Independent Auditors' Report to the Members of British Airways
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British Airways Plc Annual Report and Accounts for the year ended March 31, 2007 Registered in England and Wales No. 1777777 Registered Office: Waterside, PO Box 365, Harmondsworth UB7 0GB Agent of the Company in the United States: Paul C. Jasinski 75-80 Astoria Boulevard Jackson Heights, NY 11370 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. KEY RESULTS Restated Group Results 2006-07 2005-06 Revenue £m up 3.4% 8,492 8,213 Operating profit £m down 13.3% 602 694 Profit before tax £m down 0.8% 611 616 Attributable profit for the year £m down 35.7% 290 451 Net assets £m up 16.2% 2,411 2,074 Basic earnings per share p down 36.9% 25.5 40.4 Key financial statistics Passenger yield p/RPK up 2.1% 6.44 6.31 Operating margin % down 1.4 points 7.1 8.5 Net debt/total capital ratio % down 15.1 points 29.1 44.2 Group operating statistics Passengers carried ‘000 up 2.0% 33,068 32,432 Revenue passenger kilometres m up 2.9% 112,851 109,713 Revenue tonne kilometres m up 1.3% 16,112 15,909 Available tonne kilometres m up 0.7% 22,882 22,719 Passenger load factor % flat 76.1 76.1 CONTENTS 35 Corporate Governance 37 Report of the Audit Committee 38 Report of the Nominations Committee 1 Key Results 39 Report of the Remuneration Committee 2 Chairman’s Statement 48 Report of the Safety Review Committee 4 Chief Executive’s Statement 50 Directors’ Disclosure Statement 6 Directors’ Report and Business Review 50 Statement of Directors’ Responsibilities 6 Overview of the Business 51 Report of the Auditors to the Members 14 Key Performance Indicators (KPIs) of British Airways Plc 16 Development and Performance of the Business 52 Group Consolidated Income Statement 20 Resources and Relationships 53 Balance Sheets 23 Corporate Responsibility Report 54 Cash flow Statements 27 Principal Risks and Uncertainties 55 Statements of Changes in Equity 28 Receipts and Returns to Shareholders 56 Notes to the Accounts 30 Treasury Policies and Objectives 101 Principal Investments 33 Operating and Financial Statistics 102 Shareholder Information 35 The Board of Directors 103 Glossary British Airways 06/07 Annual Report 1 Airbus aircraft for our shorthaul fleet. These are the first steps CHAIRMAN’S STATEMENT towards a single shorthaul fleet. Earlier in the year we ordered four Boeing 777s for delivery in We won the OAG Airline of the Year award in April. There is 2009 and we expect to make a major order soon for new nothing unusual about that you might say. Normally we accept replacement and growth longhaul aircraft to be delivered in the such accolades graciously and add them to the trophy cabinet. next decade. But on this occasion we were a little surprised. There has been much bid speculation around Iberia, our While the year got off to a very promising start, it was preferred partner in Europe for the last ten years. We are subsequently marked by a series of events and disruptions that considering how to use our ten per cent holding in the best caused frustration for our customers. We are all very aware of the interests of our shareholders. However, any consortium bid inconvenience caused by issues such as new government security would not involve further capital investment by us and we have measures, airport infrastructure failures and a threatened strike. ruled out an independent bid for the airline. So what does this award say about British Airways, or, more Public consultation on a third runway and mixed mode operation accurately the frequent flyers, who voted for us over the likes of at London Heathrow airport is scheduled for the autumn. We Singapore Airlines, Emirates and Lufthansa? believe the benefits from building the third runway at Heathrow can begin to flow through in 2015-2020, as the Government's It says that despite these issues, they think our customer service 2003 Policy White Paper intended. We expect the public is the best, and our products too. Equally important, it is an consultation will show conclusively that the tight limits set on the indication that they recognise our ability to manage through environmental effects of expansion can be met with confidence. difficult periods. The environment and aviation’s contribution to climate change Our full year results reflect the significant impact of the remains high on the public and political agenda. Our progress in disruptions. We reported an operating profit of £602 million this important area is detailed on page 23. (after absorbing a fuel cost increase of £350 million), down £92 million on last year, giving us an operating margin of 7.1 per cent We are absolutely committed to meeting our environmental costs and a pre-tax profit of £611 million, down £5 million on the in full. Our argument that carbon emissions trading is the most previous year. environmentally effective way of combating aviation's impact on climate change has now been accepted by the European Earnings per share were down 37 per cent to 25.5 pence, Commission, and airlines will be included in the EU's carbon partially reflecting a higher effective tax rate. We are not trading scheme from 2011. We wish it were sooner. recommending a dividend but anticipate reinstating the dividend next year when we will be seeking to achieve our ten per cent The Government’s announcement in December to double Air operating margin target. Passenger Duty (APD) and position it as a green tax was disingenuous. The APD rise is a simple tax grab that produces no Our revenue performance was good, up 3.4 per cent in financial direct environmental benefit. The revenue is used simply to year 2007, despite the threatened cabin crew strike after Christmas, support general public expenditure. We have suggested to the which was felt in the fourth quarter. Total costs were up 5.5 per Chancellor that APD could be reformed so that the proceeds are cent, driven mainly by fuel, up 22.1 per cent at £1.93 billion. Fuel spent on offsetting flight emissions. It is worth noting that British continues to be a major cost and we expect our fuel bill next year Airways was the only airline to absorb the backdated cost of APD to be just over £2 billion, some £100 million up on this year. Our to passengers, of some £11 million. cargo performance suffered due to operational and security related The results include two one-off items. Arcane accounting rules issues. We also flew one less dedicated freighter aircraft. created a pension credit of £396 million from the changes we Security remains a big issue for us, and our passengers. To be made to our pension scheme. This makes a mockery of the effective, security has to be credible. Government has insisted on traditional concept of true and fair accounting because in practice maintaining security requirements that are not. For example we merely reduced the unfunded pension deficit. We also made a insisting on only one piece of hand baggage is irritating to provision of £350 million against settlement of the competition passengers. This makes London an unattractive airport for transit investigations into anti-competitive activity on longhaul passengers in particular and has no credibility as a security passenger and cargo fuel surcharges. measure when it is not required in the US nor in any other The investigations by the US Department of Justice, the European European country. Commission, the UK Office of Fair Trading and others, into anti- Looking at one of the highlights of the year, I am particularly competitive activity on longhaul passenger and cargo fuel pleased that we tackled the £2.1 billion deficit in our New surcharges are continuing. We have a long-standing, clearly Airways Pension Scheme (NAPS). It was a very complex and defined and comprehensive competition compliance policy, which emotional issue that management, staff, trustees and trade unions requires all staff to comply with the law at all times. It has become resolved together. apparent that there have been breaches of this policy in relation to discussions about these surcharges with competitors. This We took other steps during the year to further strengthen our behaviour is both regrettable and totally unacceptable. business, laying the foundations for delivery of a ten per cent operating margin by March 2008. We disposed of the loss Under IAS 37 accounting rules the Company is required to make making regional airline business of BA Connect and made a provision for potential settlement of the competition progress at Gatwick, particularly on cost, which has given us the investigations.