British Airways Plc Annual Report and Accounts for the year ended March 31, 2006 Registered in England and Wales No. 1777777 Registered Office: Waterside, PO Box 365, Harmondsworth UB7 0GB Certain statements included in this Report and Accounts may be forward-looking and may involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the forward-looking statements. Forward-looking statements include, without limitation, projections relating to results of operations and financial conditions and the Company's plans and objectives for future operations, including, without limitation, discussions of the Company’s business and financing plans, expected future revenues and expenditures and divestments. All forward-looking statements in this report are based upon information known to the Company on the date of this report. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. It is not reasonably possible to itemise all of the many factors and specific events that could cause the Company’s forward- looking statements to be incorrect or that could otherwise have a material adverse effect on the future operations or results of an airline operating in the global economy. British Airways Plc has disclosed on its website www.bashares.com significant ways in which its corporate governance practices differ from those mandated for US companies under NYSE listing standards. CONTENTS Key Results 2 Chairman’s Statement 3 Directors’ Report and Business Review 4 Board members 4 Corporate governance 5 Company information 9 Aircraft fleet 11 Organisational structure 19 Development and performance of the business 21 Critical accounting policies 24 Key performance indicators 26 Outlook 27 Principal risks and uncertainties 28 Resources and relationships 31 Receipts and returns to shareholders 37 Operating and financial statistics 43 Remuneration Report 45 Statement of Directors’ Responsibilities 55 Report of the auditors to the members of British Airways Plc 55 Group consolidated income statement 56 Balance sheets 57 Cash flow statements 58 Statements of changes in equity 59 Notes to the Accounts 60 Shareholder information 110 Glossary 111 British Airways 05/06 Annual Report 1 Key Results 2005-06 2004-05 Group results Revenue £m up 9.6% 8,515 7,772 Operating profit £m up 26.8% 705 556 Profit before tax £m up 20.9% 620 513 Attributable profit for the year £m up 19.6% 451 377 Net assets £m up 48.5% 2,074 1,397 Basic earnings per share p up 14.8% 40.4 35.2 Key financial statistics Airline operations yield p/RPK up 1.3% 6.10 6.02 Operating margin % up 1.1 points 8.3 7.2 Net debt/total capital ratio % down 23.5 points 44.2 67.7 Group operating statistics Passengers carried ‘000 down 0.2% 35,634 35,717 Revenue passenger kilometres m up 3.7% 111,859 107,892 Revenue tonne kilometres m up 2.4% 16,105 15,731 Available tonne kilometres m up 2.4% 23,106 22,565 Passenger load factor % up 0.8 points 75.6 74.8 2 British Airways 05/06 Annual Report future. We will be on our guard against any attempt to settle for a Chairman’s Statement less ambitious arrangement that fails to deliver the benefits we seek. This has been a year of transition and renewal during which the Over the next 12-18 months, the CAA and the Competition airline has made steady progress towards its key financial goals Commission will decide the level of airport charges that will and in developing new customer products to provide service that apply after 2008, when we are occupying Terminal 5. matters. We believe there is a settlement option which delivers much Willie Walsh took over as Chief Executive and quickly made his better value for Heathrow users than the current price cap, which mark, building on our core strategies – tackling unprofitable parts has allowed charges to rise at 6.5 per cent above inflation. of our business, re-setting the dial on controlling costs with a This should not be achieved by cutting back on necessary management restructure and preparing for the vital move to investment, but by setting a much more realistic cost of capital Terminal 5 – now less than 700 days away. and pressing the airport operator to deliver much greater cost The line up on the Board changed too with an all new executive efficiencies, in line with the efforts British Airways and other team who together with three new non-executives, will bring airlines have had to make. fresh ideas and thinking to our business. The bid frenzy around BAA suggests there is a lot of value to be In the unique world of aviation the International Air Transport unlocked in the BAA business. We expect the regulator to ensure Association’s narrowing of its red ink forecast for airline losses in that it is the airport users - ultimately the passengers – who see 2006, from $4.3 billion to $2.2 billion, has led to talk of cautious the benefits of cost efficiencies and lower financing costs, rather optimism emerging in the industry. than delivering a windfall to BAA shareholders. Our operating profit for the year, of £705 million and £620 Another key issue for us all is the environment. British Airways’ million pre-tax, is a good result and compares favourably with environmental progress is reported in detail on page 36. We our principal competitors. But soaring fuel costs – Brent crude continue to support the inclusion of aviation in emissions trading, reached an all time high of $72 a barrel in May - continue to and allowing the market - rather than regulators - to decide the stalk the industry and there is no sign this will change. right balance between cuts in emissions from aircraft and I am encouraged that we achieved an operating margin of 8.3 per reductions on the ground. cent, which triggered a well deserved bonus for our staff. However In recent months, airlines have been targeted as the largest we remain committed to achieving our ten per cent goal by 2008. contributors to environmental concerns. While it is crucial that the Another highlight is that our shorthaul business is back in the black whole industry faces up to its environmental responsibilities more for the first time in ten years but there is still much to be done. energetically, the issue must be seen in context. The contribution The other challenge is our pension deficit. The stark reality is of UK aviation to global emissions is around 0.1 per cent. that your Company has the biggest deficit of any company in the While this does not absolve us of our responsibility to the FTSE 100 relative to its size and it is growing, despite equities at environment, it clearly shows that we are not – as many a five year high. Not surprisingly, commentators have described commentators would like to suggest – the biggest polluters, and British Airways as a ‘pension fund with wings’. ignores the other side of the equation, the great benefit to We have shared our proposal for tackling the deficit in the New lifestyle, globalisation and gross domestic products contributed Airways Pension Scheme (NAPS) with our staff, trustees and by the sector. trade unions and once it is agreed we hope to implement it next Another vital issue is local air quality which was described in the year. It is an issue that must be tackled if we are to grow our Government’s White Paper in 2003 as the "most difficult issue" in business, invest in new aircraft and restore the dividend. relation to potential expansion of runway capacity at Heathrow. Investments that will come to fruition this year for our customers Air quality monitoring by the National Environmental Technology include the rollout of an upgraded in-flight entertainment system Centre, supported by British Airways, shows that levels of and our new Club World and First class offering which I am nitrogen dioxide around Heathrow are coming down to levels confident will set a new industry benchmark in the air. We are within the proposed new EU legal limits. This is encouraging now truly an Internet age airline with online systems and features evidence as the Government prepares to issue its own technical that make the travel experience simple and hassle free. More of analysis based on the Project for Sustainable Development of these will be introduced ahead of our move to Terminal 5. Heathrow. Providing superb customer service and products our customers want is at the heart of our business. The data also shows that it is London’s air quality that has a detrimental effect on Heathrow – not the other way round, as As you know, aviation is a highly regulated business – with many people think. governments controlling where we fly and when we fly our ability to grow and expand like other global industries is prevented. Our It remains for me to thank all our staff for their contribution to frustration at this is well documented. these results. We depend on all our people to put the customers first and are grateful for their commitment and dedication to We have been ardent supporters of the European Union’s own British Airways. Open Aviation Area and support the extension of that into a new aviation treaty with the United States. Such a deal could break the current mould of restrictive bilateral agreements, and set a template for the rest of the world to follow. Recent protectionist tendencies on both sides of the Atlantic however seem likely to delay any prospect of a good deal being reached in the near Martin Broughton, Chairman British Airways 05/06 Annual Report 3 Directors’ report and CHIEF EXECUTIVE Willie Walsh (44) business review Executive Board Member since May, 2005, becoming Chief Executive on October 1, 2005.