Association held in Zaragoza.
“Iberia celebrates Solidarity Christmas” Campaign. In the run-up to Christmas, Iberia gave its smallest passengers a small alpaca plane, hand made by a group of Goal 5: improve Reduce by three quarters, between 1990 women who live in hamlets in the mountains, on the banks of Lake Titicaca. These maternal health and 2015, the maternal mortality ratio women travel to Puno to do the embroidery, for which they receive a small wage, and during their trip they are given talks on nutrition, health in general and education.
Have halted by 2015 and begun to Cooperation with the organisations Basida, Remal and Sucael to help people with reverse the spread of HIV/AIDS Goal 6: combat AIDS or drug addicts in the district of Vallecas, Madrid. HIV/AIDS, malaria Contributions to Fundación Respira [Breathe Foundation], the Carlos III National and other diseases Have halted by 2015 and begun to Oncological Research Institution and the Assistance against Drug Addiction reverse the incidence of malaria and other Foundation. major diseases
Integrate the principles of sustainable See the Environment chapter of this Report. development into country policies and Iberia with Spanish protected species. All new aircraft incorporated in Iberia’s fleet programmes; reverse loss of are christened with the names of endangered species in Spain. Iberia transports environmental resources Goal 7: ensure animals of endangered species in the bellies of its aircraft to return them to their original locations for recovery in specialised centres. environmental Halve, by 2015, the proportion of people sustainability without sustainable access to safe drinking Iberia attended the European Renewable Energies Forum held in Bilbao, the Congress water and basic sanitation of the CONAMA (water, climate change, nature) Foundation in Iguazú, the “AQUA 09” Conference on water management in Madrid and the International Congress on Achieve significant improvement in lives of Energy Engineering and the Environment in Portugal. at least 100 million slum dwellers, by 2020 Develop further an open trading and financial system that is rule-based, predictable and non-discriminatory Address the least developed countries' Goal 8: Foster a special needs Commitment to the Global Compact principles. • Close cooperation with the Spanish International Cooperation and world alliance for Address the special needs of landlocked Development Agency (AECID). development and small island developing States Deal comprehensively with developing countries' debt problems through national and international measures to make debt sustainable in the long term Corporate Responsibility / Society 416
Iberia contributes towards publicising of the Millennium Development Goals and raising awareness among its stakeholders to their achievement through the initiative: “2015: A better world for Joana” of the Corporate Reputation Forum, to which Iberia belongs www.2015unmundomejorparajoana.com
Iberia and Latin America Once again, the company celebrated a Solidarity Christmas, giving its customers Christmas decorations hand made by men and women from Peruvian villages. Business customers received another special gift: a ceramic star to hang on their Christmas trees, handmade and painted by young Peruvian craftsmen and women.
8.2 Participation in associations and foundations
The company belongs to several associations and foundations related with Corporate Social Responsibility.
Corporate Reputation Forum: The Corporate Reputation Forum (fRC) was founded in September 2002; its members are currently eleven major Spanish enterprises: Grupo Agbar, BBVA, Repsol YPF, Telefónica, Abertis, Ferrovial, Gas Natural, Iberdrola, Iberia, RENFE and Metro de Madrid. The fRC is a place of encounter, analysis and spreading of trends, tools and models of corporate reputation management. All the fRC companies have signed the UN Global Compact initiative and promote achievement of the Millennium Development Goals. The interest of the fRC in reputation derives from its conviction of the impact of reputation as an element generating value for companies, their stakeholders and, ultimately, society.
www.reputacioncorporativa.org Corporate Responsibility / Society 417
Business and Society Foundation The Business and Society Foundation was set up in 1995 and receives sponsorship and strategic support from Fundación Once, Iberia and Mapfre. It encourages companies to take the initiative in respect of challenges related with the full integration in society of the underprivileged (immigration, aging, disability, local development, education, international cooperation…). It is based on the comparative analysis of Spanish companies committed to improving social integration, taking each case in context, according to its type, size and impact. It endeavours to inspire specific lines of action and encourage each company to reflect on the initiatives that make most sense considering its resources, features and circumstances.
www.empresaysociedad.org
Carolina Foundation: An institution set up in 2000, sponsored by Sogecable, PRISA, FCC, ACS, EL Corte Inglés and Iberia, among others. It promotes cultural relations and cooperation in science and education between Spain and the countries of the South American Community of Nations and with other countries with special historic, cultural or geographical ties. The 2009 Action Plan of the Carolina Foundation is based on the principle that education and research play an important role in building fairer societies and are the best guarantee for strengthening the democratic institutions and exercising responsible citizenship.
www.fundacioncarolina.es
Exceltur: A non-profit association currently consisting of 24 of the most influential Spanish tourist business groups. This association endeavours to foresee and adapt to processes of change required by the increasingly more global and demanding markets, publishing surveys related to tourism and recommendations for the future.
www.exceltur.org Corporate Responsibility / Society 418
Spanish Confederation of Business Organisations - CEOE: Iberia is a member of the Social Responsibility Commission of the CEOE along with other Spanish large enterprises and SME associations, set up as a forum for encounter and debate to analyse CSR trends on the market. In turn, it represents its members in the work group on the ISO 26000 Guidelines and in the State Council on Corporate Social Responsibility set up in February 2008 and headed by the Spanish Ministerio de Trabajo y Asuntos Sociales.
www.ceoe.es
Management Excellence Club: Iberia participates with other companies, public and private organisations and academic institutions in a workshop created in 2009, called Socially Responsible Excellence, to find solutions to incorporate social values in the strategy of organisations, as a source of opportunities and competitive edge.
www.clubexcelencia.org
Iberia and Latin America
The Euroamerica Foundation, of which Iberia is a trustee, celebrated its X Anniversary in 2009, ten years during which it has promoted projects to improve collaboration and understanding between Europe and Latin America and fostered dialogue between the two continents.
Iberia is also a trustee and founding member of FUNDIBEQ, the Latin American Quality Foundation, which develops a Management Excellence and Quality Programme attached to the Latin American Summit of Heads of State and of the Government, with the participation of large Spanish and Latin American enterprises.
8.3 Responsible investment
Iberia’s direct investment in social interest groups during 2009, considering contributions in cash and in kind, totalled 1,617,919 €. For the third year in succession, the company has also made contributions to external environmental protection projects. The breakdown of aids given by Iberia can be seen in the Annexes to this Report. Corporate Responsibility / Society 419
Investments in sponsorship arrangements, that is, collaboration agreements with sports, cultural, educational, etc. organisations, totalled 7,870,765 € in 2009.
The company sponsors at all times initiatives and events that are in line with the values with which it identifies. Some of the new initiatives in 2009 were:
Commercial agreement with the Spanish Federation of Book Chambers to transport books and educational material and assist with the travelling of professionals to cultural events related with the publishing sector. Iberia, aware of the importance of Spanish literature production, collaborates in the spreading and transportation of culture. Collaboration agreement with the Spanish Royal Academy (RAE), whereby Iberia has been nominated official carrier of the Academy, providing transport for members of the RAE and its professional collaborators in their trips to Spanish-speaking countries and the different national and European linguistic research centres. The service is extended to the representatives of the 21 associated Academies which attend events organised by the RAE. Collaboration agreement with the Friends of the Prado Museum Foundation, whereby Iberia employees and their relatives can become Friends of the Prado Museum on very beneficial economic terms, which enables them, among other benefits, to go to exhibitions without having to wait in queues and contribute to the preservation and development of one of the most important art galleries in the world.
Iberia and Latin America Iberia and Casa de América have an agreement to encourage the company’s employees and customers to go to the cinema, with discounts for the “Sala Iberia” at the Casa de América. The “Sala Iberia” is the only screen in Spain that exclusively puts on Latin American cinema. Consequently, Latin American films that are not distributed commercially can be put on and recognised by the Spanish Ministerio de Cultura. Corporate Responsibility / Society 420
DONATE YOUR MOBILE Campaign
With the slogan “There’s a lot of life left in the mobile you no longer use, DONATE IT!”, Iberia, the Spanish Red Cross and the NGO Entreculturas launched a campaign in 2009 to encourage collaboration for collecting unused mobiles from customers and employees in bags installed in dispensing machines at work places, ticket offices and VIP lounges at national airports and available on board aircraft. Once the mobile has been put into the bag, the donor can put the bag into any post box. The revenues generated from the recycling of donated mobiles are being allocated to humanitarian, social and educational projects in developing countries. Moreover, by promoting their reuse and recycling, the company is also helping to protect the environment. Corporate Responsibility / Annexes 421
ANNEXES
A.1. Development of the Global Compact Principles
A.2. Contents and Indicators according to the Global Reporting Initiative - version 3.0
A.3. Contributions made to social causes and sponsorship arrangements
A.4. Workforce and labor relations
A.5. Assurance Certificate Corporate Responsibility / Annexes 422
A.1. Development of the Global Compact Principles
THE UNITED NATIONS GLOBAL COMPACT IN THE ANNUAL REPORT ON CORPORATE RESPONSIBILITY 2009
GRI indicators Location in Report GRI indicators Categories Principles (indirect (direct relevance) > N. CHAPTER > Section > relevance) Paragraph Principle 1: Businesses should > 1. CORPORATE RESPONSIBILITY support and respect the protection LA4, LA13, LA14, > Impact analysis of internationally proclaimed HR1 - HR7 SO1 > 2. STAKEHOLDER ENGAGEMENT human rights within their area of > Public positions IBERIA AND HUMAN influence RIGHTS > 6. SUPPLIERS > Responsible Principle 2: Businesses should procurement make sure that they are not HR1, HR2 > 7. EMPLOYEES > Ethics and complicit in human rights abuses Codes of Conduct Principle 3: Businesses should > 7. EMPLOYEES > Workforce and uphold the freedom of association labour relations > Union LA4, LA5, HR5 and the effective recognition of the representation and participation & right to collective bargaining Collective Agreements Principle 4: Businesses should uphold the elimination of all forms HR7 HR1 - HR3 > 6. SUPPLIERS > Responsible IBERIA AND ITS of forced and compulsory labour procurement EMPLOYEES Principle 5: Businesses should >7. EMPLOYEES > Ethics and uphold the effective abolition of HR6 HR1 - HR3 Codes of Conduct child labour Principle 6: Businesses should uphold the elimination of HR4, LA2, LA13, HR1, HR2, EC5, EC7, > 7. EMPLOYEES > Equality discrimination in respect of LA14 LA3 opportunity and diversity employment and occupation > 1. CORPORATE RESPONSIBILITY Principle 7: Businesses should > Impact analysis support a precautionary approach EN1-EN30, EC2 > 2. STAKEHOLDER ENGAGEMENT to environmental challenges > Public positions EC2, EN1, EN3, EN4, Principle 8: Businesses should EN2, EN5 - EN7, EN8, EN16, EN17, IBERIA AND THE undertake initiatives to promote EN10, EN14, EN18, EN19, EN20, EN23, ENVIRONMENT greater environmental EN21, EN22, EN26, EN24, EN28, EN29, responsibility EN30 PR3, PR4 > 3. ENVIRONMENT > 8. SOCIETY Principle 9: Businesses should encourage the development and EN2, EN5 - EN7,
diffusion of environmentally EN10, EN18, EN26 friendly technologies Principle 10: Businesses should > 5. SHAREHOLDERS > Fraud work against all forms of ANTI-CORRUPTION SO2 - SO4 SO5 prevention and anti-corruption corruption, including extortion and measures bribery
Iberia adhered to these principles as a founding participant in 2004. More information at www.pactomundial.org Corporate Responsibility / Annexes 423
Code of Ethics for application of the Global Compact in Iberia
The Iberia employees are aware of the impact that our conduct may have on other persons, especially those with different cultures to ours. Therefore, in application of the United Nations Global Compact principles, we perform our work respecting the following ethical principles:
1. We never discriminate against anyone, for any reason: race, age, sex, beliefs, physical condition or different points of view from ours. 2. We offer our customers a correct, respectful, proactive service attitude, especially when operating incidents arise. 3. We reject any unlawful or unethical activity that we may observe and report it promptly. 4. We do not disclose confidential information of the company and never attempt to have a bearing on the commercial relations that our relatives and/or friends may have with the company. 5. We take great care to avoid any occupational accident that could affect ourselves, our colleagues or our customers. 6. We take care of the environment and encourage its protection among our customers, suppliers and colleagues. 7. We use the company’s material and intellectual assets with the utmost respect and responsibility. 8. We submit our ideas for improvement internally, so that they may be useful for the future of the company. 9. We cooperate with our colleagues whenever they ask us for help and we are able to give it, and always answer their requests as soon as possible. 10. We maintain a high level of efficiency in our work, making our employment compatible with our personal lives, and opt for good humour, respect, loyalty and kindness in all interpersonal relationships we have within our work.
These guidelines do not replace any of the agreements, codes, bylaws and rules signed by the company, but complement them and seek to help secure their fulfilment. Please send any comments or suggestions on these ethical guidelines to: [email protected] Corporate Responsibility / Annexes 424
A.2. Contents and Indicators according to the Global Reporting Initiative - version 3.0
GRI 3.0 Guidelines - Basic Content Index and Performance Indicators
Preliminary Explanations
The G3 indicators are classified into core and additional indicators. The former are those of interest for our company and most of the stakeholders. The latter represent a prominent, although not widely used, practice in measuring social, economic or environmental aspects, offer significant information for the interested parties and may be changed in the future to core indicators. According to the standard G3 A+ all the core indicators must be included, or their omission explained. The core indicators not applicable to the air transport business or to Iberia are indicated in the table Indicators Not Applicable, stating the reasons for their exclusion. Iberia has also included some indicators complementing those listed in the GRI 3.0 Guidelines, in view of their importance in its activities and compliance with the principle of transparency. Just as in earlier Reports, this report indicates the approximate correspondence of the GRI indicators with the criteria for including the company in the Dow Jones Sustainability Index (DJSI) (last columns of the tables). It is considered interesting to make that correspondence in order to identify what aspects are taken into account by the main references for the company regarding Corporate Responsibility. The indicators published in this Report cover all the areas and activities performed by the company, with no limitation on the reporting scope or boundaries. Adequate comparability of the 2009 indicators with previous years is also guaranteed. In the case of annual information in percentages, the comparison is made in percentage points (p.p.) Since 2008, a column has been added indicating the area responsible for each indicator, according to the organisation and responsibilities of Iberia’s CR Model (see chapter > 1. CORPORATE RESPONSIBILITY IN IBERIA). Corporate Responsibility / Annexes 425
Location in the Report or explanations GRI Contents Area accountable DJSI FTSE4Good Section > N. CHAPTER > Section > Paragraph
STRATEGY AND ANALYSIS
Chairman's Statement 1.1 Chairman's statement > 2. STAKEHOLDER ENGAGEMENT > Public positions
> 0. INTRODUCTION > The air transport sector CORPORATE Description of key > 0. INTRODUCTION > A year of changes for Iberia RESPONSIBILITY 1.2 impacts, risks and > 1. CORPORATE RESPONSIBILITY > Impact analysis opportunities > 1. CORPORATE RESPONSIBILITY > Corporate Responsibility Framework > Corporate Responsibility Policy
ORGANISATIONAL PROFILE
Name of reporting 2.1 Iberia, Líneas Aéreas de España, S.A. organisation Primary brands, > 0. INTRODUCTION > Profile of Iberia L.A.E. 2.2 products and/or > 5. SHAREHOLDERS > Brand Management services
> 0. INTRODUCTION > A year of changes for Iberia ALL Operational structure of > 1. CORPORATE RESPONSIBILITY > Corporate Responsibility 2.3 the organisation Framework > CR ORGANISATION AND RESPONSIBILITIES IN IBERIA Location of 2.4 organisation's c/ Velázquez, 130 - 28006 - MADRID (SPAIN) headquarters Countries where the 2.5 7. EMPLOYEES > Workforce & Labor Relations HUMAN RESOURCES organisation operates Nature of ownership 2.6 Public limited company and legal form Air Transport business: Spain, Europe, America, Africa and 2.7 Markets served Middle East MRO & Airport Services business: Con base en España, asisten a compañías aéreas de todo el mundo Scale of the reporting 2.8 > 0. INTRODUCTION > Profile of Iberia L.A.E. See also EC1 ALL organisation Significant changes 2.9 during the reporting > 0. INTRODUCTION > A year of changes for Iberia period Awards received in the > 1. CORPORATE RESPONSIBILITY > Prizes and recognitions 2.10 reporting period obtained in 2009 Corporate Responsibility / Annexes 426
Location in the Report or explanations GRI Contents Area accountable DJSI FTSE4Good Section > N. CHAPTER > Section > Paragraph
REPORT PARAMETERS
REPORT PROFILE
3.1 Reporting period 2009
Date of most recent 3.2 2008 previous report CORPORATE 3.3 Reporting cycle Anual RESPONSIBILITY Contact point for 3.4 questions regarding the [email protected] report
REPORT SCOPE AND BOUNDARY
> 1. CORPORATE RESPONSIBILITY > Corporate Responsibility Framework > CR Policy & Scopes of application Process for defining > 1. CORPORATE RESPONSIBILITY > Impact analysis 3.5 report content > 1. CORPORATE RESPONSIBILITY > External assessment See also the consultative process described in the report of 2008 (Section 1.1). Iberia, Líneas Aéreas de España, S.A. For its small size and for develop, completed activities to the parent company, 3.6 Boundary of the report mostly of the Iberia Group investee companies have no significant impacts on sustainability, except Vueling, on which there is a Commitment of Independence Specific limitations on 3.7 scope or boundary of > ANNEXES > A.2. > Indicators not applicable this report CORPORATE RESPONSIBILITY Basis for reporting on The indicators of this Report belong to Iberia L.A.E. Group 3.8 joint ventures, information can be consulted in the Financial Statements and subsidiaries, etc. Management Report 2009 - Consolidated Data measurement The indicators are calculated using internationally accepted 3.9 techniques and the methods bases of calculation Effect of any re-statements of 3.10 information provided in earlier reports There have been no changes in data or methods in respect of the previous year Significant changes from 3.11 previous reporting periods in the scope
GRI CONTENT INDEX
> CONTENTS GUIDE Location of standard CORPORATE 3.12 > 2. STAKEHOLDER ENGAGEMENT disclosures in the report RESPONSIBILITY > ANNEXES > A.2. > Contents and Indicators according to GRI
ASSURANCE
Policy and current practice with regard to CORPORATE 3.13 > 0. INTRODUCTION > About this Report seeking external RESPONSIBILITY assurance for the report Corporate Responsibility / Annexes 427
Location in the Report or explanations GRI Contents Area accountable DJSI FTSE4Good Section > N. CHAPTER > Section > Paragraph
GOVERNANCE, COMMITMENT AND ENGAGEMENT OF STAKEHOLDERS
BOARD OF DIRECTORS, Executive Committee, Audit & Compliance Committee, Nomination & 4.1 Governance structure of the organisation Remuneration Committee, Safety Committee. See Corporate Governance Report in Annual Report 2009 Indicate whether the Chair of the highest Yes, see Corporate Governance Report Section B. 1. 4.2 governance body is also an executive officer 21 Number of members of the highest 10, all except the Chairman & Managing 4.3 governance body that are independent or Director non-executive members General Shareholders' Meeting. Company Mechanisms for shareholders and employees department responsible for relations with 4.4 to provide recommendations or direction to shareholders: [email protected] the highest governance body > 7. EMPLOYEES > Workforce and labour relations GENERAL SECRETARY > Union representation and participation Linkage between compensation for members DIRECTORS: % of profit allocated on previous of the highest governance body, senior 4.5 year's results SENIOR MANAGEMENT: Variable managers, and executives and the annual by objectives organisation's performance Rules of the Board of Directors; Code of Processes in place for the highest governance Conduct in respect of matters relating to 4.6 body to ensure confl icts of interest are security markets; Nomination and avoided Remuneration Committee Process for determining the qualifications and Proposal by the Board to the General expertise of the members of the highest Shareholders' Meeting, following report by the 4.7 governance body for guiding the Nomination and Remuneration Committee. See organisation’s strategy on economic, Corporate Governance Report in Annual Report environmental, and social topics 2009 Internally developed statements of mission or > 1. CORPORATE RESPONSIBILITY > Corporate values, codes of conduct, and principles CORPORATE 4.8 Responsibility Framework > CR Policy relevant to economic, environmental, and RESPONSIBILITY > 5. SHAREHOLDERS > Good Governance social performance Procedures of the highest governance body for BOARD OF DIRECTORS approves the CR Policy. overseeing the organisation’s identification and 4.9 Audit and Compliance Committee reviews the management of economic, environmental, and annual reporting for its approval in the Board social performance GENERAL SECRETARY Nomination and Remuneration Committee. See Processes for evaluating the highest 4.10 Corporate Governance Report in Annual Report governance body’s own performance 2009 > 1. CORPORATE RESPONSIBILITY > Impact Explanation of how the precautionary approach CORPORATE 4.11 analysis or principle is addressed by the organisation RESPONSIBILITY > 5. SHAREHOLDERS > Risk Management Externally developed economic, environmental, > 7. EMPLOYEES > Corporate citizenship and social charters, principles, or other > 8. SOCIETY > Millennium Development Goals 4.12 initiatives to which the organisation subscribes > ANNEXES > A.3. > Contributions made to social ADVERTISING & or endorses and environmental causes and entities in 2009 SPONSORSHIP Main associations of which the organisation is > 8. SOCIETY > Participation in associations and 4.13 a member or which it supports foundations List of stakeholder groups engaged by the 4.14 organisation > 1. CORPORATE RESPONSIBILITY > Corporate Basis for identification and selection of Responsibility Framework > Spheres of influence 4.15 stakeholders with whom to engage CORPORATE 4.16 Approaches to stakeholder engagement RESPONSIBILITY
Key topics and concerns that have been raised > 2. STAKEHOLDER ENGAGEMENT through stakeholder engagement, and how 4.17 the organisation has responded to them through its reporting Corporate Responsibility / Annexes 428
Economic Dimension: MANAGEMENT APPROACH Location in the report: > Chapter 5 > SHAREHOLDERS Location in the report: > Chapter 6 > SUPPLIERS
Economic performance indicators Variation Location in the report 2005 2006 2007 2008 2009 2009-2008 Area accountable DJSI FTSE4Good GRI Type of Name (% or p.p.) Code indicator > N. CHAPTER > Section > Paragraph Direct economic value generated and distributed, including operating SEE ANNUAL REPORT - IBERIA EC1 Core 4,929 5,.359 5,494 5,480 4,439 -19.0% INVESTOR RELATIONS revenues and costs, (NB: operating revenues in million €) L,A,E, > 2. STAKEHOLDER Financial implications and other risks and opportunities for the ENGAGEMENT > Public positions QUALITY & EC2 Core Qualitative organisation’s activities due to climate change > 3. ENVIRONMENT > Flight ENVIRONMENT operations: climate change > 7. EMPLOYEES > Welfare EC3 Core Coverage of the organisation’s defined benefit plan obligations 100% (see also indicator LA3) HUMAN RESOURCES benefits CORPORATE EC4 Core Significant financial assistance received from government This page 00000 - RESPONSIBILITY Minimum wage (€) 7,182 7,573 7,988 8,400 8,736 4.0% Minimum wage Iberia (€) 14,684 13,930 14,635 15,147 15,147 0.0% EC5 Additional This page HUMAN RESOURCES Range of ratios of standard entry level wage compared to local minimum 104.4% 84.0% 83.2% 80.3% 73.4% -6.9 p.p. wage at significant locations of operation All significant operations for the contracting of products and Policy, practices, and proportion of spending on locally-based suppliers at > 6. SUPPLIERS > Responsible services are run from Spain (purchasing centralization), EC6 Core PURCHASING significant locations of operation procurement without implying that favors the recruitment of domestic suppliers (competing on equal terms) The company has the policy of hiring local personnel in the countries where it operates as a multinational enterprise. Procedures for local hiring and proportion of senior management hired > 7. EMPLOYEES > Equality Approximately 50% of the executives are locally hired. Hiring EC7 Core HUMAN RESOURCES from the local community at significant locations of operation opportunity and diversity personnel abroad is ruled by internal controls. See also ANNEXES > A.4. > Workforce and labor relations, by countries Development and impact of infrastructure investments and services > 8. SOCIETY > Responsable ADVERTISING & EC8 Core provided primarily for public benefit through commercial, in-kind or pro See breakdown in Annex A.3 investment SPONSORSHIP bond engagement > 1. CORPORATE Understanding and describing significant indirect economic impacts, CORPORATE EC9 Additional RESPONSIBILITY > Impact Qualitative including extent of impacts RESPONSIBILITY analysis
Ratio of revenues from flights of less than 400 km to total revenues 1.96% 1.53% 1.98% 0.32% 0.30% -0.02 p.p. > 3. ENVIRONMENT > Flight QUALITY & IBERIA's KPI operations: climate change ENVIRONMENT Tonnes of cargo carried (on regular or special traffic) 209,684 208,762 260,601 242,213 211,243 -12.8% Corporate Responsibility / Annexes 429
Ambiental Dimension: MANAGEMENT APPROACH Location in the report: > Chapter 3 > ENVIRONMENT > Environmental management in Iberia
Environmental performance indicators
FLIGHT OPERATIONS Area accountable DJSI FTSE4Good Location in the report Variation GRI Type of Name of indicator 2005 2006 2007 2008 2009 2009-2008 (% or Code indicator > N. CHAPTER > Section p.p.) > Paragraph
Fuel consumption (tonnes/year) 1,920,245 1,927,472 1,923,837 1,835,884 1,794,209 -2.27% EN3 Core Specific fuel consumption (litres/RTK) > 3. ENVIRONMENT > 0.470 0.432 0.417 0.411 0.414 0.73% Flight operations: climate EN16 Core CO2 emissions (tonnes) for all Iberia flights change 6,049,793 6,071,538 6,060,086 5,783,034 5,651,758 -2.27%
Iberia's KPI Average age of fleet (no. years) 7.95 7.92 7.66 7.13 7.30 2.38%
NOx emissions in LTO cycles (tonnes) 2,995 2,841 2,673.90 2,185.00 2,161.96 -1.05% QUALITY & > 3. ENVIRONMENT > ENVIRONMENT EN20 Core UHC emissions in LTO cycles (tonnes) Flight operations: local air 233 219 212 164 168 2.17% quality CO emissions in LTO cycles (tonnes) 1,211 1,125 1,088 944 940 -0.44%
Number and value of fines and sanctions for > 3. ENVIRONMENT > non-compliance with conventions, treaties, EN28 Core Environmental 00000 - declarations and standards on environmental management in Iberia issues
Figures calculated using internal methods. Directive 2008/101/EC is currently under study Corporate Responsibility / Annexes 430
GROUND OPERATIONS
Location in the report GRI Type of Code indicator Name of indicator 2005 2006 2007 2008 2009 Variation 2009-2008 (% or p.p.) Area accountable DJSI FTSE4Good > N. CHAPTER > Section > Paragraph
CARGO
CLASSIFICATION GROUND EQUIPMENT
Iberia's KPI Diesel vehicles 44 49 33 30 28 -6.67% Petrol vehicles 00000 - Electric vehicles > 3. ENVIRONMENT > Ground operations: greenhouse gas emissions 159 145 139 134 125 -6.72% EN3 Core Diesel consumption (litres) 102,135 91,387 79,412 64,465 43,150 -33.06%
EN4 Core Electricity consumption (J*109 ) 23,671 7,888 9,540 9,835 9,362 -4.81%
EN8 Core Water consumption (m3) > 3. ENVIRONMENT > Ground operations: consumption of resources 8,647 5,210 4,157 3,102 4,095 32.01%
EN1 Core Paper consumption (tonnes) 66 60 61 32 33 2.14%
BOILER CONSUMPTION EN3 Core Gasoil C consumption (litres) > 3. ENVIRONMENT > Ground operations: consumption of resources 626,133 560,000 697,500 738,000 721,334 -2.26%
HAZARDOUS WASTE MANAGEMENT (fluorescents, toner, batteries, oil filters, impregnated absorbers, etc.) EN24 Additional Generation (tonnes) > 3. ENVIRONMENT > Waste 2.15 3.89 6.54 3.22 3.28 1.86%
URBAN WASTE MANAGEMENT (paper/cardboard, glass, wood, organic) EN22 Core Generation (tonnes) > 3. ENVIRONMENT > Waste 270 207 213 223 211 -5.13% QUALITY & ENVIRONMENT
AIRPORT SERVICES
CLASSIFICATION GROUND EQUIPMENT
Iberia's KPI Diesel vehicles 3,325 3,484 3,373 3,373 2,479 -26.50% Petrol vehicles 88 93 52 42 26 -38.10% Electric vehicles > 3. ENVIRONMENT > Ground operations: greenhouse gas emissions 495 494 472 393 378 -3.82% EN3 Core Diesel consumption (litres) 8,551,947 7,659,755 6,548,405 6,690,692 4,449,266 -33.50%
EN4 Core Electricity consumption (J*109 ) 41,811 30,471 13,323 29,317 29,614 1.01%
EN8 Core Water consumption (m3) > 3. ENVIRONMENT > Ground operations: consumption of resources 100,796 88,073 76,242 28,257 34,852 23.34%
EN1 Core Paper consumption (tonnes) 123 109 78.0 82.0 71.7 -12.54%
EN24 Additional HAZARDOUS WASTE MANAGEMENT (oils and oil filters, solvents, batteries, shoes, polluted absorbents, cutting oils, antifreeze, polluted containers, decanter sludge, fluorescents, cells, etc.), including vehicles out of use delivered to CART Generación (Ton.) > 3. ENVIRONMENT > Waste 264 249 183.55 258.4 378.6 46.54%
EN22 Core GESTIÓN DE RESIDUOS URBANOS (papel/cartón, envases y embalajes, pallets, otros)
Generación (Ton.) > 3. ENVIRONMENT > Waste 892 1098.2 586.56 1,123.24 277.36 -75.31% Corporate Responsibility / Annexes 431
GROUND OPERATIONS
Location in the report GRI Type of Variation 2009-2008 Name of indicator 2005 2006 2007 2008 2009 Area accountable DJSI FTSE4Good Code indicator (% or p.p.) > N. CHAPTER > Section > Paragraph
INDUSTRIAL AREAS - MADRID
FUEL CONSUMPTION IN BOILERS EN3 Core Natural gas consumption (kWh) > 3. ENVIRONMENT > Ground operations: 181,808,413 144,358,672206,266,380 124,882,00191,921,933 -26.39% Gasoil C consumption (litres) consumption of resources 257,632 244,900 161,357 118,047 163,512 38.51%
ELECTRICITY GENERATION IN COGENERATION PLANT
Net total (J*109 ) 142,035 101,369 55,955 79,419 35,882 -54.82% EN4 Core % consumed in Iberia 33 27 36.24 83.96 83.65 - 0.31 p.p. % sold to grid > 3. ENVIRONMENT > Ground operations: 67 73 64 16.04 16.35 + 0.31 p.p. Natural gas consumption (kWh) consumption of resources 118,742,426 85,309,139 47,859,872 66,149,494 29,886,531 -54.82% EN4 Core TOTAL ELECTRICITY CONSUMPTION (J*109 ) 217,993 247,180 270,788 223,855 257,928 15.22% EN8 Core TOTAL WATER CONSUMPTION (m3) 557,003 414,898 376,227 403,498 405,996 0.62%
EMISIONES DE CALDERAS EN ZONAS INDUSTRIALES EN16 Core
CO2 (tonnes) 33,967 27,276 19,209 24,286 19,541 -19.54% > 3. ENVIRONMENT > Ground operations: SO (tonnes) 1.01 0.39 0.63 0.46 0.62 35.43% EN20 Core 2 greenhouse gas emissions NOx (tonnes) 32.5 25.9 18.4 22.2 17.8 -19.82%
USOS CRÍTICOS DE HALÓN QUALITY & EN19 Core kg installed in equipment 7,645 7,270 7,312 6,336 7,250 14.43% ENVIRONMENT kg used > 3. ENVIRONMENT > Ground operations: 120.00 71.15 24.92 52.05 18.63 -64.21% kg stored for this use greenhouse gas emissions 00000 - EN19 Core Use of products with VOCs in industrial areas (litres) 122,729 101,101 110,074 113,651 118,351 4.14% EN22 Core URBAN WASTE GENERATION (tonnes) (paper & cardboard, timber, not separated) 1,250 1,487 1,537 1,555 1,322 -14.98% > 3. ENVIRONMENT >Ground operations: HAZARDOUS WASTE GENERATION (washing water, paints, solvents, metals in solution, oils, polluted EN24 Additional waste 17,496 16,362 15,013 13,760 14,387 4.56% containers and absorbers, hydroxide sludge, residual kerosene, WEEE, etc.) (tonnes) (*)
COMMON TO ALL GROUND OPERATINOS
Urban waste management (%)
Re-use 0 0 0 0.7 0.0 - 0.7 p.p. EN22 Core Recycling > 3. ENVIRONMENT >Ground operations: 29 28 27.4 21.8 27.2 + 5.6 p.p Recovery waste 0 1.9 2.1 1.1 0.6 - 0.5 p.p Elimination 71.0 70.1 70.5 76.4 72.2 - 4.2 p.p
Hazardous waste management (%)
Re-use 9 9 0.0 0.0 0.0 - EN24 Additional Recycling > 3. ENVIRONMENT >Ground operations: 21 21 0.2 0.2 0.3 + 0.1 p.p. Recovery for energy purposes waste 24 24 5.5 2.3 3.4 + 1.1 p.p. Safe deposit 46 46 94.3 97.5 96.3 - 1.2 p.p. (*) Includes industrial effluent (95% of hazardous waste) Corporate Responsibility / Annexes 432
GENERAL ENVIRONMENTAL ASPECTS
Location in the report Area accountable DJSI FTSE4Good GRI Type of Variation 2009-2008 (% Name of indicator 2005 2006 2007 2008 2009 Code indicator > N. CHAPTER > Section or p.p.) > Paragraph > 3. ENVIRONMENT > Owing to the peculiarities of the aviation sector, the applicable technical standards Percentage of materials used that are recycled EN2 Core Ground operations: and prevailing safety parameters, no recovered materials are used, only original input materials consumption of resources materials > 3. ENVIRONMENT > Energy saved due to conservation and efficient EN5 Additional Flight operations: climate -5.24% -8.09% -3.47% -1.44% 0.73% + 0.71 p.p. improvements change Initiatives to provide energy-efficient or renewable QUALITY & energy-based products and services, and reductions EN6 Additional See also innovations projects on chapter >4. COSTUMERS ENVIRONMENT in energy requirements as a result of these > 3. ENVIRONMENT > initiatives Environmental management in Iberia Initiatives to reduce indirect energy consumption EN7 Additional See indicators EN6, EN18 and EN26 and reductions achieved > 3. ENVIRONMENT > Percentage and total volume of water recycled an EN10 Additional Ground operations: 00000 - reused consumption of resources EN13 Additional Habitats protected or restored > 3. ENVIRONMENT > The indirect emissions produced in Iberia are included in the indicators EN16 and ADVERTISING & Strategies, current actions and future plans for EN14 Additional Nature protection EN20, and in the emissions inventory SPONSORSHIP managing impacts on biodiversity Other relevant indirect greenhouse gas emissions The indirect emissions produced in Iberia are included in the indicators EN16 and EN17 Core by weight > 3. ENVIRONMENT > EN20, and in the emissions inventory Flight operations: climate Initiatives to reduce greenhouse gas emissions and EN 18 Additional change Check variation 2005-2009 of the environmental KPIs reductions achieved
Total water discharge by quality and destination 168,832 142,048 120,792 102,790 106,115 3.23% EN21 Core > 3. ENVIRONMENT > (m3) All effluent is treated in accordance with legal requirements Ground operations: waste EN23 Core Total number and volume of significant spills 0 0 0 0 0 - QUALITY & Initiatives to mitigate environmental impacts of > 3. ENVIRONMENT > See also Iberia's KPI (Average age of fleet ) and indicators EN16 and EN20 to check ENVIRONMENT EN26 Core products and services and extent of impact Flight operations: climate reductions mitigation change Significant environmental impacts of transporting > 3. ENVIRONMENT > products and other goods and materials used for EN29 Additional Ground operations: See CO emissions inventory the organisation’s operations, and transporting 2 greenhouse gas emissions members of the workforce > 3. ENVIRONMENT > Total environmental protection expenditures and EN30 Additional Environmental 3,139 3,926 2,869 3,995 6,000 50.19% investments by type (thous. euro) management in Iberia Corporate Responsibility / Annexes 433
CO2 EMISSIONS INVENTORY ACCORDING TO GHG PROTOCOL METHODS
Emissions GEIs (tCO2 ) Emissions per employee* (tCO2 /employee) GHG Protocol Scope Types of emission Variation 2009 - Variation 2009 - 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 2008 2008 Boilers and generator sets (natural gas) 55,542 42,443 46,963 35,303 22,510 -36.24% 2.16 1.70 1.99 1.57 1.06 -32.62% Boilers and generator sets (diesel) 2,383 2,171 2,316 3,372 2,386 -29.23% 0.09 0.09 0.10 0.15 0.11 -25.22% Direct emissions (Scope 1) Vehicles owned or rented by Iberia (petrol) 56 55 38 38 15 -60.30% 0.002 0.002 0.002 0.002 0.001 -58.05% Vehicles owned or rented by Iberia (diesel) 23,193 20,773 17,763 17,722 12,040 -32.07% 0.90 0.83 0.75 0.79 0.57 -28.21% Indirect emissions (Scope 2) Electricity consumption 37,875 34,423 36,135 26,304 26,391 0.33% 1.47 1.38 1.53 1.17 1.24 6.02% Travel to work in private vehicle 19,375 18,833 17,744 16,930 16,021 -5.36% 0.75 0.75 0.75 0.75 0.75 0.00% Other indirect emissions Travel to work in bus 9,328 9,067 8,542 8,150 7,713 -5.36% 0.36 0.36 0.36 0.36 0.36 0.00% (Scope 3) Travel to work in train/underground 5,550 5,395 5,083 4,850 4,590 -5.36% 0.22 0.22 0.22 0.22 0.22 0.00% Total Scope 1 (direct emissions) 81,174 65,441 67,079 56,435 36,951 -34.52% 3.15 2.61 2.84 2.51 1.74 -30.81% Total Scope 2 (indirect emissions) 37,875 34,423 36,135 26,304 26,391 0.33% 1.47 1.38 1.53 1.17 1.24 6.02% Total (scope 1+2+3) 34,253 33,294 31,369 29,930 28,324 -5.36% 1.33 1.33 1.33 1.33 1.33 0.00% Totals Total (alcance 1+2+3) 153,303 133,159 134,583 112,669 91,667 -18.64% 5.95 5.32 5.71 5.01 4.31 -14.03% Total (including flight operations, which are 6,203,096 6,204,697 6,194,669 5,895,703 5,743,425 -2.58% 241 248 263 262 270 2.94% scope 1)
* Although the total CO2 emissions were reduced by 2.58%, emissions per employee have increased due to the declining workforce by 5%. Not including flight operations, the emissions covered were reduced by 18% and emissions per employee by 14%. Corporate Responsibility / Annexes 434
Social Dimension / Labor practices and ethics: MANAGEMENT APPROACH Location in the report: > Chapter 7 > EMPLOYEES
Social performance indicators
Area Location in the report Variation DJSI FTSE4Good GRI Type of accountable Name of indicator 2005 2006 2007 2008 2009 2009-2008 (% Code indicator > N. CHAPTER > Section or p.p.) > Paragraph
Workforce
Ground 19,503 19,068 17,548 16,678 15,743 -5.61% Flight 6,247 5,961 6,034 5,822 5,550 -4.67% TOTAL workforce 25,750 25,029 23,582 22,500 21,293 -5.36% Average seniority (years) 14.72 14.29 13.98 15.75 16.73 6.22% LA1 Core Average age of workforce (years) 42.0 41.9 41.7 42.5 43.5 2.21% > 7. EMPLOYEES > Type of contract Workforce & labor relations Permanent 20,651 19,948 21,068 18,843 18,164 -3.60% Permanent part-time 1,519 1,827 1,177 1,732 1,747 0.87% Permanent discontinuous 180 175 40 17 2 -88.24% Temporary 3,373 3,079 2,474 1,908 1,380 -27.67% Total no. employees & average rate of employee turnover, by age group, gender and LA2 Core See breakdowns in Annex A.4 . and age pyramid graphic in > 7. EMPLOYEES> Equality opportunities and diversity. region Welfare benefits provided to full-time employees that are not provided to temporary or > 7. EMPLOYEES > Temporary employees enjoy the same welfare benefits as permanent employees (medical assistance, access to LA3 Additional part-time employees, by major operations Welfare benefits grants, suggestion box prizes, special payslips, meal vouchers and free tickets, among others) LA4 Core Percentage of employees covered by collective bargaining agreements Almost 100% (see Annex A.4. for exceptions)
Percentage union affiliation (%) HUMAN RESOURCES Ground > 7. EMPLOYEES > 57.5 68.3 69.8 72.2 73.0 + 0.8 p.p. INDICADOR IBERIA Workforce & labor Pilots relations 100 100 100 100 100 - Flight attendants 31.3 31.5 31.7 31.3 31.7 + 0.4 p.p. Minimum notice periods regarding significant operational changes, including whether Spanish law contemplates cases in which minimum notice is required when the company makes a substantial LA5 Core it is specified in collective agreements modification of its employees’ working conditions. No such changes have taken place in Iberia in 2009. 100 % (24 100 % (21 100 % (22 101 % (22 Percentage of total workforce represented in formal joint management-worker health committees & committees & 87 committees & committees & LA6 Core and safety committees that help monitor and advise on occupational health and safety 100% - 108 prevention prevention 105 prevention 105 prevention programmes delegates) delegates) delegates) delegates) Rate of absenteeism for ordinary disease and occupational accident New indicator from 2008 5.1% 5.3% + 0.2 p.p. Occupational disease 0 0 0 0 0 - LA7 Core Number accidents at or on the way to or from work > 7. EMPLOYEES > Health 2,724 2,591 2,142 1,878 2,703 43.93% & safety at work Number of days’ sick leave for occupational accidents or in intinere New indicator from 2008 35,404 31,974 -9.69% Number of work-related fatalities 0 0 0 0 1 (in itínere) 100.00% Education, training, counselling, prevention & risk-control programmes in place to LA8 Core assist employees, their families or community members regarding serious diseases 481 747 805 844 294 -65.17% (number of courses given) LA9 Additional Health & safety topics covered in formal agreements with trade unions 100% (See also LA6 and Annex A.4.) Corporate Responsibility / Annexes 435
Social performance indicators
Area Location in the report DJSI FTSE4Good GRI Type of Variation 2009-2008 accountable Name of indicator 2005 2006 2007 2008 2009 Code indicator > N. CHAPTER > Section > (% or p.p.) Paragraph
Training: total no. courses 11.079 10.777 11.919 11.817 10.552 -10,70%
Training: total no. participants 80.355 68.625 70.475 82.834 74.481 -10,08%
Average hours by employee category
Managers & Engineers 8 14.4 80.02% LA10 Core Pilots 67 43.6 -34.89%
Flight assistants New indicators from 2008 24 21.3 -11.42%
Technical staff/Specialists 28 43.7 56.07% > 7. EMPLOYEES > Training & Administrative/Auxiliary Services Development 34 13.5 -60.33%
Work experience programmes
Novations employee contracts 7 9 10 9 10 11.11% Iberia's KPI No. scholarships: graduates, undergraduates, vocational training 178 229 334 414 427 3.14% HUMAN No. people with work experience contracts 69 31 67 81 40 -50.62% RESOURCES Programmes for skills management and lifelong learning that LA11 Additional support the continued employability of employees and assist Qualitative them in managing career endings
> 7. EMPLOYEES> Satisfaction, % employees receiving regular performance and career LA12 Additional internal communication & 100%, regulated by collective agreements - development reviews motivation
Igualdad de oportunidades (Ver desglose en el Anexo A.4.)
% Women 36.8% 37.2% 38.5% 38.3% 38.0% - 0.3 p.p. > 7. EMPLOYEES > Equality LA13 Core % Men 63.2% 62.8% 61.5% 61.7% 62.0% + 0.3 p.p. opportunity & diversity No. women in positions of responsibility > ANNEXES > A.4. > Workforce 131 139 146 161 128 (*) -20.50% by qualification and gender No. women in the Board of Directors 0 0 0 0 0 -
Salary is the same for men and women at the different employee LA14 Core Ratio of basic salary of men to women by employee category levels, regulated by collective agreements
(*) In 2009 there was an organizational change with a corresponding reduction in the total number of 19.31% Corporate Responsibility / Annexes 436
Social Dimension / Human Rights: MANAGEMENT APPROACH Location in the report: > Chapter 6 > SUPPLIERS. Location in the report: > Chapter 7 > EMPLOYEES
Social performance indicators
Location in the Area DJSI FTSE4Good GRI Type of report accountable Name of indicator 2005 2006 2007 2008 2009 Variation 2009-2008 (% or p.p.) Code indicator > N. CHAPTER > Section > Paragraph Percentage and total number of significant investment agreements that HR1 Core include human rights clauses or that have undergone human rights 6. SUPPLIERS > 100% (Iberia requires the inclusion of a number of clauses in its contracts with suppliers, whereby the supplier undertakes screening. Responsible “not to infringe any of the principles established in the UN Global Compact, of which Iberia is a member, and to offer in the PURCHASING Percentage of significant suppliers and procurement performance of its duties effective compliance with all obligations deriving therefrom”) contractors that have undergone HR2 Core screening on human rights and actions taken. Total hours of employee training on The content of training is not only related to the development of skills associated with the job, but also the alignment policies and procedures concerning 7. EMPLOYEES > between that content and the strategic goals of the company, such as respect for the environment and human rights. These HR3 Additional aspects of human rights that are Training & aspects are addressed in all company management courses and in on-the-job training. Estimated 3 hours of training per relevant to operations, including Development year for approximately 7,000 employees. See also indicators HR6 and HR7. To reach all employees, Iberia has launched a percentage of employees trained Code of Ethics. See Annex A.1. Total number of incidents of HR4 Core 00000 - discrimination and actions taken. Operations identified in which the right to exercise freedom of association and HR5 Core collective bargaining may be at None. See indicator LA4 significant risk, and actions taken to HUMAN support these rights. RESOURCES Operations identified as having > 1. CORPORATE significant risk for incidents of child RESPONSIBILITY > HR6 Additional labour, and measures taken to Impact analysis contribute to the elimination of child labour. Iberia joined the UN Global Compact in 2004 and includes a clause requiring compliance with its Principles in all its contracts. Operations identified as having significant risk for incidents of forced or HR7 Core compulsory labour, and measures taken to contribute to the elimination of forced or compulsory labour. Percentage of security personnel trained in the organisation’s policies or > 6. SUPPLIERS > HR8 Additional procedures concerning aspects of Responsible 100%. See indicator HR2 PURCHASING human rights that are relevant to procurement operations Corporate Responsibility / Annexes 437
Social Dimension / Society: MANAGEMENT APPROACH Location in the report: > Chapter 5 > SHAREHOLDERS Location in the report: > Chapter 8 > SOCIETY
Social performance indicators
Location in the report Area accountable DJSI FTSE4Good GRI Type of Variation 2009-2008 (% or Name of indicator 2005 2006 2007 2008 2009 Code indicator > N. CHAPTER > Section > p.p.) Paragraph Nature, scope and effectiveness of any programmes > 3. ENVIRONMENT > Flight As a result of fleet renewal, actions in operations and environmental and practices that assess and manage the impacts of operations: local air quality QUALITY & SO1 Core management systems implemented in the company, the impact of operations operations on communities, including entering, > 3. ENVIRONMENT > Noise in ENVIRONMENT in areas around the airport, noise and emissions is reduced year on year. operating and exiting the company the vicinity of the airport Percentage and total number of business units SO2 Core 100% 100% 100% 100% 100% - analysed for risks related to corruption > 5. SHAREHOLDERS > Fraud Percentage of employees trained in the 100% of employees with responsibility in internal management and budget prevention and anti-corruption SO3 Core organisation’s anti-corruption policies and control: training on the job. Furthermore, the Code of Ethics for application of measures procedures the Global Compact principles is addressed to all employees. > 5. SHAREHOLDERS > Good CORPORATE Governance There have been no significant cases in 2009. The obligations and actions to be RESPONSIBILITY SO4 Core Actions taken in response to incidents of corruption taken in the event of breah are set out in the corporate governance regulations and collective agreements. > 2. STAKEHOLDER Public policy positions and participation in public SO5 Core ENGAGEMENT > Public Qualitative policy development and lobbying positions Total value of financial contributions and SO6 Additional contributions in kind made to political parties or 00000 - related institutions, by countries This page Total number of legal actions for anti-competitive SO7 Additional behaviour, anti-trust and monopoly practices and 0001 (+)0 - INVESTOR their outcomes RELATIONS Monetary value of significant fines and total number of non-monetary sanctions. (In million €, total operating expenses in indemnities for passengers & > 4. COSTUMERS > Iberia 35.5 51.6 37.0 33.0 25.0 -24.24% passengers: the essence of our SO8 Core baggage, in pursuance of Regulation (EC) No 261/2004. existence > Commitment to passenger rights INNOVATION & Total No. of non-monetary sanctions 0 0 0 0 0 - BUSINESS RISKS (+) In 2008 the Supreme Court confirmed a fine of €3.6 million imposed by the Fair Trading Court on Air Europa, Iberia and Spanair, and the agencies of the Leading Spanish Travel Agencies (CAAVE), for fixing charges for the issuance of air tickets in 2005. Corporate Responsibility / Annexes 438
Social Dimension / Product Responsibility: MANAGEMENT APPROACH Location in the report: > Chapter 4 > COSTUMERS
Social performance indicators
Location in the report Variation Area accountable DJSI FTSE4Good GRI Type of Name of indicator 2005 2006 2007 2008 2009 2009-2008 (% Code indicator > N. CHAPTER > Section > Paragraph o p.p.)
Life cycle stages in which customer health and safety > 4. COSTUMERS > Iberia passengers: the impacts of products and services are assessed for essence of our existence > Commitment to PR1 Core 100% 100% 100% 100% 100% - improvement, and percentage of significant products and quality services categories subject to such procedures > 4. COSTUMERS > Iberia passengers: the essence of our existence > Commitment to Health Total number of incidents of non-compliance with > 4. COSTUMERS > Guarantees for all our regulations and voluntary codes concerning health and PR2 Additional customers > Safety 00000 - safety impacts of products and services during their life > 6. SUPPLIERS > Specific relationships in the air MARKETING & cycle, by types of outcomes transport sector COSTUMER LOYALTY Type of product and service information required by PR3 Core procedures and legislation and percentage of products > 4. COSTUMERS > Iberia passengers: the 100% 100% 100% 100% 100% - and services subject to such information requirements essence of our existence > Commitment to passenger rights, Commitment to price Total number of incidents of non-compliance with transparency, Dealing with passengers with special 1 PR4 Additional regulations and voluntary codes concerning product and 0000 - needs (++) service information and labelling, by type of outcomes > 4. COSTUMERS > Iberia passengers: the Practices related to customer satisfaction, including results QUALITY & PR5 Additional essence of our existence > Commitment to Qualitative of surveys measuring customer satisfaction ENVIRONMENT quality Programmes for adherence to laws, standards and PR6 Core voluntary codes related to marketing communications, > 4. COSTUMERS > Iberia passengers: the Qualitative including advertising, promotion and sponsorship essence of our existence > Commitment to price ADVERTISING & transparency Total number of incidents of non-compliance with SPONSORSHIP regulations and voluntary codes concerning marketing > 4. COSTUMERS > Guarantees for all our 1 (0 1 (0 PR7 Additional 000 - communications, including advertising, promotion and customers > Ethical advertising euros) euros) sponsorship, by type of outcomes > 4. COSTUMERS > Iberia passengers: the Total number of substantial complaints regarding breaches INNOVATION & PR8 Additional essence of our existence > Commitment to 00000 - of customer privacy and losses of customer data BUSINESS RISKS passenger rights Monetary value of significant fines for non-compliance > 4. COSTUMERS > Iberia passengers: the CORPORATE PR9 Core with laws and regulations concerning the provision and use essence of our existence > Dealing with 00000 - RESPONSIBILITY of products and services of the organisation passengers with special needs (++) Judgement of the Court of Madrid by refusing onboard unaccompanied three people with hearing impairment in a flight from Melilla to Madrid in 2004. Iberia and Air Nostrum accepted the terms of the decision: to amend their rules and pay the symbolic sum of 1 euro for each person. Corporate Responsibility / Annexes 439
INDICATORS NOT APPLICABLE Area responsible Type of GRI Code Name of indicator Reason indicator There are no significant impacts in Iberia. Water sources significantly affected by The water used by Iberia is obtained EN9 Additional withdrawal of water exclusively from the local mains; no wells or own withdrawal points are used. Description of land adjacent to or in protected areas or areas of high biodiversity value outside protected areas. EN11 Core State location and size of land owned, "Iberia does not operate on land in or leased or managed in areas of high adjacent to protected natural spaces or biodiversity value areas of high biodiversity. Description of significant impacts of activities, products and services on Moreover, Iberia does not represent a EN12 Core biodiversity in protected areas or areas of threat to the species included on the IUCN high biodiversity value outside protected Red List and national lists, since the areas company’s operations are not performed in the habitats of these species. See Number of IUCN Red List species and indicator EN13. QUALITY & national conservation list species, with ENVIRONMENT EN15 Additional habitats in areas affected by operations, by Similarly, Iberia’s activities do not affect the level of extinction risk, indicating the water resources and related habitats. In degree to which the species is threatened addition, the company’s effluent is way Identity, size, protected status and below the limits established in current biodiversity value of water bodies and legislation." EN25 Additional related habitats significantly affected by the reporting organisation’s discharges of water and runoff This indicator is not applicable to air transport activities. This notwithstanding, it is worth noting the resources saved Percentage of products sold and their through the issuing of electronic tickets, for EN27 Core packaging materials that are receaimd at both passenger and cargo services, and the the end of their useful life, by category ground operation waste management, which are described in the Environment chapter of this report. The international structure of the company Total number of incidents of violations performs exclusively commercial and HUMAN HR9 Additional involving rights of indigenous people and administrative duties at urban zones, so RESOURCES actions taken there are no material impacts in these aspects. Corporate Responsibility / Annexes 440
A.3. Contributions made to social causes and sponsorship arrangements
2009 / TOTAL CONTRIBUTIONS MADE BY IBERIA TO SOCIAL ENTITIES AND CAUSES: 1,617,919 €
Valoration in Entity Collaboration Euro kind (€) Remittance of humanitarian aid (118,120 kilos) 144,226
Mano a Mano Cooperation in its projects (4 tickets) 6,159 Medical assistance for foreign children in Spain 23,913
Carriage of goods (83,109 kilos) 84,713
Annual non-repayable aid 72,121
Christmas Campaign 2008 “bid for them” 36,041 APMIB Donation Internal Social Fund of Ground Staff 144,243
Company contribution by Flight Assistants 118,331
Cooperation in its projects (20 tickets) 12,684
Agencia Española de Cooperación Internacional Collaboration in all activities and projects 800,000 AECID
Fundación Europa Nostra Charity Dinner 1,950 Donation 600 CRUZ ROJA ESPAÑOLA Transfer to Brazil of a girl after being operated 14,315
Marcha Mundial por la Paz Tickets for journalists covering the event 9,296
Fundación Empresa y Sociedad Cooperation in its activities 4,263
Fundación Ilusiones Cooperation in its projects with sick children 30,000
Fundación "You First" Transport of 10 computers to Dakar 516
Centro Internacional de Toledo para la Paz Cooperation in its activities 50,000
Foro de Reputación Corporativa Cooperation in its activities 31,800
Fundación de Ayuda contra la Drogadicción Cooperation in its activities 30,500
Asociación Española contra el Cáncer Donation 600
Ruta de la sonrisa Approval of 70 kgs. excess baggage 150
Delegación española de la OTAN en la U.E Charity bazaar 1,498
TOTAL 407,999 1,209,920
Otras: Recaudación a bordo para Special Olympics: donación clientes 2.188
Organización Nacional de Trasplantes:
Transporte de 83 órganos para trasplante
2009 / TOTAL CONTRIBUTIONS MADE BY IBERIA TO ENVIRONMENTAL PROJECTS: 675 €
Valoration in Entity Collaboration Euro kind (€) Embajada de Cuba Transfer to Cuba of endangered reptile 545
Consejería de medio ambiente de Andalucía Transfer of the alligator tiznada from Seville to Tenerife 130
TOTAL 675
Acknowledgement
Iberia would like to thank all the customers, shareholders, suppliers, institutions and employees who selflessly cooperate with the socially responsible initiatives and projects run by the company every year. Corporate Responsibility / Annexes 441
Sponsorship Arrangements 2009
Total investment (Euro): 7,870,765
SOCIAL ENTITIES € EDUCATION € Agencia Española de Cooperación Internacional C.R.U.E Fundación You First Foundation Fundación Carolina Centro Internacional de Toledo para la Paz Premio Ingeniero Rafael de Ureña Cruz Roja Española Instituto de Empresa Fundación Ilusiones Universidad Rey Juan Carlos Fundación de Ayuda contra la Drogadicción Universidad de Alcalá de Henares Fundación Ulls del Mon Fundación Ecomar TOTAL 1,958,515 TOTAL 1,166,022
ART & CULTURE € SPORT € Asociación Bilbaína de Amigos de la Ópera CETURSA Sierra Nevada Pilgrim Pictures Media Pilates Day Asociación Cultural Aldivia XXII Trofeo de orientación "Martin Kronlund" Casa de América Vuelta al Mundo de Vela (Volvo Ocean Race) Art Fair TOTAL 3,007,165 Círculo de Bellas Artes Fundación Cristobal Gabarrón HEALTH € Fundación Gran Teatre del Liceu de Barcelona Centro Nacional de Investigaciones Oncológicas Carlos III Fundación Isacc Albéniz Barcelona Centro Médico Fundación Juan March Fundación Respira Fundación Museo Guggenheim de Bilbao TOTAL 105,000 Fundación Príncipe de Asturias Cortometraje "El milagro de la pupuna y los aviones" TOURISM € SEACEX Oficina de Turismo de Centroamérica I.E.S.E. Asociación EXCELTUR Instituto Cervantes TOTAL 49,585 Instituto Valenciano de Arte Moderno
Egeda-Premios José María Forqué MEDIA € Fundación First Team Asociación Prensa de Segovia Fundación Carlos de Amberes Federación Gremios Editores de España José Manuel Ciria Onda Cero - Premios "Protagonistas" Fest. Int. De Música Clásica de Villanueva de los Infantes Telemadrid - Prgrama "Madrileños por el mundo" Madrid Fusión - Jornadas Gastronómicas Asociación de Periodistas Europeos Asociación Cultural Romanza TOTAL 86,405 Organización de Estados Iberoamericanos
Museo del Prado OTHERS € Orfeón Donostiarra Asociación de Marcas Renombradas Españolas Semana Internacional de Cine de Valladolid Infinitconsulting OEPLY Fundación Ideas Fundación Francisco Godia Gate Gourmet Fundación Pablo Iglesias Embajada de Guatemala - Fiesta de Navidad TOTAL 944,146 Instituto de Consejeros-Administradores
Fundación Dña. María de las Mercedes SOCIOECONOMIC DEVELOPMENT € Fundación Empresa y Sociedad Asociación Plan Estratégico Metropolitano de Barcelona Foro de Reputación Corporativa Centro Iberoamericano de Desarrollo Estratégico Urbano (CIDEU) TOTAL 362,565 Club de Madrid Fundación Sistema Fundación Madrid Excelente Management Focus Fundación CIDOB Fundación Rayet Asociación Española de Accionistas Minoritarios de Empresas Cotizadas Asociación de Creadores de Moda de España Feria ágora sobre salud laboral Fundación EOI Fundación SISTEMA IESE/Instituto Estudios Superiores de Empresa Fundación Euroamérica Real Instituto Elcano de Estudios Internacionales y Estratégicos Fundación Iberoamericana para la gestión de la calidad (FUNDIBEQ) TOTAL 191,362 Corporate Responsibility / Annexes 442
A.4. Workforce and labor relations
By countries:
Country No. employees at 31-12-09 Collective Agreements Union Representation
GERMANY 60 ARGENTINA 68 AUSTRIA 4 BELGIUM 16 BRAZIL 109 CHILE 31 COLOMBIA 9 COSTA RICA 9 CUBA 15 DENMARK 7 SPAIN 20,432 USA 45 ECUADOR 24 EGYPT 9 FRANCE 53 GREECE 10 GUATEMALA 10 ECUATORIAL GUINEA 8 HOLLAND 15 IRELAND 3 ISRAEL 17 ITALY 54 MOROCCO 14 MEXICO 50 NIGERIA 1 PANAMA 8 PARAGUAY 2 PERU 23 POLAND 2 PORTUGAL 24 PUERTO RICO 7 UNITED KINGDOM 43 CZECH REPUBLIC 2 DOMINICAN REPUBLIC 21 RUMANIA 2 RUSSIA 7 SENEGAL 8 SOUTH FRICA 10 SWEDEN 4 SWITZERLAND 18 TURKEY 7 URUGUAY 5 VENEZUELA 27
TOTAL WORKFORCE 21,293 Corporate Responsibility / Annexes 443
By group, age and seniority:
Group No. of persons Average age Average seniority
Ground (Spain) 14,862 43.65 16.94 Cabin crew 3,910 41.71 16.47 Pilots 1,640 46.00 17.12 Local staff abroad 861 43.46 13.35 Spanish abroad 20 46.05 21.40
TOTAL 21,293 43.47 16.73
By Business Unit:
Area Ground Flight Total
CORPORATE 1,122 n.a. 1,122 AIR TRANSPORT 2,871 5,550 8,421 AIRPORTS 7,926 n.a. 7,926 MAINTENANCE 3,824 n.a. 3,824
TOTAL 15,743 5,550 21,293
By Type of Contract:
Type of contract
PERMANENT 18,164 PERMANENT PART-TIME 1,747 PERMANENT DISCONTINUOUS 7,926 TEMPORARY 2
TOTAL 21,293 Corporate Responsibility / Annexes 444
By Qualification and Gender:
WOMEN MEN TOTAL GROUP No. % No. % No. %
SENIOR MANAGERS 1 10.00% 9 90.00% 10 0.05% MANAGERS AND ENGINEERS 431 38.93% 676 61.07% 1,107 5.20% AIRCRAFT MAINTENANCE TECHNICIANS 32 1.09% 2,891 98.91% 2,923 13.73% GROUND EQUIPMENT MAINTENANCE TECHNICIANS 0.00% 9 100.00% 9 0.04% FACILITY MAINTENANCE TECHNICIANS 0.00% 18 100.00% 18 0.08% IT MAINTENANCE TECHNICIANS 26 21.67% 94 78.33% 120 0.56% DATA PROCESS TECHNICIANS 7 14.58% 41 85.42% 48 0.23% ADMINISTRATIVE 3,657 66.37% 1,853 33.63% 5,510 25.88% PVT 38 36.54% 66 63.46% 104 0.49% AUXILIARY SERVICES 455 9.04% 4,578 90.96% 5,033 23.64%
SUBTOTAL GROUND (a) 4,646 31.24% 10,226 68.76% 14,872 69.84%
LOCAL STAFF ABROAD 449 52.15% 412 47.85% 861 4.04%
SUBTOTAL GROUND (b) 449 52.15% 412 47.85% 861 4.04%
TOTAL GROUND (C) 5,096 32.37% 10,647 67.63% 15,743 73.94%
PILOTS 60 3.66% 1,580 96.34% 1,640 7.70% CABIN CREW 2,935 75.06% 975 24.94% 3,910 18.36%
SUBTOTAL FLIGHT (D) 2,995 53.96% 2,555 46.04% 5,550 26.06%
TOTAL (C + D) 8,091 38.00% 13,202 62.00% 21,293 100.00% Corporate Responsibility / Annexes 445
A.5. Assurance Certificate Producido por Grupo CGA
Depósito Legal: M-15910-2010