Annual Report1999.Pdf

ANNUAL REPORT 1999

IBERIA L.A.E. AND IBERIA GROUP

ANNUAL REPORT 1999

I N D E X

IBERIA,LINEAS AEREAS DE ESPAÑA S.A. AND IBERIA GROUP

I B E R I A , L Í N E A S A É R E A S D E E S PA Ñ A , S. A. I B E R I A G R O U P

LETTER FROM THE CHAIRMAN ...... 6 LEGAL INFORMATION ...... 101

LEGAL INFORMATION ...... 9 CONSOLIDATED FINANCIAL STATEMENTS ...... 105

FINANCIAL STATEMENTS ...... 13 -CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998 ...... 106 -BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998 ...... 14 -CONSOLIDATED STATEMENTS OF INCOME FOR 1999 AND 1998 . . . . .108 -STATEMENTS OF INCOME FOR 1999 AND 1998 ...... 16 NOTES TO 1999 CONSOLIDATED FINANCIAL STATEMENTS ...... 111 NOTES TO 1999 FINANCIAL STATEMENTS ...... 19 -DESCRIPTION OF THE CONTROLLING COMPANY AND THE GROUP ...... 113 -COMPANY DESCRIPTION ...... 21 -DEPENDENT COMPANIES ...... 114 -BASIS OF PRESENTATION OF THE FINANCIAL STATEMENTS ...... 22 -ASSOCIATED COMPANIES ...... 116 -DISTRIBUTION OF INCOME ...... 22 -BASIS OF PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS .118 -VALUATION STANDARDS ...... 22 -DISTRIBUTION OF THE CONTROLLING COMPANY’S INCOME ...... 119 -INTANGIBLE ASSETS ...... 29 -VALUATION STANDARDS ...... 119 -PROPERTY, PLANT AND EQUIPMENT ...... 31 -INTANGIBLE ASSETS ...... 128 -LONG-TERM FINANCIAL INVESTMENTS ...... 39 -PROPERTY, PLANTAND EQUIPMENT ...... 129 -ACCOUNTS RECEIVABLE ...... 47 -LONG-TERMFINANCIAL INVESTMENTS ...... 138 -SHORT-TERM FINANCIAL INVESTMENTS ...... 48 -GOO D W I L LI NC O N S O L I D AT I O N AN DN E G AT I V E DI F F E R E N C E INC O N S O L I D AT I O N .142 -SHAREHOLDERS’ EQUITY ...... 49 -SHORT-TERM FINANCIAL INVESTMENTS ...... 143 -PROVISION FOR THIRD-PARTY LIABILITY ...... 50 -SHAREHOLDERS’ EQUITY ...... 144 -PAYABLE TO CREDITENTITIES ...... 51 -MINORITY INTERESTS ...... 149 -FUTURES TRANSACTIONS ...... 52 -PROVISIONS FOR CONTINGENCIES AND EXPENSES ...... 150 -BALANCES AND TRANSACTIONS WITH GROUP AND ASSOCIATED COMPANIES . . 53 -PAYABLE TO CREDIT ENTITIES ...... 151 -TAX MATTERS ...... 55 -FUTURES TRANSACTIONS ...... 152 -REVENUES AND EXPENSES ...... 59 -TAX MATTERS ...... 153 -”YEAR 2000 ISSUE” ...... 63 -REVENUES AND EXPENSES ...... 156 -DIRECTORS’ COMPENSATION AND OTHER BENEFITS ...... 63 -CONTRIBUTION OF THE GROUP AND ASSOCIATED COMPANIES -1999 AND 1998 STATEMENTSOF CHANGES IN FINANCIAL POSITION . . . . 64 TO CONSOLIDATED INCOME ...... 160

MANAGEMENT REPORT ...... 67 -”YEAR 2000 ISSUE” ...... 161

-1999 HIGHLIGHTS ...... 69 -DIRECTORS’ COMPENSATION AND OTHER BENEFITS ...... 161

-GROUP PRODUCTION (BY NETWORK) ...... 74 1999 CONSOLIDATED MANAGEMENT REPORT ...... 163

-SUMMARY BY MANAGEMENT AREA OF IBERIA L.A.E...... 78 -1999 HIGHLIGHTS ...... 165

-RESUORCES ...... 86 -GROUP PRODUCTION (BY NETWORK) ...... 170

-IBERIA OPERATING REVENUES ...... 88 -SUMMARY BY SUBSIDIARY ...... 177

GOVERNING BODIES ...... 95 -RESOURCES ...... 182

AGENDA ...... 99 -OPERATING INCOME AT THE AIR TRANSPORT GROUP ...... 186 THE END OF A STAGE, THE START OF A NEW ERA

BY XABIER DE IRALA, PRESIDENT IBERIA AIRLINES Several chapters of Iberia’s recent history were closed in 1999. In the first place, the year witnessed the successful completion of the strategic plan which informed the Company’s decisions and operations for the past three years, and secondly, it brought the first steps towards its move into the private sector, where it will remain. Many changes are still to come, but many have already occurred, and in fact the company has been managed as a private company for three years, though the Spanish State has continued as majority shareholder.

The year was one of intense activity, which was difficult but encouraging —despite the problems occasioned by European air traffic congestion, labour conflicts with the Spanish airline pilot’s association SEPLA, and strong competition in all our markets, the Iberia’s group’s profits before tax of 31,082 million pesetas were the second-largest in our history. The year also brought important advances in such fundamental areas as the renewal of Iberia’s fleet of aircraft, our entry into the great oneworld alliance, the addition of new routes and of new services in the Latin American market, the market launch of our tour operator unit Viva Tours, the absorption of Aviaco by Iberia, the signing of commercial cooperation agreements with American Airlines and British Airways, and the moves toward privatisation mentioned above.

All the objectives set forth in the 1997-1999 strategic plan were achieved, including the Company’s preparations for privatisation, the attainment of substantial margins and profits, the increase of Iberia’s world-wide presence, and the beginning of the transformation of our corporate culture to focus more on attracting and keeping both customers and private investors. In addition, new collective bargaining agreements were signed, which will remain in force through 2001. Iberia’s business results far outstripped initial projections in terms of gross revenues, earnings, and margins. Our aggregate revenues in the past three years amounted to 1.9 trillion pesetas (6.5% above initial forecasts) and to more than 117,000 million pesetas in profits before tax (62% larger than our first estimates for the three-year period).

Despite the problems I referred to above, in 1999 Iberia managed to reduce unit costs by 4%, and to earn a profit before tax of 31,082 million pesetas, the second largest in the company’s history. This was all the more satisfactory if we consider the European congestion crisis (aggravated in Spain by the shortage of traffic controllers), the SEPLA strike, the economic crisis affecting some of our markets, the steep rise in aviation fuel costs, and the downward pressure on seat prices exerted by the strong competition in the airline business.

A series of major decisions regarding the Company’s future were taken in the course of 1999. In February, we signed a commercial agreement with British Airways which provides both for code-sharing and for cooperation in other areas such as frequent flyer programmes, as well as freight and ground services. The previous year a similar agreement had been signed with American Airlines, and it substantially increased Iberia’s access to the United States market, the world’s largest. At the same Iberia entered into strategic agreements with both these airlines, whereby they agreed to take up 10% of our equity, thus beginning the privatisation process. The process continued throughout the year with the incorporation as institutional shareholders of Caja Madrid, BBV, Logista, El Corte Inglés and Ahorro Corporación, which together hold a 30% stake. Privatisation is now to be completed with the listing of all remaining shares on the stock market.

Also in February, Iberia announced it was joining the world’s largest airline alliance, oneworld, which was made effective in September, and gives our passengers privileged access to 650 destinations around the world, 300 VIP lounges, and the assistance of 250,000 airline employees. They also earn points in the Iberia Plus frequent flyer programme when travelling with any of the oneworld partners. The year under review also saw delivery of the first 21 aircraft ordered under the 1998 purchase agreements with Airbus and Boeing, as part of Iberia’s aircraft fleet renewal programme. A total of 103 aircraft are to be delivered in a five-year period, at a total cost of 600,000 million pesetas. The 21 aircraft joining our fleet in 199 included twelve Airbus 320s, one Airbus 340, and eight Boeing 757s, and this allowed us to retire 10 older aircraft from service. In 2000 we expect to receive 26 more aircraft and to retire 37. This renovation and rationalisation of our fleet is necessary for commercial, environmental and economic reasons. The new aircraft will allow better utilisation of flight crews, while consuming less fuel, costing less to maintain, making less noise, and giving our customers a better product, although in the short term we will have to dedicate much larger sums to the training of pilots and crews.

Our completely redesigned Intercontinental Business Class compartments and services were also launched in 1999, on Iberia’s routes to the Americas and South Africa. Attesting to its success was the subsequent increase by more than 30% in the number of Business Class passengers. This year we are at work on upgrading our other seating classes, and we will added fully-reclining sleeper seats for first-class passengers.

These improvements to our passenger services reflect our commitment to maintaining and increasing our leadership position in the Latin American market. In this respect, we have added new flights, with the ultimate objective of operating daily flights to all major South American cities. We are also increasing the number of direct flights, and adding new destinations. Our growth in the markets of the Americas, from New York to Santiago, Chile, reached 24% in 1999. We began services to Guayaquil, Ecuador, and now fly direct from Madrid to Quito, and from Barcelona to New York.

The three-year strategic plan also called for the absorption of our subsidiary carriers into the Iberia network, for reasons of efficiency and economy. Our Aviaco unit, which has shared Iberia codes for two years, was fully merged with Iberia in September, following complex and protracted negotiations with the unions over the incorporation of Aviaco crews. However, the Viva Air charter flight unit was closed in April when it proved impossible to reach an agreement with SEPLA over its incorporation into Iberia as a scheduled carrier. Viva Air had been the sole Iberia unit to operate at a loss, accruing a deficit of some 7,000 million pesetas.

In sum, 1999 was a highly satisfactory year in terms both of the strategic decisions taken or implemented, and of the results achieved, even though the traffic congestion and labour problems mentioned earlier did have a negative impact on our services to customers during part of the year. The worst period was the spring, which was complicated further by the war in Kosovo, the restructuring of European air routes, and the SEPLA pilots’ strike. From Iberia, and from the international organisations to which we belong, we shall continue to press European authorities to devise policies that can resolve the problem of the organisation of European air space, which is now badly fragmented. This problem undermines our competitiveness and the quality of service we can offer our customers.

One stage is over, but we are now hard at work on the next. The strategic plan for 2000-2003 calls for continuing growth, new investments in improvements to our services, and new measures to reduce overall costs and to boost productivity. We need to reduce the average age of our staff, and to exploit our assets more efficiently, most particularly our aircraft fleet. We must continue to incorporate new technologies, and to perfect our new organisational structure, which allows each business line to be managed independently. The primary and ultimate aim of all these improvements is to create value for our shareholders.

Xabier de Irala

ANNUAL REPORT 1999

LEGAL INFORMA T I O N

IBERIA, LINEAS AEREAS DE ESPAÑA, S.A.

ANNUAL REPORT 1999

1999 FINANCIAL STA T E M E N T S AND MANAGEMENT REPORT BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998 S T ATEMENTS OF INCOME FOR 1999 AND 1998

T R A N S L AT I O N O F A R E P O R T A N D F I N A N C I A L S T A T E M E N T S O R I G I N A L L Y I S S U E D I N S P A N I S H A N D P R E PA R E D I N A C C O R D A N C E W I T H G E N E R A L L Y A C C E P T E D A C C O U N T I N G P R I N C I P L E S I N S P A I N ( S E E N O T E 2 0 ) . I N T H E E V E N T O F A D I S C R E P A N C Y , T H E S P A N I S H - L A N G U A G E V E R S I O N P R E V A I L S .

IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998

ASSETS M I L L I O N S O F P E S E TA S

1999 1998

FIXED AND OTHER NONCURRENT ASSETS: STA R T-U P E X P E N S E S ( NOT E 4 -a) 2 8 5 4 6 5 IN TA N G I B L E A S S E T S ( NOT E 5 ) 5 8 , 2 9 0 2 5 , 7 1 2 PR O P E R T Y, P L A N T A N D E Q U I P M E N T ( NOT E 6 ) 2 8 2 , 0 7 0 2 0 2 , 1 9 4 AI R C R A F T: CO S T 4 0 7 , 5 6 2 3 3 8 , 8 0 9 AC C U M U L AT E D D E P R E C I AT IO N A N D P R O V IS IO N S ( 1 8 9 , 0 9 3 ) ( 1 9 1 , 7 2 0 ) 2 1 8 , 4 6 9 1 4 7 , 0 8 9 OT H E R TA N G I B L E F I X E D A S S E TS: CO S T 1 5 8 , 9 0 1 1 5 7 , 1 3 5 AC C U M U L AT E D D E P R E C I AT IO N A N D P R O V IS IO N S ( 9 5 , 3 0 0 ) ( 1 0 2 , 0 3 0 ) 6 3 , 6 0 1 5 5 , 1 0 5 LO N G-T E R M F I N A N C I A L I N V E S T M E N T S 1 2 7 , 9 4 3 1 3 6 , 0 7 4 HO L D I N G S I N GR O U P A N D A S S O C I AT E D C O M PA N I E S ( NOT E 7 ) 9 6 , 2 2 6 9 3 , 9 4 3 LOA N S TO GR O U P A N D A S S O C I AT E D C O M PA N I E S ( NOT E 7 ) 3 3 , 6 2 5 2 7 , 5 5 3 LO N G-T E R M R E C E I VA B L E S F R O M GR O U P C O M PA N I E S ( NOT E 1 4 ) 3 6 , 0 6 6 5 0 , 1 9 2 IN V E S T M E N T S E C U R I T I E S A N D OT H E R L OA N S ( NOT E 7 ) 1 1 , 4 4 0 4 , 6 5 9 PR O V IS IO N S ( NOT E 7 ) ( 4 9 , 4 1 4 ) ( 4 0 , 2 7 3 ) TOTA L F I X E D A N D OT H E R N O N C U R R E N T A S S E T S 4 6 8 , 5 8 8 3 6 4 , 4 4 5

DEFERRED CHARGES (N OTE 5) 1 6 , 1 6 3 5 , 5 7 1

CURRENT ASSETS: IN V E N TO R I E S 1 2 , 0 0 5 8 , 7 4 4 RE C E I VA B L E F R O M GR O U P C O M PA N I E S ( NOT E 1 4 ) 1 2 , 3 5 3 1 4 , 3 8 5 AC C O U N T S R E C E I VA B L E ( NOT E 8 ) 7 1 , 0 6 4 5 5 , 4 1 8 SH O R T-T E R M F I N A N C I A L I N V E S T M E N T S ( NOT E 9 ) 8 7 , 3 9 3 7 6 , 5 5 7 CA S H 1 , 1 7 5 1 , 9 7 7 AC C R UA L AC C O U N T S 4 , 3 9 5 4 , 9 6 4 TOTA L C U R R E N T A S S E T S 1 8 8 , 3 8 5 1 6 2 , 0 4 5 TOTAL ASSETS 6 7 3 , 1 3 6 5 3 2 , 0 6 1

14 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998

TRANSLATIONOF A REPORT ANDFINANCIAL SHAREHOLDERS’ EQUITY AND LIABILITIES M I L L I O N S O F P E S E TA S STATEMENTSORIGINALLY ISSUEDIN SPANISH ANDPREPAREDINACCORDANCEWITHGENERALL Y ACCEPTEDACCOUNTINGPRINCIPLESIN SPAIN 1999 1998 (SEE NOTE 20). IN THEEVENTOF A DISCREPANCY, THE SPANISH-LANGUAGEVERSIONPREVAILS . SHAREHOLDERS’ EQUITY ( NOT E 1 0 ) : CA P I TA L S TO C K 1 1 8 , 4 7 8 1 1 4 , 7 2 7 AD D I T I O N A L PA I D-I N C A P I TA L 1 6 , 0 4 9 - LE GA L R E S E R V E 5 , 1 2 9 - VO L U N TA R Y R E S E R V E S 6 2 3 - DIFFERENCES DUE TO THE ADJUSTMENT OF CAPITAL STOCK TO EUROS 2 0 0 - PR I O R Y E A R S’ L O S S E S ( 5 , 5 7 0 ) ( 1 5 , 8 0 9 ) IN C O M E F O R T H E Y E A R 1 6 , 0 5 2 5 1 , 2 9 1 TOTA L S H A R E H O L D E R S’ E Q U I T Y 1 5 0 , 9 6 1 1 5 0 , 2 0 9

DEFERRED REVENUES 2 , 5 0 3 1 , 1 4 7

P R OVISIONS FOR CONTINGENCIES AND EXPENSES: PR OV I S I O N S F O R P E N S I O N S (NOTE 4-I) 1 4 , 9 7 4 1 5 , 1 1 7 PR OV I S I O N S F O R O B L I GAT I O N S TO E M P L OY E E S ( NOT E 4 -K) 5 0 , 5 4 9 4 5 , 1 5 6 PR OV I S I O N F O R M A J O R R E PA I R S 1 9 , 1 1 5 1 5 , 7 4 0 PR OV I S I O N F O R T H I R D-PA R T Y L I A B I L I T Y ( NOT E 1 1 ) 5 6 , 3 5 6 6 3 , 9 7 9 TOTA L P R OV I S I O N S F O R C O N T I N G E N C I E S A N D E X P E N S E S 1 4 0 , 9 9 4 139,992

LONG-TERM DEBT: PAYA B L E TO C R E D I T E N T I T I E S ( NOT E 1 2 ) 8 9 , 7 9 4 4 8 , 3 2 2 PAYA B L E TO GR O U P A N D A S S O C I AT E D C O M PA N I E S ( NOT E 1 4 ) 4 , 9 7 0 4 , 8 5 1 UN C A L L E D C A P I TA L PAY M E N T S PAYA B L E 2 2 9 9 OT H E R AC C O U N T S PAYA B L E 4 0 4 TOTA L L O N G-T E R M D E BT 9 4 , 8 2 6 5 3 , 2 7 6

CURRENT LIABILITIES: PAYA B L E TO C R E D I T E N T I T I E S ( NOT E 1 2 ) 5 6 , 9 8 2 3 5 , 9 1 0 PAYA B L E TO GR O U P A N D A S S O C I AT E D C O M PA N I E S ( NOT E 1 4 ) 7 7 , 4 0 9 1 7 , 6 1 7 TR A D E AC C O U N T S PAYA B L E 1 1 1 , 4 5 7 1 0 0 , 4 5 6 CUS TO M E R A D VA N C E S 3 0 , 4 5 9 2 7 , 5 4 7 PAYA B L E S F O R P U R C H A S E S A N D S E R V IC E S 8 0 , 9 9 8 7 2 , 9 0 9 CO M P E N SAT I O N PAYA B L E 1 8 , 7 0 4 1 6 , 2 3 5 OT H E R N O N T R A D E PAYA B L E S (NOTE 15) 1 9 , 2 2 0 1 7 , 1 9 3 AC C R UA L AC C O U N T S 8 0 2 6 TOTA L C U R R E N T L I A B I L I T I E S 2 8 3 , 8 5 2 1 8 7 , 4 3 7 The accompanying Notes 1 to 20 TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 6 7 3 , 1 3 6 5 3 2 , 0 6 1 are an integral part of the balance sheet as of December 31, 1999.

15 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 S T ATEMENTS OF INCOME FOR 1999 Y 1998

DEBIT M I L L I O N S O F P E S E TA S

1999 1998

E X P E N S E S : PU R C H A S E S ( NOT E 1 6 ) 8 6 , 1 8 6 7 4 , 1 8 3 PE R S O N N E L E X P E N S E S ( NOT E 1 6 ) 1 8 7 , 1 7 0 1 6 6 , 1 6 8 PE R IO D D E P R E C I AT IO N A N D A MO R T I Z AT IO N 1 9 , 8 9 5 1 9 , 1 3 7 VA R I AT IO N I N O P E R AT I N G P R O V IS IO N S 6 0 2 2 , 0 2 3 OT H E R O P E R AT I N G E X P E N S E S ( NOT E 1 6 ) 3 2 4 , 6 3 8 3 2 2 , 8 5 1 6 1 8 , 4 9 1 5 8 4 , 3 6 2 OP E R AT I N G I N C O M E 5 , 4 7 7 4 7 , 9 7 9

FI N A N C I A L A N D S I M I L A R E X P E N S E S 8 , 2 5 4 7 , 6 6 3 EXC H A N G E L O S S E S 1 5 , 8 7 0 8 , 5 2 9 2 4 , 1 2 4 1 6 , 1 9 2

FI N A N C I A L I N C O M E 1 8 , 6 4 4 - IN C O M E F R O M O R D I N A R Y AC T I V I T I E S 2 4 , 1 2 1 4 4 , 3 0 4 VA R I AT IO N I N F I X E D A S S E T P R O V IS IO N S (NOTE 7) 9 , 1 4 3 ( 3 8 2 ) LO S S E S O N F I X E D A S S E TS 5 8 4 9 5 3 EX T R AO R D I N A R Y E X P E N S E S ( NOT E S 7 a nd 1 6 ) 2 4 , 4 4 6 1 3 , 0 9 2 PR IO R Y E A R S’ E X P E N S E S A N D L O S S E S 1 , 0 0 0 3 0 5 3 5 , 1 7 3 1 3 , 9 6 8

EX T R AO R D I N A R Y I N C O M E - 1 8 , 4 9 7

IN C O M E B E F O R E TA X E S 1 6 , 8 5 9 6 2 , 8 0 1 CO R P O R AT E I N C O M E TA X ( NOT E 1 5 ) 8 0 7 1 1 , 5 1 0 IN C O M E F O R T H E Y E A R 1 6 , 0 5 2 5 1 , 2 9 1

16 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 S T ATEMENTS OF INCOME FOR 1999 Y 1998

TRANSLATIONOF A REPORT ANDFINANCIAL CREDIT M I L L I O N S O F P E S E TA S STATEMENTSORIGINALLY ISSUEDIN SPANISH ANDPREPAREDINACCORDANCEWITHGENERALL Y ACCEPTEDACCOUNTINGPRINCIPLESIN SPAIN 1999 1998 (SEE NOTE 20). IN THEEVENTOF A DISCREPANCY, THE SPANISH-LANGUAGEVERSIONPREVAILS . R E V E N U E S : NE T R E V E N U E S ( NOT E 1 6 ) 5 9 6 , 2 7 2 6 0 6 , 9 5 3 OT H E R O P E R AT I N G R E V E N U E S ( NOT E 1 6 ) 2 7 , 6 9 6 2 5 , 3 8 8

6 2 3 , 9 6 8 6 3 2 , 3 4 1

RE V E N U E S F R O M S H A R E HO L D I N G S ( NOT E 7 ) 1 0 , 9 0 4 3 1 2 RE V E N U E S F R O M OT H E R M A R K E TA B L E S E C U R I T I E S ( NOT E 7 ) 9 , 3 9 7 - OT H E R I N T E R E S T A N D S I M I L A R R E V E N U E S 4 , 3 3 5 5 , 9 1 0 EXC H A N G E GA I N S 1 8 , 1 3 2 6 , 2 9 5 4 2 , 7 6 8 1 2 , 5 1 7

FI N A N C I A L L O S S - 3 , 6 7 5

GA I N S O N F I X E D A S S E T D IS P O SA L S 5 4 3 7 , 9 7 4 EX T R AO R D I N A R Y R E V E N U E S ( NOT E 7 A N D 1 6 ) 1 4 , 6 0 8 1 0 , 9 4 5 PR IO R Y E A R S’ R E V E N U E S A N D I N C O M E ( NOT E 1 6 ) 1 2 , 7 6 0 1 3 , 5 4 6 2 7 , 9 1 1 3 2 , 4 6 5

EX T R AO R D I N A R Y L O S S 7 , 2 6 2 -

The accompanying Notes 1 to 20 are an integral part of the 1999 statement of income.

ANNUAL REPORT 1999

NOTES TO 1999 FINANCIAL STA T E M E N T S

T R A N S L AT I O N O F A R E P O R T A N D F I N A N C I A L S T A T E M E N T S O R I G I N A L L Y I S S U E D I N S P A N I S H A N D P R E PA R E D I N A C C O R D A N C E W I T H G E N E R A L L Y A C C E P T E D A C C O U N T I N G P R I N C I P L E S I N S P A I N ( S E E N O T E 2 0 ) . I N T H E E V E N T O F A D I S C R E PA N C Y , T H E S P A N I S H - L A N G U A G E V E R S I O N P R E V A I L S .

IBERIA, LINEAS AEREAS DE ESPAÑA, S.A.

IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

- 1 - COMPANY DESCRIPTION

IBERIA, Líneas Aéreas de España, S.A. engages in the air transport of passengers and cargo TRANSLATIONOF A REPORT ANDFINANCIAL STATEMENTSORIGINALLY ISSUEDIN SPANISH and also carries on other activities related to its core business. ANDPREPAREDINACCORDANCEWITHGENERALL Y ACCEPTEDACCOUNTINGPRINCIPLESIN SPAIN As a carrier of passengers and cargo, the Company operates through a large network serving (SEE NOTE 20). IN THEEVENTOF A DISCREPANCY, three major markets: Spain, Europe and the Americas. As regards international traffic, in countries THE SPANISH-LANGUAGEVERSIONPREVAILS . with which bilateral agreements have been entered into designating a single company as the operator, IBERIA, Líneas Aéreas de España, S.A. is the operator designated by the Spanish party.

As part of the activities related to the core business, mention should be made of the Company’s activities as a handling agent, its maintenance activity and the special positioning of IBERIA, Líneas Aéreas de España, S.A. in distribution systems.

As regards the handling activity, it should be noted that in 1992, after a public call for tenders, Ente Público de Aeropuertos Españoles y Navegación Aérea (AENA) -the Spanish public airports and aviation agency- awarded the Company a contract for the provision of handling services as the first operator in Spain from April 1, 1993, to April 1, 2000.

The Company performs a significant portion of its own maintenance work and provides technical assistance to various companies, mainly through its maintenance center in Barajas.

As regards the distribution system, IBERIA, Líneas Aéreas de España, S.A. is a partner of the Amadeus Group, which owns the Amadeus central booking system, on an equal footing with Lufthansa and Air France. This investment enables IBERIA, Líneas Aéreas de España, S.A. to be present in an industry with significant economic and growth potential, characterized by its significant technological content.

In 1999 the Company completed the implementation of the 1997-1999 Master Plan, the purpose of which was to consolidate IBERIA, Líneas Aéreas de España, S.A. as a global air transport operator. The main actions taken under this Master Plan were as follows: 1- Optimization of the organizational structure for separate management systems for each business: Airports, Materials, Systems and Cargo. 2- Strengthening of the “group” concept by consolidating the operating management system, performed through various operators, which is completely separate from the global commercial management activities carried out by a single Commercial Department. 3- The forging of commercial alliances with American Airlines, Inc. and British Airways, and the signature of an agreement for the acquisition of a 10% holding in the Company. In 1999 the Company became a fully-fledged member of the oneworld “megacarrier”, one of the two largest air transport groups in the world, which is led by the two aforementioned companies. This will facilitate globalization of the air transport business. 4- In December 1999 an agreement was entered into by Sociedad Estatal de Participaciones Industriales (SEPI) and the new shareholders of IBERIA, Líneas Aéreas de España, S.A. whereby the latter will acquire 40% of the capital stock of the Company.

21 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

5- In September 1999 the employees of Aviación y Comercio, S.A. (AVIACO) joined the labor force of the Company and in December 1999 the Company acquired all AVIACO’s aircraft. Also, it is planned to merge Aviación y Comercio, S.A. into the Company in 2000.

- 2 - BASIS OF PRESENTATION OF THE FINANCIAL STATEMENTS The 1999 financial statements, which were prepared from the Company’s accounting records adjusted for the effects of the revaluation made pursuant to Royal Decree-Law 7/1999, are presented in accordance with the Spanish National Chart of Accounts and, accordingly, they give a true and fair view of the Company’s net worth, financial position, results of operations and funds obtained and applied in 1999. These financial statements, which were prepared by the Company’s directors, will be submitted for approval by the Shareholders’ Meeting, and it is considered that they will be approved without any changes.

- 3 - DISTRIBUTION OF INCOME The Company’s directors propose the following distribution of 1999 income:

DISTRIBUTION OF INCOME MILLIONS OF PESETAS

OF F S E T O F P R IO R Y E A R S’ L O S S E S 5 , 5 7 0 TO L E GA L R E S E R V E 1 , 6 0 5 TO V O L U N TA R Y R E S E R V E S 8 5 1 DI V I D E N D S 8,026 IN C O M E F O R T H E Y E A R 1 6 , 0 5 2

- 4 - VALUATION STANDARDS The main valuation methods applied by the Company in preparing its financial statements for 1999, in accordance with the Spanish National Chart of Accounts, were as follows:

A) START-UP EXPENSES These expenses consist basically of public deed execution and registration expenses relating to capital increases, and are amortized at an annual rate of 20%.

Ptas. 180 million of amortization of start-up expenses were charged to the 1999 statement of income.

22 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

B) INTANGIBLE ASSETS Leased assets are rec o r ded as intangible assets at the cost of the related item, excluding in t e r est costs, and are amortized by the same methods as those used to depreciate similar items of prop e rt y , plant and equipment. The total debt for lease payments plus the amount of the purch a s e option is rec o r ded as a liability. The diffe r ence between the two amounts, which rep r esents the in t e r est expenses on the transaction, is rec o r ded under the “Deferred Expenses” caption in the accompanying balance sheet and is allocated to income each year by the interest method.

In prior years the Company modified the net book value of certain of its leased aircraft pursuant to a Ministry of Economy and Finance Order (see Note 4-f).

Since no aircraft were leased in currencies other than the peseta or the euro in 1999 or in any of the four preceding years, no modification pursuant to this Order was made to the net book value of any aircraft in 1999.

Computer software is recorded at cost and is being amortized on a straight-line basis over an estimated useful life of five years.

Ptas. 2,491 million of amortization of intangible assets were charged to the 1999 statement of income.

C) PROPERTY, PLANT AND EQUIPMENT The valuation methods applied by the Company are as follows:

1. AIRCRAFT: Ai r craft are carried at cost revalued pursuant to the applicable enabling legislation, including Royal Decree-Law 7/1996, except for certain aircraft, the value of which was modified in prior years and in 1999 pursuant to the provisions of a Ministry of Economy and Finance Order (see Note 4-f).

2. OTHER TANGIBLE FIXED ASSETS: The tangible fixed assets recorded under the “Other Tangible Fixed Assets” caption in the accompanying balance sheets are carried at cost revalued pursuant to the applicable enabling legislation, including Royal Decree-Law 7/1996.

3. REPAIRS, UPKEEP AND MAINTENANCE: The Company re c o rds a provision for the periodic major repairs of the fuselages of its B-747, B-757, B-767, DC-10, MD-87, MD-88, A-300, A-320, A-321 and A-340 aircraft based on the total estimated cost to be incurred, and allocates this cost to income on a straight-line basis during the period elapsing between two successive major repairs. The balance of this provision is reflected under the “Provision for Major Repairs” caption in the accompanying balance sheet as of December 31, 1999.

23 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

The costs of minor repairs to the aforementioned types of aircraft and of all repairs to the B-727 and DC-9 aircraft are expensed currently, since the annual expenses tend to be uniform.

Upkeep and maintenance expenses are expensed currently.

D) DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT The Company depreciates its property, plant and equipment by the straight-line method at annual rates based on the years of estimated useful life.

The methods applied to calculate the depreciation of the main items of property, plant and equipment are as follows:

1. AIRCRAFT: The depreciable cost of the aircraft is equal to their book value less the estimated residual value at the end of their useful lives. The residual value ranges from 10% to 20%, depending on the aircraft.

2. AIRCRAFT SPARE PARTS: Spare parts for aircraft maintenance are depreciated, depending on the type of part, as follows: a) Rotatable parts These parts are depreciated over 18 years from the date of purchase, assuming a residual value of between 10% and 20%, depending on the type of aircraft. b) Repairable parts These are depreciated in a period ranging from eight to ten years, depending on the aircraft, from the date of purchase, assuming a residual value of 10% in all cases. The Company also records provisions for diminution in value of spare parts due to obsolescence.

3. YEARS OF ESTIMATED USEFUL LIFE: The years of estimated useful life of property, plant and equipment items are as follows:

YEARS OF ESTIMATED USEFUL LIFE YEARS

A I R C R A F T ( a ) 3, 9 AND 18 B U I L D I N G S A N D O T H E R S T R U C T U R E S 20 - 50 M A C H I N E R Y, I N S TA L L AT IO N S A N D T O O L S 10 – 16 T R A N S P O R T E Q U I P M E N T 7 – 10 F U R N I T U R E A N D F I X T U R E S 10 (a) The estimated useful life of the aircraft is normally 18 years. C O M P U T E R H A R D WA R E 5 – 7 However, in 1999 the Company acquired aircraft from Aviación S P A R E P A R T S 8 – 18 y Comercio, S.A., the estimated useful life of which is considered F L IG H T S I M U L AT O R S 10 – 14 to be their residual useful life.

24 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

The buildings and facilities on land owned by the Spanish State, mostly at Spanish airports, with an aggregate net book value of Ptas. 3,828 million as of December 31, 1999, are depreciated over the respective concession periods.

Depreciation is taken on the net amount of property, plant and equipment revaluations from the date they are recorded, using the same useful life periods as for the cost values.

The detail of depreciation of and provisions for property, plant and equipment charged to the statement of income for 1999 is as follows:

1999 MILLIONS OF PESETAS

A I R C R A F T 8 , 1 7 6 O T H E R T A N G I B L E F I X E D A S S E T S 9 , 0 7 3 1 7 , 2 4 9

E) SHAREHOLDINGS AND OTHER FINANCIAL INVESTMENTS

1. HOLDINGS IN GROUP AND ASSOCIATED COMPANIES The Company carries its investments in other companies at cost, net, where appropriate, of the required provisions for diminution in value if cost exceeds fair market value at year-end, which in the case of Vuelos Internacionales de vacaciones, S.A. (VIVA), the Amadeus Group, Touroperador Viva Tours, S.A. and the companies which own the A-340 aircraft, was based on their provisional financial statements as of December 31, 1999.

The effects of applying consolidation criteria to the Company’s 1999 financial statements was to increase assets by Ptas. 13,728 million, income by Ptas. 9,414 million and reserves by Ptas. 8,377 million.

2. GOVERNMENT DEBT SECURITIES Investments in government debt securities are carried at cost. The interest on these securities is credited to income when earned and is charged through maturity to the “Short-Term Financial Investments” caption.

3. TIME DEPOSITS Time deposits are recorded at the amount delivered. The interest on these deposits is credited to income when earned and is charged to the “Short-Term Financial Investments” caption.

F) TRANSLATION OF FOREIGN CURRENCY BALANCES The balances of accounts denominated in foreign currencies are translated to pesetas at the exchange rates ruling at December 31 of each year. However, following customary airline practice, the balance of the liability for unused traffic documents is reflected in the balance sheet at the exchange rate ruling 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 days of the preceding month.

25 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

Translation differences arising from translation at official year-end exchange rates and from the difference between exchange rates at December 31 of the preceding year and those prevailing at the date of effective collection or payment are recorded under the “Exchange Gains/Losses” captions in the statement of income, except for the net gains or losses relating to the financing obtained for the acquisition of certain aircraft.

However, unrealized exchange gains arising on currencies for which exchange losses have not been allocated to income in prior years or in the current year are recorded under the “Deferred Revenues” caption in the balance sheet.

EXCHANGE DIFFERENCES ARISING FROM AIRCRAFT FINANCING

Pursuant to Valuation Rule 14 in Section 5 of the Spanish National Chart of Accounts, on March 23, 1994, the Ministry of Economy and Finance issued, at the proposal of the Accounting and Audit Institute (ICAC), a Ministerial Order on the accounting treatment of certain foreign currency exchange differences.

Under this accounting regulation, from January 1, 1993, the net amount of fore i g n c u rrency exchange diff e rences arising in each year on debts for financing for the acquisition by the Company and other IBERIA Group companies of aircraft added to the fleet in the current year and in the four immediately preceding years has to be re c o rded as an increase or decrease in the value of such airc r a f t .

In accordance with this regulation, in 1999 the Company recorded the related increases in the cost and depreciation of certain of its aircraft, although the effect thereof was not material.

G) INVENTORIES Inventories, basically aeronautical supplies, are valued at average acquisition cost, and the related provisions for diminution in value are recorded.

H) RECOGNITION OF REVENUES AND EXPENSES Revenues and expenses are recognized on an accrual basis, i.e. when the actual flow of the related goods and services occurs, re g a rdless 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. The balance of this caption in the balance sheet reflects the liability for tickets and traffic documents sold prior to December 31, 1999, but not yet used at that date.

The revenues relating to these items are recognized when the transport or service is performed.

26 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

The Company has introduced the “Iberia Plus” card as an ongoing promotional tool whereby the holder of the card accumulates points for taking certain flights, using certain hotels, renting cars or making credit card purchases with credit cards covered by the program. The points can be exchanged for free tickets or other services offered by the companies included in the program. The accompanying balance sheet as of December 31, 1999, includes a provision of Ptas. 6,686 million in this connection, based on estimates of the value of the points accumulated at that date.

I) PROVISIONS FOR PENSIONS Under the collective labor agreements currently in force, the Company is required to pay full compensation to flight personnel who take early retirement (special leave) and to supplement the social security benefits of ground personnel taking early retirement, in accordance with the conditions specified for each case.

The “Provisions for Pensions” caption in the accompanying balance sheet includes the liabilities incurred in this connection as of December 31, 1999. The provisions recorded to cover the discounted value of the liabilities incurred as of December 31, 1999, and the interest allocable to the recorded allowance amount to Ptas. 621 million and Ptas. 605 million, respectively, and these amounts are included under the “Personnel Expenses” and “Financial and Similar Expenses” captions, respectively, in the accompanying 1999 statement of income.

In the first half of 2000, management of the Company will analyze the most appropriate financing or rebalancing plan for externalizing a portion of the liability in this connection as required under current legislation.

The liability incurred as of December 31, 1999, was determined on the basis of actuarial studies conducted by independent actuaries using the unit credit method, and the main assumptions were an annual interest rate of 4%, an expected annual CPI variation of 2% and annual provisions payable in arrears. Also, the demographic tables used were GRM/F-80 tables minus two years.

On September 1, 1999, the employees of Aviación y Comercio, S.A. (AVIACO) joined the labor force of the Company. The liability incurred in this connection through August 31, 1999, relating to the AVIACO employees will be recorded in the Company’s balance sheet when the merger with AVIACO, which is planned for 2000, takes place. The recording of this liability will not entail any expense for the Company.

J) 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 the Company) and other welfare benefits in certain circumstances (death of spouse, temporary and permanent disability, etc.).

Under the current collective labor agreements, the Company and its employees make the regulatory contributions to the Montepío, as established in these labor agreements. The Montepío’s bylaws limit the Company’s liability to the payment by it of the regulatorily established contributions.

27 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

The Company’s contribution of Ptas. 3,171 million in 1999 was recorded under the “Personnel Expenses” caption in the accompanying 1999 statement of income.

K) OBLIGATIONS TO FLIGHT PERSONNEL PLACED ON THE RESERVE Under the collective labor agreements in force, the Company is required to pay full compensation to flight personnel placed on the reserve.

The “Provisions for Obligations to Employees” account in the accompanying balance sheet includes the liabilities incurred in this connection as of December 31, 1999. The provisions recorded to cover the estimated liability incurred in 1999 and the interest allocable to the recorded allowance amount to Ptas. 5,389 million and Ptas. 1,806 million, respectively, and these amounts are included under the “Personnel Expenses” and “Financial and Similar Expenses” captions, respectively, in the accompanying 1999 statement of income.

As of December 31, 1999, the Company recorded an additional provision of Ptas. 836 million with a charge to the “Extraordinary Expenses” caption in the accompanying 1999 statement of income to cover the obligations to the flight personnel of Vuelos Internacionales de Vacaciones, S.A. who joined the labor force of IBERIA, Líneas Aéreas de España, S.A.

L) PROVISION FOR THIRD-PARTY LIABILITY The Company records under the “Provision for Third-Party Liability” caption in the balance sheet the estimated amount required for probable or certain third-party liability arising from legal proceedings and litigation in progress or from outstanding indemnity payments or obligations of undetermined amount, and collateral and other similar guarantees provided by the Company. As described in Note 11, the Company has recorded a provision for the restructuring costs that its directors consider will be incurred in the coming years as a result of the measures contained in the IBERIA Group’s Master Plan.

M) CORPORATE INCOME TAX The corporate income tax of each year is calculated on the basis of the book income before taxes, increased or decreased, as appropriate, by the permanent differences from taxable income, net of tax relief and tax credits, excluding tax withholdings and prepayments.

28 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

As part of SEPI, the Company is taxed under the consolidated taxation system. This system is regulated by Articles 42 et seq. of the Commercial Code, as provided for by Law 5/1996. Consequently, the 1999 corporate income tax will be settled on a consolidated tax return basis.

N) FUTURES AND OTHER SIMILAR INSTRUMENTS The Company uses these instruments in transactions to hedge its asset and liability positions and its future cash flows. It only carries out “nongenuine” hedging transactions (i.e. those arranged between two parties, establishing in each case the contractual terms of the transactions agreed upon between them).

If cash deposits are required to guarantee the obligations inherent to the aforementioned transactions, they are recorded under the “Short-Term Financial Investments - Short-Term Deposits and Guarantees” caption on the asset side of the balance sheet.

The expenses relating to transactions involving futures and similar instruments are expensed currently.

The price differences arising during the term of futures and similar instruments are recorded as follows: 1. In the case of transactions arranged to hedge exchange rates relating to asset or liability positions, the related balances are discounted to present value based on the related gains or losses. 2. For the other exchange rate transactions, the pricing differences are recorded in the statement of income when the futures transactions or similar instruments are cancelled or finally settled.

- 5 - INTANGIBLE ASSETS The variations in 1999 in intangible asset accounts and in the related accumulated amortization were as follows:

1999 M I L L I O N S O F P E S E TA S ADDITIONS 01-01-99 AN D PRO V IS IO N S RETIREMENTS TRANSFERS 12-31-99 RIGHTS ON LEASED ASSETS 34,709 33,764 - 308 68,781 COMPUTER SOFTWARE 1,813 1,272 - (209) 2,876 LEA S E HO L D AS S IG N M E N T AN D OTH E R RIG H T S 243 52 - (210) 85 AMORTIZATION (11,053) (2,538) 71 68 (13,452) NET VALUE 25,712 32,550 71 (43) 58,290

29 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

RIGHTS ON LEASED ASSETS In 1999 the Company leased six A-320 aircraft for Ptas. 31,644 million.

The main features of these six lease contracts are as follows: 1. Maturity: September 1, 2007. 2. Interest: six-monthly, payable on March 1 and September 1 each year. 3. Interest rate: fixed of approximately 5.44%. 4. Purchase option: 20,579,347 each for three of the six aircraft and 20,644,653 each for the other three.

The general features of the lease contracts (relating mainly to aircraft) in force as of December 31, 1999, some of which have interest rates tied to LIBOR and lease payments denominated in foreign currencies, are as follows:

DECEMBER 31, 1999 MILLIONS OF PESETAS

CASH PRICE OF THE FIXED ASSETSACQUIRED, ACCORDING TO CONTRACTS 68,759 (a) As of December 31, 1999, AMOUNT OF LEASE PAYMENTSPAID - IN PRIOR YEARS 27,592 these amounts included a total of Ptas. 14,914 million of unaccrued interest - IN THE CURRENT YEAR 4,915 at that date, the balancing entry for which is included under AMOUNT OF LEASE PAYMENTS OUTSTANDING AT DECEMBER 31 40,212 (a) the “Deferred Charges” caption in the accompanying balance sheet AMOUNT OF PURCHASE OPTIONS 41,878 (a) as of December 31, 1999.

The due dates for the lease payments outstanding as of December 31, 1999, including the amount of the purchase options, are as follows:

DECEMBER 31, 1999 LE A S E PAY M E N T S DU E I N MI L L I O N S O F PE S E TA S 2000 8,581 2001 12,829 2002 10,603 2003 9,302 2004 - 2007 40,775

30 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

- 6 - PROPERTY, PLANT AND EQUIPMENT The variations in 1999 in property, plant and equipment accounts and in the related accumulated depreciation and provisions were as follows:

COST

COST M I L L I O N S O F P E S E TA S

01-01-99 ADDITIONS RETIREMENTS TRANSFERS 12-31-99

AIRCRAFT 301,624 64,755 (12,602) 6,107 359,884 ADVANCES ON AIRCRAFT 37,185 37,722 (23,632) (3,597) 47,678 338,809 102,477 (36,234) 2,510 407,562 OTHER TANGIBLE FIXED ASSETS: LAND 551 - (22) - 529 BUILDINGS AND OTHER STRUCTURES 26,661 1,432 (387) - 27,706 MACH I N E R Y , IN S TA L L AT IO N S AN D TOO L S 59,443 2,791 (1,369) 516 61,381 TRANSPORT EQUIPMENT 2,683 1,075 (137) 4 3,625 FURNITURE AND FIXTURES 3,437 217 (477) - 3,177 COMPUTER HARDWARE 24,078 1,646 (12,576) 14 13,162 SPARE PARTS 30,870 19,718 (11,320) - 39,268 FLIGHT SIMULATORS 7,153 20 -- 7,173 CONSTRUCTION IN PROGRESS 2,259 7,012 (3,505) (2,886) 2,880 157,135 33,911 (29,793) (2,352) 158,901

ADVANCES ON AIRCRAFT The advances on aircraft relate to advances paid as a result of purchase commitments to manufacturers in accordance with the established schedules.

The additions in 1999 relate to advances paid in connection with 12 B-757 aircraft, 19 A-320 aircraft, 5 A-321 aircraft and 6 A-340 aircraft to be received under the Company’s fleet renewal plan.

Also, in 1999 Ptas. 8,199 million relating to the advances paid for the eight B-757 aircraft that came into service were recovered.

Additionally, Ptas. 12,007 million relating to the advances paid for eight A-320 aircraft that came into service in 1999, six under financial lease contracts and two under operating lease contracts, were recovered. Also, Ptas. 3,597 million were transferred to the “Aircraft” caption relating to the advances paid for two A-321 aircraft that were acquired by the Company in December 1999. Lastly, Ptas. 3,426 million relating to advances paid on the A-340 aircraft that came into service in 1999 were recovered.

31 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

AIRCRAFT, PERIOD ADDITIONS On December 21, 1999, the Company acquired substantially all the property, plant and equipment (buildings and aeronautical supplies) of Aviación y Comercio, S.A., as follows:

AIRCRAFT, PERIOD ADDITIONS ITEM MILLIONS OF PESETAS

B U I L D I N G S 1,432 1 9 D C- 9 A I R C R A F T 5,057 4 7 D C - 9 E N G I N E S 1,679 1 3 M D - 8 8 A I R C R A F T 41,941 3 1 M D - 8 8 E N G I N E S 1,826 1 M D - 8 7 A I R C R A F T 1,465 2 M D - 8 7 E N G I N E S 118 TOTA L 5 3 , 5 1 8

Additionally, in December 1999, two A-321 aircraft and five A-321 engines were acquired for Ptas. 10,250 million and Ptas. 2,435 million, respectively.

AIRCRAFT, PERIOD RETIREMENTS In 1999 the Company sold one B-727 aircraft, one MD-87 aircraft and two A-300 aircraft.

REVALUATION RESERVE ROYAL DECREE-LAW 7/1996 On December 31, 1996, the Company revalued its property, plant and equipment pursuant to Royal Decree-Law 7/1996, and paid the single 3% tax. The Company had previously availed itself of other revaluation legislation. The revaluation in 1996 was carried out by applying the maximum coefficients authorized by the Royal Decree-Law, with the 40% reduction for the effect of the Company’s financing up to the limit of the estimated market value of each of the assets. The revaluation surplus and the effect thereof as of December 31, 1999, are as follows:

REVALUATION M I L L I O N S O F P E S E TA S

SURPLUS 1999 AT 12-31-98 PROVISION RETIREMENTS SURPLUS

AIRCRAFT 2,316 (100) - 2,216 LAND 147 -- 147 BUILDINGS AND OTHER STRUCTURES 1,959 (227) (63) 1,669 MACHINERY, INSTALLATIONS AND TOOLS 1,522 (770) (32) 720 TRANSPORT EQUIPMENT 12 (7) - 5 FLIGHT SIMULATORS 234 (64) - 170 6,190 (1,168) (95) 4,927

32 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

As of December 31, 1999, the accumulated depreciation on the surplus arising from the revaluation amounted to approximately Ptas. 10,706 million.

The revaluation increased the 1999 depreciation charge by approximately Ptas. 1,168 million, and will increase the 2000 depreciation charge by approximately Ptas. 1,114 million.

The revaluation surplus, net of the single 3% tax, was credited to the “Revaluation Reserve” caption, with a charge to the appropriate revalued asset accounts, without altering the recorded accumulated depreciation amount.

DEPRECIATION AND PROVISIONS

DEPRECIATION AND PROVISIONS M I L L I O N S O F P E S E TA S

01-01-99 PROVISIONS RETIREMENTS TRANSFERS 12-31-99

AIRCRAFT 191,720 8,176 (10,803) - 189,093 OTHER TANGIBLE FIXED ASSETS: BUILDINGS AND OTHER STRUCTURES 14,238 947 (170) - 15,015 MACHINERY, INSTALLATIONS AND TOOLS 38,338 3,832 (1,213) 71 41,028 TRANSPORT EQUIPMENT 1,148 341 (130) - 1,359 FURNITURE AND FIXTURES 2,796 174 (468) - 2,502 COMPUTER HARDWARE 21,491 901 (12,569) (3) 9,820 SPARE PARTS 18,640 2,383 (1,296) - 19,727 FLIGHT SIMULATORS 5,379 470 -- 5,849 102,030 9,048 (15,846) 68 95,300

As of December 31, 1999, the cost of the fully depreciated assets which the Company maintains in property, plant and equipment amounted to Ptas. 43,608 million.

TRANSACTIONS INVOLVING THE AIRCRAFT In recent years the Company has formalized the agreements relating to its fleet renewal plan and has entered into certain agreements with its suppliers, particularly Airbus Industrie, G.I.E. and The Boeing Company. The main features of these agreements are as follows.

BOEING AIRCRAFT

B-757 In 1994 the Company entered into operating lease contracts with several companies for seven B-757 aircraft. Two of these aircraft were on lease for a period of four years, extended by a further 18 months in 1997 and for a further 12 months in 1998 (through October 2000), and the contracts did not provide for a purchase option. The other five B-757 aircraft were on lease for an initial period of approximately five years, at the end of which the Company would have the following three options for each plane: to exercise the purchase option; to extend the lease by up to a further 12 years; or to return the plane to the lessor. The lease contracts relating to four of these aircraft were extended through 2000 and the Company returned one of the aircraft in 1999.

33 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

As of December 31, 1999, the contracts entered into by the Company with The Boeing Company (“Boeing”) for the purchase of 16 B-757 aircraft and a purchase option on a further 14 aircraft were still in force.

In 1999 eight of the B-757 aircraft relating to the agreement with Boeing came into service. These eight planes were acquired under operating lease contracts from various companies (a different company for each plane). The initial lease term for these aircraft is 62 or 63 months, at the end of which the lessor of the aircraft has a residual value guarantee from International Lease Finance Corporation.

The investment commitment assumed in connection with the other eight B-757 aircraft amounts to approximately US$ 498 million. The eight B-757 aircraft for which there is a firm purchase commitment are scheduled for delivery in 2000. Of the aircraft on which there is a purchase option, eleven will be received in 2001 and three in 2002. As of December 31, 1999, the Company had paid advances of Ptas. 9,197 million on these aircraft.

B-747 In 1994 the Company sold one B-747 aircraft to Boeing. Subsequently, the Company entered into a three-year operating lease contract for this aircraft, which included a purchase option.

In 1997 the Company renegotiated the operating lease contract, extending it for a further 29 months and modifying the purchase option price at the end of this period. In December 1999 the Company extended the contract for a further 36 months, and it can exercise the purchase option at any time.

AIRBUS AIRCRAFT

A-340 In 1996 the Company reached an agreement with Airbus Industrie, G.I.E. (Airbus) for the delivery dates of eight A-340 aircraft (which have already been received and are operating) and on the delivery schedule for a further four aircraft on which there is a purchase option: one in 1999, one in 2000 and two in 2001.

The nine A-340 aircraft in service were leased under operating lease contracts from the “Iberbus” companies (see Note 7). The Company has holdings of 40% in the capital stock of eight of these companies, and of 45.45% in the other. The term of the operating leases for the nine A-340 aircraft is seven years, at the end of which the Company will have the following three options: to exercise the purchase option and pay a predetermined price for the aircraft; to extend the lease for periods of between three and eight years and mandatorily exercise the purchase option; or to return the planes to the lessor.

34 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

If the Company opts to return the planes and if the owner of the aircraft does not find a buyer for the aircraft, the Company is obliged to extend the operating lease contract for a further one-year period for the aircraft which came into service in 1996 and for a further two-year period for the aircraft which came into service in 1997, 1998 and 1999.

In 1998 the Company entered into an agreement with Airbus for the acquisition of a further six A-340 aircraft and a purchase option on a further five. With this agreement, the Company exercised two of the purchase options acquired under the agreement entered into with Airbus in 1996, one of which relates to the aircraft received in 1999. Also, the Company has four subordinated options that it can exercise provided that it exercises the purchase option on four of the five aforementioned aircraft.

The delivery schedule for these five aircraft would be: four in 2000 and one in 2001 in the case of the aircraft for which there are firm commitments, and one in 2001, three in 2002 and one in 2003 for the aircraft on which there is a purchase option.

In connection with three of these aircraft that will be received in 2000 and 2001, the Company has entered into financing agreements that will enable it to operate them under an operating lease similar to that existing for the nine A-340 aircraft that it currently operates. The Company has a minority holding in each of the companies and must make contributions to finance them so that they can purchase the aircraft from the manufacturer. The contributions that the Company will have to make on both these counts for the three aircraft range from a minimum of US$ 21 million to a maximum of US$ 51 million.

At the end of the initial lease term of seven years, the Company may opt to extend the lease for a further eight years, exercise the purchase option or return the aircraft.

The basic price of the five aircraft is approximately US$ 689 million.

As of December 31, 1999, the Company had made advances totaling Ptas. 15,044 million in connection with these aircraft.

A-319, A-320 and A-321 On June 19, 1998, IBERIA, Líneas Aéreas de España, S.A. and Airbus Industrie, G.I.E. entered into an agreement for the firm purchase of 50 A-320-type aircraft, with the option of acquiring a further 26 aircraft of this type and a purchase option on an additional 14 aircraft.

Also, the Company entered into an agreement with Singapore Aircraft Leasing Enterprise Pte. Ltd. (“SALE”) to bring forward the date on which two A-320 scheduled for delivery in 2002 came into service to 1999.

Additionally, the Company entered into an additional agreement with Airbus for the firm purchase of two A-320 aircraft which will come into service in 2002 on the same date as that on which the aircraft on which the purchase option has been exchanged with SALE were scheduled to come into service.

35 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

In 1999 the Company received eight A-320 aircraft, of which six were acquired under financial lease agreements (see Note 5) and two under operating lease agreements, for initial terms of five years, at the end of which the Company may renew the agreements for up to seven years. These two aircraft relate to the aforementioned exchange with SALE.

Also, in 1999 the Company acquired two A-321 aircraft and their engines for Ptas. 12,685 million.

The delivery schedule for the aircraft receivable under the agreement with Airbus Industrie, G.I.E. is as follows:

DELIVERY SCHEDULE FOR AIRCRAFT

(a) Relating to aircraft on which TYPE OF AIRCRAFT 2000 2001 2002 2003 2004 2005 2006 TOTAL there is a purchase option. (b) Including three aircraft (a) (a) that were originally to be A-321 but that were replaced by A-320. A-319 - - - - - 4 5 9 (c) Including three aircraft on which there is a purchase option. A-320 8 (b) 6 10 5 (c) 5 (c) 3 2 39 (d) Including six aircraft on which there is a purchase option. A-321 - 2 5 11 (d) 10 (e) - 6 34 (e) Including eight aircraft on which 8 8 15 16 15 7 13 82 there is a purchase option.

The basic price of the aircraft involved in this transaction is approximately Ptas. 361,000 million.

As of December 31, 1999, the Company had made advances totaling Ptas. 23,357 million in connection with these aircraft.

In connection with the A-320 aircraft, on July 17, 1998, the Company entered into a lease contract with International Lease Finance Corporation (“ILFC”) for nine A-319 and seven A-320 aircraft under a dry lease arrangement for an initial period of five years, on expiration of which the Company may extend the contract twice for one- or five-year periods, provided that the two extensions do not total more than six additional years.

In 1999 the Company received two of the aforementioned A-320 aircraft under the contract with ILFC, and a change was subsequently made to one of the lease contracts, whereby a third-party lessor was subrogated to ILFC’s position under the contract. The aforementioned lease term and extensions were not altered.

36 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

The delivery schedule for the aircraft to be received is as follows:

DELIVERY SCHEDULE FOR AIRCRAFT TYPE OF AIRCRAFT 2000 2001 A- 3 2 0 3 7 (a ) A- 3 1 9 4 - (a) Including five aircraft 7 7 that were originally to be A-319 but that were replaced by A-320.

OTHER AIRCRAFT

A-300 In 1999 two inactive A-300 aircraft whose cost had either been fully depreciated or provisioned were sold for US$ 650,000 (Ptas. 92 million), and a gain for the same amount was recorded under the “Gains on Fixed Asset Disposals” caption in the accompanying 1999 statement of income.

A-320 and MD-87 Without prejudice to the foregoing regarding the A-319, A-320 and A-321 aircraft, in 1993 the Company sold six A-320 and five MD-87 aircraft, and subsequently entered into operating lease contracts therefor.

In July 1997 the owner of these aircraft sold them to three companies, which entered into new lease contracts with the Company. The lease contracts entered into for the six A-320 aircraft expire in 2001, 2002 and 2003, at which time the Company may extend them for a further five-year period or return the planes. The term of the lease contracts entered into for the five MD-87 aircraft is 96 months at the end of which the Company may exercise the purchase option provided for in the contract or return the planes.

In 1999 the Company signed novations of the operating lease contracts for the five A-320 aircraft, as a result of which five new lessors were subrogated to the position of the original lessors.

37 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

AIRCRAFT IN SERVICE The detail of the aircraft that the Company had in service as of December 31, 1999, is as follows:

AIRCRAFT IN SERVICE - 1999

(a) Lease type including aircraft and UNDER UNDER WET crew for approximately one year. The main TYPE OF OWNED BY FINANCIAL OPERATING LEASE lessors are Air Atlanta U.K. Limited, AIRCRAFT THE COMPANY LEASE LEASE (a) TOTAL Air Europa, S.A. and Atlas Air Inc. (b) Including two DC-10 aircraft formerly owned by Venezolana Internacional B-727 23 (e) (c) - - - 23 de Aviación, S.A. received in December 1997 in execution of the mortgages B-737 - - - 3 3 on the loans granted by IBERIA, Líneas Aéreas de España, S.A. B-747 6 - 1 3 (d) 10 These aircraft came into service in 1999. (c) These figures do not include four B-757 - 1 14 6 21 B-727 and one DC-10 aircraft that were owned by Venezolana Internacional B-767 - - 2 (g) - 2 de Aviación, S.A. received in December 1997 in execution of the mortgages A-300 6 - - - 6 on loans granted by the Company. The aforementioned aircraft were inactive A-320 11 11 10 - 32 as of December 31, 1999, and are ready for sale. A-321 2 (h) - - - 2 (d) Including one B-747 equipped A-340 - - 9 - 9 for cargo transport. (e) Excluding four inactive aircraft DC-8 - - - 2 2 that are ready for sale. (f) Excluding eight inactive aircraft DC-9 18 (f) - - - 18 that are ready for sale. (g) These aircraft were operated under DC-10 6 (b) (c) - - - 6 a wet lease arrangement until December 1999, when they started to be operated MD-87 17 2 5 - 24 under a dry lease arrangement. MD-88 13 - - - 13 h) These two aircraft, which were operated under an interim charter arrangement, were 102 14 41 14 171 acquired in December 1999.

One aircraft operated by the Company under a financial lease contract had been mortgaged for a net book value of Ptas. 4,070 million as of December 31, 1999.

As of December 31, 1999, 17 aircraft (eight B-727, eight DC-9 and one DC-10), with a net book value of Ptas. 2,014 million as of that date, were grounded. These aircraft are ready for sale, and management of the Company does not expect any losses to arise in this connection.

WET LEASE In recent years the Company has entered into several wet lease contracts (lease of aircraft with crew).

In March 1998 the Company entered into an agreement with Air Europa, S.A. for the lease of eleven aircraft currently in service (six B-757, three B-737 and two B-767) under a wet lease arrangement. These agreements have an initial term of two years and are renewable annually. In December 1999 the two B-767 started to be operated under a dry lease arrangement.

38 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

Also, in August 1998 the Company entered into a wet lease contract with Atlas Air, Inc. to operate two B-747 aircraft (one for only six months) equipped for cargo transport. The lease contract has an initial term of four years. In 1999 one of these aircraft was returned.

LEASE EXPENSES The operating lease payments paid in 1999 for the operating lease of the aforementioned 39 aircraft of the B-747, B-757, A-320, A-340 and MD-87 types amounted to Ptas. 20,648 million, and are included under the “Other Operating Expenses” caption in the accompanying 1999 statement of income (see Note 16). The detail of the approximate operating lease payments payable for these aircraft and of the due dates is as follows:

LEASE EXPENSES

YE A R MI L L I O N S O F U.S . DO L L A R S 2000 174 2001 155 2002 TO 2006 409 738

INSURANCE COVERAGE The Company has arranged insurance policies for its property, plant and equipment and intangible assets which sufficiently covered their net book value as of December 31, 1999. It has also arranged insurance policies for the aircraft leased from third parties in accordance with the conditions stipulated in the related lease contracts. Most of these policies are with Musini, Sociedad Anónima de Seguros y Reaseguros.

- 7 - LONG-TERM FINANCIAL INVESTMENTS

HOLDINGS IN GROUP AND ASSOCIATED COMPANIES The variations in 1999 the balance of the “Holdings in Group and Associated Companies” caption and in the related allowance were as follows:

PAYABLE TO GROUP AND ASSOCIATED COMPANIES M I L L I O N S O F P E S E TA S COST ALLOWANCE

BA L A N C E AT 01-01-99 93,943 ( 3 4 , 7 0 5 ) AD D I T IO N S O R P R O V IS IO N S 2,382 ( 9 , 9 3 3 ) RE T I R E M E N TS O R A MO U N TSUS E D ( 9 9 ) 7 8 6 BA L A N C E AT 1 2 - 3 1 - 9 9 9 6 , 2 2 6 ( 4 3 , 8 5 2 )

39 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

The additions in 1999 relate mainly to the subscription by the Company of 10% (Ptas. 1,604 million) of the US$ 100 million capital increase approved by the Shareholders’ Meeting of Interinvest, S.A. on June 30, 1999.

The additions also include the Company’s subscription in full, for Ptas. 225 million, of the capital increase approved by the Shareholders’ meeting of Touroperador Viva Tours, S.A. Lastly, the additions reflect the contribution of Ptas. 215 million made by the Company to Bínter Mediterráneo, S.A., in order to offset losses, and the acquisition, for Ptas. 316 million, of a 45.45% holding in the capital stock of the lessor of the A-340 aircraft that came into service in 1999.

DECEMBER 31, 1999

PERCENTAGE OF DIR E C T AN D IND I R E C T PAYABLE TO GROUP AND ASSOCIATED COMPANIES REGISTERED OFFICE OWNERSHIP (a) AVIACIÓN Y COMERCIO, S.A. MAUDES, 51; MADRID 99.93 BINTER CANARIAS, S.A. (d) AEROPUERTO DE LAS PALMAS 99.99 BINTER MEDITERRÁNEO, S.A. (d) VELÁZQUEZ, 130; MADRID 99.99 COMPAÑÍA AUXILIAR AL CARGO EXPRÉS, S.A. CEN T R O DE CAR G A AÉR E A PAR C E L A 2 P.5 NAV E 6; MAD R I D 75.00 CAMPOS VELÁZQUEZ, S.A. VELÁZQUEZ, 134; MADRID 99.99 CARGOSUR, S.A. VELÁZQUEZ, 130; MADRID 100.00 IBER-SWISS CATERING, S.A. CTRA. DE LA MUÑOZA, S/N; MADRID 70.00 VUE L O S INT E R N AC IO N A L E S DE VACAC IO N E S , S.A. (VIVA) (d) CAMINO DE LA ESCOLLERA, 5; PALMA DE MALLORCA 99.47 AMADEUS GLOBAL TRAVEL DISTRIBUTION, S.A. SALVADOR DE MADARIAGA, 1; MADRID 31.87(e) VEN E Z O L A N A INT E R N AC IO N A L DE AVI AC I Ó N , S.A. (VIASA) OSCAR M. ZULOAGA, S/N; CARACAS 45.00 SIST E M A S AUTO M AT I Z A D O S AGE N C I A S DE VIA J E S , S.A. (SAVI A ) VELÁZQUEZ, 130; MADRID 76.84(e) TOUROPERADOR VIVA TOURS, S.A. TRESPADERNE, 29; MADRID 49.04 IBERBUS CONCHA, LTD. GEORGE’S DOCK HOUSE, IFSC; DUBLÍN 40.00 IBERBUS ROSALÍA, LTD. GEORGE’S DOCK HOUSE, IFSC; DUBLÍN 40.00 IBERBUS CHACEL, LTD. GEORGE’S DOCK HOUSE, IFSC; DUBLÍN 40.00 IBERBUS ARENAL, LTD. GEORGE’S DOCK HOUSE, IFSC; DUBLÍN 40.00 IBERBUS TERESA, LTD. EARLSFORT CENTRE-HATCH ST., DUBLÍN 40.00 IBERBUS EMILIA, LTD. EARLSFORT CENTRE-HATCH ST., DUBLÍN 40.00 IBERBUS AGUSTINA, LTD. EARLSFORT CENTRE-HATCH ST., DUBLÍN 40.00 IBERBUS BEATRIZ, LTD. EARLSFORT CENTRE-HATCH ST., DUBLÍN 40.00 IBERBUS JUANA INÉS, LTD. GEORGE’S DOCK HOUSE, IFSC; DUBLÍN 45.45 INTERINVEST, S.A. TUCUMÁN, 141; BUENOS AIRES 10.00 TOTAL

40 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

The retirements from cost relate mainly to the capital reduction of Ptas. 150 million approved by the Shareholders’ Meeting of Sistemas Automatizados Agencias de Viaje, S.A. and carried out through the reduction in the par value of its shares. Consequently, the Company’s holding in the capital stock of the aforementioned company was reduced by Ptas. 99 million.

The information relating to the main Group and associated companies as of December 31, 1999, drawn from their respective audited financial statements or from provisional financial statements in the case of Vuelos Internacionales de Vacaciones, S.A. (VIVA), Interinvest, S.A., the Amadeus Group, Touroperador Viva Tours, S.A. and the Iberbus companies (which have not yet been approved by the respective Shareholders’ Meetings), is as follows:

M I L L I O N S O F P E S E TA S

INCOME (LOSS) (a) In 1999 there were no variations in the percentages (b) EXTRAOR- of ownership interest held by the Company in the capital COST ALLOWANCE CAPITAL RESERVES ORDINARY DINARY stock of Group and associated companies, with the exception of the holdings in Amadeus Global Travel Distribution, S.A. and Sistemas Automatizadas Agencias de Viaje, S.A., which 42,740 (2,411) 7,400 17,754 14,000 3,590 were modified as a result of the tender offer to purchase shares launched by Amadeus Global Travel Distribution, S.A. 5,127 (1,506) 1,387 673 1,428 135 (the parent company of the Amadeus Group) in October 1999, 6,620 (6,391) 100 (32) (18) 179 and that in Touroperador Viva Tours, S.A., the Company’s interest in the latter having increased by 49%. 111 - 32 261 67 (3) (b) Including the following amounts relating to revaluation reserves resulting from the assets revalued in 1996 459 (253) 150 31 32 (6) pursuant to Royal Decree-Law 7/1996: 1,445 (608) 1,008 (186) (7) 22 594 - 500 704 141 (19) M I L L I O N S O F P E S E TA S 13,093 (12,700) 5,001 (1,841) (1,953) (812) AVIACIÓN Y COMERCIO, S.A. 4,736 2,275 - 6,212 103,045 22,789 - BINTER CANARIAS, S.A. 593 COMPAÑÍA AUXILIAR AL CARGO EXPRÉS, S.A. 1 14,716 (14,716) (c) (C) (c) (c) CARGOSUR, S.A. 185 33 - 50 676 445 (127) IBER-SWISS CATERING, S.A. 232 225 - 460 786 (242) - VUELOS INTERNACIONALES DE VACACIONES, S.A. 498 338 - 1,003 (191) (14) - 342 - 1,127 (160) (18) - (c) Venezolana Internacional de Aviación, S.A.’s operations 379 (56) 1,235 (390) (47) - were discontinued in January 1997 and in March 1997 the company filed for “suspensión de pagos” (Chapter 11-type 393 (149) 1,277 (538) (129) - insolvency proceedings, hereinafter “suspension of payments”) and the process of liquidation commenced. At the date 417 (17) 1,138 (112) (42) - of preparation of these financial statements, it had not been possible to obtain any recent financial statements relating 416 (4) 1,160 (88) (43) - to this company. 430 - 1,160 (19) 16 - (d) The Company recorded the following amounts as additional provisions under the “Provision for Third-Party Liability” caption 425 - 1,164 (4) 15 - of the accompanying balance sheet as of December 31, 1999: Ptas. 180 million for Bínter Canarias, S.A., Ptas. 2,140 million 316 (9) 694 - (20) - for Bínter Mediterráneo, S.A. and Ptas. 393 million for Vuelos 5,032 (5,032) 129,259 (86,878) (30,418) - Internacionales de Vacaciones, S.A. (e) The dividend rights relating to the Amadeus Group 95,926 (43,852) and Sistemas Automatizados Agencias de Viaje, S.A. amount to 25% and 74.50%, respectively.

41 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

In 1999 the Shareholders’ Meetings of the Group and associated companies listed below adopted the following resolutions:

1999 M I L L I O N S O F P E S E TA S

CA P I TA L IN C R E A S E S DI S T R I B U T I O N C A P I TA L CO N T R I B U T I O N S I N C L U D I N G O F D I V I D E N S R E D U C T I O N TO O F F S E T AD D I T I O N A L PA I D-I N LO S S E S CA P I TA L (I F A N Y)

AV I AC I Ó N Y CO M E R C IO, S.A. 2 , 4 1 4 -- - BI N T E R CA N A R I A S, S.A. 9 6 0 -- - BI N T E R ME D I T E R R Á N E O, S.A. - 1 5 0 2 1 5 - CA M P O S VE L Á Z Q U E Z, S.A. 1 9 0 -- - COMPAÑÍA AUXILIAR AL CARGO EXPRÉS, S.A. 52 -- - IB E R- SW IS S CAT E R I N G, S.A. 5 3 -- - SIST E M A S AUTO M AT I Z A D O S AGE N C I A S DE VIA J E , S.A. - 15 0 - - TO U R O P E R A D O R VI VA TO U R S, S.A. --- 2 2 5 AMA D E U S GLO BA L TRAV E L DIST R I B U T IO N , S.A. 24 , 9 5 8 -- 80 , 9 6 4

AVIACIÓN Y COMERCIO, S.A. On June 12, 1999, the Shareholders’ Meeting of Aviación y Comercio, S.A. resolved to distribute a dividend out of 1998 income, of which Ptas. 2,411 million corresponded to the Company. This amount was recorded under the “Revenues from Shareholdings” caption in the accompanying 1999 statement of income.

Additionally, on January 27, 2000, the Shareholders’ Meeting of Aviación y Comercio, S.A. declared an interim dividend of Ptas. 17,582 million to be distributed out of 1999 income, of which Ptas. 17,572 million corresponded to the Company and were paid on January 28, 2000.

It is planned to merge Aviación y Comercio, S.A. into the Company in 2000.

BÍNTER CANARIAS, S.A., CAMPOS VELÁZQUEZ, S.A., COMPAÑÍA AUXILIAR AL CARGO EXPRÉS, S.A. AND IBERSWISS CATERING, S.A. The Shareholders’ Meetings of the aforementioned companies, held at various dates in 1999, resolved to distribute dividends out of their respective 1998 income, of which Ptas. 960 million, Ptas. 190 million, Ptas. 39 million and Ptas. 37 million, respectively, corresponded to the Company. Of the total dividend distributed by Campos Velázquez, S.A., Ptas. 34 million relate to an interim dividend paid in 1998 and recorded under the “Revenues from Shareholdings” caption of the accompanying 1998 statement of income. The remainder of the dividend distributed by Campos Velázquez, S.A. and the dividends distributed by the other companies were recorded under the “Revenues from Shareholdings” caption in the accompanying 1999 statement of income.

42 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

VUELOS INTERNACIONALES DE VACACIONES, S.A. Because it was not possible to integrate Vuelos Internacionales de Vacaciones, S.A. as an IBERIA Group operator, as required under the Master Plan, and in view of the significant losses incurred by this company in recent years, at the end of 1998 Company management decided to discontinue the company’s operations and submitted the related labor force reduction plan, on which an agreement was reached at the end of February 1999. This company ceased operations as an operator in April 1999, and became a maintenance company in Palma de Mallorca.

In May 1999 the employees of Vuelos Internacionales de Vacaciones, S.A. either joined the labor force of IBERIA, Líneas Aéreas de España, S.A. or were terminated. As of December 31, 1999, this company had 91 employees engaging in the provision of maintenance services. Also, in December 1999 this company sold its aircraft.

TOUROPERADOR VIVA TOURS, S.A. On December 23, 1998, the Company, by subscribing to 0.4% of the capital stock, incorporated, together with other shareholders, Touroperador Viva Tours, S.A., whose corporate purpose is the management and sale of package tours. On that same date, the Shareholders’ Meeting approved a capital increase of Ptas. 225 million, which was fully subscribed by the Company in March 1999. As of December 31, 1999, the Company had a 49.04% holding in Touroperador Viva Tours, S.A.

AEROLÍNEAS ARGENTINAS GROUP AND INTERINVEST, S.A. In 1996 the Company significantly reduced its holding in Aerolíneas Argentinas, S.A. by selling its holding in Interinvest, S.A. (the majority shareholder of Aerolíneas Argentinas, S.A.) to Andes Holding, B.V. (42% owned by SEPI).

As of December 31, 1998, US$ 135,000,000 (Ptas. 20,500 million) of the account receivable arising from this transaction had not been collected, and the Company recorded a provision of Ptas. 11,000 million based on the amount of the account receivable that it expected to recover.

In April 1999 SEPI’s Board of Directors resolved to acquire from the Company this account receivable from Andes Holding, B.V. for US$ 62,000,000, and this amount was collected in June 1999 for an amount equal to Ptas. 9,673 million.

On October 23, 1998, the Company assigned to Andes Holding, B.V. its direct holding (20% of the capital stock of Aerolíneas Argentinas, S.A.) in exchange for an 8.92% holding in the capital stock of Interinvest, S.A. Also, on the same date, the Company acquired a 1.08% holding in the capital stock of Interinvest, S.A.

43 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

At year-end 1999 Company management, in view of the significant losses incurred by Aerolíneas Argentinas, S.A., resolved to record a provision for the full amount of its investment in Interinvest, S.A. as of December 31, 1999. Accordingly, a portfolio provision of Ptas. 4,432 million was recorded with a charge to the “Variation in Fixed Asset Provisions” caption in the accompanying 1999 statement of income.

As of December 31, 1999, the Company had provided U.S. dollar guarantees for Aerolíneas Argentinas, S.A. to several entities totaling Ptas. 8,447 million. The Company has covered this risk through a Ptas. 2,882 million provision recorded under the “Provision for Third-Party Liability” caption in the accompanying balance sheet as of December 31, 1999, and through a mortgage guarantee on two B-747 aircraft owned by Aerolíneas Argentinas, S.A.

VENEZOLANA INTERNACIONAL DE AVIACIÓN, S.A. (VIASA) VIASA’s operations were discontinued in January 1997, and in March 1997 the company filed for suspension of payments and the process of liquidation commenced.

As a result of the liquidation process, as of December 31, 1999, the Company had recorded provisions for all the balances (loans, interest and trading accounts) with VIASA at that date.

In December 1997, after the court-ordered auction which transferred to the Company the ownership of four B-727 and three DC-10 aircraft belonging to VIASA, which were mortgaged as security for the loans granted in the past by the Company, these aircraft were capitalized for a symbolic value. As of December 31, 1999, the four B-727 aircraft were grounded in Miami ready for sale and, of the three DC-10 aircraft, two were in service and the third was grounded in Madrid ready for sale.

As of December 31, 1999, the balances of the Company with VIASA were as follows:

DECEMBER 31, 1999 M I L L I O N S O F P E S E TA S C O S T AL L O WA N C E

H O L D I N G 14,716 (14,716) L O A N S A N D I N T E R E S T 4,263 (4,263) C U R R E N T A C C O U N T 4,868 (4,868) T OTA L 23,847 (23,847)

The Company received guarantees for the balances recorded in connection with the loans and interest consisting of mortgages on buildings and a B-727 aircraft of VIASA.

AMADEUS GROUP The Amadeus Group, whose corporate purpose consists of the management and operation of a computerized booking system, comprises Amadeus Global Travel Distribution, S.A. (the parent company), Amadeus Data Processing KG (a German company) and their investees.

44 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

In 1997 the Company sold its holding in Amadeus Data Processing KG to Amadeus Global Travel Distribution, S.A. for DM 156,494,119 (equal to Ptas. 13,234 million), giving rise to a capital gain of the same amount. This was the first sale involved in an operation implemented in 1999 under which all the Amadeus Group shareholders sold their holdings in Amadeus Data Processing KG to Amadeus Global Travel Distribution, S.A., after which a public capital increase was carried out at the parent company.

Since there was no change in 1997 in the Company’s holding in the aforementioned Group or in the Group’s net worth, until the completion of the transaction the Company opted to record a provision for the amount of the capital gain obtained from the sale under the “Provision for Third-Party Liability” caption in the balance sheet.

The following events relating to this Group took place in 1999: 1- The Company subscribed in full a capital increase at Amadeus Global Travel Distribution, S.A. for Ptas. 100,000. 2- The Board of Directors of Amadeus Global Travel Distribution, S.A. redenominated the company’s capital stock in euros. This made it necessary to round the capital down and, accordingly, capital was reduced by reducing the par value of the shares by 734.93. 3- On August 11, 1999, the Shareholders Meeting of Amadeus Global Travel Distribution, S.A. resolved to distribute an interim dividend of Ptas. 24,958 million out of 1999 income, of which Ptas. 7,287 million corresponded to the Company. This amount was recorded under the “Revenues from Shareholdings” caption in the accompanying 1999 statement of income. 4- In October 1999 a public offering was launched and there were two public capital increa s e s .

As a result of the foregoing: 1- As of December 31, 1999, the Company had a holding of 31.87% in Amadeus Global Travel Distribution, S.A. in terms of voting rights and of 25% in terms of dividend rights. 2- The Company reversed the provision of Ptas. 8,834 million recorded in 1997 with a credit to the “Extraordinary Revenues” caption in the accompanying 1999 statement of income, since it considered that the price established in the original sale transaction had been realized. The reversal was made for the aforementioned amount, net of the tax effect of the original transaction.

SISTEMAS AUTOMATIZADOS AGENCIAS DE VIAJE, S.A. As of December 31, 1999, the Company’s direct and indirect ownership interest in the capital stock of Sistemas Automatizados Agencias de Viaje, S.A. was 76.84% in terms of voting rights and 74.50% in terms of dividend rights.

45 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

LOANS TO GROUP AND ASSOCIATED COMPANIES The main data on the balance of the “Loans to Group and Associated Companies” caption and the related allowance in the accompanying balance sheet as of December 31, 1999, are as follows:

LOANS TO GROUP AND ASSOCIATED COMPANIES

MI L L I O N S DU E CR E D I T S O F PE S E TA S DAT E IN T E R E S T RAT E

AEROLÍNEAS ARGENTINAS, S.A. 510 (b) 2006 5.25% VIASA 4,263 (a) (a) IBERBUS CONCHA LTD. 3,255 02-29-2003 5.00% IBERBUS ROSALÍA LTD. 3,231 05-10-2003 5.00% IBERBUS CHACEL LTD. 3,578 09-06-2003 6.00% IBERBUS ARENAL LTD. 3,661 10-18-2003 6.00% IBERBUS TERESA LTD. 3,310 10-21-2004 6.00% (a) These credits are instrumented in IBERBUS EMILIA LTD. 3,324 11-10-2004 6.00% several loans and promissory notes denominated in U.S. dollars. In May 1997 IBERBUS AGUSTINA LTD. 3,326 05-15-2005 6.00% the Company ceased to record interest on these loans since they were IBERBUS BEATRIZ LTD. 3,337 06-15-2005 6.00% not recoverable. See information on VIASA in the “Holdings in Group and Associated IBERBUS JUANA INÉS LTD. 1,830 12-01-2006 6.00% Companies” section of this Note. (b) This amount is recorded under TOTAL 33,625 the “Provision for Third-Party Liability” caption in the accompanying balance ALLOWANCE (4,263) sheet as of December 31, 1999.

The loans granted to the Iberbus companies relate to loans to the lessor companies of the A-340 aircraft in service (see Note 6).

In the first half of 1999 the Company granted a loan of US$ 5,000,000 (Ptas. 828 million) to Aerolíneas Argentinas, S.A., which as of December 31, 1999, was recorded according to its maturity and, accordingly, Ptas. 497 million were recorded under the “Loans to Group and Associated Companies” caption and Ptas. 331 million were recorded under the “Short-Term Financial Investments” caption in the accompanying balance sheet as of December 31, 1999. Also, in 1999 the Company recorded Ptas. 38 million of interest on this loan (Ptas. 25 million at short term and Ptas. 13 million at long term). As of December 31, 1999, the Company had recorded a provision for the full amount of this loan plus the interest thereon under the “Provision for Third-Party Liability” caption in the balance sheet as of December 31, 1999, with a charge to the “Extraordinary Expenses” caption in the accompanying 1999 statement of income.

46 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

INVESTMENT SECURITIES AND OTHER LOANS The Company, together with the other international airline companies, had an ownership interest in SITA Fundation, a not-for-profit cooperative that engaged mainly in providing a communication service linking the airports of the world. The Company’s ownership interest in this entity was instrumented in certificates of deposit. In 1999, in view of the possibility of offering this service to third parties, a company called EQUANT was formed with the contributions made in the past by the airlines. Accordingly, the Company received 1,404,786 shares of the new company in exchange for a portion of their certificates of deposit. In August and December 1999 two tender offers were launched, and 771,451 shares were sold for Ptas. 9,421 million, giving rise to a gain of Ptas. 9,397 million, which was recorded under the “Revenues from Other Marketable Securities” caption in the accompanying 1999 statement of income.

Also, in September 1999 the Company subscribed to bonds issued by Iberbond PLC 1999 totaling 39,000,000 (Ptas. 6,489 million). These bonds form part of an issue relating to the acquisition of six A-320 aircraft that were subsequently leased to IBERIA, Líneas Aéreas de España, S.A. under a financial lease contract.

The bonds subscribed to by the Company earn annual interest of 5.90%, which is settled every six months. The principal is redeemed annually. The final maturity of the transaction is set for September 1, 2007. Based on this maturity, as of December 31, 1999, the Company recorded the portion of the investment maturing at long term (Ptas. 6,294 million) under the “Investment Securities and Other Loans” caption and the portion maturing in 2000 under the “Short-Term Financial Investments” caption in the accompanying balance sheet as of December 31, 1999.

- 8 - ACCOUNTS RECEIVABLE The breakdown of the “Accounts Receivable” caption in the accompanying balance sheet as of December 31, 1999, is as follows:

ACCOUNTS RECEIVABLE MILLIONS OF PESETAS

RE C E I VA B L E F R O M PA S S E N G E R A N D F R E IG H T A G E N C I E S 2 2 , 5 8 3 RE C E I VA B L E F R O M P U B L ICAU T HO R I T I E S 1 7 , 2 1 2 RE C E I VA B L E F R O M A I R L I N E S 1 1 , 2 6 6 RE C E I VA B L E F R O M C US TO M E R S ATSA L E S O F F IC E S 4 , 1 1 1 C R E D I T C A R D R E C E I VA B L E S 2 , 1 8 8 O T H E R C US TO M E R R E C E I VA B L E S F O R S A L E S A N D S E R V IC E S 4 , 7 5 0 S U N D R Y A C C O U N TS R E C E I VA B L E 9 , 5 4 0 D O U BT F U L R E C E I VA B L E S 2 , 1 8 9 P R O V IS IO N S ( 2 , 7 7 5 ) 7 1 , 0 6 4

47 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

The balance of the “Receivable from Public Authorities” caption relates basically to accounts receivable from the Spanish Directorate-General of Civil Aviation in connection with the subsidy for residents in the Autonomous Communities of the Canary Islands, the Balearic Islands and Ceuta and Melilla; accounts receivable from several Spanish ministries for maintaining the aircraft of the Royal Family and the Armed Forces; accounts receivable from the Spanish Postal and Telegraph Service and other foreign postal agencies for the transport of mail; and accounts receivable from foreign tax authorities.

The balance of the “Sundry Accounts Receivable” caption includes an account receivable for Ptas. 4,671 million which, relating to the sale of the shares of EQUANT in late December 1999 (see Note 7), was collected in January 2000.

- 9 - SHORT-TERM FINANCIAL INVESTMENTS The detail of the balance of this caption in the accompanying balance sheet as of December 31, 1999, is as follows:

DECEMBER 31, 1999 MILLIONS OF PESETAS

SHO R T-T E R M D E P O S I TS 6 5 , 7 6 0 GO V E R N M E N T D E BT S E C U R I T I E S 1 7 , 1 5 2 SHO R T-T E R M D E P O S I TS A N D G UA R A N T E E S 1 , 5 4 0 UN M AT U R E D I N T E R E S T R E C E I VA B L E 1 , 1 4 1 OT H E R S HO R T-T E R M F I N A N C I A L I N V E S T M E N TS 1 , 8 0 0 8 7 , 3 9 3

The average return on short-term deposits was 2.96% in 1999.

The government debt securities relate to government debentures and Treasury bills, which earned average interest of 4.98% in 1999.

48 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

- 10 - SHAREHOLDERS’ EQUITY The variations in equity accounts in 1999 were as follows:

SHAREHOLDERS’ EQUITY M I L L I O N S O F P E S E TA S

ADD I T I O N A L DIF F E R E N C E DUE PRIOR INCOME CAPITAL PAI D -IN LEGAL VOLUNTARY TO ADJ U S T M E N T YEARS’ FOR THE DI V I D E N D S STOCK CAP I TA L RESERVE RESERVES OF CAP I TA L STOC K LOSSES YEAR TO EUR O S

BALANCES AT JANUARY 1, 1999 11 4 , 7 2 7 ---- (1 5 , 8 0 9 ) 51 , 2 9 1 - DIST R I B U T IO N OF 1998 INCOME -- 5, 1 2 9 62 3 - 10 , 2 3 9 (5 1 , 2 9 1 ) 35 , 3 0 0 RED E NO M I N AT IO NO F CAPITAL STOCK TO EUROS (1 9 3 ) --- 19 3 --- CAP I TA L INCREASE 3, 9 4 4 16 , 0 4 9 - - 7 - - - INCOME FOR 1999 PER ACCOMPANYING STATEMENT OF INCOME ------16 , 0 5 2 - BALANCES AT 12-31-99 11 8 , 4 7 8 16 , 0 4 9 5, 1 2 9 62 3 20 0 (5 , 5 7 0 ) 16 , 0 5 2 -

CAPITAL STOCK As of December 31, 1998, the Company’s capital stock consisted of 882,512,019 fully subscribed and paid registered shares of Ptas. 130 par value each.

The following events took place in 1999:

REDENOMINATION OF CAPITAL STOCK IN EUROS On October 28, 1999, the Board of Directors of the Company unanimously resolved to redenominate the capital stock in euros. For this purpose, it adopted a par value per share of 0.78, the result of applying to the par value in pesetas the legal euro/peseta exchange rate, rounded down by two decimal places. This rounding down made it necessary to reduce capital by reducing the par value of the shares, as permitted by Article 28 of Law 46/1998 on the Introduction of the Euro. In accordance with the aforementioned Law, a restricted reserve for the amount of the capital reduction (Ptas. 193 million) was recorded.

49 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

CAPITAL INCREASE WITH ADDITIONAL PAID-IN CAPITAL On June 12, 1999, the Shareholders’ Meeting resolved to increase capital by Ptas. 20,000,000,146 through the issuance of 30,395,137 shares of Ptas. 130 par value each with an additional paid-in capital of Ptas. 528 per share.

The capital increase was subscribed in full by SEPI. The shares were subscribed and paid on October 27, 1999. However, following the redenomination of the capital stock in euros, this capital in c r ease was also redenominated in euros and, accordi n g l y , the par value of the new shares issued was 0.78 per share, giving rise to a restricted res e r ve of Ptas. 7 million due to the rounding down.

As of December 31, 1999, the Company s capital stock consisted of 912,907,156 fully subscribed and paid registered shares of 0.78 par value each.

As of December 31, 1999, SEPI was the Company s majority shareholder, with a 93.91% holding.

ADDITIONAL PAID-IN CAPITAL The revised Corporations Law expressly permits the use of the additional paid-in capital balance to increase capital and establishes no specific restrictions as to its use.

LEGAL RESERVE Under the revised Corporations Law, 10% of income for each year must be transferred to the legal reserve until the balance of this reserve reaches at least 20% of capital stock.

The legal reserve can be used to increase capital provided that the remaining reserve balance does not fall below 10% of the increased capital stock amount. Otherwise, until the legal reserve exceeds 20% of capital stock, it can only be used to offset losses, provided that sufficient other reserves are not available for this purpose.

- 11 - PROVISION FOR THIRD-PARTY LIABILITY The variations in 1999 in the balance of this caption in the accompanying balance sheet were as follows:

PROVISION FOR THIRD-PARTY LIABILITY MI L L I O N S O F P E S E TA S

BA L A N C E AT 0 1 - 0 1 - 9 9 6 3 , 9 7 9 PE R IO D P R O V IS IO N S 1 6 , 7 3 3 AMO U N TSUS E D I N T H E Y E A R ( 2 4 , 3 5 6 ) BA L A N C E AT 1 2 - 3 1 - 9 9 5 6 , 3 5 6

50 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

In 1999 the directors of the Company reassessed the restructuring costs, basically indemnity payments to employees, envisaged in the IBERIA Group’s Master Plan. This new estimate was made mainly as a result of the integration into the Company of the employees of Aviación y Comercio, S.A. and of a significant number of the employees of Vuelos Internacionales de Vacaciones, S.A. The period provisions for third-party liability include Ptas. 10,000 million to increase the total allowance recorded in this connection to Ptas. 30,000 million. The 1999 provision was recorded with a charge to the “Extraordinary Expenses” caption in the accompanying statement of income.

The other provisions in 1999, which were also re c o rded mainly with a charge to the “Extraord i n a ry Expenses” caption in the accompanying statement of income, relate to the estimate made by the directors of the Company of the amount re q u i red to cover probable sundry t h i rd - p a rty liability.

The amounts used in 1999 include Ptas. 11,764 million recorded as extraordinary revenues for the year as a result of the disappearance of the risk for which the related provisions were recorded in prior years, and the remaining Ptas. 11,849 million relate mainly to provisions used for the purpose for which they were recorded.

- 12 - PAYABLE TO CREDIT ENTITIES The breakdown, by maturity, of the Company’s payables to credit entities as of December 31, 1999, is as follows:

DECEMBER 31, 1999 M I L I L O N S O F P E S E TA S

D U E I N : SUB S E Q U E N T CU R R E N C Y 2 0 0 0 2001 2002 2003 2004 YE A R S D E BT : PESETA LOANS 3,594 1,496 1,318 2,337 3,080 - FOR E IG N CU R R E N C Y LOA N S : U.S. DOLLAR 48,594 5,714 14,344 1,931 -- YEN 602 4,575 1,940 2,242 -- DEUTSCHE MARK 1,134 1,141 1,172 1,205 6,587 - EURO 3,058 3,082 3,004 3,519 3,240 27,867 56,982 16,008 21,778 11,234 12,907 27,867

The weighted annual average interest rates on the foregoing loans in 1999 were 3.95% for peseta loans and 5.27% for foreign currency loans, and some of the rates were tied to MIBOR or LIBOR, respectively.

51 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

- 13 - FUTURES TRANSACTIONS The Company’s policy is to actively manage the risks arising from fluctuations in exchange and interest rates and in fuel prices.

Hedging transactions are arranged to minimize the impact of these variables on the statement of income. Following is a detail of the transactions arranged by IBERIA, Líneas Aéreas de España, S.A. as of December 31, 1999, based on the following criteria: notional values to hedge asset and liability positions, and for options, exchange rate hedging and fuel price hedging transactions, and present values for the income hedged for the other future cash flow hedging transactions.

DECEMBER 31, 1999 MILLIONS OF PESETAS HE D G I N G O F A S S E T A N D L I A B I L I T Y P O S I T I O N S: EXC H A N G E R I S K H E D G I N G T R A N SAC T I O N S CR O S S C U R R E N C Y S WA P S 2 2 , 7 3 1 IN T E R E S T R AT E R I S K H E D G I N G T R A N SAC T I O N S IN T E R E S T R AT E S WA P S 2 0 , 4 0 6

HE D G I N G O F F U T U R E C A S H F L OW S: EXC H A N G E A N D I N T E R E S T R AT E R I S K H E D G I N G T R A N SAC T I O N S CR O S S C U R R E N C Y I N T E R E S T A N D E XC H A N G E R AT E S WA P S 2 8 , 9 6 8 EXC H A N G E R I S K H E D G I N G T R A N SAC T I O N S CR O S S C U R R E N C Y S WA P S 8 2 , 7 9 0 CALL O P T IO N S B O U G H T 4 , 5 1 1 PUT O P T IO N S S O L D 4 , 1 5 0 EXC H A N G E R AT E I N S U R A N C E 7 6 8 IN T E R E S T R AT E R I S K H E D G I N G T R A N SAC T I O N S IN T E R E S T R AT E S WA P S 1 5 , 4 1 1 OT H E R H E D G I N G T R A N SAC T I O N S FU E L P R IC E H E D G I N G T R A N SAC T IO N S 60,477

52 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

- 14 - BALANCES AND TRANSACTIONS WITH GROUP AND ASSOCIATED COMPANIES The detail of the receivables from and payables to SEPI Group and associated companies as of December 31, 1999, is as follows:

DECEMBER 31, 1999 M I L L I O N S O F P E S E TA S

RE C E I VA B L E PAYA B L E LONG SHORT LONG SHORT COMPANY TERM TERM TERM TERM SEPI, TAXES (NOTE 15) 36,066 3,010 3,240 3,342 SEPI, OTHER -- 46 65 VUELOS INTERNACIONALES DE VACACIONES, S.A. - 3,675 -- CAMPOS VELÁZQUEZ, S.A. - 156 - 83 COMPAÑÍA AUXILIAR AL CARGO EXPRÉS, S.A. - 476 - 153 IBER-SWISS CATERING, S.A. - 25 - 241 IBERIA TECNOLOGÍA, S.A. - 34 - 3 SAVIA - 667 -- AVIACIÓN Y COMERCIO, S.A. - 680 - 69,322 CARGOSUR, S.A. --- 834 AEROLÍNEAS ARGENTINAS, S.A. (b) - 2,563 (a) - 70 AMADEUS GROUP - 735 -- BINTER FINANCE B.V. --- 530 BINTER CANARIAS, S.A. --- 714 BINTER MEDITERRÁNEO, S.A. - 2 - 215 MUSI N I , SDAD . ANÓ N I M A DE SEG U R O S Y REA S E G U R O S - 97 1,684 200 CONSTRUCCIONES AERONÁUTICAS, S.A. - 38 - 2 (a) Including Ptas. 22 million relating to Austral Líneas Aéreas - VENEZOLANA INTERNACIONAL DE AVIACIÓN, S.A. --- 410 Cielos del Sur, S.A. OTHER - 195 - 1,225 (b) Additionally, the company granted a loan to Aerolíneas Argentinas, S.A., 36,066 12,353 4,970 77,409 the balances of which are explained in Note 7.

The Company has recorded a short-term account receivable of Ptas. 4,868 million from Venezolana Internacional de Aviación, S.A. for which a provision has been recorded in full.

Also, the short-term account receivable from Vuelos Internacionales de Vacaciones, S.A. includes a loan of Ptas. 3,000 million which matured on December 30, 1999, and earned interest at Mibor + 0.25%. This loan will be repaid in the first quarter of 2000.

53 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

The Company’s account payable to Aviación y Comercio, S.A. as of December 31, 1999, related to three promissory notes for the following items: 1- Acquisition of property, plant and equipment of Aviación y Comercio, S.A. for Ptas. 50,019 million (see Note 6). 2- Services received and contributions of short-term funds amounting to Ptas. 18,800 million. 3- Deposits of funds received amounting to Ptas. 450 million.

Additionally, the account payable includes Ptas. 53 million relating to interest accrued as of December 31, 1999, on the three promissory notes.

The Company’s main transactions with SEPI Group and associated companies in 1999 were as follows:

1999 M I L L I O N S O F P E S E TA S

FINANCIAL SERVICES REVENUES SERVICES FINANCIAL COMPANY RENDERED AND DIVIDENDS RECEIVED EXPENSES SEPI - 3 - 13 VUELOS INTERNACIONALES DE VACACIONES, S.A. 255 - 750 - CAMPOS VELÁZQUEZ, S.A. - 156 -- COMPAÑÍA AUXILIAR AL CARGO EXPRÉS, S.A. 1,871 39 461 - IBER-SWISS CATERING, S.A. 101 37 8,286 - SAVIA 3,550 - 724 - AVIACIÓN Y COMERCIO, S.A. 3,882 2,411 28,860 193 AEROLÍNEAS ARGENTINAS, S.A. 4,323 - 1,114 43 VENEZOLANA INTERNACIONAL DE AVIACIÓN, S.A. ---- AMADEUS GROUP 4,763 7,287 13,173 - BINTER FINANCE, B.V. - 117 - 7 BINTER CANARIAS, S.A. 3,079 960 -- BINTER MEDITERRÁNEO, S.A. 784 --- IBERBUS COMPANIES - 1,472 10,051 - MUSINI --- 183

The services rendered to Aviación y Comercio, S.A., Aerolíneas Argentinas, S.A. and Bínter Canarias, S.A. consist basically of aircraft maintenance, passenger service, handling services for aircraft on stopovers, commissions on ticket sales and aircraft leasing.

54 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

The services rendered to the Company by Iber-Swiss Catering, S.A. relate to catering services and materials. The Amadeus Group bills the Company for ticket reservations made through its system and the Company receives a commission for each ticket issued through that system.

The services rendered by the Company to SAVIA relate mainly to the charge for the license to use the trademark, reservation services and rent.

Also, as of December 31, 1999, the Company had provided guarantees to third parties for the subsidiary Bínter Mediterráneo, S.A. totaling Ptas. 2,600 million, for the subsidiary Bínter Canarias, S.A. totaling Ptas. 3,276 million and for the subsidiary Vuelos Internacionales de Vacaciones, S.A. totaling Ptas. 2,800 million.

- 15 - TAX MATTERS The “Accounts Receivable” and “Other Nontrade Payables” captions in the accompanying balance sheet as of December 31, 1999, include the accounts receivable from and payable to, respectively, public authorities, the detail being as follows:

DECEMBER 31, 1999 MILLIONS OF PESETAS R E C E I VA B L E : RECEIVABLE FROM FOREIGN TAX AUTHORITIES 650 650 P AY A B L E : VAT 354 PERSONAL INCOME TAX WITHHOLDINGS 4,348 AIRPORT TAKEOFF AND SAFETY LEVIES 714 PAYABLE TO FOREIGN TAX AUTHORITIES 3,080 ACCRUED SOCIAL SECURITY TAXES PAYABLE 6,063 OTHER PAYABLES TO PUBLICAUTHORITIES 734 15,293

Corporate income tax is calculated on the basis of the income per books, which does not necessarily coincide with the taxable income for corporate income tax purposes.

55 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

The reconciliation of the income per books for 1999 to the taxable income for corporate income tax purposes is as follows:

1999 M I L L I O N S O F P E S E TA S

IN C R E A S E D E C R E A S E AM O U N T

INCOME FOR THE YEAR PER BOOKS (BEFORE TAXES) - - 16,859 PERMANENT DIFFERENCES 9,543 (13,290) (3,747) T I M I N G D I F F E R E N C E S : (a) This amount relates basically to the provisions for pensions ARISING IN THE YEAR 29,143 (a) (590) 28,553 and other commitments to employees, for projected restructuring costs ARISING IN PRIOR YEARS - (18,540) (b) (18,540) and for contingencies related to investee companies. TAXABLE INCOME (BEFORE CONSOLIDATION ADJUSTMENTS) 23,125 (b) This amount relates basically TA X C O N S O L I DAT I O N A D J U S T M E N T S: to amounts used of provisions recorded in prior years for PERMANENT DIFFERENCES 1,316 (4,076) (2,760) pensions and other commitments to employees and for risks relating TAXABLE INCOME 20,365 to accounts receivable.

Under the consolidated tax regime applicable to the Company, individual tax assets and liabilities are integrated in the Controlling Company (SEPI) and, accordingly, the Company paid corporate income tax amounting to Ptas. 3,342 million to SEPI in 1999.

The offset in 1999 of the tax losses contributed to the Group involves repurchasing the related tax assets amounting to Ptas. 3,404 million, and this amount is recorded under the “Corporate Income Tax” caption in the accompanying 1999 statement of income. The detail of the balance of the “Corporate Income Tax” caption in the accompanying 1999 statement of income is as follows:

1999 MILLIONS OF PESETAS AP P L IC AT IO N O F T H E 35% TA X R AT E TO I N C O M E P E R B O O KS A D J US T E D BY T H E P E R M A N E N T D I F F E R E N C E S 3 , 6 2 3 AD D / (LE S S) : 7% O F T H E P R IO R Y E A R S’ TA X L O S S E S O F F S E T I N 1 9 9 9 (851) DO U B L E TA X AT IO N A N D I N V E S T M E N T TA X C R E D I TS (2,750) OT H E R 785 C O R P O R AT E I N C O M E TA X 807

The 7% of prior years’ tax losses offset in 1999 relates to the difference between the corporate income tax rate (35%) and the rate of 28% that the Company obtained from SEPI by contributing its tax losses in consolidation for tax purposes.

56 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

As of December 31, 1999, the prior years’ tax losses susceptible to repurchase from SEPI amounted to Ptas. 194,899 million. 7% of this figure amounts to Ptas. 13,643 million, which the Company has recorded under the “Long-Term Receivables from Group Companies” caption in the accompanying consolidated balance sheet as of December 31, 1999. The Company will maintain a provision for the latter amount until it is able to use this tax asset.

The tax assets and liabilities were recorded, on the basis of the recovery date, under the “Receivable from Group Companies”, “Long-Term Receivables from Group Companies” and “Payable to Group and Associated Companies” captions in the accompanying balance sheet as of December 31, 1999, the detail being as follows:

DECEMBER 31, 1999 M I L L I O N S O F P E S E TA S

RE C E I VA B L E F R O M PAYA B L E TO GR O U P GR O U P CO M PA N I E S AS S O C I AT E D CO M PA N I E S SH O R T L O N G S H O R T L O N G TE R M TE R M TOTA L TE R M TE R M TOTA L TAXABLE INCOME FOR 1999 --- 3,342 - 3,342 TIMING DIFFERENCES ARISING IN THE YEAR - 9,416 9,416 - 206 206 UNALLOCATED TIMING DIFFERENCES ARISING IN PRIOR YEARS 3,010 26,650 29,660 - 3,034 3,034 TOTAL 3,010 36,066 39,076 3,342 3,240 6,582

The estimated years for use of the long-term tax assets as of December 31, 1999, are as follows:

YEAR OF RECOV E RY MILLIONS OF PESETA S 2 0 0 1 5 , 8 4 3 2 0 2 1 5 , 3 2 6 2003 A N D S U B S E Q U E N T Y E A R S 2 4 , 8 9 7 3 6 , 0 6 6

The Company’s directors consider that all these assets will be recovered in not more than ten years.

Current corporate income tax regulations provide certain tax incentives to encourage vocational training and export activity. The Company availed itself of the tax benefits envisaged in this legislation and earned tax credits of Ptas. 66 million in 1999 this connection. As of December 31, 1999, the Company did not have any unused tax credits.

57 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

In 1999 and 1998 the Company availed itself of the tax regime for the reinvestment of extraordinary income and deducted Ptas. 487 million and Ptas. 6,889 million, respectively, of tax.

The Company opted to include the income deferred in 1999 and 1998 by the method established in Article 34.1 a) of the Corporate Income Tax Regulations.

REINVESTMENT OF EXTRAORDINARY INCOME M I L L I O N S O F P E S E TA S 1 9 9 9 1 9 9 8

I N C O M E Q UA L I F Y I N G F O R R E I N V E S T M E N T E X E M P T IO N A N D NOT I N C L U D E D I N T A X A B L E I N C O M E 4 8 7 6 , 8 8 9 R E I N V E S T M E N T C O M M I T M E N T 9 7 3 6 , 9 0 6

In 1999 the Company reinvested the amounts shown below as follows:

REINVESTED IN 1999 M I L L I O N S O F P E S E TA S 1999 GAIN 1998 GAIN

PR O P E R T Y, P L A N T A N D E Q U I P M E N T: AI R C R A F T 9 7 3 3 , 5 6 6 MAC H I N E R Y - 8 3 9 AI R P O R T E Q U I P M E N T - 1 , 5 0 6 C O M P U T E R H A R D WA R E - 9 9 5 TOTA L 9 7 3 6 , 9 0 6

The Company has no outstanding reinvestment commitments for future years.

As of December 31, 1999, the Company had not included in its taxable income any of the income qualifying for reinvestment deferral in prior years, and all this income must be included in future years, the detail, by year of origin being as follows:

DECEMBER 31, 1999 YE A R O F O R I G I N M I L L I O N S O F P E S E TA S 1 9 9 6 864 1 9 9 7 915 1 9 9 8 6,889 1 9 9 9 487

58 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

In January 1997 the tax authorities commenced an audit of 1992 to 1995 for all the taxes applicable to the Company. As a result of the aforementioned tax audit, tax assessments were issued and contested by the Company. The Company’s directors do not expect any liabilities additional to those recorded as of December 31, 1999, to arise from these tax assessments. As a result of the audit of corporate income tax, provisional tax assessments were issued confirming the data included in the tax returns filed by the Company.

In 1999 the tax authorities commenced an audit of 1996 and 1997 for all the taxes applicable to the Company. As a result of the audit, tax assessments relating to personal income tax withholdings and VAT amounting to Ptas. 748 million were issued and accepted, and tax assessments for the same taxes totaling Ptas. 535 million were issued and contested. The Company’s directors do not expect any liabilities additional to those recorded as of December 31, 1999, to arise in this connection. The years through 1997 can now no longer be audited for VAT. As a result of the audit of corporate income tax, a certificate was issued documenting the increases of Ptas. 1,884 million and Ptas. 5,826 million in the 1996 and 1997 tax bases, respectively. 1996 and 1997 are open for review for personal income tax withholdings, but only in respect of compensation in kind.

- 16 - REVENUES AND EXPENSES

A) NET SALES The breakdown of the Company’s net sales in 1999 and 1998, by type of activity, is as follows:

BY TYPE OF ACTIVITY M I L L I O N S O F P E S E TA S 1 9 9 9 1 9 9 8

PA S S E N G E R T IC K E T R E V E N U E S 4 8 9 , 2 0 2 4 9 7 , 0 3 9 CA R G O R E V E N U E S 3 5 , 5 2 7 3 6 , 9 3 3 HA N D L I N G (A I R C R A F T D IS PATC H I N G A N D A I R P O R T S E R V IC E S) 4 1 , 1 7 5 4 0 , 2 0 0 TE C H N IC A L A S S IS TA N C E TO A I R L I N E S 2 1 , 2 1 9 2 2 , 6 0 3 OT H E R R E V E N U E S 9 , 1 4 9 1 0 , 1 7 8 5 9 6 , 2 7 2 6 0 6 , 9 5 3

59 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

The geographical breakdown of passenger ticket revenues in 1999 and 1998, by network, is as follows:

BY NETWORK M I L L I O N S O F P E S E TA S 1 9 9 9 1 9 9 8

SPA I N A N D E U R O P E 3 4 0 , 3 3 4 3 5 1 , 8 4 3 AT L A N T IC 1 3 6 , 6 0 1 1 2 4 , 8 9 0 FA R E A S T - 9 , 5 4 8 AF R IC A 1 2 , 2 6 7 1 0 , 7 5 8 4 8 9 , 2 0 2 4 9 7 , 0 3 9

TECHNICAL ASSISTANCE TO AIRLINES This caption includes revenues from aircraft maintenance services rendered to other airlines, including Group companies.

B) OTHER OPERATING REVENUES The detail of the balances of this caption in the accompanying 1999 and 1998 statements of income is as follows:

OTHER OPERATING REVENUES M I L L I O N S O F P E S E TA S 1 9 9 9 1 9 9 8

CO M M IS S IO N S 1 3 , 1 4 8 1 0 , 9 6 2 ROYA LT I E S 2 , 2 4 4 3 , 1 5 3 R E N T 1 , 0 5 5 1 , 8 1 7 RE C O G N I T IO N O F D E F E R R E D R E V E N U E S 2 8 7 1 , 3 2 9 OT H E R S U N D R Y R E V E N U E S 1 0 , 9 6 2 8 , 1 2 7 2 7 , 6 9 6 2 5 , 3 8 8

C) EXTRAORDINARY REVENUES The detail of the balance of the “Extraordinary Revenues” caption in the accompanying 1999 statement of income is as follows:

EXTRAORDINARY REVENUES MI L L I O N S O F P E S E TA S

RE C O V E R Y O F P R O V IS IO N S F O R T H I R D-PA R T Y L I A B I L I T Y 1 1 , 7 6 4 RE C O V E R Y O F C O N T I N G E N C Y-R E L AT E D O P E R AT I N G P R O V IS IO N S 2 , 1 6 7 OT H E R 6 7 7 1 4 , 6 0 8

60 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

D) PRIOR YEARS’ REVENUES AND INCOME The detail of the balance of the “Prior Years’ Revenues and Income” caption in the accompanying 1999 statement of income is as follows:

PRIOR YEARS’ REVENUES AND INCOME MI L L I O N S O F P E S E TA S A E N A 1 0 , 3 0 3 OT H E R 2 , 4 5 7 1 2 , 7 6 0

“AENA” includes Ptas. 6,255 million recovered from the claims filed with various courts and Ptas. 4,048 million relating to an adjustment to the 1998 rates applied.

E) PURCHASES The detail of the “Purchases” caption in the accompanying 1999 and 1998 statements of income is as follows:

PURCHASES M I L L I O N S O F P E S E TA S 1 9 9 9 1 9 9 8

AIRCRAFT FUEL 57,049 49,902 AIRCRAFT SPARE PARTS 21,205 15,920 CATERING MATERIALS 4,909 5,467 OTHER PURCHASES 3,023 2,894 86,186 74,183

F) HEADCOUNT AND PERSONNEL EXPENSES The detail of the “Personnel Expenses” caption in the accompanying 1999 and 1998 statements of income is as follows:

HEADCOUNT AND PERSONNEL EXPENSES M I L L I O N S O F P E S E TA S 1 9 9 9 1 9 9 8

WA G E S , S A L A R I E S, E TC . 1 4 1 , 7 8 2 1 2 7 , 0 0 9 E M P L OY E E W E L FA R E E X P E N S E S 4 5 , 3 8 8 3 9 , 1 5 9 1 8 7 , 1 7 0 1 6 6 , 1 6 8

61 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

The average number of employees, by professional category, in 1999 and 1998 was as follows:

EMPLOYEES 1 9 9 9 1 9 9 8 GR O U N D P E R S O N N E L : S E N IO R M A N AG E R S A N D T E C H N IC I A N S 1 , 2 7 6 1 , 1 7 2 C L E R IC A L S TA F F 6 , 4 9 8 6 , 0 3 9 OT H E R 1 0 , 7 7 0 1 0 , 3 2 9 1 8 , 5 4 4 1 7 , 5 4 0 FL I G H T P E R S O N N E L : PI L OTS 1 , 4 7 6 1 , 2 3 9 F L IG H T E N G I N E E R S 2 2 3 2 2 9 C A B I N C R E W 3 , 7 2 1 3 , 0 5 6 5 , 4 2 0 4 , 5 2 4 2 3 , 9 6 4 2 2 , 0 6 4

The inclusion of the employees of Aviación y Comercio, S.A. and of Vuelos Internacionales de Vacaciones, S.A. increased the equivalent headcount by 447 ground employees, 126 pilots and 253 cabin crew members.

G) OTHER OPERATING EXPENSES The detail of the balances of this caption in the accompanying 1999 and 1998 statements of income is as follows:

OTHER OPERATING EXPENSES M I L L I O N S O F P E S E TA S 1 9 9 9 1 9 9 8 AIR C R A F T LE A S E PAYM E N T S AN D PAYM E N T S TO OP E R A TOR S (N OTE 6) (a) (c) 7 5 , 9 0 7 8 0 , 5 6 5 CO M M E R C I A L E X P E N S E S 6 5 , 0 4 0 6 7 , 3 7 7 AI R T R A F F IC L E V I E S A N D C H A R G E S 3 7 , 9 9 4 3 6 , 6 3 1 MA I N T E N A N C E (b) 2 8 , 9 5 7 2 3 , 5 7 1 (a) Including the cost of the NAV IGAT IO N A I D S 2 7 , 5 9 0 2 5 , 5 3 2 wet lease contracts amounting to Ptas. 21,208 million in 1999 and IN-F L IG H T S E R V IC E S 1 5 , 2 4 4 1 3 , 8 9 5 to Ptas. 16,773 million in 1998. RE S E R VAT IO N SY S T E M E X P E N S E S 1 4 , 9 9 0 1 6 , 2 2 0 (b) Including maintenance expenses and provision for major repairs. SU N D R Y R E N T 8 , 5 4 1 8 , 7 9 8 (c) Including payments OT H E R 5 0 , 3 7 5 5 0 , 2 6 2 to the operator AVIACO amounting to Ptas. 28,351 million in 1999 and 3 2 4 , 6 3 8 3 2 2 , 8 5 1 to Ptas. 38,174 million in 1998.

62 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

H) EXTRAORDINARY EXPENSES The detail of the balance of the “Extraordinary Expenses” caption in the accompanying 1999 statement of income is as follows:

EXTRAORDINARY EXPENSES MI L L I O N S O F P E S E TA S PR O V IS IO N S F O R T H I R D-PA R T Y L I A B I L I T Y ( NOT E 1 1 ) 1 6 , 4 8 7 ME R G E R E X T R A PAY R O L L PAY M E N T 4 , 7 9 2 PR O V IS IO N F O R OT H E R O B L IGAT IO N S TO E M P L OY E E S 8 3 6 OT H E R E X T R AO R D I N A R Y E X P E N S E S 2 , 3 3 1 2 4 , 4 4 6

In accordance with the agreements entered into with the employees’ representatives in June 1999 and as a result of the integration of the employees and assets and liabilities of Aviación y Comercio, S.A., on September 1, 1999, a merger extra payroll payment amounting to Ptas. 4,792 million was paid.

- 17 - “YEAR 2000 ISSUE” The effect of the Year 2000 issue presented a particularly significant problem for aviation because of its implications for the efficient and normal operation of international air transport.

Since the first half of 1997 the Company has been adopting the measures required to tackle the Year 2000 Issue, and implemented a plan for assessing all systems and remedying possible problems, applying the plans and measures established by IATA (International Air Transport Association) and ICAO (International Civil Aviation Organization), and by the main aircraft and aircraft part suppliers.

The Company made the transition to the Year 2000 successfully, and it currently has, in addition to certain non-critical systems in the course of being replaced, various warning systems relating to the possible effects of the Year 2000 Issue.

- 18 - DIRECTORS’ COMPENSATION AND OTHER BENEFITS The compensation of all types earned by the Company’s directors amounted to Ptas. 135 million in 1999.

In 1999 no advances or loans were granted to the directors and there were no pension commitments to them.

63 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

- 19 - 1999 AND 1998 STATEMENTS OF CHANGES IN FINANCIAL POSITION Following are the Company’s statements of changes in financial position for 1999 and 1998:

APPLICATION OF FUNDS M I L L I O N S O F P E S E TA S

1999 1998

FIXED ASSET ADDITIONS: INTANGIBLE ASSETS 35,088 645 PROPERTY, PLANT AND EQUIPMENT 115,917 54,732 LONG-TERM FINANCIAL INVESTMENT IN GROUP AND ASSOCIATED COMPANIES 4,675 48,978 OTHER FINANCIAL INVESTMENTS 7,202 2,916 DEFERRED REVENUES 1,148 182 DIVIDENDS PAID 35,300 - REPAYMENT OR TRANSFER TO SHORT TERM OF LONG-TERM DEBT: DEBT SECURITIES AND OTHER SIMILAR ISSUES 11,231 34,096 GROUP AND ASSOCIATED COMPANIES 88 129 OTHER DEBT 2 97 PROVISION FOR MAJOR REPAIRS 1,744 1,016 PROVISIONS FOR PENSIONS 2,348 2,245 PROVISIONS FOR OBLIGATIONS TO EMPLOYEES 1,659 1,524 PROVISION FOR THIRD-PARTY LIABILITY 1,022 1,074 TOTA L FU N D S AP P L I E D 217,424 147,634 FU N D S OBTA I N E D I N EXC E S S O F FU N D S AP P L I E D ( IN C R E A S E I N WO R K I N G C A P I TA L) --

64 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

SOURCE OF FUNDS M I L L I O N S O F P E S E TA S

1999 1998

FUNDS OBTAINED FROM OPERATIONS 37,622 77,599 CAPITAL INCREASE 20,000 - LONG-TERM DEBT: GROUP COMPANIES - 2,602 OTHER COMPANIES 38,009 16,109 DISPOSALS OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS 29,842 10,019 DISPOSALS OF LONG-TERM FINANCIAL INVESTMENTS 9,424 3,566 DIVIDENDS RECEIVED - 3,325 EARLY REDEMPTION OR TRANSFER TO SHORT TERM OF LONG-TERM FINANCIAL INVESTMENTS: GROUP COMPANIES - 147 OTHER FINANCIAL INVESTMENTS 10,575 583 DEFERRED REVENUES 1,625 235 DEFERRED CHARGES 45 - LONG-TERM DEFERRED TAX LIABILITY 207 - TOTA L FU N D S OBTA I N E D 147,349 114,185 FU N D S AP P L I E D I N EXC E S S O F FU N D S OBTA I N E D ( DE C R E A S E I N WO R K I N G C A P I TA L) 70,075 33,449

VARIATION IN WORKING CAPITAL M I L L I O N S O F P E S E TA S 1 9 9 9 1 9 9 8 IN C R E A S E DE C R E A S E IN C R E A S E DE C R E A S E

INVENTORIES 3,261 - 1,317 - ACCOUNTS RECEIVABLE 13,614 - - 4,160 CURRENT LIABILITIES - 96,415 - 31,126 SHORT-TERM FINANCIAL INVESTMENTS 10,836 - - 392 CASH - 802 708 - ASSET ACCRUAL ACCOUNTS - 569 204 - TOTA L 27,711 97,786 2,229 35,678 VA R I AT I O N I N WO R K I N G CA P I TA L - 70,075 - 33,449

65 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 NOTES TO 1999 FINANCIAL STAT E M E N T S

The reconciliation of the income per books to the funds obtained from operations is as follows:

RECONCILIATION M I L L I O N S O F P E S E TA S 1 9 9 9 1 9 9 8

IN C O M E P E R B O O KS 16,052 51,291 AD D / (LE S S) : PERIOD DEPRECIATION AND AMORTIZATION AND FIXED ASSET PROVISIONS 27,055 21,356 PROVISION FOR CONTINGENCIES AND EXPENSES 31,746 25,974 DEFERRED INTEREST EXPENSES AND DEFERRED CHARGES 1,106 2,071 TAX ASSET RECOVERABLE AT LONG-TERM (6,374) (6,927) NET EXCHANGE DIFFERENCES ON LONG-TERM DEBT (7,851) 3,297 NET EXCHANGE DIFFERENCES ON FIXED ASSET REVALUATIONS 180 - DEFERRED INTEREST REVENUES (269) (1,430) NET LOSSES ON FIXED ASSET DISPOSALS (9,356) (7,022) RECOVERY OF OVERSTATED PROVISIONS AND DEPRECIATION AND AMORTIZATION (14,667) (11,736) WRITE-OFF CAPITALIZED INTEREST - 725 37,622 77,599

66 ANNUAL REPORT 1999

MANAGEMENT REPORT

D U E T O I T S L E N G T H , T H I S P U B L I C AT I O N I N C L U D E S O N L YA S U M M A R Y O F T H E M A N A G E M E N T R E P O R T . T H E C O M P L E T E T E X T H A S B E E N D E P O S I T E D W I T H T H E M A D R I D M E R C A N T I L E R E G I S T E R . T R A N S L AT I O N O F A R E P O R T O R I G I N A L LY I S S U E D I N S PA N I S H . I N T H E E V E N T O F A D I S C R E PA N C Y, T H E S P A N I S H -L A N G U A G E V E R S I O N P R E VA I L S .

IBERIA, LINEAS AEREAS DE ESPAÑA, S.A.

IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 MANAGEMENT REPORT

- 1 - 1999 HIGHLIGHTS The new era for the Group commenced in 1999 with the second best earnings figures in its history, namely income before taxes of Ptas. 31,082 million, achieved in a difficult year for the industry as a whole, and particularly for IBERIA, as a result of the conflicts during the year and the specific problems of airport facilities and air traffic congestion.

Despite these problems, when we refer to a new era we mean that the targets set by the IBERIA Group three years ago when it established its Master Plan have been achieved. The objective of the Plan was to turn IBERIA into a financially healthy competitive and profitable company, with a forward-looking industrial project, oriented towards serving its customers and consolidating its position among the leading airlines in the world, all aimed at generating shareholder value.

The commencement of this new era for the IBERIA Group was founded on several circumstances: the existence of a flexible business structure, with new shareholders; the significant financial soundness achieved during the term of the Plan, since the Group companies generated sufficient funds to reduce the net indebtedness, despite the fact that this period was characterized by the commencement of a significant investment drive to replace aircraft, making it possible, in addition, to remunerate their shareholders; and the fact that the Group is now a “global” operator as a result of the alliances forged in 1999.

To reach the current situation, at the end of 1996 Company management designed a Plan that, in the period from 1997 to 1999, was aimed at making the Company profitable and competitive. Translating the targets achieved into figures, the Group’s actual pre-tax income of Ptas. 117,831 million ( 708.18 million) for this three-year period exceeded by 62% the pre-tax income of Ptas. 72,730 million ( 437 million) projected in the Plan.

This Plan involved the development of a management model, in which each of IBERIA’s management areas taken individually had to be profitable. The measures taken to increase revenues included improving marketing and harnessing network design possibilities to the full by integrating the subsidiaries. This enabled maximum returns to be obtained from aircraft and crews, for which it was necessary to optimize connections between the Group’s flights at its Barajas hub.

To d a y, the IBERIA Group offers better service and, as a result of its alliances, more destinations and more frequent flights. In short, it is a global operator, which has tailored its supply to the demand of its customers. As a result of the alliances, which culminated in the formalization of the commitment to join the oneworld alliance as a fully-fledged member from September 1, 1999, the Group can cover more than 680 destinations in over 140 countries, i.e. a global network of destinations and frequencies. The bilateral agreements entered into by IBERIA with British Airways have enabled shared-code flights to be offered in reciprocal domestic markets since June 17, 1999.

Under the Aircraft Fleet Plan, in 1999 21 new aircraft were acquired by IBERIA, which will lead to improved productivity and lower costs at short and medium term as a result of the greater uniformity of aircraft, facilitating pilot training and availability, and of the reduction in fuel and maintenance operating costs.

69 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 MANAGEMENT REPORT

1999 was a difficult year for all European airlines, and particularly for IBERIA. Two events had a major effect on the Group’s performance and earnings in 1999: on the one hand, the pilots’ strike at Easter and its ramifications until the June agreements were reached and, on the other, the congested European skies and airport difficulties, which were particularly intense in Spain as a result of the shortage of air traffic controllers.

Despite the manifest improvements in the latter part of the year, the main problem that continues to afflict European air transport as a whole is the lack of organization of European airspace, leading to congestion, delays and operating difficulties for airlines, a circumstance that has been denounced on multiple occasions by all the airlines and associations in the industry. Specifically, in the case of Spanish air traffic, there were serious problems at Madrid-Barajas airport in early 1999, particularly in spring, due, initially, to saturation and a shortage of slots and, subsequently, to the insufficient number of air traffic controllers. This hit all airlines, but especially the IBERIA Group, the leading operator at this airport.

This situation, combined with the conflicts with the pilots’ union SEPLA, damaged the Company’s image, significantly reducing passenger revenues. Both problems have been partially solved by the signature with SEPLA of the sixth collective labor agreement and the current return to normality of operations at Spanish airports.

The Group’s financial performance in 1999 was strongly affected by the two aforementioned factors, although its competitors were also similarly hit. The Group’s operating revenues decreased by 2.8% with respect to 1998, whereas its operating expenses increased by 4.0%.

The fall in operating revenues was due mainly to the decrease in passenger revenues, largely as a result of the conflictive situation in the period from April to June, which however lasted until October, and to the drop in prices, which reduced the yield (average revenue passenger kilometer) by more than 3.5% in real terms with respect to 1998 in the Spanish and European markets, and by 5% in the intercontinental market.

From May onwards, to contribute to air traffic decongestion, the Company reduced its flights in the last eight months of the year by approximately 20,000 block hours (5% of its production), with the concomitant impact on revenues and margins and on IBERIA’s competitiveness in the markets affected by these flight cancellations.

The economic recession in the Far East helped to quash growth expectations in that air transport market, in which the airlines had already increased their production capacity. This led to the redistribution of capacity with the transfer of certain aircraft initially earmarked to cover the Asia/Pacific area to other regions, mainly North and South America, with the resulting effect on the equilibrium of all air transport markets. As a result of the greater increase in supply than in demand in 1999, actual traffic revenues were lower than expected in many markets and, in general, the excess supply reduced load factors and unit revenues.

Also, the economies of South and Central American countries were hit by the economic crisis. The economic recession in certain countries in 1999 had an impact on their air traffic, with negative growth in some markets.

70 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 MANAGEMENT REPORT

There were two clearly differing parts of the year as regards the performance of the cargo market. The negative trend in the first half of 1999, which was subsequently reversed, was due to the surplus supply that arose from the reallocation of resources from the Asia-Pacific markets to Europe-Atlantic markets and the economic recession in certain areas that commenced in the second half of 1998. This led to an across-the-board decrease on load factors and unit revenues as a result of the price cuts made by airlines in an attempt to shore up their positions. The signs of recovery in the world air transport market that started to emerge in the second half of 1999 appear to be holding.

In 1999 the Cargo Division maintained its objective of making maximum use of the capacity of passenger aircraft holds and reducing the use of cargo planes, which should help to make supply more stable, flexible and complete. In this regard, in 1999 IBERIA contracted the holds of three aircraft, thereby ensuring a high degree of resource management flexibility.

In 1999 IBERIA Material’s production amounted to almost 4 million hours, of which nearly 3.3 million hours were worked by in-house personnel, thereby exceeding output in 1998. Technical assistance revenues in this area amounted to Ptas. 21,219 million ( 127.53 million), down 6.1% from 1998. The activities carried on in the year include most notably the maintenance of Air Europa’s aircraft operated under wet lease arrangements, the maintenance of the proprietary A-340 aircraft; the equipping of the short- and medium-haul aircraft with TCAS (Traffic Alert and Collision Avoidance System) close traffic danger alert systems, and the increase in C and D overhauls of proprietary planes, with the outsourcing of certain lower value added aircraft and engine overhauls.

In line with the Master Plan, the employees and handling activities of Aviaco at airports where this company held the related licenses were gradually incorporated into IBERIA Handling, a process which ended on September 1, 1999, with the integration of the handling activities at Mahón airport.

Pursuant to current legislation, in 1999 IBERIA L.A.E. operated the general groundhandling agent license at 37 Spanish airports. The Company has a customer roster comprising more than 250 foreign and Spanish companies, and it its the leading handling operator in Spain with a market share of around 65% in 1999 (in terms of third-party handling, excluding self-handling companies).

Noteworthy in connection with other revenue-generating activities, such as in-flight sales, was the elimination of Duty Free sales in the EU from July 1999, which led to a significant reduction in these revenues in the second half of the year. To offset this reduction, the catering article sales policy was redesigned.

Noteworthy as regards the Group’s operating expenses was the sharp increase in fuel prices in 1999, which is affecting the profits of the air transport business as a whole. The price in pesetas per liter paid by the Company has almost doubled since 1998.

71 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 MANAGEMENT REPORT

The cost of navigation charges increased once again in 1999, this time by 1.6%, not only as a result of the increased number of flights (which in terms of take-offs increased by 2.2% with respect to 1998), but also of the landing charge applied by AENA since 1998, to which a lower discount was applied in 1999, increasing this cost by more than Ptas. 2,000 million (over 12 million). This was partially offset by a saving of Ptas. 1,619 million ( 9.73 million) as a result of the elimination of the operations of Viva Air.

Personnel expenses increased by 6.6% in 1999, due mainly to the increase both in technical flight personnel (10.3% in cabin crew and 4.7% in pilots) as a result of the hiring of trainees to operate the new aircraft acquired, signifying that it is in future years when the increase in productivity will become evident, and in ground personnel, basically in the Spanish groundhandling area (7.7%) to recover quality levels and cater for the increased number of flights. Besides the increased labor force, the salary increases agreed on in the collective labor agreements (raises equal to the projected increase in the CPI with no subsequent revision), promotions and the increase in social security costs were also factors behind this increase. The collective labor agreements for flight personnel will remain in force until December 31, 2000, as will the collective labor agreement for ground personnel following the renewal agreement signed on December 16, 1999.

To meet one of its strategic objectives, the Company worked hard at applying the general expense reduction policies established in the Master Plan. In 1999 the decrease in this caption was close to the 5% set as the annual target for 1997-1999. Passenger service operating expenses due to interrupted journeys or missed connections (food, hotels, transport, etc.) and the indemnities relating to passenger and cargo transport increased significantly, one of the main reasons behind the fall in earnings.

As a result of all the foregoing, the Group’s income for the year before taxes amounted to Ptas. 31,082 million ( 186.8 million). IBERIA reported income before taxes of Ptas. 16,859 million ( 101.3 million), giving a return on equity of 15% at consolidated Group level.

As regards the variations in unit operating ratios at IBERIA plus Aviaco level, in 1999 the cost per ASK was Ptas. 12.16, down 3.9% from 1998, despite the significant increases in certain uncontrollable cost items, as described above. The operating revenue per ASK was Ptas. 12.35, 10.5% lower than in 1998, partly as a result of the pressure exerted on prices by the surplus supply in all markets, and partly as a result of the increase in long-haul flights, which have a greater importance in the make-up of the networks. Accordingly, the unit operating margin decreased by Ptas. 1.14/ASK to Ptas. 0.19/ASK in 1999.

Lastly, mention should be made of certain projects carried out by the IBERIA Group in 1999.

72 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 MANAGEMENT REPORT

The most important of these was the Year 2000 Project. All IBERIA’s aircraft, systems and equipment were analyzed in close cooperation with the related manufacturers. Both Boeing and Airbus formally notified the companies that the “Year 2000 Issue” would not affect the safety and airworthiness of their aircraft. As a supplementary measure, two demonstration flights were made sufficiently in advance (on October 28 with an A-320 aircraft of IBERIA L.A.E. and on November 1 with an ATR72 aircraft of Binter Canarias), simulating the changeover to the year 2000.

IBERIA L.A.E. also participated actively in IATA’s Year 2000 Project and cooperated with the Spanish air transport supervisory bodies (the Directorate-General of Civil Aviation, AENA and the Ministry for Development) and with the U.S. Federal Aviation Administration (FAA) and the OACI in their respective Year 2000 projects.

Lastly, IBERIA L.A.E. set up the “Year 2000 Transition Center”, which started to operate at 10:00 a.m. on December 31, 1999, and concluded its work at 3:00 p.m. on January 4, 2000. The Company’s flights operated normally during this transitional period, and the Project was deemed to have successfully concluded on that date, although ongoing monitoring was performed during the first few weeks of the year 2000.

Also, the timetable for adapting systems to the euro is being fulfilled. Among other measures taken, since January 3, 1999, for customers paying by credit card, tickets can be acquired in either pesetas or euros. A commercial campaign with fares in euros was also launched for certain routes between EU Member States. The Company’s employees received their payroll slips with their net salary in euros, and, in the capital increase of Ptas. 20,000 million ( 120.20 million) in 1999, the capital stock was redenominated in euros, as a result of which the par value of the shares was set at 0.78.

In 1999 the targets set in the Master Plan were the first step towards the total privatization of IBERIA L.A.E. through the incorporation of industrial partners with the signature by SEPI and said industrial partners in December of an agreement whereby Caja Madrid acquired 10%, British Airways 9%, Banco Bilbao Vizcaya 7.3%, Logista 6.7%, El Corte Inglés 3%, Ahorro Corporación 3% and American Airlines 1% of the capital stock of IBERIA. To this 40% of the capital stock of IBERIA must be added the 6.1% owned by the employees.

1999 was, therefore, a difficult year, in which IBERIA had to adapt itself to and overcome such difficulties in order to achieve satisfactory results. The new targets in this New Era of the IBERIA group are to strengthen its position as one of the major global air transport groups and to maintain an adequate profitability and sustained growth at long term. For this purpose the Group’s human resources must continue to focus their efforts on meeting two key objectives: creating shareholder value, and continuing to improve the quality and service offered to our customers.

73 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 MANAGEMENT REPORT

- 2 - GROUP PRODUCTION (BY NETWORK) 2.1. SUPPLY In terms of ASKs, the IB Group’s production increased by over 10% with respect to 1998, the largest increase being on long-haul routes (24,4%), on which IBERIA’s strategic growth strategy is focused. The total growth was 4.8% as a result of the discontinuation of Viva’s charter flights from April.

AVAILABLE SEATS KILOMETRE S U P P LY M I L L I O N S O F A S K S

SOUTHERN AFRICA 1.53 % 1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N

SPAIN 25.68 % S PAIN 12,901 1 2 , 2 1 8 6 8 3 5 . 6 EUROPE 1 2 , 1 3 7 1 1 , 8 6 9 2 6 8 2 . 2 A M E R IC A S 2 4 , 4 3 2 1 9 , 6 3 8 4 , 7 9 4 2 4 . 4 SOUTHERN AFRIC A 7 6 8 4 1 8 3 5 0 8 3 . 6 AMERICAS 48.63 % EUROPE FAR EAST - 1 , 3 7 5 ( 1 , 3 7 5 ) - 24.16 % IBERIA, L.A.E. 5 0 , 2 3 8 4 5 , 5 1 8 4 , 7 2 0 1 0 . 4

1 9 9 9 S PANISH GROUP 5 1 , 2 1 2 4 8 , 8 7 5 2 , 3 3 7 4 . 8 IBERIA L.A.E.: 50,238 S PANISH GROUP: 51,212 Group production in terms of block hours was similar to that of 1998, due to the discontinuation of Viva Air’s operations during the year. Wet lease transactions continued to be maintained because of the flexibility that they give to the Company’s production.

The variations in 1999 were as follows:

BLOCK HOURS VA R I ATIONS IN 1999 B L O C K H O U R S 1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N IBERIA 330,913 OPERATIONS 279,829 IBERIA OPERATOR 3 3 0 , 9 1 3 2 7 9 , 8 2 9 5 1 , 0 8 4 1 8 . 3 42,641 WET-LEASE 37,576 W E T-LEASE 4 2 , 6 4 1 3 7 , 5 7 6 5 , 0 6 5 1 3 . 5

AVIACO 51,729 AV I ACO OPERATOR (*) 5 1 , 7 2 9 8 3 , 5 4 7 ( 3 1 , 8 1 8 ) ( 3 8 . 1 ) OPERATIONS* 83,547 IBERIA, L.A.E. 4 2 5 , 2 8 3 4 0 0 , 9 5 2 2 4 , 3 3 1 6 . 1 IBERIA L.A.E. 1999: 425,283 S PANISH GROUP 1999: 462,068 S PANISH GROUP 4 6 2 , 0 6 8 4 6 0 , 3 0 4 1 , 7 6 4 0 . 4 1999 1998 (*) Integrated in IBERIA L.A.E. since September.

74 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 MANAGEMENT REPORT

2.2. DEMAND IBERIA carried approximately the same number of passengers in 1999 as in 1998, basically because the decrease of over 400,000 passengers on domestic island routes caused by the limitations arising from airport saturation was offset by the 20% increase in the number of passengers carried by the Atlantic network.

The breakdown of passengers carried is as follows:

DEMAND T H O U SA N D S O F P A S S E N G E R S PASSENGERS CARRIED

1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N AMERICAS SOUTHERN AFRICA 0.27 % 10.78 % S PAIN 1 2 , 8 8 8 1 3 , 1 9 9 ( 3 1 1 ) ( 2 . 4 ) EUROPE 6 , 5 7 4 6 , 4 5 3 1 2 1 1 . 9 A M E R IC A S 2 , 3 5 9 1 , 9 6 4 3 9 5 2 0 . 1

SOUTHERN AFRIC A 5 8 3 7 2 1 5 8 . 5 EUROPE 30.05 % SPAIN FAR EAST - 1 0 0 ( 1 0 0 ) - 58.91 % IBERIA, L.A.E. 2 1 , 8 7 9 2 1 , 7 5 3 1 2 6 0 . 6 1 9 9 9 S PANISH GROUP 2 4 , 2 7 4 2 5 , 0 1 0 ( 7 3 6 ) ( 2 . 9 ) IBERIA L.A.E.: 21,879 S PANISH GROUP: 24,274

The trend in RPKs was positive, since the increase in activity was centered on longer-haul networks.

The detail by company and network is as follows:

BY COMPANY AND NETWORK M I L L I O N S O F R P K S REVENUE PASSENGERS KILOMETRE

1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N SOUTHERN AFRICA 1.35 %

SPAIN S PAIN 8 , 6 6 9 8 , 6 1 5 5 4 0 . 6 25.04 %

EUROPE 8 , 0 4 3 8 , 0 6 0 ( 1 7 ) ( 0 . 2 ) AMERICAS 50.35 % A M E R IC A S 1 7 , 4 2 5 1 4 , 6 3 6 2 , 7 8 9 1 9 . 1 SOUTHERN AFRIC A 4 7 0 2 9 6 1 7 4 5 8 . 7

FAR EAST - 9 1 3 ( 9 1 3 ) - EUROPE IBERIA, L.A.E. 3 4 , 6 0 7 3 2 , 5 2 0 2 , 0 8 7 6 . 4 23.24 % 1 9 9 9 S PANISH GROUP 3 5 , 3 7 9 3 5 , 1 9 0 1 8 9 0 . 5 IBERIA L.A.E.: 34,607 S PANISH GROUP: 35,379

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2.3. PASSENGER LOAD FACTOR The Spanish Group’s passenger load factor of 69.1% in 1999 was almost 3 percentage points lower than in 1998. The passenger load factor was strongly affected by the significant increase in supply in transatlantic networks (where the load factor fell by 3.2 percentage points) and in the Southern Africa network, as a result of the densification of frequencies, and by the excess supply generated in all markets as a result of the reallocation by other airlines of resources from the Asian market, which reduced the load factors of all the operators in these markets.

Also noteworthy was the decrease of almost 3 percentage points in the domestic market, due to the problems caused for the airlines by airport congestion for most of the year.

The breakdown by company and network is as follows:

PASSENGER LOAD FACTOR PASSENGER LOAD FAC TO R L O A D F A C TO R % (IN %) 1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N 67.2 % SPAIN 70.5 % S PAIN 6 7 . 2 7 0 . 5 ( 3 . 3 ) ( 4 . 7 ) 66.3 % EUROPE 67.9 % EUROPE 6 6 . 3 6 7 . 9 ( 1 . 6 ) ( 2 . 4 )

71.3 % AMERICAS A M E R IC A S 7 1 . 3 7 4 . 5 ( 3 . 2 ) ( 4 . 3 ) 74.5 % S OTHERN AFRIC A 6 1 . 1 7 0 . 8 ( 9 . 7 ) ( 1 3 . 6 ) 61.1 % SOUTHERN AFRICA 70.8 % FAR EAST - 6 6 . 4 --

FAR EAST 66.4 % IBERIA, L.A.E. 6 8 . 9 7 1 . 4 ( 2 . 5 ) ( 3 . 6 )

IBERIA L.A.E. 1999: 68.9 % S PANISH GROUP 6 9 . 1 7 2 . 0 ( 2 . 9 ) ( 4 . 0 ) S PANISH GROUP 1999: 69.1 % 1999 1998 2.4. AVERAGE YIELD The detail of the variations in the average yield, by area/company, in 1999, and of the comparable figures for 1998 is as follows:

AVERAGE YIELD AV E R AGE YIELD P T S . / R P K - C E N T S / R P K (IN PTS./RPK) 1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N 20.7 SPAIN 20.9 S PAIN 2 0 . 7 1 2 . 4 2 0 . 9 1 2 . 6 ( 0 . 2 ) ( 0 . 2 ) ( 1 . 2 ) 19.8 EUROPE 20.9 EUROPE 1 9 . 8 1 1 . 9 2 0 . 9 1 2 . 6 ( 1 . 1 ) ( 0 . 7 ) ( 5 . 4 )

7.6 AMERICAS A M E R IC A S 7 . 6 4 . 6 8 . 3 5 . 0 ( 0 . 7 ) ( 0 . 4 ) ( 8 . 2 ) 8.3

6.1 SOUTHERN AFRIC A 6 . 1 3 . 7 5 . 9 3 . 5 0 . 2 0 . 2 3 . 2 SOUTHERN AFRICA 5.9 FAR EAST -- 1 0 . 3 6 . 2 ---

FAR EAST 10.3 IBERIA, L.A.E. 1 3 . 7 8 . 2 1 4 . 8 8 . 9 ( 1 . 1 ) ( 0 . 7 ) ( 7 . 5 )

IBERIA L.A.E. 1999: 13.7 S PANISH GROUP 1 3 . 9 8 . 4 1 4 . 6 8 . 8 ( 0 . 7 ) ( 0 . 4 ) ( 4 . 8 ) S PANISH GROUP 1999: 13.9 1999 1998

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IBERIA’s average yield decreased sharply by almost 8% in 1999. This was a result of the downward pressure on prices exerted by the excess supply in all markets and of significant increases in IBERIA’s supply, precisely on the routes with the lowest yields, namely the Mid and South Atlantic markets, giving rise to a reduction due to the traffic mix effect.

Again noteworthy in this area was the increase in the proportion of business-class travelers to 9.82% in 1999 from 9.55% in 1998.

2.5. PASSENGER REVENUES IBERIA L.A.E.’s scheduled flight passenger revenues fell by 1.6% in 1999, and the total passenger revenues obtained by the Spanish Group amounted to Ptas. 492,563 million ( 2,960.36 million), down 4.3% from 1998, due to the discontinuation of Viva’s air transport operations in April. The detail is as follows:

PASSENGER REVENUES M I L L I O N S O F P T A S . - M I L L I O N S O F E U R O S PASSENGERS REVENUES

1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N SOUTHERN AFRICA 0.60 %

SPAIN 179,241 1,077.26 180,322 1,083.76 (1,081) (6.50) (0.6) AMERICAS 27.92 % SPAIN EUROPE 159,105 956.24 168,535 1,012.92 (9,430) (56.68) (5.6) 37.86 % AMERICAS 132,198 794.53 121,019 727.34 11,179 67.19 9.2 SOUTHERN AFRICA 2,860 17.19 1,747 10.50 1,113 6.69 63.7

FAR EAST -- 9,403 56.51 (9,403) (56.51) - EUROPE 33.61 % IBERIA, L.A.E. 473,404 2,845.22 481,026 2,891.02 (7,622) (45.80) (1.6) 1 9 9 9 SPANISH GROUP 492,563 2,960.36 514,469 3,092.02 (21,906) (131.66) (4.3) IBERIA L.A.E.: 473,404 S PANISH GROUP: 492,563

The increase of 19% in demand in the Atlantic market was accompanied by a very sharp fall in the yield in gross terms (8.2%), although the revenues of this network were ultimately 9.2% higher than in 1998. This increase offset the decrease in the aforementioned markets.

It should be noted that the Japanese network, which contributed more than Ptas. 9,000 million (over 54 million) ceased to operate, and that the Group’s charter traffic decreased as a result of the discontinuation of Viva Air’s operations, hitting revenues by almost Ptas. 18,000 million (more than 107 million).

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- 3 - SUMMARY BY MANAGEMENT AREA OF IBERIA L.A.E. 3.1. IBERIA MARKETING, NETWORK AND SCHEDULING Since 1997 IBERIA L.A.E. has been pursuing an aggressive sales policy, in contrast with its largely defensive approach on the past. This enabled IBERIA to increase its presence in markets in which, although it is the leader, it had lost market share; specifically in the Atlantic market with flights from Europe.

For this purpose, in 1999 IBERIA significantly increased its supply on transatlantic routes. New non-stop destinations such as Quito and Guayaquil from Madrid and New York from Barcelona were introduced, and flight frequencies to Lima, Santiago de Chile, Bogotá, Havana, Mexico and Miami were increased. In all, IBERIA’s transatlantic production increased by 24.4% with respect to 1998. This growth was necessary to maintain IBERIA’s leadership between Europe and Latin America, in a year in which our main European competitors have made significant efforts to increase their presence in this market. This objective was achieved -14.6% IB share in 1999-, increasing the distance between IBERIA and its main competitor -2.6 percentage points in 1999 as compared with 0.4 in 1998-. Also, IBERIA clawed back more than 4 percentage points of market share in the Spain-U.S. market, reversing the negative trend of many years.

The increase in supply in 1999, which pushed down both load factors and prices, was also affected by the supply of competitors which, by reallocating resources to transatlantic markets, saturated these markets, which impacted the margin in this business area.

The Europe-Spain market grew by over 10% in 1999, and the Europe-Latin America market grew by 9%. Although these growth figures were high, they were below 1998 levels. The outlook for IBERIA’s strategic markets continues to be positive. The launch of the new Business Intercontinental class in early 1999 proved a success, and despite the negative impact of the labor conflict with the pilots in April and May and the airport difficulties throughout the year, in 1999 as a whole the number of passengers carried in long-haul higher-priced classes increased by 31%, and IBERIA’s market share in the Spain-Latin America business segment rose by almost 4%.

As regards the use of the franchisee Air Nostrum, from November 1999 onwards the inter-Balearic Island routes were operated by Air Nostrum, since it was the last significant production excluded from the MAD and BCN hubs, and the operations using aircraft with over 100 seats are loss-making: this market requires more flights with smaller planes.

In December, the IBERIA Group started to offer daily direct flights, also operated by Air Nostrum, between Madrid and Turin.

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The airport congestion problems (particularly at Barajas) and, later, the labor conflicts with the pilots also affected traffic, obliging the Company to adjust its domestic programming supply from May onwards, with reductions in MAD-Mainland traffic. These changes did not affect the MAD-BCN shuttle, one of the products most highly valued by the Company’s customers, which on November 4, 1999, had been operating for 25 years. In June certain european routes were discontinued and the budgeted supply was reduced.

In connection with the IB-Plus program, new cards were created for the best customers (Iberia Plus Platino), and new companies were included. More than 31% of IBERIA’s traffic revenues are obtained from passengers participating in the Iberia Plus program. IBERIA L.A.E.’s membership of oneworld enhances the benefits obtained by holders of the Iberia Plus card (special lounges in other airports, more opportunities to earn points, etc.).

Other projects also contribute to providing customers with a more convenient service, such as Internet sales (airlines have high hopes for this sales channel), the recent introduction of tickets with a magnetic strip, and the introduction of the “electronic ticket”.

3.2. IBERIA CARGO In 1999 the Cargo management area maintained its objective of making maximum use of passenger aircraft cargo hold capacity and minimizing the use of cargo planes, three of which were operated under a wet lease arrangement to supplement the supply of the passenger aircraft cargo holds, thus guaranteeing resource management flexibility in the face of cargo market supply saturation.

The performance of our traditional markets was marked by the surplus supply, and by price cuts as a result of the efforts made by all airlines to maintain their positions without abandoning markets.

On long-haul routes, the B-747/200 leased from Atlas Air operated the Miami and Mexico routes. In view of the surplus cargo aircraft supply on long-haul routes due to the situation of our international markets, a new agreement was negotiated with ATLAS that gave rise to a significant cutback in the guaranteed block hours.

To strengthen our presence in this long-haul market, certain actions were taken, including most notably the use of Havana as a stopover to Mexico, the increase in the use of trucks to carry freight, mainly in the south of France and, above all, the regularization and consolidation of the supply of our freight aircraft to Maastrich.

The two DC-8/62 leased from CYGNUS operated on short- and medium-haul routes, specifically on the Madrid-Barcelona-Tenerife-Las Palmas-Madrid routes to cover the mail service (a contract concluded in September and expiring in 2000), and between Madrid and the Canary Islands, for courier services and carrying of perishable goods to the mainland. Three flights a week operate on the Maastrich route (Madrid-Maastrich-Madrid), to carry cargo from Central Europe to the Americas (with stopover in Madrid).

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Lastly, we sought new markets to cushion the loss of Tokyo, always clearly secondary to the commercial passenger program. Thus we started to carry goods to and from the South African, Chicago, Montreal etc. markets, for which the long-haul tonnes transported in 1999 were almost 3% more than in 1998, although it is true that revenues decreased by over 10% as a result of the drop in unit prices due to competition and the aforementioned foreign economic situation.

The main parameters (noteworthy with respect to revenues was the sharp impact of the discontinuation of the Japan route at the end of 1999) were as follows:

IBERIA CARGO

1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N

MI L L IO N S AT KS 1 , 3 4 2 . 5 1 , 2 1 0 . 8 1 3 1 . 3 1 0 . 9 INHO L D S 1 , 0 0 2 . 2 7 7 8 . 5 2 2 3 . 7 2 8 . 7 IN C A R G O A I R C R A F T 3 4 0 . 4 4 3 2 . 2 ( 9 1 . 8 ) ( 2 1 . 2 ) MI L L IO N S T K TS 8 2 3 . 3 8 1 3 . 2 1 0 . 1 1 . 2 INHO L D S 6 5 7 . 3 5 8 4 . 9 7 2 . 4 1 2 . 4 IN C A R G O A I R C R A F T 1 6 6 . 0 2 2 8 . 3 ( 6 2 . 3 ) ( 2 7 . 3 ) LOA D FAC TO R ( % ) 6 1 . 3 6 7 . 2 ( 5 . 9 ) ( 8 . 8 ) INHO L D S 6 5 . 6 7 5 . 1 ( 9 . 5 ) ( 1 2 . 6 ) IN C A R G O A I R C R A F T 4 8 . 8 5 2 . 8 ( 4 . 0 ) ( 7 . 6 ) AV E R AG E YI E L D ( PTA S. / T K T ) 4 1 . 4 4 3 . 5 ( 2 . 1 ) ( 4 . 7 ) AV E R AG E YI E L D ( / T K T ) 2 4 . 8 8 2 6 . 1 4 ( 1 . 2 6 ) ( 4 . 7 ) TOTAL FREIGHT REVENUES (M IL L IO N S OF PTAS ) 3 4 , 0 5 1 . 0 3 5 , 3 3 9 . 8 ( 1 , 2 8 8 . 8 ) ( 3 . 7 ) TOTAL FREIGHT REVENUES (M IL L IO N S OF EUR O S ) 2 0 4 . 6 5 2 1 2 . 4 0 ( 7 . 7 5 ) ( 3 . 7 )

3.3. IBERIA HANDLING The deregulation of handling in Spain initiated in 1994 continued in 1999, and the process is expected to be completed in 2000. However, the activity of Spanish and foreign third-party companies increased by 4.7% with respect to 1998 giving rise to aircraft handling revenues of Ptas. 40,884 million ( 245.72 million), as compared with Ptas. 39,809 million ( 239.26 million) in 1998 with increases of 63.2% in services rendered to Spanish companies and of 1.4% in services rendered to foreign companies, and 157 employees were assigned to the second handling operator. These figures are the result of the measures envisaged in the Master Plan aimed at defending our market share in the third-party handling market.

The average revenue from third-party companies (Spanish + foreign) fell by 0.8% with respect to 1998, due mainly to the additional discounts applied to maintain the projected market share, albeit below the levels envisaged.

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Total handling activity (including that of IB) in 1999 was 6.5% higher than in 1998, despite the weighted cancellation of 3,815 planes as a result of airport congestion and of the conflicts with the technical flight employees in March and April. Air Nostrum increased its activity by 27.7% with respect to 1998, and Viva disappeared as an operator in May 1999.

As part of the policy to improve service, new contracts were entered into with AENA for use of the VIP lounges at Barajas and Barcelona airports, increasing their capacity. Also, the labor force was increased as a result of new services offered, including most notably incident information points, more information positions, floating personnel at arrivals, accompaniment on higher-priced classes, transport between terminals, more “red jackets”, etc.

A noteworthy event in this area was the sharp rise in “non-quality” costs (interrupted journeys, lost connections, luggage delivery expenses, passenger and goods indemnity payments, etc.). The increase in operating expenses per weighted plane was due mainly to the rise in personnel expenses and expenses relating to interrupted journeys.

Following are certain data on the handling area:

IBERIA HANDLING

1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N

WEIGHTED PLANES HANDLED 427,999 401,972 26,027 6.5 IBERIA AND IBERIA GROUP 245,061 231,596 13,465 5.8 FRANCHISEES 25,048 19,609 5,439 27.7 THIRD PARTIES 157,890 150,767 7,123 4.7 EQUIVALENT FULL-TIME EMPLOYEES 7,947 7,382 565 7.7 THIRD-PARTY REVENUES (M. PTAS) 40,884 39,809 1,075 2.7 THIRD-PARTY REVENUES (M. EUROS) 245.72 239.26 6.46 2.7 OPERATING EXPENSES (M. PTAS) 68,001 61,696 6,305 10.2 OPERATING EXPENSES (M. EUROS) 408.69 370.80 37.89 10.2 OPERATING EXPENSES/WPH (PTAS) 158,882 153,483 5,399 3.5 OPERATING EXPENSES/WPH (EUROS) 954.90 922.45 32.45 3.5

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3.4. IBERIA MAINTENANCE IBERIA’s marketing drive focused mainly on products with the brightest technological future, relating to A-320, A-340, MD-87 and B-747 aircraft fuselages, engines and parts. Also, in 1999 maintenance work continued to be performed on the Air Europe aircraft leased by IB under a wet lease arrangement.

Also, work continued on the development of new products, including most notably: - Modification of cabins of long-haul aircraft - Incorporation of TCAS and 8.33 VHF to IBERIA aircraft - Overhaul of the hot area of the CFM56-5C4 (A-340) engine, A-340 aircraft parts and “C” overhauls of A-340 aircraft

The main customers in 1998 were as follows: - ALITALIA “C” and “D” overhauls of B-747 aircraft - AIR LIBERTE Overhauls of JT8D-217 engines (contract per flying hour) - A. ARGENTINAS JT8D-200 and JT9D-7Q engines and “D” overhauls of B-747 aircraft and parts. New contract for A-340 parts and CFM56-5C engine - OLYMPIC AIRWAYS JT9D-7Q engines and parts overhauls - AUSTRAL JT8D engines, parts overhaul and support - AIR CAMERUN Overhauls of JT9D-7Q engines - IAI BEDEK Overhauls of JT9D-7Q engines - POLAR AIR CARGO Overhauls of JT9D-7Q/70A engines - SPANAIR “D” overhauls of MD-80 aircraft - MIN. OF DEFENSE Overhauls of B-707 and FALCON engines and overhauls of RR Pegasus engines - AIR MADAGASCAR JT9D-70A

There was a notable increase in maintenance expenses with respect to 1998 as a result of the increase in aircraft spare parts (B-737 and B-767 aircraft of Air Europe, engines, etc.), of the greater outsourcing of work (standard JT8 D engines), of the rise in personnel costs and of the appreciation of the U.S. dollar. Revenue growth only partially offset the increase in costs, thereby significantly reducing the operating income for 1999 with respect to 1998.

The average headcount increased with respect to 1998 (mainly due to the incorporation of TMAs), and there was a notable rise in the number of hours outsourced to cater for the aircraft at the phase-out stage.

In 1999 the maintenance area had to take certain special measures in addition to the normal scheduled maintenance of the Company’s aircraft, including most notably certain modifications: in avionics (RNAV, TCAS, 8.33 VHF and GPS); in CFM56 engines to comply with guidelines issued during the year; and modifications to long-haul aircraft cabins.

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The variations in the main operating aggregates were as follows:

IBERIA MAINTENANCE

1999 1998 VAR I AT I O N 99 / 9 8 %VAR I AT I O N

NO. O F O V E R H AU L S 233 230 3 1.3 THOU SAN D S OF PR O D U C T IO N HOU R SO F IN -HOUS E PE R S O N N E L 3,262 2,982 280 9.4 IN D I R E C T/ DI R E C T L A B O R 0.54 0.55 (0.01) (1.6) TECH. ASSISTANCE AND OTHER SALES (M. PTAS.) 21,441 22,929 (1,488) (6.5) TECH. ASSISTANCE AND OTHER SALES ( MILL.) 128.86 137.81 (8.95) (6.5) EQ U I VA L E N T F U L L-T I M E E M P L OY E E S 4,171 3,929 242 6.1

3.5. IBERIA SYSTEMS MANAGEMENT The “Year 2000 Issue” program was implemented throughout the year in order to prepare all the systems for any eventuality arising from the change of millennium. In the first few days of January 2000 special monitoring work was performed throughout the Company, and there were no incidents worthy of mention in any area. It can be said, therefore, that the project has been completely successful.

As regards habitual activities, a new UNISYS processor with greater processing capacity was installed to cater for the increased activity in the reservations, check-in and ticket sales area.

The telecommunications network is migrating to the TCP/IP protocol, which has required highly intensive efforts since it necessarily entails the completion of the plan to renew the terminals at all sales offices in order to connect PCs using this protocol, and it is expected to be completed in 2000.

In the strategic alliance area, the systems started to operate under the new regulations for oneworld on September 1, 1999, “day one” for the Alliance, with complete success.

As regards the projects affecting the commercial area, the new operator VIVA Tours successfully commenced operations on May 1, 1999, with the installation of the required information systems, and in November the new yield management (PROS) system started up. Also, telephony and management systems were installed for the Serviberia and Serviagencias call centers.

In the economic and financial area, the fare intervention system started up, which enables the recovery of revenues lost through the incorrect issuance of tickets (P.R.A. Solutions), together with a new financial accounting system (Oracle GL) and Goods-In and Goods-Out Billing systems.

In the maintenance area, a new production environment was introduced in the SISPAC System, and the DEDALO product was installed to monitor and control aircraft movements.

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The variations in the main operating aggregates were as follows:

IBERIA SYSTEMS MANAG E M E N T

19 9 9 19 9 8 VAR I AT I O N 99 / 9 8 % VAR I AT I O N

OP E R AT I N G E X P E N S E S (MILLIONS OF PTAS.) 1 0 , 4 6 8 9 , 8 6 3 6 0 5 6.1 OP E R AT I N G E X P E N S E S (MILLIONS OF EUROS) 6 2 . 9 1 5 9 . 2 8 3 . 6 4 6 . 1 EQ U I VA L E N T F U L L-T I M E E M P L OY E E S 5 7 9 5 6 7 1 2 2 . 1

3.6. IBERIA OPERATIONS MANAGEMENT In 1999 45 internal audits were conducted in the flight safety area to monitor the Operations Department Quality Plan, under the requirements of the ISO 9001 and JAR standards. A follow-up audit was also performed by the firm SGS and, since it was passed, the related certificate was retained.

In addition to the publication of flight safety bulletins and the customary monitoring of incidents, in the human resources area 29 c.r.m. courses were given, including external courses to other companies, as well as to the Spanish Air Force.

In the crew planning area, technical crews were scheduled, and standard training courses were planned for technical crews, increased by the introduction of the transitional category for pilots from Aviaco. Accordingly, using the new CARMEN system, the schedules for the crews of all types of aircraft were drawn up. This system was developed by the Crew Management area, which as part of its functions monitored the pairings module and the process for implementing the module for assigning this application.

In addition, various projects were initiated aimed at creating new work methods and defining the computer support, including most notably “Carlinga” in the crew training area, “P.T.T.” in the crew planning area and “Alhambra” in the ground personnel and aircraft technical activity areas.

The Operational Control area focused in 1999 on performing various projects, such as: - Sirio II, a manager decision-making support system offering possible alternatives in the face of the problems that arise in relation to the daily operation of aircraft, crews and passengers. - Mercurio, a computer system that, by means of a magnetic card, will enable crew members to sign automatically and collect per diems and provide them with other information of general interest, with the concomitant time saving. Also, from a vehicle, the flight operating documentation can be obtained (mobile office) in real time. - New computerized load and load distribution sheet system design, the incorporation of ETOPS procedures and the new NOTAM system.

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- System for the reception and processing of weather maps in real time with the Spanish National Weather Institute. Work also commenced on the development of a new system that permits the control and monitoring of the billing of navigation and landing charges using the new procedures for exchanging information with Eurocontrol via the Internet and the flight plan system databases.

In addition to complying with the draft Ministerial Orders, Royal Decrees and Spanish Directorate-General of Civil Aviation Circulars, the Technical and Flight Support area participated in the Air Navigation and Airports Coordination Committee, in the Barajas Noise Control Committee, in the European TELSACS programme and in the Isaware project.

Also, 1999 saw the establishment of the operating specifications of the new systems to be incorporated into the Company’s aircraft (EGPWS, ACARS and DLK) and the selection of the FMS of the new Airbus aircraft.

The operations documentation center is currently being computerized, and, also, the JARDOC project commenced to convert all operations documentation to the SGML electronic format adapted to JAR OPS-1 regulations.

The Cabin Crew Scheduling and Aircraft Supply area scheduled the in-flight service for the short- and long-haul aircraft, analyzing cabin crew and equipment needs, and it participated in the design of new cabin layouts on long-haul aircraft. Also, the computer system for portable in-flight sale terminals was designed, including these sales under the Iberia Plus Program, and the in-flight sales strategy was adapted to offset the drop in revenues in EU Member States.

The Flight Service area participated in the recruiting and training of new cabin crew members and supervisors, and in the training and supervision of the cabin crew members of other companies that operated for IBERIA L.A.E. It collaborated in the recruiting of cabin crew at the MIAMI hub and participated in various work groups of oneworld (cabin crew) and IATA (in-flight).

The Operations area engaged in intensive training activities in 1999, due to the hiring of 231 new pilots. Training was given to 12,540 trainees and management courses were given to 64 future commanders. In addition, all the training processes were streamlined.

Accordingly, numerous courses were taught in which 71,139 training hours were given to technical crew members and 4,920 hours to cabin crew members. Training was given using the Company’s flight simulators or flight simulators abroad (17,200 hours) and by means of training flights (922 flying hours).

The cabin crew training area organized 364 training courses, and 82,661 hours of specific training was given to 7,902 trainees as part of the standardization of the service in relation to the oneworld alliance.

These courses were given to 4,995 trainees trained in flight operating tasks, and the training relating to the oneworld service was given to 2,907 trainees.

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- 4 - RESOURCES 4.1. FLEET The detail of the passenger aircraft operated by the Group as of December 31, 1999, is as follows:

F L E E T BI N T E R BI N T E R TOTA L AI R C R A F T TY P E IB E R I A CA N A R I A S ME D I T E R R A N E O OP E R AT E D W E T B - 7 2 7 * 2 3 - - 2 3 - B-737 -- - - 3 B-747 7 - - 7 2 B - 7 5 7 1 5 - - 1 5 6 B - 7 6 7 2 - - 2 - A- 3 0 0 6 - - 6 - A- 3 2 0 3 2 - - 3 2 - A- 3 2 1 2 - - 2 - A- 3 4 0 9 - - 9 - D C - 9 * 1 8 - - 1 8 - DC-10* 5 - - 5 - M D - 8 7 2 4 - - 2 4 - MD-88 1 3 - - 1 3 - C N - 2 3 5 -- 5 5 - * Excluding the inactive aircraft: eight DC-9, four B-727 and one DC-10. ATR-72 - 1 1 - 1 1 - In adition the holds of cargo freigthers TOTAL* 156 1 1 5 17 2 11 (2 DC-8 and 1 B-747) are leased.

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4.2.PERSONNEL In performing a comparative analysis of the headcount, it should be taken into account that in September Aviaco’s employees were transferred to IBERIA.

AV E R AGE ANNUAL HEADCOUNT

G R O U N D F L I G H T T OT A L 1 9 9 9 1 9 9 8 1 9 9 9 1 9 9 8 1 9 9 9 1 9 9 8

MARKETING, NETWORK AND SCHED. 2,732 2,722 -- 2,732 2,722 CARGO 1,084 1,081 -- 1,084 1,081 HANDLING 7,947 7,382 -- 7,947 7,382 MAINTENANCE 4,166 3,921 -- 4,166 3,921 SYSTEMS 573 564 -- 573 564 OPERATIONS 743 641 5,420 4,525 6,163 5,166 CENTRAL SERVICES 1,299 1,229 -- 1,299 1,229 IBERIA, L.A.E. 18,544 17,540 5,420 4,525 23,964 22,065 AIR TRANSPORT GROUP 20,844 20,045 6,246 5,781 27,090 25,833

YEAR-END HEADCOUNT

G R O U N D F L I G H T T OT A L 1 9 9 9 1 9 9 8 1 9 9 9 1 9 9 8 1 9 9 9 1 9 9 8

MARKETING, NETWORK AND SCHED. 2,788 2,854 -- 2,788 2,854 CARGO 1,145 1,121 -- 1,145 1,121 HANDLING 9,533 8,654 -- 9,533 8,654 MAINTENANCE 4,378 3,998 -- 4,378 3,998 SYSTEMS 570 573 -- 570 573 OPERATIONS 865 674 6,302 4,827 7,167 5,501 CENTRAL SERVICES 1,355 1,265 -- 1,355 1,265 IBERIA, L.A.E. 20,634 19,139 6,302 4,827 26,936 23,966 AIR TRANSPORT GROUP 22,576 21,654 6,503 6,052 29,079 27,706

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- 5 - IBERIA OPERATING REVENUES 5.1. OPERATING INCOME Operating income amounted to Ptas. 5,477 million ( 32.92 million) in 1999.

The summarized detail of IBERIA’s operating account for management accounting purposes, which differs from the statement of income in the Company’s financial statements because the revenue and expense items are aggregated using management accounting criteria, is as follows:

O P E R ATING INCOME M I L L I O N S O F P T A S . - M I L L I O N S O F E U R O S 1 9 9 9 1 9 9 8 % VA R. O P E R ATING REVENUES PA S S E N G E R 4 8 7 , 1 8 6 2 , 9 2 8 . 0 5 4 9 6 , 0 8 9 2 , 9 8 1 . 5 5 ( 1 . 8 ) CA R G O A N D E XC E S S BAG GAG E 3 5 , 6 9 4 2 1 4 . 5 2 3 7 , 1 0 7 2 2 3 . 0 2 ( 3 . 8 ) HA N D L I N G 4 1 , 1 7 4 2 4 7 . 4 6 4 0 , 2 0 0 2 4 1 . 6 1 2 . 4 MA I N T E N A N C E 2 1 , 2 1 9 1 2 7 . 5 3 2 2 , 6 0 3 1 3 5 . 8 5 ( 6 . 1 ) CAT E R I N G SA L E S 2 , 8 3 2 1 7 . 0 2 3 , 6 6 6 2 2 . 0 3 ( 2 2 . 7 ) SA L E S C O M M IS S IO N S 1 3 , 1 4 8 7 9 . 0 2 1 0 , 9 6 2 6 5 . 8 8 1 9 . 9 OT H E R O P E R AT I N G R E V E N U E S 2 2 , 7 1 5 1 3 6 . 5 2 2 1 , 7 1 4 1 3 0 . 5 0 4 . 6 6 2 3 , 9 6 8 3 , 7 5 0 . 1 2 6 3 2 , 3 4 1 3 , 8 0 0 . 4 4 ( 1 . 3 ) O P E R ATING EXPENSES CO M M E R C I A L E X P E N S E S 7 1 , 2 4 7 4 2 8 . 2 0 7 3 , 2 8 7 4 4 0 . 4 6 ( 2 . 8 ) FU E L 5 7 , 0 3 4 3 4 2 . 7 8 4 9 , 9 0 1 2 9 9 . 9 1 1 4 . 3 AI R C R A F T L E A S E E X P E N S E S 4 7 , 6 9 1 2 8 6 . 6 3 4 2 , 3 9 1 2 5 4 . 7 8 1 2 . 5 CO M M IS S IO N S 2 , 3 7 9 1 4 . 3 0 2 , 3 9 9 1 4 . 4 2 ( 0 . 8 ) AI R C R A F T M A I N T E N A N C E 4 5 , 7 4 9 2 7 4 . 9 6 3 5 , 5 3 8 2 1 3 . 5 9 2 8 . 7 NAV IGAT IO N C H A R G E S 2 7 , 5 9 0 1 6 5 . 8 2 2 5 , 5 3 2 1 5 3 . 4 5 8 . 1 TR A F F IC S E R V IC E S 5 5 , 0 0 5 3 3 0 . 5 9 5 1 , 7 2 4 3 1 0 . 8 7 6 . 3 RE S E R VAT IO N SY S T E MS 1 4 , 9 9 0 9 0 . 0 9 1 6 , 2 2 8 9 7 . 5 3 ( 7 . 6 ) IN-F L IG H T S E R V IC E S 1 5 , 2 4 4 9 1 . 6 2 1 3 , 8 9 5 8 3 . 5 1 9 . 7 PE R S O N N E L E X P E N S E S 1 8 7 , 1 7 0 1 , 1 2 4 . 9 1 1 6 6 , 1 6 8 9 9 8 . 6 9 1 2 . 6 PE R IO D D E P R E C I AT IO N A N D A MO R T I Z AT IO N 1 9 , 8 9 5 1 1 9 . 5 7 1 9 , 1 3 7 1 1 5 . 0 2 4 . 0 OT H E R O P E R AT I N G E X P E N S E S* 7 4 , 4 9 7 4 4 7 . 7 3 8 8 , 1 6 2 5 2 9 . 8 5 ( 1 5 . 5 ) 6 1 8 , 4 9 1 3 , 7 1 7 . 2 0 5 8 4 , 3 6 2 3 , 5 1 2 . 0 8 5 . 8 O P E R ATING INCOME 5 , 4 7 7 3 2 . 9 2 4 7 , 9 7 9 2 8 8 . 3 6 ( 8 8 . 6 ) *Fleet rent paid to O P E R ATING INCOME I B + AO 9 , 4 1 6 5 6 . 5 9 5 2 , 0 7 1 3 1 2 . 9 5 ( 8 1 . 9 ) Aviaco operator, included.

88 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 MANAGEMENT REPORT

The main comments on the operating account are as follows:

a) OPERATING REVENUES

Operating revenues decreased by 1.3% in 1999. The main variations were as follows:

PASSENGER REVENUES The difference between the passenger revenue figure shown above and that shown in the activity tables is due to the fact that the latter relates directly to the actual production for each year and does not reflect accounting adjustments and revaluations. The breakdown of the Ptas. 8,903 million ( 53.91 million) decrease in passenger revenues is as follows:

PASSENGER REVENUES M I L L I O N S O F P E S E TA S

VAR I AT I O N IN C A U S E O F T H E V A R I AT I O N VARIATION IN OPE R AT I N G REVENUES PER REV E N U E S 99 / 9 8 PR I C E VO L U M E PA R I T Y OT H E R * BOOKS 99 / 9 8 DOMESTIC (1,081) (2,478) 1,091 306 -- EU COUNTRIES (7,287) (7,807) 38 482 -- NON-EU COUNTRIES (2,142) (1,726) (542) 126 -- * The “Other” column shows LONG-HAUL 2,888 (15,804) 16,753 1,939 -- the variation in the difference between IBERIA, L.A.E. (7,622) (27,815) 17,340 2,853 (1,281) (8,903) revenues per books and the revenues by network.

The difference due to volume is the result of the increase in demand, which was 0% in terms of passengers and 6.4% in terms of RPKs, since there was a greater increase in long-haul traffic, which has a bigger impact on the average haul. There were significant drops of 7.5% in the average revenue per PRK and of 2.2% in average passenger revenues, due mainly to the across-the-board drop in prices due to the excess supply in the markets and a falling yield as a result of the growth in the long-haul network and the concomitant lengthening of the average haul, which were only partially offset by the positive effect of the class mix, with an increase in higher-class ticket sales. The parity effect was due mainly to fluctuations in the U.S. dollar with respect to its average value in 1998, with an annual average decrease of 2.8% from Ptas. 154.298/US$ 1 to Ptas. 150.040/US$ 1.

89 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 MANAGEMENT REPORT

CARGO REVENUES The drop in cargo revenues by 3.8% (Ptas. 1,413 million - 8.49 million) was due mainly to the fall in the yield (4.7%), largely as a result of the pressure exerted on prices by the excess supply in transatlantic markets derived from the reallocation of aircraft from the Asian market and the economic crisis in South America, which hit the revenues in these networks.

HANDLING REVENUES The increase in handling revenues was due to the 4.1% increase in the number of aircraft handled, basically of Spanish third-party airlines and of Air Nostrum, which was offset by the decrease in the activity of Viva Air. The average revenue per plane handled, which was slightly down from 1998, meant that less market share was lost than expected.

MAINTENANCE Aircraft maintenance revenues decreased in 1999 by Ptas. 1,384 million ( 8.32 million) as a result of a significant drop of Ptas. 1,428 million ( 8.58 million) in warranty-related work billed and of an increase in maintenance of proprietary aircraft maintenance work due to higher production and to an increase of 20% in special aeronautical work in terms of in-house employee production hours, which made it necessary to reduce the work performed for third-parties using in-house resources by 13% and to increase outsourcing.

SALES COMMISSIONS The increase in the volume of business led to an increase of almost 20% (Ptas. 2,186 million - 13.14 million) in these revenues, due largely to billings relating to ticket sales through the oneworld megacarrier and the growing activity of Air Nostrum.

OTHER OPERATING REVENUES AND IN-FLIGHT SALES It is important to note that the decrease in in-flight sales and other catering revenues as a result of the disappearance of duty-free sales in all EU Member States and, therefore, of duty-free sales on intra-European flights, which reduced these revenues by approximately Ptas. 834 million ( 5.01 million), was offset by the Ptas. 1,001 million ( 6.02 million) of other traffic revenues, basically revenues from the frequent flyer program with oneworld companies, with billings of Ptas. 937 million ( 5.63 million) to American Airlines and of Ptas. 33 million ( 0.20 million) to British Airways.

b) OPERATING EXPENSES

Operating expenses increased by 5.8% (Ptas. 34,129 million - 205.12 million), due largely to the increase in fuel costs, to the lease of new aircraft, to the increase in maintenance costs and landing charges and to the rise in personnel costs (as a result of the collective labor agreements, and the increases in the number of flight, ground handling and maintenance employees).

90 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 MANAGEMENT REPORT

The variations in the main expense items were as follows:

FUEL Total fuel expenses in 1999 were 14.3% higher than in 1998 (an increase of Ptas. 7,133 million - 42.87 million), due mainly to the increase in fuel prices and to the 2.8% appreciation in the value of the U.S. dollar. The cost in pesetas/block hour increased by 8.4%, whereas the number of block hours increased by 5.5%, and it was not possible to offset the increase in crude oil prices by the saving arising from the use of new aircraft that use fuel more efficiently. The comparative detail of the statements of income does not include in “Fuel” the fuel consumed by Aviaco aircraft, since these costs are included as billings of operators in the other operating expenses. For uniformity purposes, these costs were included in the analysis of variations, the detail of the various effects being as follows:

ANALYSIS OF VARIATIONS

MI L L. PTA S.MI L L.

PR IC E ( 2 , 3 8 3 ) ( 1 4 . 3 2 ) VO L U M E 4 , 9 5 9 2 9 . 8 0 PA R I T Y 2 , 1 6 4 1 3 . 0 1 C O N S U M P T IO N / A S K ( 9 5 ) ( 0 . 5 7 ) TOTA L 4 , 6 4 5 2 7 . 9 2

PERSONNEL EXPENSES Personnel expenses increased by 12.6% with respect to 1999, due mainly to the following: - The incorporation of all Aviaco’s flight and ground personnel (the effect of which was cushioned at consolidated Group level), with net increases of 5.7% ground employees and of 19.8% in flight employees, and the increase in employees to provide information on incidents at airports - Salary increase under the collective labor agreement signed - Length of service, promotions etc. and increases in social security costs - Increase in activity, with the concomitant effect on flight employees’ per diems, the cost of which increased by 19.4%, and bonuses, which rose by almost 18%, totaling Ptas. 5,146 million ( 30.93 million) - An increase of Ptas. 1,660 million in the provisions for pilots placed on the reserve and on special leave, due to the need to offset the loss of interest as a result of the drop in interest rates earned by the investments in which the provisions are materialized.

91 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 MANAGEMENT REPORT

TRAFFIC AND IN-FLIGHT SERVICE COSTS The increase of 6.3% in traffic service costs was in line with the increase in IBERIA’s activity (6.3% in terms of block hours and 10.4% in terms of supply).

It should be noted that of the total increase of Ptas. 3,281 million ( 19.72 million), Ptas. 1,201 million ( 7.22 million) relate to higher flight personnel accommodation costs, with an increase of over 29% with respect to 1998, and a rise in non-quality expenses (interrupted journeys and lost connections) of almost Ptas. 888 million ( 5.34 million), which were 13% higher than in 1998.

The 9.7% increase in in-flight service costs, which are expenses that relate mainly to passengers, was due largely to cost increases arising from improved service levels and the good performance of business classes, since the overall volume of passengers remained unchanged.

COMMERCIAL EXPENSES (COMMISSIONS, OVERCOMMISSIONS AND ADVERTISING) The decrease of 1.9% (Ptas. 10,316 million - 62 million) in passenger and cargo revenues was only partially responsible for the drop in commercial expenses. This is because commercial costs (commissions and overcommissions) as a proportion of traffic revenues decreased by 1.6%, since these costs are continuing to fall in relation to passenger revenues due to greater use of the TNM (net market price) method, to the effect of the measures taken under the Master Plan, to the impact of the implementation in Spain of the Valor 98 plan for Spanish travel agencies, which made it possible to cut commercial costs through commercial management based much more on incentives to agencies, and to the fact that the gradual incorporation of new direct selling systems reduced the costs associated with distribution intermediaries.

However, advertising expenses increased by Ptas. 296 million ( 1.78 million) due to a significant commercial drive.

NAVIGATION CHARGES There was an increase in air traffic control expenses of 8.1% (Ptas. 2,058 million- 12.37 million), due largely to the increase in activity and to the impact of the landing charge as a result of the elimination of the second discount bracket (Ptas. 2,085 million - 12.53 million) and, to a lesser extent, of the increase in 1999 in the prices charged by Eurocontrol, which was partially offset by the savings obtained from the change in authorized maximum take-off weights.

92 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 MANAGEMENT REPORT

AIRCRAFT MAINTENANCE Aircraft maintenance expenses increased by almost 29% (Ptas. 10,221 million - 61.37 million) due, among other reasons, to the performance of additional work on aircraft pursuant to air safety legislation and to the outsourcing of engine maintenance, which was partially reflected in the amounts billed to third parties.

The increase in purchases of spare parts incorporated into aircraft (RNAVS and TCAS), and in initial purchases relating to the aircraft amounted to Ptas. 5,284 million ( 31.76 million), and the 29% rise in subcontracted work, which amounted to Ptas. 4,225 million ( 25.39 million), was the result of an increase in work assigned to third parties, equal to the increase in hours worked abroad.

AIRCRAFT LEASE EXPENSES The increase of Ptas. 5,300 million ( 31.85 million) in these expenses was due mainly to: - A higher operating lease cost incurred as a result of aircraft additions: A340 (Ptas. 1,568 million - 9.42 million), A320 (Ptas. 1,015 million - 6.1 million), B757 (Ptas. 1,893 million - 11.38 million) and other aircraft, with a total impact of Ptas. 4,491 million ( 27.0 million). - The higher cost incurred in wet lease transactions with Air Atlanta (Ptas. 1,022 million - 6.14 million) and Air Europa (Ptas. 3,648 million - 21.92 million). - A smaller impact or saving on currency risk hedging of the aforementioned transactions (Ptas. 2,088 million - 12.55 million). - The price of contracts for cargo aircraft and cargo hold rental, which increased by Ptas. 651 million ( 3.91 million), relating mainly to the cost of the cargo aircraft leased from Cygnus.

PERIOD DEPRECIATION AND AMORTIZATION There was a small increase of Ptas. 758 million ( 4.56 million- 4.0%) in the charge in this connection.

93 IBERIA, LINEAS AEREAS DE ESPAÑA, S.A. - ANNUAL REPORT 1999 MANAGEMENT REPORT

OTHER OPERATING EXPENSES AND RESERVATION SYSTEM These expenses decreased by Ptas. 14,901 million ( 89.56 million), the detail being as follows: - Billings to the operator Aviaco were Ptas. 9,743 million ( 58.56 million) lower than in 1998 as a result of a reduction of 38% in the number of block hours leased (as indicated above, this amount includes the fuel expenses paid by Aviaco and subsequently billed with other costs to IBERIA). - Reservation system expenses dropped by Ptas. 1,238 million ( 7.44 million), due largely to the decrease in the prices charged by Amadeus. - Other operating expenses fell by almost Ptas. 4,000 million ( 24.04 million) as part of the general cost cutting measures envisaged in the Master Plan. Rent fell by Ptas. 307 million ( 1.85 million), insurance by Ptas. 284 million ( 1.71 million) and other outside services by Ptas. 3,034 million ( 18.23 million).

5.2. IBERIA STATEMENTS OF INCOME

IBERIA, L.A.E. STATEMENTS OF INCOME M I L L I O N S O F P E S E TA S - M I L L I O N S O F E U R O S 1 9 9 9 1 9 9 8 O P E R ATING INCOME 5 , 4 7 7 3 2 . 9 2 4 7 , 9 7 9 2 8 8 . 3 6 FI N A N C I A L R E V E N U E S 2 4 , 6 3 6 1 4 8 . 0 6 6 , 2 2 2 3 7 . 3 9 FI N A N C I A L E X P E N S E S ( 5 , 8 4 3 ) ( 3 5 . 1 2 ) ( 4 , 8 0 2 ) ( 2 8 . 8 6 ) PR O V IS IO N TO P E N S IO N A L L O WA N C E ( 2 , 4 1 1 ) ( 1 4 . 4 9 ) ( 2 , 8 6 1 ) ( 1 7 . 1 9 ) EXC H A N G E GA I N S 1 8 , 1 3 2 1 0 8 . 9 8 6 , 2 9 5 3 7 . 8 3 EXC H A N G E L O S S E S ( 1 5 , 8 7 0 ) ( 9 5 . 3 8 ) ( 8 , 5 2 9 ) ( 5 1 . 2 6 ) FINANCIAL INCOME (LOSS) 1 8 , 6 4 4 1 1 2 . 0 5 ( 3 , 6 7 5 ) ( 2 2 . 0 9 ) LOSS (GAIN) ON SECURITIES PORTFOLIO ( 9 , 1 4 3 ) ( 5 4 . 9 5 ) 3 8 2 2 . 3 0 E X T R AORDINARY INCOME 1 , 8 8 1 1 1 . 3 0 1 8 , 1 1 5 1 0 8 . 8 7 NET INCOME BEFORE TA X E S 1 6 , 8 5 9 1 0 1 . 3 2 6 2 , 8 0 1 3 7 7 . 4 4 TA X E S 8 0 7 4 . 8 5 1 1 , 5 1 0 6 9 . 1 8 INCOME FOR THE YEAR 1 6 , 0 5 2 9 6 . 4 7 5 1 , 2 9 1 3 0 8 . 2 6

I B E R I A + AV I ACO INCOME NET INCOME BEFORE TA X E S 2 2 , 4 2 9 1 3 4 . 8 0 6 6 , 4 8 8 3 9 9 . 6 0 INCOME FOR THE YEAR 1 9 , 2 4 1 1 1 5 . 6 4 5 3 , 7 0 5 3 2 2 . 7 7

94 ANNUAL REPORT 1999

GOVERNING BODIES

IBERIA GROUP IBERIA L.A.E. AND IBERIA GROUP - ANNUAL REPORT 1999 GOVERNING BODIES

BOARD OF IBERIA, L.A.E.

CHAIRMAN Xabier de Irala Estévez

BOARD MEMBERS Juan José Arroyo Riego Joaquín Clotet Garriga José de Carvajal Salido Marino Díaz Guerra Carlos Horno Octavio Juan Gurbindo Gutiérrez Fermín López Covarrubias García María Angeles Monjas Revilla Miquel Nadal Segalá Cecilio Pérez Velasco Francisco Javier Salas Collantes José Manuel Serra Peris

SECRETARY OF THE BOARD Ignacio Pinilla Rodríguez

96 IBERIA L.A.E. AND IBERIA GROUP - ANNUAL REPORT 1999 GOVERNING BODIES

MANAGEMENT TEAM

CHAIRMAN AND C.E.O. Xabier de Irala Estévez

MEMBERS Angel Mullor Parrondo MANAGING DIRECTOR

Martín Cuesta Vivar ORGANIZATION AND HUMAN RESSOURCES DIRECTOR

Luis Díaz Güell COMMUNICATION DIRECTOR

Enrique Donaire Rodríguez COMERCIAL DIRECTOR

Enrique Dupuy de Lôme Chávarri FINANCIAL DIRECTOR

José Mª Fariza Batanero CONTROL AND ADMINISTRATION DIRECTOR

Luis Fernández Turanzas IN-FLIGHT SERVICES DIRECTOR

Manuel López Colmenarejo NETWORK DEVELOPMENT AND PROGRAMMING DIRECTOR

Juan Losa Montañés GENERAL DIRECTOR AVIACO

Salvador Magalló Martínez BUSINESS DIRECTOR

Enrique Pérez de Villaamil Sierra OPERATIONS DIRECTOR

Ignacio Pinilla Rodríguez GENERAL COUNCIL - SECRETARY OF THE BOARD

Guillermo Serrano Entrambasaguas S.V.P. CORPORATE AFFAIRS

Sergio Turrión Barbado INDUSTRIAL RELATIONS DIRECTOR

Vicente Aguilera Ribota TECHNICAL SECRETARY

IBERIA L.A.E. AND IBERIA GROUP ANNUAL REPORT 1999

AGENDA

AGENDA FOR THE ANNUAL SHAREHOLDERS’ MEETING OF IBERIA, LÍNEAS AÉREAS DE ESPAÑA, S.A. TO BE HELD ON JUNE 12, 2000.

1 Approval of the 1999 financial statements (balance sheet, statement of income and notes to financial statements) and management report of the Company and of the consolidated Group.

2 Resolution on the distribution of the Company’s income for 1999.

3 Approval of the conduct of business by the Company’s Board of Directors in 1999.

4 Approval of the resolutions required to merge AVIACION Y COMERCIO, S.A. (AVIACO) into IBERIA, LÍNEAS AÉREAS DE ESPAÑA, S.A., with the dissolution without liquidation of the former, and approval of the merger plan following information provided by the directors as to any significant modification in the Company’s assets or liabilities in the period from the date of preparation of the merger plan to the date of the Shareholders’ Meeting; and consequent capital increase at IBERIA, with the concomitant amendment of Articles 5 and 6 of the bylaws, by the amount specified in the merger plan, i.e. 42,805.62, through the issuance of 54,879 new Series A shares of 0.78 par value each with the same characteristics and rights as the existing shares, for subscription exclusively by the minority shareholders of AVIACO, pursuant to Article 159.2 of the revised Corporations Law, without there being, therefore, a preemptive subscription right.

5 Reappointment of the auditors of the Company and of the consolidated Group.

6 Delegation of powers.

ANNUAL REPORT 1999

LEGAL INFORMA T I O N

IBERIA GROUP

ANNUAL REPORT 1999

C O N S O L I D A TED FINANCIAL S T A T E M E N T S C O N S O L I D ATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998 C O N S O L I D A TED STATEMENTS OF INCOME FOR 1999 AND 1998

T R A N S L AT I O N O F A R E P O R T A N D C O N S O L I D AT E D F I N A N C I A L S TA T E M E N T S O R I G I N A L L Y I S S U E D I N S P A N I S H A N D P R E PA R E D I N A C C O R D A N C E W I T H G E N E R A L L Y A C C E P T E D A C C O U N T I N G P R I N C I P L E S I N S P A I N ( S E E N O T E 2 2 ) . I N T H E E V E N T O F A D I S C R E P A N C Y , T H E S P A N I S H - L A N G U A G E V E R S I O N P R E V A I L S .

IBERIA GROUP IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D ATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998

ASSETS M I L L I O N S O F P E S E TA S

1999 1998

FIXED AND OTHER NONCURRENT ASSETS: STA R T-U P E X P E N S E S ( NOT E 6 -D) 4 7 6 4 8 3 IN TA N G I B L E A S S E T S ( NOT E 7 ) 6 1 , 4 2 9 3 1 , 8 2 0 PR O P E R T Y, P L A N T A N D E Q U I P M E N T ( NOT E 8 ) 2 7 4 , 2 1 0 2 5 3 , 8 8 2 AI R C R A F T: CO S T 4 4 1 , 3 4 9 4 2 7 , 2 9 9 AC C U M U L AT E D D E P R E C I AT IO N A N D P R O V IS IO N S ( 2 3 6 , 0 5 6 ) ( 2 3 6 , 1 3 6 ) 2 0 5 , 2 9 3 1 9 1 , 1 6 3 OT H E R TA N G I B L E F I X E D A S S E TS: CO S T 1 7 4 , 4 0 7 1 7 5 , 3 3 0 AC C U M U L AT E D D E P R E C I AT IO N A N D P R O V IS IO N S ( 1 0 5 , 4 9 0 ) ( 1 1 2 , 6 1 1 ) 6 8 , 9 1 7 6 2 , 7 1 9 LO N G-T E R M F I N A N C I A L I N V E S T M E N T S 9 7 , 7 8 4 8 9 , 4 6 9 HO L D I N G S I N C O M PA N I E S C A R R I E D BY T H E E Q U I T Y M E T HO D ( NOT E 9 ) 1 5 , 6 8 8 2 , 7 2 4 LOA N S TO C O M PA N I E S C A R R I E D BY T H E E Q U I T Y M E T HO D ( NOT E 9 ) 3 3 , 1 1 5 2 7 , 5 5 3 LO N G-T E R M I N V E S T M E N T S E C U R I T I E S ( NOT E S 3 a nd 9 ) 1 2 , 3 5 4 4 , 4 6 4 OT H E R L O N G-T E R M R E C E I VA B L E S ( NOT E 1 7 ) 4 7 , 2 2 2 6 0 , 8 9 6 PR O V IS IO N S ( 1 0 , 5 9 5 ) ( 6 , 1 6 8 ) SH A R E S O F T H E CO N T R O L L I N G CO M PA N Y 3 3 TOTA L F I X E D A N D OT H E R N O N C U R R E N T A S S E T S 4 3 3 , 9 0 2 3 7 5 , 6 5 7

GOODWILL IN CONSOLIDATION ( NOT E 1 0 ) 2 0 , 7 2 4 2 1 , 8 2 4

DEFERRED CHARGES (NOTE 7) 16,563 6,965

CURRENT ASSETS: IN V E N TO R I E S 1 4 , 2 2 8 1 0 , 8 7 4 AC C O U N T S R E C E I VA B L E 1 0 3 , 2 6 9 7 1 , 9 8 6 SH O R T-T E R M F I N A N C I A L I N V E S T M E N T S ( NOT E 1 1 ) 9 0 , 8 3 1 9 9 , 7 2 9 CA S H 2 , 3 9 6 3 , 5 9 1 AC C R UA L AC C O U N T S 4 , 9 5 1 5 , 5 1 2 TOTA L C U R R E N T A S S E T S 2 1 5 , 6 7 5 1 9 1 , 6 9 2

TOTAL ASSETS 6 8 6 , 8 6 4 5 9 6 , 1 3 8

106 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D ATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998

TR A N S L AT I O N O F A R E P O RT A N D C O N S O L I D AT E D I L L I O N S O F E S E TA S SHAREHOLDERS’ EQUITY AND LIABILITIES M P F I N A N C I A L S TAT E M E N T S O R I G I N A L LY I S S U E D I N SPA N I S H A N D P R E PA R E D I N A C C O R D A N C E W I T H G E N E R A L LY A C C E P T E D A C C O U N T I N G P R I N C I P L E S 1999 1998 I N SPA I N (S E E NO T E 2 2 ) . IN T H E E V E N T O F A D I S C R E PA N C Y, T H E SPA N I S H-L A N G U A G E V E R S I O N P R E VA I L S. SHAREHOLDERS’ EQUITY ( NOT E 1 2 ): CA P I TA L S TO C K 1 1 8 , 4 7 8 1 1 4 , 7 2 7 AD D I T I O N A L PA I D-I N C A P I TA L 1 6 , 0 4 9 - DIFFERENCES DUE TO THE ADJUSTMENT OF CAPITAL STOCK TO EUROS 2 0 0 - RE S E R V E S O F T H E CO N T R O L L I N G CO M PA N Y 1 8 2 ( 1 5 , 8 0 9 ) LE GA L R E S E R V E 5 , 1 2 9 - PR IO R Y E A R S’ L O S S E S ( 5 , 5 7 0 ) ( 1 5 , 8 0 9 ) VO L U N TA R Y R E S E R V E S 6 2 3 - RES E R V E S AT CO M PA N I E S CO N S O L I D ATE D BY TH E GL O BA L IN T E G R AT I O N ME T H O D 7 , 4 3 1 5 , 0 4 7 RE S E R V E S AT C O M PA N I E S C A R R I E D BY T H E E Q U I T Y M E T H O D 3 9 3 1 , 0 4 3 TR A N S L AT I O N D I F F E R E N C E S 5 5 3 1 1 4 IN C O M E AT T R I B U TA B L E TO T H E CO N T R O L L I N G CO M PA N Y (NOTE 19 ) 25,466 53,025 CO N S O L I DAT E D I N C O M E F O R T H E Y E A R 25,596 53,171 IN C O M E AT T R I B U T E D TO M I NO R I T Y I N T E R E S TS (N OTE S 13 AN D 19 ) ( 1 3 0 ) ( 1 4 6 ) TOTA L S H A R E H O L D E R S’ E Q U I T Y 1 6 8 , 7 5 2 1 5 8 , 1 4 7

MINORITY INTERESTS ( NOT E 1 3 ) 7 4 5 6 9 8 NEGATIVE DIFFERENCE IN CONSOLIDATION 266 - DEFFERED REVENUES 3,759 1,979

PR O VISIONS FOR CONTINGENCIES AND EXPENSES (N OTE 14 ) 1 5 9 , 7 0 1 1 6 0 , 3 3 0 LONG-TERM DEBT: PAYA B L E TO C R E D I T E N T I T I E S ( NOT E 1 5 ) 1 0 4 , 5 3 5 6 7 , 3 3 3 OT H E R AC C O U N T S PAYA B L E ( NOT E 1 7 ) 8 , 1 3 3 4 , 9 0 4 TOTA L L O N G-T E R M D E BT 1 1 2 , 6 6 8 7 2 , 2 3 7 CURRENT LIABILITIES: PAYA B L E TO C R E D I T E N T I T I E S ( NOT E 1 5 ) 6 3 , 5 5 4 4 0 , 5 5 0 CU S TO M E R A DVA N C E S 3 0 , 4 6 3 2 7 , 6 8 3 PAYA B L E S F O R P U R C H A S E S A N D S E R V I C E S 9 3 , 2 8 0 8 3 , 1 9 2 OT H E R N O N T R A D E PAYA B L E S ( NOT E 1 7 ) 3 3 , 5 8 3 3 2 , 6 3 5 CO M P E N SAT I O N PAYA B L E 1 9 , 3 2 1 1 8 , 4 9 9 AC C R UA L AC C O U N T S 7 7 2 1 8 8 TOTA L C U R R E N T L I A B I L I T I E S 2 4 0 , 9 7 3 2 0 2 , 7 4 7 The accompanying Notes 1 to 22 are an integral part TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 6 8 6 , 8 6 4 5 9 6 , 1 3 8 of the consolidated balance sheet as of December 31, 1999.

107 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

DEBIT M I L L I O N S O F P E S E TA S

1999 1998

E X P E N S E S : PU R C H A S E S ( NOT E 1 8 ) 9 6 , 4 6 6 8 8 , 2 1 6 PE R S O N N E L E X P E N S E S ( NOT E 1 8 ) 2 0 9 , 9 8 1 1 9 7 , 0 4 3 PE R IO D D E P R E C I AT IO N A N D A MO R T I Z AT IO N 2 7 , 1 3 8 2 6 , 3 2 7 VA R I AT IO N I N O P E R AT I N G P R O V IS IO N S 6 8 0 2 , 2 6 6 OT H E R O P E R AT I N G E X P E N S E S ( NOT E 1 8 ) 3 0 2 , 4 5 5 2 9 9 , 0 2 1 6 3 6 , 7 0 0 6 1 2 , 8 7 3 OP E R AT I N G I N C O M E 9 , 6 2 5 5 2 , 4 6 1 FI N A N C I A L A N D S I M I L A R E X P E N S E S 1 0 , 2 3 2 1 0 , 0 5 3 VA R I AT IO N I N F I N A N C I A L I N V E S T M E N T P R O V IS IO N S ( 3 ) 2 EXC H A N G E L O S S E S 1 6 , 0 9 4 8 , 8 5 1

2 6 , 3 2 3 1 8 , 9 0 6 FI N A N C I A L I N C O M E 6 , 9 2 1 - SHARE IN LOSSES OF COMPANIES CARRIED BY THE EQUITY METHOD 2 2 5 1 7 6 AMO R T I Z AT IO N O F G O O D W I L L I N C O N S O L I DAT IO N ( NOT E 6 -A) 1 , 1 0 0 1 8 4 IN C O M E F R O M O R D I N A R Y AC T I V I T I E S 2 2 , 9 6 4 4 9 , 6 9 6 LO S S E S O N F I X E D A S S E TS 6 3 7 9 7 7 VA R I AT IO N I N F I X E D A S S E T P R O V IS IO N S ( NOT E 9 ) 4 , 3 2 8 7 1 3 EX T R AO R D I N A R Y E X P E N S E S ( NOT E 1 8 ) 2 8 , 1 9 6 1 3 , 1 6 0 PR IO R Y E A R S’ E X P E N S E S A N D L O S S E S 1 , 7 0 3 4 9 7 3 4 , 8 6 4 1 5 , 3 4 7 EX T R AO R D I N A R Y I N C O M E 8 , 1 1 8 1 6 , 2 7 1

CO N S O L I DAT E D I N C O M E B E F O R E TA X E S 3 1 , 0 8 2 6 5 , 9 6 7 CO R P O R AT E I N C O M E TA X ( NOT E 1 7 ) 5 , 4 8 6 1 2 , 7 9 6 CO N S O L I DAT E D I N C O M E F O R T H E Y E A R 2 5 , 5 9 6 5 3 , 1 7 1 IN C O M E AT T R I B U T E D TO M I NO R I T Y I N T E R E S TS ( NOT E 1 9 ) 1 3 0 1 4 6 INCOME FOR THE YEAR ATTRIBUTED TO THE CONTROLLING COMPANY 2 5 , 4 6 6 5 3 , 0 2 5

108 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

TR A N S L AT I O N O F A R E P O RT A N D C O N S O L I D AT E D I L L I O N S O F E S E TA S CREDIT M P F I N A N C I A L S TAT E M E N T S O R I G I N A L LY I S S U E D I N SPA N I S H A N D P R E PA R E D I N A C C O R D A N C E W I T H G E N E R A L LY A C C E P T E D A C C O U N T I N G P R I N C I P L E S 1999 1998 I N SPA I N (S E E NO T E 2 2 ) . IN T H E E V E N T O F A D I S C R E PA N C Y, T H E SPA N I S H-L A N G U A G E V E R S I O N P R E VA I L S. R E V E N U E S : NE T SA L E S ( NOT E 1 8 ) 6 2 2 , 6 0 7 6 4 4 , 9 6 0 OT H E R O P E R AT I N G R E V E N U E S ( NOT E 1 8 ) 2 3 , 7 1 8 2 0 , 3 7 4

6 4 6 , 3 2 5 6 6 5 , 3 3 4

RE V E N U E S F R O M S H A R E HO L D I N G S 3 0 2 7 RE V E N U E S F R O M OT H E R M A R K E TA B L E S E C U R I T I E S 9 , 7 4 2 - OT H E R I N T E R E S T A N D S I M I L A R R E V E N U E S 5 , 0 9 5 7 , 3 1 5 EXC H A N G E GA I N S 1 8 , 3 7 7 6 , 5 7 2 3 3 , 2 4 4 1 3 , 9 1 4 FI N A N C I A L L O S S - 4 , 9 9 2 SHARE IN INCOME OF COMPANIES CARRIED BY THE EQUITY METHOD 7 , 6 2 4 2 , 5 8 7 RE V E R SA L O F N E GAT I V E D I F F E R E N C E I N C O N S O L I DAT IO N ( NOT E 6 -A) 1 1 9 -

GA I N S O N F I X E D A S S E T D IS P O SA L S ( NOT E S 7 a nd 8 ) 3 , 1 4 8 6 , 5 4 8 EX T R AO R D I N A R Y R E V E N U E S ( NOT E 1 8 ) 2 5 , 5 4 3 1 1 , 0 4 6 PR IO R Y E A R S’ R E V E N U E S A N D I N C O M E ( NOT E 1 8 ) 1 4 , 2 9 1 1 4 , 0 2 4

4 2 , 9 8 2 3 1 , 6 1 8

The accompanying Notes 1 to 22 are an integral part of consolidated statement of income.

109

ANNUAL REPORT 1999

NOTES TO 1999 C O N S O L I D A TED FINANCIAL S T A T E M E N T S

T R A N S L AT I O N O F A R E P O R T A N D C O N S O L I D AT E D F I N A N C I A L S T A T E M E N T S O R I G I N A L LY I S S U E D I N S P A N I S H A N D P R E PA R E D I N A C C O R D A N C E W I T H G E N E R A L LY A C C E P T E D A C C O U N T I N G P R I N C I P L E S I N S PA I N ( S E E N O T E 2 2 ) . I N T H E E V E N T O F A D I S C R E PA N C Y , T H E S P A N I S H - L A N G U A G E V E R S I O N P R E V A I L S .

IBERIA GROUP

IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

- 1 - DESCRIPTION OF THE CONTROLLING COMPANY AND THE GROUP

IBERIA, Líneas Aéreas de España, S.A. engages in the air transport of passengers and cargo TR A N S L AT I O N O F A R E P O RT A N D C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S O R I G I N A L LY I S S U E D and also carries on other activities related to its core business. I N SPA N I S H A N D P R E PA R E D I N A C C O R D A N C E W I T H G E N E R A L LY A C C E P T E D A C C O U N T I N G P R I N C I P L E S I N SPA I N (S E E NO T E 2 2 ) . As a carrier of passengers and cargo, the Company operates through a large network serving IN T H E E V E N T O F A D I S C R E PA N C Y, three major markets: Spain, Europe and the Americas. As regards international traffic, in countries T H E SPA N I S H-L A N G U A G E V E R S I O N P R E VA I L S. with which bilateral agreements have been entered into designating a single company as the operator, IBERIA, Líneas Aéreas de España, S.A. is the operator designated by the Spanish party.

As regards the handling activity, it should be noted that in 1992, after a public call for tenders, Ente Público de Aeropuertos Españoles y Navegación Aérea (AENA) -the Spanish public airports and aviation agency- awarded IBERIA, Líneas Aéreas de España, S.A. a contract for the provision of handling services as the first operator in Spain from April 1, 1993, to April 1, 2000.

IBERIA, Líneas Aéreas de España, S.A. carries out itself a significant portion of the maintenance work and provides technical assistance to various companies, mainly through its maintenance center in Barajas.

As regards the distribution system, IBERIA, Líneas Aéreas de España, S.A. is a partner of the Amadeus Group, which owns the Amadeus central booking system, on an equal footing with Lufthansa and Air France. This investment enables IBERIA to be present in an industry with significant economic and growth potential, characterized by its significant technological content.

In 1999 IBERIA, Líneas Aéreas de España, S.A. completed the implementation of the 1997- 1999 Master Plan, the purpose of which was to consolidate the Group as a global air transport operator. The main actions taken under this Master Plan were as follows: 1- Optimization of the organizational structure for separate management systems for each business: Airports, Materials, Systems and Cargo. 2- Strengthening of the “group” concept by consolidating the operating management system, performed through various operators, which is completely separate from the global commercial management activities carried out by a single Commercial Department. 3- The forging of commercial alliances with American Airlines, Inc. and British Airways, and the signing of an agreement for the acquisition of a 10% holding in IBERIA, Líneas Aéreas de España, S.A. In 1999 IBERIA, Líneas Aéreas de España, S.A. became a fully fledged member of the oneworld “megacarrier”, one of the two largest air transport groups in the world, which is led by the two aforementioned companies. This will facilitate globalization of the air transport business.

113 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

4- In December 1999 an agreement was entered into by Sociedad Estatal de Participaciones Industriales (SEPI) and the new shareholders of IBERIA, Líneas Aéreas de España, S.A. whereby the latter will acquire 40% of the capital stock of IBERIA, Líneas Aéreas de España, S.A. 5- In September 1999 the employees of Aviación y Comercio, S.A. (AVIACO) were integrated into IBERIA, Líneas Aéreas de España, S.A., and in December 1999 IBERIA, Líneas Aéreas de España, S.A. acquired all AVIACO’s aircraft.

Also, it is planned to merge Aviación y Comercio, S.A. into IBERIA, Líneas Aéreas de España, S.A. in 2000.

- 2 - DEPENDENT COMPANIES The data on the dependent companies is as follows:

DEPENDENT COMPANIES P E R C E N TA G E O F O W N E R S H I P BY I B E R I A , L Í N E A S A É R E A S D E E S PA Ñ A , S .A . C O M PA N Y R E G I S T E R E D O F F I C E L I N E O F B U S I N E S S %

AV I AC I Ó N Y CO M E R C IO, S.A. MAU D E S, 51 AI R TR A N S P O R T O F ( AV I ACO) MA D R I D PA S S E N G E R S A N D C A R G O 9 9 . 9 3

VU E L O S IN T E R N AC IO N A L E S D E CA M I NO D E L A ES C O L L E R A, 5 AI R C R A F T VAC AC IO N E S, S.A. (VIVA) PA L M A D E MA L L O R C A M A I N T E N A N C E 9 9 . 4 7

CA M P O S VE L Á Z Q U E Z, S.A. VE L Á Z Q U E Z, 134 - MA D R I D AC Q U IS I T IO N A N D HO L D I N G O F U R BA N P R O P E R T I E S 9 9 . 9 9

BÍ N T E R CA N A R I A S, S.A. AE R O P U E R TO D E LA S PA L M A S AI R TR A N S P O R T O F PA S S E N G E R S A N D C A R G O I N T H E CA N A R Y IS L A N D S 9 9 . 9 9

BÍ N T E R ME D I T E R R Á N E O, S.A. VE L Á Z Q U E Z, 130 - MA D R I D AI R TR A N S P O R T O F PA S S E N G E R S A N D C A R G O 9 9 . 9 9

CA R G O S U R, S.A. VE L Á Z Q U E Z, 130 - MA D R I D AI R TR A N S P O R T O F C A R G O (I N AC T I V E) 1 0 0 . 0 0

IB E R– SW IS S CAT E R I N G, S.A. CT R A. D E L A MU Ñ OZ A, S/N PR E PA R AT IO N MA D R I D A N D M A R K E T I N G O F F O O D A N D OT H E R S E R V IC E S F O R A I R C R A F T 7 0 . 0 0 (a) The dividend rights conferred by this holding amount to 74.5%, SIS T E M A S AU TO M AT I Z A D O S VE L Á Z Q U E Z, 130 CO M P U T E R S E R V IC E S which was the percentage used AG E N C I A S D E VI A J E, S.A. MA D R I D A P P L IC A B L E TO T H E T R AV E L in consolidation, and which includes ( SAVIA) A N D TO U R IS M I N D US T R I E S 7 6 . 8 4 (a) the 66% holding owned directly by IBERIA, Líneas Aéreas de España, S.A. and the 8.5% holding owned indirectly CO M PA Ñ Í A AU X I L I A R A L CA R G O CE N T R O D E CA R GA AÉ R E A TR A N S P O R T O F C A R G O 7 5 . 0 0 through the Amadeus Group. EX P R E S, S.A. (CAC E SA) PA R C E L A 2 P.5 NAV E 6 MA D R I D

114 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

All the foregoing companies were consolidated by the global integration method in 1999 and their fiscal years end on December 31.

AVIACIÓN Y COMERCIO, S.A. On August 31, 1999, the Shareholders’ Meeting of Aviación y Comercio, S.A. and the Board of Directors of IBERIA, Líneas Aéreas de España, S.A. approved the full integration of the employees of Aviación y Comercio, S.A. into IBERIA, Líneas Aéreas de España, S.A., effective September 1, 1999, in conformity with the agreements entered into with the representatives of the employees of the two companies in June 1999.

It is planned to merge Aviación y Comercio, S.A. into IBERIA, Líneas Aéreas de España, S.A. in 2000.

VUELOS INTERNACIONALES DE VACACIONES, S.A. Because it was not possible to integrate Vuelos Internacionales de Vacaciones, S.A. as an IBERIA Group operator, as required under the Master Plan, and in view of the significant losses incurred by this company in recent years, at the end of 1998 IBERIA Group management decided to discontinue the company’s operations and submitted the related labor force reduction plan, on which an agreement was reached at the end of February 1999. This company ceased operations as an operator in April 1999, and became a maintenance company in Palma de Mallorca.

115 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

- 3 - ASSOCIATED COMPANIES The fiscal years of the associated companies consolidated in the IBERIA Group in 1999 end on December 31. The data on these companies, all of which are carried by the equity method, are as follows:

ASSOCIATED COMPANIES P E R C E N TA G E O F O W N E R S H I P BY I B E R I A , L Í N E A S A É R E A S D E E S PA Ñ A , S . A .

C O M PA N Y R E G I S T E R E D O F F I C E L I N E O F B U S I N E S S %

VENEZOLANA INTERNACIONAL OSCAR M. ZULOAGA, S/N AI R T R A N S P O R T O F 45.00 DE AVIACIÓN, S.A. CARACAS, VENEZUELA PASSENGERS AND CARGO (VIASA)

AMADEUS GROUP SALVADOR DE MADARIAGA, 1 MANAGEMENT AND 31.87 (a) MADRID OPERATION OF A COMPUTERIZED BOOKING SYSTEM

IBERBUS CONCHA LTD.GEORGE’S DOCK HOUSE,LEASE OF 40.00 IFSC; DUBLÍN AIRCRAFT

IBERBUS ROSALÍA LTD.GEORGE’S DOCK HOUSE,LEASE OF 40.00 IFSC; DUBLÍN AIRCRAFT

IBERBUS CHACEL LTD.GEORGE’S DOCK HOUSE,LEASE OF 40.00 IFSC; DUBLÍN AIRCRAFT

IBERBUS ARENAL LTD.GEORGE’S DOCK HOUSE,LEASE OF 40.00 IFSC; DUBLÍN AIRCRAFT

IBERBUS TERESA LTD.EARLSFORT LEASE OF 40.00 CENTRE-HATCH ST.;DUBLÍN AIRCRAFT

IBERBUS EMILIA LTD.EARLSFORT LEASE OF 40.00 CENTRE-HATCH ST.; DUBLÍN AIRCRAFT

IBERBUS AGUSTINA LTD.EARLSFORT LEASE OF 40.00 CENTRE-HATCH ST.; DUBLÍN AIRCRAFT

IBERBUS BEATRIZ LTD.EARLSFORT LEASE OF 40.00 CENTRE-HATCH ST.; DUBLÍN AIRCRAFT

IBERBUS JUANA INÉS LTD.EARLSFORT LEASE OF 45.45 CENTRE-HATCH ST.; DUBLÍN AIRCRAFT (a) The dividend rights relating to this holding amount to 25%, TOUROPERADOR VIVA TOURS, S.A. EDIFICIO BARAJAS 1 MANAGEMENT OF 49.04 which is the percentage TRESPADERNE, 29; MADRID PACKAGE TOURS used in consolidation.

The net worth data of the Amadeus Group, of each of the Iberbus companies and of Touroperador Viva Tours, S.A. used in consolidation were drawn from their respective provisional financial statements as of December 31, 1999, before receipt of the related auditors’ reports.

116 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

VENEZOLANA INTERNACIONAL DE AVIACIÓN, S.A. Venezolana Internacional de Aviación, S.A.’s operations were discontinued in January 1997 and in March 1997 the company filed for “suspensión de pagos” (Chapter 11-type insolvency proceedings, hereinafter “suspension of payments”) and the process of liquidation commenced. At the date of preparation of these consolidated financial statements, it had not been possible to obtain any recent financial statements relating to this company.

As of December 31, 1998, IBERIA Líneas Aéreas de España, S.A. had a holding of 29.2% in Amadeus Global Travel Distribution, S.A.

As a result of various events in 1999, as described in Note 9, including a public offering and two public capital increases at Amadeus Global Travel Distribution, S.A., as of December 31, 1999, IBERIA Líneas Aéreas de España, S.A. had a holding of 31.87% in this company in terms of voting rights and of 25% in terms of dividend rights.

TOUROPERADOR VIVA TOURS, S.A. On December 23, 1998, IBERIA, Líneas Aéreas de España, S.A., by subscribing to 0.4% of the capital stock, incorporated, together with other shareholders, Touroperador Viva Tours, S.A., whose corporate purpose is the management and sale of package tours. On that same date, the Shareholders’ Meeting resolved to increase capital by Ptas. 225 million, which was fully subscribed by IBERIA, Líneas Aéreas de España, S.A. in March 1999. As of December 31, 1999, IBERIA, Líneas Aéreas de España, S.A. had a 49.04% holding in Touroperador Viva Tours, S.A.

AEROLÍNEAS ARGENTINAS GROUP AND INTERINVEST, S.A. In 1996 IBERIA, Líneas Aéreas de España, S.A. significantly reduced its holding in Aerolíneas Argentinas, S.A. by selling its holding in Interinvest, S.A. (the majority shareholder of Aerolíneas Argentinas, S.A.) to Andes Holding, B.V. (42% owned by SEPI).

As of December 31, 1998, US$ 135,000,000 (Ptas. 20,500 million) of the account receivable arising from this transaction had not been collected, and IBERIA, Líneas Aéreas de España, S.A. recorded a provision of Ptas. 11,000 million based on the amount of the account receivable that it expected to recover.

In April 1999 SEPI’s Board of Directors resolved to acquire from IBERIA, Líneas Aéreas de España, S.A. this account receivable from Andes Holding, B.V. for US$ 62,000,000, and this amount was collected in June 1999 for an amount equal to Ptas. 9,673 million.

117 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

On October 23, 1998, IBERIA, Líneas Aéreas de España, S.A. assigned to Andes Holding, B.V. its direct holding (20% of the capital stock of Aerolíneas Argentinas, S.A.) in exchange for an 8.92% holding in the capital stock of Interinvest, S.A. Also, on the same date, IBERIA, Líneas Aéreas de España, S.A. acquired a 1.08% holding in Interinvest, S.A.

Since as of December 31, 1999, IBERIA, Líneas Aéreas de España, S.A. had a holding of 10% in Interinvest, S.A., this company was not consolidated in 1999, and the value of its shares is recorded under the “Long-Term Investment Securities” caption in the accompanying consolidated balance sheet as of December 31, 1999.

- 4 - BASIS OF PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS

A) TRUE AND FAIR VIEW The 1999 consolidated financial statements were prepared from the accounting records of IBERIA, Líneas Aéreas de España, S.A. and of its subsidiaries (as detailed in Notes 2 and 3) which include, in the case of certain companies, the effects of the revaluation made pursuant to Royal Decree-Law 7/1996.

The financial statements of the Spanish subsidiaries consolidated by the global integration method were prepared by each company’s directors in accordance with the Spanish National Chart of Accounts, except in the case of Vuelos Internacionales de Vacaciones, S.A. (VIVA), for which the information used in consolidation by the global integration method relates to its provisional financial statements as of December 31, 1999.

The Amadeus Group was consolidated on the basis of its provisional consolidated financial statements as of December 31, 1999, before receipt of the related auditors’ report.

Iberbus Concha, Ltd., Iberbus Rosalía, Ltd., Iberbus Chacel, Ltd., Iberbus Arenal, Ltd., Iberbus Teresa, Ltd., Iberbus Emilia, Ltd., Iberbus Agustina, Ltd., Iberbus Beatriz, Ltd., Iberbus Juana Inés, Ltd. and Touroperador Viva Tours, S.A. were consolidated using their provisional financial statements as of December 31, 1999, before receipt of the related auditors’ reports.

As a result of the situation of Venezolana Internacional de Aviación, S.A. (see Note 9) and because recent financial statements were not available, this company was consolidated on the basis of its latest available provisional financial statements.

The 1999 consolidated financial statements, which were prepared by the directors of IBERIA, Líneas Aéreas de España, S.A., will be submitted for approval by the Shareholders’ Meeting, and it is considered that they will be approved without any changes.

118 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

B) CONSOLIDATION PRINCIPLES The companies over which there is effective control were consolidated by the global integration method. The Controlling Company and the companies consolidated by the global integration method constitute the “consolidable Grou p ” .

Also, the associated companies in which the Controlling Company has a significant influence on management but does not have majority voting rights and does not manage them jointly with third parties are carried by the equity method. The companies comprising the consolidable Group and those carried by the equity method constitute the IBERIA Group. The equity of minority shareholders in the net worth and results of the consolidated subsidiaries is reflected under the “Minority Interests “ caption on the liability side of the consolidated balance sheet. Also, the equity of minority shareholders in the results of the aforementioned subsidiaries is reflected under the “Income Attributed to Minority Interests” caption in the consolidated statement of income.

All material accounts and transactions between companies consolidated by the global integration method were eliminated in consolidation.

- 5 - DISTRIBUTION OF THE CONTROLLING COMPANY’S INCOME The directors of IBERIA, Líneas Aéreas de España, S.A. propose the following distribution of 1999 income:

DISTRIBUTION OF THE CONTROLLING COMPANY’S INCOME MILLIONS OF PESETAS

- 6 - VALUATION STANDARDS The main valuation methods applied in preparing the consolidated financial statements for 1999 were as follows:

A) GOODWILL IN CONSOLIDATION AND NEGATIVE DIFFERENCE IN CONSOLIDATION

1- GOODWILL IN CONSOLIDATION Goodwill was calculated as the positive difference between the additional investment made in Aviación y Comercio, S.A. by IBERIA, Líneas Aéreas de España, S.A. and the underlying book value of the holding per the balance sheet used as the basis for the acquisition.

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The balance of the “Goodwill in Consolidation” caption in the accompanying consolidated balance sheet as of December 31, 1999, relates in full to securities that cannot be assigned to assets and is being amortized on a straight-line basis over 20 years (see Note 10). The directors of IBERIA, Líneas Aéreas de España, S.A. set this amortization period in accordance with Law 37/1998 amending Article 194 of the Corporations Law because they consider that this is the period in which the goodwill will contribute to the obtainment of income by the Group.

Ptas. 1,100 million of amortization of goodwill were charged to the consolidated statement of income for 1999.

2- NEGATIVE DIFFERENCE IN CONSOLIDATION The negative difference in consolidation was calculated as the difference between the investment made in Touroperador Viva Tours, S.A. by IBERIA, Líneas Aéreas de España, S.A. and the underlying book value of the holding per the balance sheet used as the basis for the acquisition.

The negative difference in the accompanying consolidated balance sheet as of December 31, 1999, is treated as a provision for contingencies and expenses and is allocated to income as the contingencies and expenses materialize or as the projected losses are recognized (see Note 10).

Ptas. 119 million were credited to the 1999 consolidated statement of income relating to the reversal of the negative difference in consolidation as a result of the losses incurred by Touroperador Viva Tours, S.A.

B) UNIFORMITY OF PRESENTATION The main valuation principles and standards used by IBERIA, Líneas Aéreas de España, S.A. were applied to all the consolidated companies and to the associated companies so as to ensure uniform presentation of the items composing the consolidated financial statements.

C) TRANSLATION METHODS The 1999 provisional financial statements of the Iberbus companies, which are denominated in U.S. dollars, were translated to pesetas at the exchange rates ruling as of December 31, 1999, except for:

1. Capital and reserves, which were translated at historical exchange rates.

2. Income statements, which were translated at the average exchange rates for the year.

The exchange differences arising from application of these translation methods are included under the “Shareholders’ Equity - Translation Differences” caption in the accompanying consolidated balance sheet as of December 31, 1999.

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D) START-UP EXPENSES These expenses consist basically of public deed execution and registration expenses relating to capital increases, and are amortized at an annual rate of 20%.

Ptas. 228 million of amortization of start-up expenses were charged to the 1999 consolidated statement of income.

E) INTANGIBLE ASSETS Leased assets are recorded as intangible assets at the cost of the related item, excluding interest cost, and are amortized by the same methods as those used to depreciate similar items of property, plant and equipment. The total debt for lease payments plus the amount of the purchase option is recorded as a liability. The difference between the two amounts, which represents the interest expenses on the transaction, is recorded under the “Deferred Expenses” caption in the accompanying consolidated balance sheet and is allocated to income each year by the interest method.

In prior years IBERIA, Líneas Aéreas de España, S.A. and Vuelos Internacionales de Vacaciones, S.A. modified the net book value of certain of their leased aircraft pursuant to a Ministry of Economy and Finance Order (see Note 6-j).

Since these companies did not lease any aircraft in currencies other than the peseta or the euro in 1999 or in any of the four preceding years, no modification pursuant to this Order was made to the net book value of any aircraft in 1999.

Computer software is recorded at cost and is being amortized on a straight-line basis over an estimated useful life of five years.

Ptas. 3,111 million of amortization of intangible assets were charged to the 1999 consolidated statement of income.

F) PROPERTY, PLANT AND EQUIPMENT The valuation methods applied by the consolidable Group are basically as follows:

1. AIRCRAFT: A i rcraft are carried at cost revalued pursuant to the applicable enabling legislation, including Royal Decree-Law 7/1996, except for certain aircraft, the value of which was modified in prior years and in 1999 pursuant to the provisions of a Ministry of Economy and Finance Ord e r (see Note 6-j).

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2. OTHER TANGIBLE FIXED ASSETS: The tangible fixed assets recorded under the “Other Tangible Fixed Assets” caption in the accompanying consolidated balance sheet are carried at cost revalued pursuant to Royal Decree- Law 7/1996.

3. REPAIRS, UPKEEP AND MAINTENANCE: The companies in the consolidable Group record a provision for the periodic major repairs of the fuselages of their aircraft (basically B-737, B-747, B-757, B-767, DC-10, A-300, A-320, A-321, A-340, MD-87 and MD-88 aircraft) based on the total estimated cost to be incurred, and allocate this cost to income on a straight-line basis during the period elapsing between two successive major repairs. The balance of this provision is reflected under the “Provisions for Contingencies and Expenses - Provision for Major Repairs” caption in the consolidated balance sheet.

The costs of minor repairs to the aforementioned types of aircraft and of all repairs to the B-727 and DC-9 aircraft are expensed currently, since the annual expenses tend to be uniform.

Upkeep and maintenance expenses are expensed currently.

G) DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT The consolidable Group companies depreciate their property, plant and equipment by the straight-line method at annual rates based on the years of estimated useful life.

The methods applied to calculate depreciation of the main items of property, plant and equipment are as follows:

2. AIRCRAFT SPARE PARTS: Spare parts for aircraft maintenance are depreciated, depending on the type of part, as follows:

a. Rotatable parts These are depreciated in a period ranging from 10 to 18 years from the date of purchase, assuming a residual value of between 10% and 20%, depending on the type of aircraft.

b. Repairable parts These are depreciated in a period ranging from 8 to 10 years, depending on the aircraft, from the date of purchase, assuming a residual value of 10% in all cases.

The Companies also re c o rd provisions for depreciation of spare parts based on obsolescence.

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3. YEARS OF ESTIMATED USEFUL LIFE

The years of estimated useful life of property, plant and equipment items are as follows:

YEARS OF ESTIMATED USEFUL LIFE YEARS

A I R C R A F T 18 B U I L D I N G S A N D O T H E R S T R U C T U R E S 20 - 50 M A C H I N E R Y, I N S TA L L AT IO N S A N D T O O L S 10 – 16 T R A N S P O R T E Q U I P M E N T 7 – 10 F U R N I T U R E A N D F I X T U R E S 10 C O M P U T E R H A R D WA R E 4 – 7 S P A R E PA R T S 8 – 18 F L IG H T S I M U L AT O R S 10 – 14

The buildings and facilities of IBERIA, Líneas Aéreas de España, S.A. and of Aviación y Comercio, S.A. on land owned by the Spanish State, mostly at Spanish airports, with an aggregate net book value of Ptas. 3,939 million, are depreciated over the respective concession periods.

Depreciation is taken on the net amount of tangible fixed asset revaluations from the date they are recorded, using the same useful life periods as for the cost values.

The detail of depreciation of and provisions for property, plant and equipment charged to the consolidated statement of income for 1999 is as follows (see Note 8):

1999 MILLIONS OF PESETAS

A I R C R A F T 1 2 , 8 9 4 O T H E R TA N G I B L E F I X E D A S S E T S 1 0 , 9 3 3 2 3 , 8 2 7

H) SHAREHOLDINGS AND OTHER FINANCIAL INVESTMENTS

1- SHAREHOLDINGS Investments in nonconsolidated companies are carried at cost net, where appropriate, of the required provisions for diminution in value (cost higher than fair value at year-end).

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2- SHORT-TERM FINANCIAL INVESTMENTS Investments in government debt securities are carried at cost. The interest on these securities is credited to income when earned and is charged through maturity to the “Short-Term Financial Investments” caption.

Time deposits are recorded at the amount delivered. The interest on these deposits is credited to income when earned and is charged to the “Short-Term Financial Investments” caption.

I) TRANSLATION OF FOREIGN CURRENCY BALANCES The balances of accounts denominated in foreign currencies are translated to pesetas at the exchange rates ruling at December 31 of each year. However, following customary airline practice, the balance of the liability for unused traffic documents is reflected in the consolidated balance sheet at the exchange rate ruling 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 days of the preceding month.

Translation differences arising from translation at official year-end exchange rates and from the difference between exchange rates at December 31 of the preceding year and those prevailing at the date of effective collection or payment are recorded under the “Exchange Gains/Losses” captions in the consolidated statements of income, except for the net gains or losses relating to the financing obtained for the acquisition of certain aircraft.

J) EXCHANGE DIFFERENCES ARISING FROM AIRCRAFT FINANCING Pursuant to Valuation Rule 14 in Section 5 of the Spanish National Chart of Accounts, on March 23, 1994, the Ministry of Economy and Finance issued, at the proposal of the Accounting and Audit Institute (ICAC), a Ministerial Order on the accounting treatment of certain foreign currency exchange differences.

Under this accounting regulation, from January 1, 1993, the net amount of foreign currency exchange differences arising in each year on financing for the acquisition by IBERIA, Líneas Aéreas de España, S.A., Aviación y Comercio, S.A. and Vuelos Internacionales de Vacaciones, S.A. of aircraft added to the fleet in the current year and in the four immediately preceding years has to be recorded as an increase or decrease in the value of such aircraft.

In accordance with this regulation, in 1999 IBERIA, Líneas Aéreas de España, S.A. recorded the related increases in the cost and depreciation of certain of its aircraft, although the effect thereof was not material.

124 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

K) INVENTORIES Inventories, basically aeronautical supplies, are valued at average purchase cost, and the related provisions for depreciation are recorded.

L) RECOGNITION OF REVENUES AND EXPENSES Revenues and expenses are recognized 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 consolidated balance sheet. The balance of this caption in the accompanying consolidated balance sheet reflects the liability for tickets and traffic documents sold prior to December 31, 1999, but not yet used at that date.

The revenues relating to these items are recognized when the transport or service is performed.

IBERIA, Líneas Aéreas de España, S.A. and its commercial air subsidiaries have introduced the “Iberia Plus” card as an ongoing promotional tool whereby the holder of the card accumulates points for taking certain flights, using certain hotels, renting cars or making credit card purchases with credit cards covered by the program. The points can be exchanged for free tickets or other services offered by the companies included in the program. The accompanying consolidated balance sheet as of December 31, 1999, includes a provision of Ptas. 6,686 million in this connection, based on estimates of the value of the points accumulated at those dates.

M) PENSION PROVISIONS Under the collective labor agreements currently in force, IBERIA, Líneas Aéreas de España, S.A. and Aviación y Comercio, S.A. are required to pay full compensation to flight personnel who take early retirement (special leave) and to supplement the social security benefits of ground personnel taking early retirement, in accordance with the conditions specified for each case.

The “Provisions for Contingencies and Expenses- Pension Provisions” account in the accompanying consolidated balance sheet includes the liabilities incurred in this connection as of December 31, 1999. The provisions recorded to cover the discounted value of the liabilities incurred as of December 31, 1999, and the interest allocable to the recorded allowance amount to Ptas. 771 million and Ptas. 743 million, respectively, and these amounts are included under the “Personnel Expenses” and “Financial and Similar Expenses” captions, respectively, in the accompanying 1999 consolidated statement of income.

In the first half of 2000, management of the IBERIA Group will analyze the most appropriate financing or rebalancing plan for externalizing a portion of the liability in this connection as required under current legislation.

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N) 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 of its subsidiaries Aviación y Comercio, S.A. and Sistemas Automatizados Agencias de Viaje, S.A.) and other welfare benefits in certain circumstances (death of spouse, temporary and permanent disability, etc.).

Under the current collective labor agreements, the aforementioned companies and their employees make the regulatory contributions to the Montepío, as established in these labor agreements. The Montepío’s bylaws limit these companies’ liability to the payment by them of the regulatory established contributions.

The consolidable Group’s contribution of Ptas. 3,381 million in 1999 was recorded under the “Personnel Expenses” caption in the accompanying 1999 consolidated statement of income.

O) OBLIGATIONS TO FLIGHT PERSONNEL PLACED ON THE RESERVE Under the collective labor agreements in force, IBERIA, Líneas Aéreas de España, S.A. and Aviación y Comercio, S.A. are required to pay full compensation to flight personnel placed on the reserve.

The “Provisions for Contingencies and Expenses - Provisions for Obligations to Employees” account in the accompanying consolidated balance sheet includes the liabilities incurred in this connection as of December 31, 1999. The provisions recorded to cover the estimated liability incurred in 1999 and the interest allocable to the recorded allowance amount to Ptas. 5,774 million and Ptas. 2,167 million, respectively, and these amounts are included under the “Personnel Expenses” and “Financial and Similar Expenses” captions, respectively, in the accompanying 1999 consolidated statement of income.

As of December 31, 1999, IBERIA, Líneas Aéreas de España, S.A. recorded an additional provision of Ptas. 836 million with a charge to the “Extraordinary Expenses” caption in the accompanying 1999 consolidated statement of income to cover the obligations to the flight personnel of Vuelos Internacionales de Vacaciones, S.A. who joined the labor force of IBERIA, Líneas Aéreas de España, S.A.

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P) PROVISION FOR THIRD-PARTY LIABILITY The consolidated companies record in the “Provisions for Contingencies and Expenses - Provision for Third-Party Liability” caption in the accompanying consolidated balance sheet the estimated amount required for probable or certain third-party liability arising from legal proceedings and litigation in progress or from outstanding indemnity payments or obligations of undetermined amount, and collateral and other similar guarantees provided by the consolidated companies. As described in Note 14, IBERIA, Líneas Aéreas de España, S.A. has included in this account the amount of the restructuring costs that the directors of IBERIA, Líneas Aéreas de España, S.A. consider will be incurred in the coming years as a result of the measures contained in the IBERIA Group’s Master Plan.

Q) CORPORATE INCOME TAX The corporate income tax of each year for each consolidated company is calculated on the basis of the book income before taxes, increased or decreased, as appropriate, by the permanent differences from taxable income, net of tax relief and tax credits, excluding tax withholdings and prepayments.

The Controlling Company and its dependent companies are taxed under the consolidated taxation system as part of SEPI. This system is regulated by Articles 42 et seq. of the Commercial Code, as provided for by Law 5/1996. Consequently, the 1999 corporate income tax will be settled on a consolidated tax return basis.

R) FUTURES AND OTHER SIMILAR INSTRUMENTS IBERIA, Líneas Aéreas de España, S.A. uses these instruments in transactions to hedge its asset and liability positions and its future cash flows. It only carries out “nongenuine” hedging transactions (i.e. those arranged between two parties, establishing in each case the contractual terms of the transactions agreed upon between them).

The expenses relating to transactions involving futures and similar instruments are expensed currently.

The price differences arising during the term of futures and similar instruments are recorded as follows: 1. In the case of transactions arranged to hedge exchange rates relating to asset or liability positions, the related balances are discounted to present value based on the related gains or losses. 2. For the other exchange rate transactions, the price differences are recorded in the consolidated statement of income when the futures transactions or similar instruments are cancelled or finally settled.

127 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

- 7 - INTANGIBLE ASSETS The variations in 1999 in intangible asset accounts and in the related accumulated amortization were as follows:

1999 M I L L I O N S O F P E S E TA S ADDITIONS 01-01-99 AND PROVISIONS RETIREMENTS TRANSFERS 12-31-99 RIGHTS ON LEASED ASSETS 42,961 36,575 (8,148) 283 71,671 COMPUTER SOFTWARE 2,821 1,503 (481) (209) 3,634 RESEARCH AND DEVELOPMENT EXPENSES 158 52 - (210) - INTELLECTUAL PROPERTY AND LEASEHOLD ASSIGNMENT RIGHTS 104 --- 104 AMORTIZATION (14,224) (3,158) 3,309 93 (13,980) NET VALUE 31,820 34,972 (5,320) (43) 61,429

RIGHTS ON LEASED ASSETS In December 1999 Vuelos Internacionales de Vacaciones, S.A. sold two leased B-737 aircraft with a cost and accumulated amortization of Ptas. 8,148 million and Ptas. 2,834 million, respectively. The resulting gain of Ptas. 468 million was recorded under the “Gains on Fixed Asset Disposals” caption in the accompanying 1999 consolidated statement of income.

In 1999 IBERIA, Líneas Aéreas de España, S.A. leased six A-320 aircraft for Ptas. 31,644 million.

The main features of these six lease contracts are as follows: 1. Maturity: September 1, 2007. 2. Interest: six-monthly payable on March 1 and September 1 each year. 3. Interest rate: fixed of approximately 5.44%. 4. Purchase option: 20,579,347 each for three of the six aircraft and 20,644,653 each for the other three.

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DECEMBER 31, 1999 MILLIONS OF PESETAS

CASH PRICE OF THE FIXED ASSETSACQUIRED, ACCORDING TO CONTRACTS 7 1 , 6 4 9 AMOUNT OF LEASE PAYMENTSPAID: (a) As of December 31, 1999, IN PRIOR YEARS 2 7 , 6 3 6 these amounts included Ptas. 15,310 million of unaccrued IN THE CURRENT YEAR 5 , 4 2 9 interest at that date, the balancing AMOUNT OF LEASE PAYMENTS OUTSTANDING AT DECEMBER, 31 4 2 , 5 1 9 (a) entry for which is included under the “Deferred Charges” caption in the AMOUNT OF PURCHASE OPTIONS 4 1 , 9 0 3 (a) accompanying consolidated balance sheet as of December 31, 1999.

The due dates for the lease payments outstanding as of December 31, 1999, including the amount of the purchase options, are as follows:

DECEMBER 31, 1999 DU E I N MI L L I O N S O F PE S E TA S 2000 8,866 2001 13,131 2002 10,911 2003 9,625 2004 13,286 2005-2007 28,603

- 8 - PROPERTY, PLANT AND EQUIPMENT The variations in 1999 property, plant and equipment accounts and in the related accumulated depreciation and provisions were as follows: COST

COST M I L L I O N S O F P E S E TA S

01-01-99 ADDITIONS RETIREMENTS TRANSFERS 12-31-99

AIRCRAFT 390,114 14,519 (17,771) 6,809 393,671 ADVANCES ON AIRCRAFT 37,185 37,722 (23,632) (3,597) 47,678 427,299 52,241 (41,403) 3,212 441,349 OTHER TANGIBLE FIXED ASSETS: LAND 552 264 (22) - 794 BUILDINGS AND OTHER STRUCTURES 28,509 495 (601) - 28,403 MACHINERY, INSTALLATIONS AND TOOLS 61,992 3,680 (1,426) 516 64,762 TRANSPORT EQUIPMENT 3,755 1,091 (186) 7 4,667 FURNITURE AND FIXTURES 3,967 242 (605) - 3,604 COMPUTER HARDWARE 28,171 2,146 (13,930) 36 16,423 SPARE PARTS 36,091 20,396 (11,880) - 44,607 FLIGHT SIMULATORS 7,153 20 -- 7,173 OTHER TANGIBLE FIXED ASSETS 1,102 8 (21) - 1,089 CONSTRUCTION IN PROGRESS 4,038 7,293 (4,858) (3,588) 2,885 175,330 35,635 (3 3 , 5 2 9 ) (3 , 0 2 9 ) 17 4 , 4 0 7

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ADVANCES ON AIRCRAFT The advances on aircraft relate to advances paid as a result of purchase commitments to manufacturers in accordance with the established schedules.

The additions in 1999 relate to advances paid in connection with 12 B-757 aircraft, 19 A-320 aircraft, 5 A-321 aircraft and 6 A-340 aircraft to be received under the fleet renewal plan of IBERIA, Líneas Aéreas de España.

Also, in 1999 Ptas. 8,199 million relating to the advances paid for the eight B-757 aircraft that came into service were recovered.

Also, Ptas. 12,007 million relating to the advances paid for eight A-320 aircraft that came into service in 1999, six under financial lease contracts and two under operating lease contracts, were recovered. Lastly, Ptas. 3,426 million relating to advances paid on the A-340 aircraft that came into service in 1999 were recovered. Also, Ptas. 3,597 million were transferred to the “Aircraft” caption relating to the advances paid for two A-321 aircraft that were acquired by IBERIA, Líneas Aéreas de España, S.A. in December 1999.

AIRCRAFT, PERIOD ADDITIONS In December 1999, two A-321 aircraft and five A-321 engines were acquired for Ptas. 10,250 million and Ptas. 2,435 million, respectively.

Also, in 1999 one ATR-72 aircraft and its spare parts were acquired for Ptas. 2,466 million.

AIRCRAFT, PERIOD RETIREMENTS In 1999 IBERIA, Líneas Aéreas de España, S.A. sold one B-727 and two A-300 aircraft.

In December 1999 Vuelos Internacionales de Vacaciones, S.A. sold two B-737 aircraft with a cost and accumulated amortization of Ptas. 6,814 million and Ptas. 2,367 million, respectively. The resulting gain of Ptas. 1,397 million was recorded under the “Gains on Fixed Asset Disposals” caption in the accompanying 1999 consolidated statement of income.

REVALUATION RESERVE ROYAL DECREE-LAW 7/1996 On December 31, 1996, IBERIA, Líneas Aéreas de España, S.A. and certain of its dependent companies revalued their property, plant and equipment pursuant to Royal Decree-Law 7/1996, and paid the single 3% tax. These companies had previously availed themselves of other revaluation legislation. The revaluation in 1996 was carried out by applying the maximum coefficients authorized by the Royal Decree-Law, with the 40% reduction for the effect of the financing of these companies (except for Aviación y Comercio, S.A.) up to the limit of the estimated market value of each of the assets. The revaluation surplus and effect as of December 31, 1999, is as follows:

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REVALUATION M I L L I O N S O F P E S E TA S

SURPLUS 1999 BALANCE AT 01-01-99 PROVISION RETIREMENTS AT 12-31-99

AIRCRAFT 7,170 (648) (353) 6,169 LAND 147 -- 147 BUILDINGS AND OTHER STRUCTURES 2,189 (254) (63) 1,872 MACHINERY, INSTALLATIONS AND TOOLS 1,545 (789) (32) 724 TRANSPORT EQUIPMENT 13 (7) - 6 FLIGHT SIMULATORS 234 (64) - 170 11,298 (1,762) (448) 9,088

As of December 31, 1999, the accumulated depreciation on the surplus arising from the revaluation amounted to approximately Ptas. 12,593 million.

The revaluation increased the 1999 depreciation charge by approximately Ptas. 1,762 million, and will increase the 2000 depreciation charge by approximately Ptas. 1,218 million.

The revaluation surplus, net of the single 3% tax, was credited to the “Revaluation Reserve” caption at each company, with a charge to the appropriate revalued asset accounts, without altering the recorded accumulated depreciation amount.

DEPRECIATION AND PROVISIONS

DEPRECIATION AND PROVISIONS M I L L I O N S O F P E S E TA S

01-01-99 ADDITIONS RETIREMENTS TRANSFERS 12-31-99

AIRCRAFT 236,136 12,894 (12,974) - 236,056 OTHER TANGIBLE FIXED ASSETS: BUILDINGS AND OTHER STRUCTURES 15,013 1,021 (335) - 15,699 MACHINERY, INSTALLATIONS AND TOOLS 40,097 4,209 (1,269) 71 43,108 TRANSPORT EQUIPMENT 1,918 403 (180) 3 2,144 FURNITURE AND FIXTURES 3,196 210 (582) - 2,824 COMPUTER HARDWARE 24,018 1,452 (13,876) 19 11,613 SPARE PARTS 22,199 3,133 (1,862) - 23,470 FLIGHT SIMULATORS 5,380 470 -- 5,850 OTHER TANGIBLE FIXED ASSETS 790 10 (18) - 782 112,611 10,908 (18,122) 93 105,490

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As of December 31, 1999, the cost of fully depreciated assets and of obsolete or unused items for which full provisions had been recorded and which the IBERIA Group maintains in property, plant and equipment amounted to approximately Ptas. 46,385 million.

TRANSACTIONS INVOLVING THE AIRCRAFT In recent years IBERIA, Líneas Aéreas de España, S.A. formalized the agreements relating to its fleet renewal plan and entered into certain agreements with its suppliers, particularly Airbus Industrie, G.I.E. and The Boeing Company. The main features of these agreements are as follows.

BOEING AIRCRAFT

B-757 In 1994 IBERIA, Líneas Aéreas de España, S.A. entered into operating lease contracts with several companies for seven B-757 aircraft. Two of these aircraft were on lease for a period of four years, extended by a further 18 months in 1997 and for a further 12 months in 1998 (through October 2000), and the contracts did not provide for a purchase option. The other five B-757 aircraft were on lease for an initial period of approximately five years, at the end of which IBERIA, Líneas Aéreas de España, S.A. would have the following three options for each plane: to exercise the purchase option; to extend the lease by up to a further 12 years; or to return the plane to the lessor. The lease agreements for four of these aircraft were extended until 2000 and IBERIA, Líneas Aéreas de España, S.A. returned one of these planes in 1999.

As of December 31, 1999, the contracts entered into by IBERIA, Líneas Aéreas de España, S.A. with The Boeing Company (“Boeing”) for the purchase of 16 B-757 aircraft and a purchase option on a further 14 aircraft were still in force.

The investment commitment assumed in connection with the other eight B-757 aircraft amounts to approximately US$ 498 million. The eight B-757 aircraft for which there is a firm purchase commitment are scheduled for delivery in 2000. Of the aircraft on which there is a purchase option, eleven will be received in 2001 and three in 2002. As of December 31, 1999, IBERIA, Líneas Aéreas de España, S.A. had paid advances of Ptas. 9,197 million on these aircraft.

B-747 In 1994 IBERIA, Líneas Aéreas de España, S.A. sold to Boeing one B-747 aircraft. Subsequently, IBERIA, Líneas Aéreas de España, S.A. entered into operating lease contracts for this aircraft for a period of three years, including a purchase option.

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In 1997 IBERIA, Líneas Aéreas de España, S.A. renegotiated the operating lease contract, extending it for a further 29 months and modifying the purchase option price at the end of this period. In December 1999 IBERIA, Líneas Aéreas de España, S.A. extended the contract for a further 36 months, and it can exercise the purchase option at any time.

AIRBUS AIRCRAFT

A-340 In 1996 IBERIA, Líneas Aéreas de España, S.A. agreed with Airbus Industrie, G.I.E. (Airbus) on the delivery dates of eight A-340 aircraft (which have already been received and are operating) and on the delivery schedule for a further four aircraft on which there is a purchase option: one in 1999, one in 2000 and two in 2001.

The nine A-340 aircraft in service were leased under operating lease contracts from the “Iberbus” companies (see Note 9). IBERIA, Líneas Aéreas de España, S.A. has holdings of 40% in the capital stock of eight of these companies, and of 45.45% in the other. The term of the operating leases for the nine A-340 aircraft is seven years, at the end of which IBERIA, Líneas Aéreas de España, S.A. will have the following three options: to exercise the purchase option and pay a predetermined price for the aircraft; to extend the lease for periods of between three and eight years and mandatorily exercise the purchase option; or to return the planes to the lessor.

If IBERIA, Líneas Aéreas de España, S.A. opts to return the planes and if the owner of the aircraft does not find a buyer for the aircraft, IBERIA, Líneas Aéreas de España, S.A. is obliged to extend the operating lease contract for a further one-year period for the aircraft which came into service in 1996 and for a further two-year period for the aircraft which came into service in 1997, 1998 and 1999.

In 1998 IBERIA, Líneas Aéreas de España, S.A. entered into an agreement with Airbus for the acquisition of a further six A-340 aircraft and a purchase option on a further five. With this agreement, IBERIA, Líneas Aéreas de España, S.A. exercised two of the purchase options acquired under the agreement entered into with Airbus in 1996, one of which relates to the aircraft received in 1999. Also, IBERIA, Líneas Aéreas de España, S.A. has four subordinated options that it can exercise provided that it exercises the purchase option on four of the five aforementioned aircraft.

In connection with three of these aircraft that will be received in 2000 and 2001, IBERIA, Líneas Aéreas de España, S.A. has entered into financing agreements that will enable it to operate them under an operating lease similar to that existing for the nine A-340 aircraft that it currently operates. IBERIA, Líneas Aéreas de España, S.A. has a minority holding in each of the companies and must make contributions to finance them so that they can purchase the aircraft from the manufacturer. The contributions that IBERIA, Líneas Aéreas de España, S.A. will have to make on both these counts for the three aircraft range from a minimum of US$ 21 million to a maximum of US$ 51 million.

133 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

At the end of the initial lease term of seven years, IBERIA, Líneas Aéreas de España, S.A. may opt to extend the lease for a further eight years, exercise the purchase option or return the aircraft.

The basic price of the five aircraft is approximately US$ 689 million.

As of December 31, 1999, IBERIA, Líneas Aéreas de España, S.A. had made advances totaling Ptas. 15,044 million in connection with these aircraft.

A-319, A-320 and A-321 On June 19, 1998, IBERIA, Líneas Aéreas de España, S.A. and Airbus Industrie, G.I.E. entered into an agreement for the firm purchase of 50 A-320 aircraft, with the option of acquiring a further 26 aircraft of this type and an additional purchase option on 14 aircraft.

Also, IBERIA, Líneas Aéreas de España, S.A. entered into an agreement with Singapore Aircraft Leasing Enterprise Pte. Ltd. (“SALE”) to bring forward the date on which two A-320 scheduled for delivery in 2002 came into service to 1999.

Also, IBERIA, Líneas Aéreas de España, S.A. entered into an additional agreement with Airbus for the firm purchase of two A-320 aircraft which will come into service in 2002 on the same date as that on which the aircraft on which the purchase option has been exchanged with SALE were scheduled to come into service.

In 1999 IBERIA, Líneas Aéreas de España, S.A. received eight A-320 aircraft, of which six were acquired under financial lease agreements (see Note 7) and two under operating lease agreements, for initial terms of five years, at the end of which IBERIA, Líneas Aéreas de España, S.A. may renew the agreements for up to seven years. These two aircraft relate to the aforementioned exchange with SALE.

Also, in 1999 IBERIA, Líneas Aéreas de España, S.A. acquired two A-321 aircraft and their engines for Ptas. 12,685 million.

The delivery schedule for the aircraft receivable under the agreement with Airbus Industrie, G.I.E. is as follows:

DELIVERY SCHEDULE FOR AIRCRAFT

(a) Relating to aircraft TYPE OF AIRCRAFT 2000 2001 2002 2003 2004 2005 2006 TOTAL on which there is a purchase option. (b) Including three aircraft (a) (a) that were originally to be A-321 but that were replaced by A-320. A-319 - - - - - 4 5 9 (c) Including three aircraft on which there is a purchase option. A-320 8 (b) 6 10 5 (c) 5 (c) 3 2 39 (d) Including six aircraft on which there is a purchase option. A-321 - 2 5 11 (d) 10 (e) - 6 34 (e) Including eight aircraft 8 8 15 16 15 7 13 82 on which there is a purchase option.

134 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

The basic price of the aircraft involved in this transaction is approximately Ptas. 361,000 million.

As of December 31, 1999, IBERIA, Líneas Aéreas de España, S.A. had made advances totaling Ptas. 23,357 million in connection with these aircraft.

In connection with the A-320 aircraft, on July 17, 1998, IBERIA, Líneas Aéreas de España, S.A. entered into a lease contract with International Lease Finance Corporation (“ILFC”) for nine A-319 and seven A-320 aircraft under a dry lease arrangement for an initial period of five years, on expiration of which IBERIA, Líneas Aéreas de España, S.A. may extend the contract twice for one- or five-year periods, provided that the two extensions do not total more than six additional years.

In 1999 IBERIA, Líneas Aéreas de España, S.A. received two of the aforementioned A-320 aircraft under the contract with ILFC, and a change was subsequently made to one of the lease contracts, whereby a third-party lessor was subrogated to ILFCís position under the contract. The aforementioned lease term and extensions were not altered.

The delivery schedule for the aircraft to be received is as follows:

DELIVERY SCHEDULE FOR AIRCRAFT TYPE OF AIRCRAFT 2000 2001 A - 3 2 0 3 7(a) A - 3 1 9 4 - (a) Including five aircraft 7 7 that were originally to be A-319 but that were replaced by A-320.

OTHER AIRCRAFT

A-320 and MD-87 Without prejudice to the foregoing regarding the A-319, A-320 and A-321 aircraft, in 1993 IBERIA, Líneas Aéreas de España, S.A. sold six A-320 and five MD-87 aircraft, and subsequently entered into operating lease contracts thereon.

135 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

In July 1997 the owner of these aircraft sold them to three companies, which entered into new lease contracts with IBERIA, Líneas Aéreas de España, S.A. The lease contracts entered into for the six A-320 aircraft expire in 2001, 2002 and 2003, at which time IBERIA, Líneas Aéreas de España, S.A. may extend them for a further five-year period or return the planes. The term of the lease contracts entered into for the five MD-87 aircraft is 96 months, at the end of which IBERIA, Líneas Aéreas de España, S.A. may exercise the purchase option provided for in the contract or return the planes.

In 1999 IBERIA, Líneas Aéreas de España, S.A. signed novations of the operating lease contracts for the five A-320 aircraft, as a result of which five new lessors were subrogated to the position of the original lessors.

AIRCRAFT IN SERVICE

The aircraft in service of the companies consolidated by the global integration method as of December 31, 1999, are summarized as follows:

AIRCRAFT IN SERVICE

UNDER UNDER WET TYPE OF OWNED BY THE FINANCIAL OPERATING LEASE AIRCRAFT COMPANIES LEASE LEASE (a) TOTAL (a) Lease type including aircraft and crew for approximately one year. The main lessors are Air Atlanta U.K. Limited, B-727 23 (e) (c) - -- 23 Air Europa, S.A. and Atlas Air Inc. (b) Including two DC-10 aircraft B-737 - - 3 3 6 formerly owned by Venezolana Internacional de Aviación, S.A. received in December 1997 B-747 6 - 1 3 (d) 10 in execution of the mortgages on the loans granted by IBERIA, Líneas Aéreas B-757 - 1 14 6 21 de España, S.A. These aircraft came into service in 1999. B-767 - - 2 (g) - 2 (c) These figures do not include four B-727 and one DC-10 aircraft A-300 6 - - - 6 formerly owned by Venezolana Internacional de Aviación, S.A. received in December 1997 A-320 11 11 10 - 32 in execution of the mortgages on the loans granted by IBERIA, Líneas Aéreas A-321 2 (h) - - - 2 de España, S.A. These aircraft were inactive as of December 31, 1999, A-340 - - 9 - 9 and are ready for sale. DC-8 - - - 2 2 (d) Including one B-747 equipped for cargo transport. DC-9 18 (f) - -- 18 (e) Excluding four inactive aircraft that are ready for sale. DC-10 6 (b) (c) - - - 6 (f) Excluding eight inactive aircraft that are ready for sale. MD-87 17 2 5 - 24 (g) These aircraft were operated under a wet lease arrangement until December 1999, MD-88 13 - -- 13 when they started to be operated under a dry lease arrangement. ATR 7 1 3 - 11 (h) These two aircraft, which were CN-235 5 - - - 5 operated under an interim charter arrangement, were acquired 114 15 47 14 190 in December 1999.

136 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

One aircraft operated by IBERIA, Líneas Aéreas de España, S.A. under a financial lease contract has been mortgaged for a net book value of Ptas. 4,070 million as of December 31, 1999.

As of December 31, 1999, 17 aircraft (eight B-727, eight DC-9 and one DC-10), with a net book value of Ptas. 2,014 million as of that date, were grounded. These aircraft are ready for sale, and management of IBERIA, Líneas Aéreas de España, S.A. does not expect any losses to arise in this connection.

Wet lease In recent years IBERIA, Líneas Aéreas de España, S.A. has entered into several wet lease contracts (lease of aircraft with crew).

In March 1998 IBERIA, Líneas Aéreas de España, S.A. entered into an agreement with Air Europa, S.A. for the lease of eleven aircraft currently in service (six B-757, three B-737 and two B-767) under a wet lease arrangement. These agreements had an initial term of two years and were renewable annually. In December 1999 the two B-767 started to be operated under a dry lease arrangement.

Also, in August 1998 IBERIA, Líneas Aéreas de España, S.A. entered into a wet lease contract with Atlas Air, Inc. to operate two B-747 aircraft (one for only six months) equipped for c a rgo transport. The lease contract has an initial term of four years. In 1999 one of these airc r a f t was re t u rn e d .

Lease expenses The operating lease payments paid in 1999 by IBERIA, Líneas Aéreas de España, S.A. for the operating lease of the aforementioned 39 aircraft of the B-747, B-757, A-320, A-340 and MD-87 types amounted to Ptas. 20,648 million, and are included under the “Other Operating Expenses” caption in the accompanying 1999 consolidated statement of income (see Note 18). The detail of the approximate operating lease payments payable for these aircraft and of the due dates is as follows:

LEASE EXPENSES

YE A R MI L L I O N S O F U.S. D O L L A R S 2000 174 2001 155 2002 TO 2006 409 738

137 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

Insurance coverage The consolidable Group companies have arranged insurance policies for their property, plant and equipment and intangible assets which sufficiently covered their net book value as of December 31, 1999. Also, IBERIA, Líneas Aéreas de España, S.A. has arranged insurance policies for the aircraft leased from third parties, in accordance with the conditions stipulated in the related lease contracts. Most of these policies are with Musini, Sociedad Anónima de Seguros y Reaseguros.

- 9 - LONG-TERM FINANCIAL INVESTMENTS

HOLDINGS IN COMPANIES CARRIED BY THE EQUITY METHOD The variation in 1999 in the balance of the “Holdings in Companies Carried by the Equity Method” caption in the accompanying consolidated balance sheet relates, on the one hand, to the effect of recording the share in the results of the Iberbus companies existing in 1998 and the effect of the related exchange differences and, on the other, to the recording of IBERIA, Líneas Aéreas de España, S.A.’s holdings in the new Iberbus company and in Touroperador Viva Tours, S.A., and of its share in the income of these companies in 1999.

Also, this caption includes the net worth variation at the Amadeus Group that arose mainly as a result of the income earned by this Group in 1999 and the public offering and successive public capital increases carried out by Amadeus Global Travel Distribution, S.A., the parent company of the Amadeus Group.

The variations in 1999 in this caption in the consolidated balance sheet were as follows:

HOLDINGS IN COMPANIES CARRIED BY THE EQUITY METHOD

MILLIONS OF PESETAS

BALANCE AT JANUARY 1, 1999 2 , 7 2 4 SHARE IN INCOME 7 , 4 0 6 EFFECT OF THE IMPROVEMENT IN THE NEXT WORTH POSITION OF THE AMADEUS GROUP 2 1 , 7 2 9 INTERIM DIVIDEND ( 7 , 2 8 7 ) HOLDINGS IN NEW COMPANIES 9 2 5 TR A N S L AT IO N D I F F E R E N C E 4 3 9 EFFECT OF THE RECLASSIFICATION OF THE NEGATIVE VALUE AT 12-31-98 (a) ( 1 0 , 2 4 8 ) (a) Relating to the negative value of the holding in the Amadeus Group BALANCE AT DECEMBER 31, 1999 1 5 , 6 8 8 as of December 31, 1998.

138 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

AEROLÍNEAS ARGENTINAS GROUP AND INTERINVEST, S.A. As indicated in Note 3, IBERIA, Líneas Aéreas de España, S.A. assigned to Andes Holding, B . V. its direct holding (20% of the capital stock) in Aerolíneas Argentinas, S.A. in exchange for an 8.92% holding in the capital stock of Interinvest, S.A. Also, on the same date, IBERIA, Líneas A é reas de España, S.A. acquired a 1.08% holding in Interinvest, S.A., giving it a total holding of 10% in that company.

On June 30, 1999, the Shareholders’ Meeting of Interinvest, S.A. resolved to increase capital in order to make an irrevocable capital contribution to Aerolíneas Argentinas, S.A. Of this irrevocable contribution, which amounted to US$ 100 million, IBERIA, Líneas Aéreas de España, S.A. subscribed the 10% relating to its percentage of ownership for an amount equal to Ptas. 1,604 million. As of December 31, 1999, the net book value of the 10% ownership interest in Interinvest, S.A. consisted of a cost of Ptas. 5,032 million, recorded under the “Long-Term Investment Securities” caption in the consolidated balance sheet, and a provision of Ptas. 5,032 million, recorded under the “Provisions” caption in the consolidated balance sheet. Ptas. 4,432 million of this amount were recorded in 1999 under the “Variation in Fixed Asset Provisions” caption in the accompanying consolidated statement of income. IBERIA, Líneas Aéreas de España, S.A. decided to record a provision as of December 31, 1999, for the full amount of Interinvest, S.A.’s investment as of that date as a result of the accumulated losses incurred by Aerolíneas Argentinas, S.A.

As of December 31, 1999, IBERIA, Líneas Aéreas de España, S.A. had provided U.S. dollar collateral guarantees for Aerolíneas Argentinas, S.A. to several entities totaling Ptas. 8,447 million. The IBERIA Group has covered this risk through a Ptas. 2,882 million provision recorded under the “Provision for Contingencies and Expenses” caption in the accompanying consolidated balance sheet as of December 31, 1999, and through a mortgage guarantee on two B-747 aircraft owned by Aerolíneas Argentinas, S.A.

As a result of the liquidation process, as of December 31, 1999, IBERIA, Líneas Aéreas de España, S.A. had recorded provisions for all the balances (loans, interest and trading accounts) with VIASA at that date.

In December 1997, after the court - o rd e red auction which transferred to IBERIA, Líneas Aéreas de España, S.A. ownership of four B-727 and three DC-10 aircraft belonging to VIASA, which were mortgaged as security for the loans granted in the past by IBERIA, Líneas Aéreas de España, S.A., these aircraft were capitalized for a symbolic value. As of December 31, 1999, the four B-727 aircraft were grounded in Miami awaiting sale and, of the three DC-10, two are in operation and the third is grounded in Madrid awaiting sale.

139 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

As of December 31, 1999, the balances of IBERIA, Líneas Aéreas de España, S.A. with VIASA, in addition to the value of the holding, were as follows:

DECEMBER 31, 1999 M I L L I O N S O F P E S E TA S COST ALLOWANCE

LOA N S A N D I N T E R E S T 4,263 ( 4 , 2 6 3 ) CU R R E N T AC C O U N T 4,868 ( 4 , 8 6 8 ) TOTA L 9,131 ( 9 , 1 3 1 )

IBERIA, Líneas Aéreas de España, S.A. received guarantees for the balances recorded in connection with the loans and interest consisting of mortgages on buildings and a B-727 aircraft of VIASA.

In 1997 IBERIA, Líneas Aéreas de España, S.A. sold its holding in Amadeus Data Processing KG to Amadeus Global Travel Distribution, S.A. for DM 156,494,119 (Ptas. 13,234 million). This transaction did not have any effect at the IBERIA Group because IBERIA, Líneas Aéreas de España, S.A. maintained its percentage of ownership. This was the first sale involved in an operation implemented in 1999 under which all the Amadeus Group shareholders sold their holdings in Amadeus Data Pr ocessing KG to Amadeus Global Travel Distribution, S.A., after which a public capital increase was ca r ried out at the parent company.

The following events relating to this Group took place in 1999: 1. IBERIA, Líneas Aéreas de España, S.A. subscribed in full a capital increase at Amadeus Global Travel Distribution, S.A. for Ptas. 100,000. 2. The Board of Directors of Amadeus Global Travel Distribution, S.A. redenominated the company’s capital stock in euros. This made it necessary to round the capital down and, accordingly, capital was reduced by reducing the par value of the shares by 734.93. 3. On August 11, 1999, the Shareholders Meeting of Amadeus Global Travel Distribution, S.A. resolved to pay an interim dividend of Ptas. 24,958 million out of 1999 income, of which Ptas. 7,287 million corresponded to IBERIA, Líneas Aéreas de España, S.A. 4. In October 1999 a public offering was launched and there were two public capital increases.

As a result of the foregoing: 1. As of December 31, 1999, IBERIA Líneas Aéreas de España, S.A. had a holding of 31.87% in Amadeus Global Travel Distribution, S.A. in terms of voting rights and of 25% in term s of dividend rights.

140 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

2. The improvement in the value of the holding as a result of the additional paid-in capital paid on the stock market amounted to Ptas. 21,729 million (Ptas. 17,329 million net of a portion of the related tax effect), and this amount was recorded under the “Extraordinary Revenues” caption in the accompanying 1999 consolidated statement of income. The remaining tax effect of Ptas. 2,973 million was recorded under the “Corporate Income Tax” caption in the accompanying 1999 consolidated statement of income.

LOANS TO COMPANIES CARRIED BY THE EQUITY METHOD The main data on the balance of the loans granted by IBERIA, Líneas Aéreas de España, S.A. included under the “Loans to Companies Carried by the Equity Method” caption in the accompanying consolidated balance sheet as of December 31, 1999, are as follows:

CREDITS

MI L L I O N S DU E O F PE S E TA S DAT E IN T E R E S T RAT E VIASA 4,263 (a) (a) IBERBUS CONCHA LTD. 3,255 02-29-2003 5% IBERBUS ROSALÍA LTD. 3,231 05-10-2003 5% IBERBUS CHACEL LTD. 3,578 09-06-2003 6% IBERBUS ARENAL LTD. 3,661 10-18-2003 6% IBERBUS TERESA LTD. 3,310 10-21-2004 6% IBERBUS EMILIA LTD. 3,324 11-10-2004 6% IBERBUS AGUSTINA LTD. 3,326 05-15-2005 6% IBERBUS BEATRIZ LTD. 3,337 06-15-2005 6% (a) These credits are instrumented IBERBUS JUANA INÉS LTD. 1,830 12-01-2006 6% in several loans and promissory notes denominated in U.S. dollars. TOTAL 33,115 In May 1997 IBERIA, Líneas Aéreas de España, S.A. ceased to record ALLOWANCE (4,263) interest on these loans since they were not recoverable.

The loans granted by IBERIA, Líneas Aéreas de España, S.A. to the Iberbus companies relate to loans to the A-340 aircraft lessor companies (see Notes 3 and 8).

LONG-TERM INVESTMENT SECURITIES IBERIA, Líneas Aéreas de España, S.A., Aviación y Comercio, S.A., Vuelos Internacionales de Vacaciones, S.A., Bínter Canarias, S.A. and Bínter Mediterráneo, S.A., together with all the other international airlines had ownership interests in SITA Foundation, a not-for-profit cooperative engaging mainly in the provision of a communication service between airports around the world. The companies’ ownership interests in this entity were instrumented in certificates of deposit.

In 1999, in view of the possibility of offering this service to third parties, a company called EQUANT was formed with the contributions made in the past by the airlines. Accordingly, the Group companies received shares of the new company in exchange for a portion of their certificates of

141 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

deposit. In August and December 1999 two tender offers were launched, and 798,692 shares were sold for Ptas. 9,836 million, giving rise to a gain of Ptas. 9,742 million, which was recorded under the “Revenues from Other Marketable Securities” caption in the accompanying 1999 consolidated statement of income. As of December 31, 1999, the price of Ptas. 4,837 million for which the shares were sold in the public offering in December had not been collected. This amount, which was recorded under the “Accounts Receivable” caption in the accompanying consolidated balance sheet as of December 31, 1999, was collected in January 2000.

Also, in September 1999 IBERIA, Líneas Aéreas de España, S.A. subscribed to bonds issued by Iberbond PLC 1999 totaling 39,000,000 (Ptas. 6,489 million). These bonds form part of an issue relating to the acquisition of six A-320 aircraft that were subsequently leased to IBERIA, Líneas Aéreas de España, S.A. under a financial lease contract.

The bonds subscribed by IBERIA, Líneas Aéreas de España, S.A. earn annual interest at 5.90% payable six-monthly. The principal is redeemed annually. The final maturity of the transaction is set for September 1, 2007. Based on this maturity, as of December 31, 1999, IBERIA, Líneas Aéreas de España, S.A. recorded the portion of the investment maturing at long term (Ptas. 6,294 million) under the “Long-Term Investment Securities” caption and the portion maturing in 2000 under the “Short-Term Financial Investments” caption in the accompanying consolidated balance sheet as of December 31, 1999.

Lastly, in the first half of 1999 IBERIA, Líneas Aéreas de España, S.A. granted a loan of US$ 5,000,000 (Ptas. 828 million) to Aerolíneas Argentinas, S.A., which as of December 31, 1999, was recorded according to its maturity and, accordingly, Ptas. 497 million were recorded under the “Long-Term Investment Securities” caption and Ptas. 331 million were recorded under the “Short- Term Financial Investments” caption in the accompanying consolidated balance sheet as of December 31, 1999. Also, in 1999 IBERIA, Líneas Aéreas de España, S.A. recorded Ptas. 38 million of interest on this loan (Ptas. 25 million at short term and Ptas. 13 million at long term).

As of December 31, 1999, IBERIA, Líneas Aéreas de España, S.A. had recorded a provision for the full amount of the loan principal and interest under the “Provisions for Contingencies and Expenses - Provision for Third-Party Liability” caption in the accompanying consolidated balance sheet as of December 31, 1999, with a charge to the “Extraordinary Expenses” caption in the accompanying 1999 consolidated statement of income.

- 10 - GOO D W I L L IN CON S O L I D A T I O N AN D NEG A T I V E DIF F E R E N C E IN CON S O L I D A T I O N

GOODWILL IN CONSOLIDATION As indicated in Note 6-a, the goodwill relates to the positive diffe r ence between the amount paid by IBERIA Líneas Aéreas de España, S.A. to acquire a 67% holding in Aviación y Comercio, S.A. and the underlying book value of the holding as of December 31, 1997.

142 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

As permitted by Law 37/1998 amending Article 194 of the Corporations Law, the directors of IBERIA, Líneas Aéreas de España, S.A. opted to amortize this goodwill on a straight-line basis over 20 years (see Note 6-a) from the acquisition date (November 10, 1998).

The only variation in 1999 in this caption in the accompanying consolidated balance sheet related to the period amortization charge of Ptas. 1,100 million.

NEGATIVE DIFFERENCE IN CONSOLIDATION As indicated in Note 6-a, the negative diffe r ence in consolidation relates to the diffe re n c e between the investment made in Tou r operador Viva Tours, S.A. by IBERIA, Líneas Aéreas de España, S.A. to acquire 49% of its capital stock and the underlying book value of the holding as of March 31, 1999. The variations in 1999 in this caption in the consolidated balance sheet were as follows:

1999 MILLIONS OF PESETAS

BA L A N C E AT JA N UA R Y 1, 1999 - NE GAT I V E D I F F E R E N C E I N C O N S O L I DAT IO N 3 8 5 AL L O C AT IO N TO I N C O M E ( 1 1 9 ) BA L A N C E AT DE C E M B E R 31, 1999 2 6 6

- 11 - SHORT-TERM FINANCIAL INVESTMENTS The detail of the balance of this caption in the accompanying consolidated balance sheet as of December 31, 1999, is as follows:

1999 MILLIONS OF PESETAS

SHO R T-T E R M D E P O S I TS 6 5 , 7 6 0 GO V E R N M E N T D E BT S E C U R I T I E S 1 7 , 5 7 5 SHO R T-T E R M D E P O S I TS A N D G UA R A N T E E S 2 , 1 5 3 UN M AT U R E D I N T E R E S T R E C E I VA B L E 1 , 1 6 3 OT H E R S HO R T-T E R M F I N A N C I A L I N V E S T M E N TS 4 , 1 8 0 TOTA L 9 0 , 8 3 1

The average return on short-term deposits was 2.96% in 1999.

The government debt securities relate to government debentures and Treasury bills which earned average interest of 4.98% in 1999.

143 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

- 12 - SHAREHOLDERS’ EQUITY The variations in equity accounts in 1999 were as follows:

SHAREHOLDERS’ EQUITY

ADDITIONAL CAPITAL PAID-IN LEGAL VOLUNTARY STOCK CAPITAL RESERVE RESERVES

BALANCES AT JANUARY 1, 1999 114,727 - --

DISTRIBUTION OF 1998 CONSOLIDATED INCOME - - 5,129 623

REDENOMINATION OF CAPITAL STOCK IN EUROS (193) - --

CAPITAL INCREASE 3,944 16,049 --

CONSOLIDATED INCOME FOR 1999, PER ACOMPANYING CONSOLIDATED STATEMENT OF INCOME - - --

OTHER VARIATIONS - - --

BALANCES AT DECEMBER 31, 1999 118,478 16,049 5,129 623

CAPITAL STOCK As of December 31, 1998, the capital stock of IBERIA, Líneas Aéreas de España, S.A. consisted of 882,512,019 fully subscribed and paid registered shares of Ptas. 130 par value each.

The following events took place in 1999:

REDENOMINATION OF CAPITAL STOCK IN EUROS On October 28, 1999, the Board of Directors of IBERIA, Líneas Aéreas de España, S.A. resolved unanimously to redenominate the capital stock in euros. For this purpose, it adopted a par value per share of 0.78, the result of applying to the par value in pesetas the legal euro/peseta exchange rate, rounded down by two decimal places. This rounding down made it necessary to reduce capital by reducing the par value of the shares, as permitted by Article 28 of Law 46/1998 on the Introduction of the Euro. In accordance with the aforementioned Law, a restricted reserve for the amount of the capital reduction (Ptas. 193 million) was recorded.

144 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

M I L L I O N S O F P E S E TA S

RESERVES AT INCOME DIFFERENCE COMPANIES FOR THE YEAR DUE TO CONSOLIDATED RESERVES AT ATTRIBUTABLE ADJUSTMENT BY THE GLOBAL COMPANIES TO THE PRIOR YEARS’ OF CAPITAL INTEGRATION CARRIED BY THE TRANSLATION CONTROLLING LOSSES STOCK TO EUROS METHOD EQUITY METHOD DIFFERENCES COMPANY DIVIDENDS

(15,809) - 5,047 1,043 114 53,025 -

10,239 - 2,384 (650) - (53,025) 35,300

- 193 - - - --

- 7 - - - --

-- - - - 25,466 -

-- - - 439 -- (a) Including shares of IBERIA, Líneas Aéreas de España, S.A. (5,570) 200 7,431 (a) 393 553 25,466 - amounting to Ptas. 3 million which constitute restricted reserves.

As of December 31, 1999, the Company s capital stock consisted of 912,907,156 fully subscribed and paid registered shares of 0.78 par value each.

As of December 31, 1999, SEPI was the majority shareholder of IBERIA, Líneas Aéreas de España, S.A., with a 93.91% holding.

145 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

ADDITIONAL PAID-IN CAPITAL The revised Corporations Law expressly permits the use of the additional paid-in capital balance to increase capital and establishes no specific restrictions as to its use.

LEGAL RESERVE Under the revised Corporations Law, 10% of income for each year must be transferred to the legal reserve until the balance of this reserve reaches at least 20% of capital stock.

RESERVES AT COMPANIES CONSOLIDATED BY THE GLOBAL INTEGRATION METHOD AND CARRIED BY THE EQUITY METHOD The detail of the balance of the “Reserves at Companies Consolidated by the Global Integration Method” caption in the accompanying consolidated balance sheet as of December 31, 1999, is as follows:

DECEMBER 31, 1999 C O M PA N Y MILLIONS OF PESETAS AV I AC I Ó N Y C O M E R C IO, S.A. 6 , 8 2 3 BÍ N T E R CA N A R I A S, S.A. ( 2 , 1 0 8 ) BÍ N T E R ME D I T E R R Á N E O, S.A. ( 6 , 5 5 3 ) CO M PA Ñ Í A AU X I L I A R A L CA R G O EX P R É S, S.A. 1 4 7 CA M P O S VE L Á Z Q U E Z, S.A. 1 , 0 2 2 CA R G O S U R, S.A. ( 6 2 3 ) IB E R– SW IS S CAT E R I N G, S.A. 2 8 7 VU E L O S IN T E R N AC IO N A L E S D E VAC AC IO N E S, S.A. ( 9 , 9 3 7 ) SIS T E M A S AU TO M AT I Z A D O S AG E N C I A S D E VI A J E S, S.A. 6 1 9 TOTA L ( 1 0 , 3 2 3 ) CO N S O L I DAT IO N A D J US T M E N TS 1 7 , 7 5 4 TOTA L 7 , 4 3 1

146 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

The breakdown of the consolidation adjustments is as follows:

DECEMBER 31, 1999 MILLIONS OF PESETAS

RE S E R VA L O F P R O V IS IO N S F O R L O N G-T E R M F I N A N C I A L I N V E S T M E N TS I N IB E R I A, LÍ N E A S AÉ R E A S D E ES PA Ñ A, S.A., M A D E BY D E P E N D E N T C O M PA N I E S I N P R IO R Y E A R S 1 9 , 1 7 3 EL I M I N AT IO N O F D I V I D E N D S R E C E I V E D I N P R IO R Y E A R S ( 1 , 1 4 6 ) EL I M I N AT IO N O F GA I N S O N F I X E D A S S E T D IS P O SA L S ( 8 9 ) AMO U N TS A L L O C AT E D TO G O O D W I L L ( 1 8 4 ) TOTA L 1 7 , 7 5 4

The detail of the balance of the “Reserves at Companies Carried by the Equity Method” caption in the accompanying consolidated balance sheet as of December 31, 1999, is as follows:

DECEMBER 31, 1999 CO M PA N Y MILLIONS OF PESETAS

VE N E Z O L A N A IN T E R N AC IO N A L D E AV I AC I Ó N, S.A. ( 1 5 , 5 4 7 ) AM A D E US GR O U P 2 , 4 6 6 IB E R B US C O M PA N I E S ( 5 2 9 ) TOTA L ( 1 3 , 6 1 0 ) CO N S O L I DAT IO N A D J US T M E N TS 1 4 , 0 0 3 TOTA L 3 9 3

The breakdown of the consolidation adjustments is as follows:

DECEMBER 31, 1999 MILLIONS OF PESETAS

RE S E R VA L O F P R O V IS IO N S F O R L O N G-T E R M F I N A N C I A L I N V E S T M E N TS I N IB E R I A, LÍ N E A S AÉ R E A S D E ES PA Ñ A, S.A., M A D E BY D E P E N D E N T C O M PA N I E S I N P R IO R Y E A R S 1 5 , 9 8 5

EL I M I N AT IO N O F GA I N S O N F I X E D A S S E T D IS P O SA L S ( 1 , 9 8 2 )

TOTA L 1 4 , 0 0 3

147 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

OTHER MATTERS The restricted re s e rves at the consolidable Group companies amounted to Ptas. 7,942 million as of December 31, 1999 (Ptas. 6,168 million of revaluation re s e rves and Ptas. 1,774 million of legal re s e rv e s ) .

The balances of the revaluation reserves of the consolidable Group companies, except for IBERIA, Líneas Aéreas de España, S.A. have not been reviewed and approved by the tax authorities and, accordingly, these reserves are restricted until the tax authorities have reviewed and approved their balances or the three-year period for review has elapsed.

Also, as of December 31, 1999, the accumulated losses of Vuelos Internacionales de Vacaciones, S.A. had reduced its net worth to less than one-half of capital stock. However, as indicated in Note 2, Group management decided to discontinue the operations of this company and submitted the appropriate labor force reduction plan.

The companies with holdings of over 10% in the capital stock of the dependent companies as of December 31, 1999, were as follows:

DECEMBER 31, 1999 P E R C E N TAG E O F C O M PA N Y O W N E R S H I P I N V E S T E E MA R Í T I M A S RE U N I DA S, S.A. 25.00 COMPAÑÍA AUXILIAR AL CARGO EXPRÉS, S.A. AM A D E US GL O BA L TR AV E L 3 4 . 0 0 SISTEMAS AUTOMATIZADOS DISTRIBUTION, S.A. AGENCIAS DE VIAJE, S.A. SW IS S– AI R GR O U P 30.00 IBER-SWISS CATERING, S.A. AI R FR A N C E 31.87 AMADEUS GROUP LU F T H A N SA 31.87 AMADEUS GROUP FO N D O D E IN V E R S I Ó N VE N E Z O L A NO 40.00 VENEZOLANA INTERNACIONAL DE AVIACIÓN, S.A. BA N C O PR O V I N C I A L 15.00 VENEZOLANA INTERNACIONAL DE AVIACIÓN, S.A. AI R B US IN D US T R I E, FI N A N C I A L SERVICES 60.00 IBERBUS CONCHA LTD. AI R B US IN D US T R I E, FI N A N C I A L SERVICES 60.00 IBERBUS ROSALÍA LTD. AI R B US IN D US T R I E, FI N A N C I A L SERVICES 60.00 IBERBUS CHACEL LTD. AI R B US IN D US T R I E, FI N A N C I A L SERVICES 60.00 IBERBUS ARENAL LTD. AI R B US IN D US T R I E, FI N A N C I A L SERVICES 60.00 IBERBUS TERESA LTD. AI R B US IN D US T R I E, FI N A N C I A L SERVICES 60.00 IBERBUS EMILIA LTD. AI R B US IN D US T R I E, FI N A N C I A L SERVICES 60.00 IBERBUS AGUSTINA LTD. AI R B US IN D US T R I E, FI N A N C I A L SERVICES 60.00 IBERBUS BEATRIZ LTD. AI R B US IN D US T R I E, FI N A N C I A L SERVICES 54.55 IBERBUS JUANA INÉS LTD. ANDES HOLDING, B.V. 80.00 INTERINVEST, S.A.

148 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

- 13 - MINORITY INTERESTS The variations, by dependent company, in the balance of the “Minority Interests” caption in the accompanying consolidated balance sheet as of December 31, 1999, were as follows:

DECEMBER 31, 1999 M I L L I O N S O F P E S E TA S VU E L O S SI S T E M A S IN T E R N A- CO M PA Ñ Í A AU TO M A- C I O N A L E S AV I AC I Ó N IB E R- AU X I L I A R T I Z A D O S D E VAC A- Y SW I S S A L CA R G O AG E N C I A S C I O N E S, CO M E R C I O, CAT E R I N G, EX P R É S, D E VI A J E, S . A . S . A . S . A . S . A . S . A . TOTA L

BALANCE AT JANUARY 1, 1999 3 19 378 87 211 698 DIVIDENDS - (2) (16) (14) - (32) CAPITAL REDUCTION ---- (51) (51)

SHARE IN (a) A provision was recorded for 1999 INCOME (15) 12 36 16 81 130 this account receivable from minority shareholders with a charge to BALANCE AT 12-31-1999 (12)(a) 29 398 89 241 745 the accompanying 1999 consolidated statement of income.

The breakdown, by company, of the balance of the “Minority Interests” caption as of December 31, 1999, is as follows:

DECEMBER 31, 1999 M I L L I O N S O F P E S E TA S

CA P I TA L RE VA L UAT I O N SH A R E I N STO C K RE S E R V E S RE S E R V E S IN C O M E TOTA L

VUELOS INTERNACIONALES DE VACACIONES, S.A. 26 (26)(a) 3 (15) (12) AVIACIÓN Y COMERCIO, S.A. 5 9 3 12 29 IBER-SWISS CATERING, S.A. 150 142 70 36 398

COMPAÑÍA AUXILIAR (a) In 1998 IBERIA, Líneas Aéreas AL CARGO-EXPRÉS, S.A. 8 65 - 16 89 de España, S.A. made a contribution of Ptas. 2,500 million to offset losses. SISTEMAS AUTOMATIZADOS Since the minority shareholders AGENCIAS DE VIAJE, S.A. 12 148 - 81 241 did not make any contribution, this amount was not included in 201 338 76 130 745 calculating the balance of the “Minority Interests” caption.

149 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

- 14 - PROVISIONS FOR CONTINGENCIES AND EXPENSES The detail of the balance of this caption in the accompanying consolidated balance sheets as of December 31, 1999, is as follows:

PROVISIONS FOR CONTINGENCIES AND EXPENSES MILLIONS OF PESETAS

PE N S IO N P R O V IS IO N S ( NOT E 6 -m) 1 8 , 8 7 5 PR O V IS IO N S F O R O B L IGAT IO N S TO E M P L OY E E S ( NOT E 6 -o) 6 0 , 1 1 5 PR O V IS IO N F O R M A J O R R E PA I R S ( NOT E 6 -f) 2 2 , 7 7 9 PR O V IS IO N F O R T H I R D-PA R T Y L I A B I L I T Y ( NOT E 6 -p) 5 7 , 9 3 2 TOTA L 1 5 9 , 7 0 1

PROVISION FOR THIRD-PARTY LIABILITY The variations in the balance of this caption in 1999 were as follows:

PROVISION FOR THIRD-PARTY LIABILITY MILLIONS OF PESETAS

BA L A N C E AT 01-01-99 6 4 , 2 3 6 PR O V IS IO N S 1 7 , 0 9 0 AMO U N TSUS E D ( 1 1 , 9 9 1 ) TR A N S F E R S ( 1 1 , 4 0 3 ) BA L A N C E AT 1 2 - 3 1 - 9 9 5 7 , 9 3 2

The directors of IBERIA, Líneas Aéreas de España, S.A. reassessed the restructuring costs, basically indemnity payments to employees, envisaged in the IBERIA Group’s Master Plan. This new estimate was made mainly as a result of the integration into IBERIA, Líneas Aéreas de España, S.A. of the employees of Aviación y Comercio, S.A. and of a significant number of the employees of Vuelos Internacionales de Vacaciones, S.A. The period provisions for third-party liability include Ptas. 10,000 million to increase the total allowance recorded in this connection to Ptas. 31,300 million. The 1999 provision was recorded with a charge to the “Extraordinary Expenses” caption in the accompanying consolidated statement of income.

150 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

The other provisions in 1999, which were also recorded mainly with a charge to the “Extraordinary Expenses” caption in the accompanying consolidated statement of income, relate to the estimate made by the directors of IBERIA, Líneas Aéreas de España, S.A. of the amount required to cover probable sundry third-party liability.

The amounts used in 1999 relate mainly to provisions used for the purpose for which they were recorded.

The transfers include the reclassification to “Holdings in Companies Carried by the Equity Method” caption of the negative value of the Amadeus Group as of December 31, 1998, which amounted to Ptas. 10,248 million (see Note 9).

- 15 - PAYABLE TO CREDIT ENTITIES The breakdown, by maturity, of the debts to credit entities as of December 31, 1999, is as follows:

DECEMBER 31, 1999 M I L L I O N S O F P E S E TA S

D U E I N : SU B S E Q U E N T 2000 2001 2002 2003 2004 YE A R S DE B T: PESETA LOANS 9,254 4,344 2,548 3,919 4,382 639 FOREIGN CURRENCY LOANS: YEN 606 4,575 1,940 2,242 -- EURO 3,966 3,897 3,819 4,334 4,055 31,747 U.S. DOLLAR 48,594 5,714 14,344 1,931 -- DEUTSCHE MARK 1,134 1,141 1,172 1,205 6,587 - 63,554 19,671 23,823 13,631 15,024 32,386

The weighted average annual interest rates on the foregoing loans in 1999 were 5.6% for peseta loans and 5.3% for foreign currency loans, and certain of the rates were tied to MIBOR or LIBOR, respectively.

151 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

- 16 - FUTURES TRANSACTIONS The policy of IBERIA, Líneas Aéreas de España, S.A. is to actively manage the risks arising from fluctuations in exchange and interest rates and in fuel prices.

Hedging transactions are arranged to minimize the impact of these variables on the consolidated statement of income. Following is a detail of the transactions arranged by IBERIA, Líneas Aéreas de España, S.A. as of December 31, 1999, based on the following criteria: notional values to hedge asset and liability positions, and for options, exchange rate hedging and fuel price hedging transactions, and present values for the income hedged for the other future cash flow hedging transactions.

DECEMBER 31, 1999 MILLIONS OF PESETAS HEDGING OF ASSET AND LIABILITY POSITIONS EXC H A N G E R I S K H E D G I N G T R A N SAC T I O N S CR O S S CU R R E N C Y S WA P S 2 2 , 7 3 1 IN T E R E S T R AT E R I S K H E D G I N G T R A N SAC T I O N S IN T E R E S T R AT E S WA P S 2 0 , 4 0 6

HEDGING OF FUTURE CASH FLOW S EXC H A N G E A N D I N T E R E S T R AT E R I S K H E D G I N G T R A N SAC T I O N S CR O S S CU R R E N C Y I N T E R E S T A N D E XC H A N G E R AT E S WA P S 2 8 , 9 6 8 EXC H A N G E R I S K H E D G I N G T R A N SAC T I O N S CR O S S CU R R E N C Y S WA P S 8 2 , 7 9 0 CALL O P T IO N S B O U G H T 4 , 5 1 1 PUT O P T IO N S S O L D 4 , 1 5 0 EXC H A N G E R AT E I N S U R A N C E 7 6 8 IN T E R E S T R AT E R I S K H E D G I N G T R A N SAC T I O N S IN T E R E S T R AT E S WA P S 1 5 , 4 1 1 OT H E R H E D G I N G T R A N SAC T I O N S FU E L P R IC E H E D G I N G T R A N SAC T IO N S 6 0 , 4 7 7

152 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

- 17 - TAX MATTERS The corporate income tax of each of the companies consolidated by the global integration method is calculated on the basis of the result per books, which does not necessarily coincide with the taxable income for corporate income tax purposes.

The reconciliation of the consolidated income per books for 1999 of the companies composing the consolidated tax group to the taxable income for corporate income tax purposes is as follows:

1999 M I L L I O N S O F P E S E TA S

IN C R E A S E DE C R E A S E AM O U N T

INCOME FOR THE YEAR PER BOOKS (BEFORE TAXES) - - 30,952 PERMANENT DIFFERENCES 11,078 (13,869) (2,791) TIMING DIFFERENCES: ARISING IN THE YEAR 31,582 (a) (841) 30,741 (a) This amount relates basically ARISING IN PRIOR YEARS 25 (23,748) (b) (23,723) to the provisions for pensions and other commitments to employees, TAXABLE INCOME for projected restructuring costs (BEFORE CONSOLIDATION ADJUSTMENTS) 35,179 and for contingencies related to investee companies. CONSOLIDATION ADJUSTMENTS: (b) This amount relates basically to amounts used of provisions PERMANENT DIFFERENCES 19,474 (11,207) 8,267 recorded in prior years for pensions and other commitments TAXABLE INCOME 43,446 to employees and for risks relating to accounts receivable.

The consolidated corporate income tax expense recorded in 1999, amounting to Ptas. 5,486 million, relates to the sum of the corporate income tax expenses recorded by each company consolidated by the global integration method, net of the necessary adjustments made to the net tax payable as a result of consolidation. The detail of the expense recorded is as follows:

1999 MILLIONS OF PESETAS AP P L IC AT IO N O F T H E 35% TA X R AT E TO I N C O M E P E R B O O KS A D J US T E D BY T H E P E R M A N E N T D I F F E R E N C E S 12,750 AD D / (LE S S) : 7% O F T H E P R IO R Y E A R S’ TA X L O S S E S O F F S E T I N 1 9 9 9 A N D O F T HO S E I N C U R R E D I N 1 9 9 9 (561) AD J US T M E N T TO C O R P O R AT E I N C O M E TA X D U E TOTA X C O N S O L I DAT IO N (4,189) DO U B L E TA X AT IO N A N D I N V E S T M E N T TA X C R E D I TS (3,104) OT H E R 590 C O R P O R AT E I N C O M E TA X 5,486

153 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

The 7% of prior years’ tax losses offset in 1999 and of those incurred in 1999 re l a t e s mainly to the diff e rence between the corporate income tax rate (35%) and the rate of 28% that the consolidated companies obtain from SEPI by contributing their tax losses in consolidation for tax purposes.

As of December 31, 1999, the prior years’ tax losses susceptible to repurchase from SEPI amounted to Ptas. 226,280 million. 7% of this figure amounts to Ptas. 15,840 million, which the IBERIA Group has recorded under the “Other Long-Term Receivables” caption in the accompanying consolidated balance sheet as of December 31, 1999. The IBERIA Group will maintain a provision for the latter amount until it is able to use this tax asset.

The tax assets and liabilities were recorded, on the basis of the recovery date, under the “Accounts Receivable”, “Other Long-Term Receivables”, “Other Nontrade Payables” and “Long-Term Debt - Other Accounts Payable” captions in the accompanying consolidated balance sheet as of December 31, 1999, the detail being as follows:

DECEMBER 31, 1999 M I L L I O N S O F P E S E TA S CURRENT LONG-TERM ASSETS OTHER TOTAL DEBT / OTHER OTHER TOTAL ACCOUNTS LONG-TERM ACCOUNTS ACCOUNTS NONTRADE ACCOUNTS RECEIVABLE RECEIVABLES RECEIVABLE PAYABLE PAYABLES PAYABLE

TAXABLE INCOME FOR 1999 ---- 10,946 10,946 TIMING DIFFERENCES ARISING IN THE YEAR - 11,054 11,054 277 - 277 OTHER TAX PAYABLES ARISING IN THE YEAR DUE TO CONSOLIDATION --- 2,973 - 2,973 UNALLOCATED TIMING DIFFERENCES ARISING IN PRIOR YEARS 3,010 30,515 33,525 3,081 - 3,081 TOTAL 3,010 41,569 44,579 6,331 10,946 17,277

The estimated years for use of the long-term tax assets as of December 31, 1999, are as follows:

YEAR OF RECOV E RY MILLIONS OF PESETA S 2 0 0 1 6 , 2 2 7 2 0 0 2 5 , 8 4 2 2003 A N D S U B S E Q U E N T Y E A R S 2 9 , 5 0 0 4 1 , 5 6 9

154 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

The directors of the consolidated companies consider that all these assets will be recovered in not more than ten years.

Current corporate income tax regulations provide certain tax incentives to encourage new investment, vocational training and export activity. The consolidated companies availed themselves of the tax benefits envisaged in this legislation and earned tax credits of Ptas. 141 million in 1999 in this connection. As of December 31, 1999, the consolidable Group companies had used Ptas. 280 million of tax credits earned in prior years and in 1999. There were no unused tax credits as of that date.

In January 1997 the tax authorities commenced a review of 1992 through 1995 of all the taxes applicable to IBERIA, Líneas Aéreas de España, S.A. As a result of the review tax assessments were issued and contested. The directors do not expect any liabilities additional to those recorded as of December 31, 1999, to arise in this connection. As a result of the tax audit of corporate income tax, provisional assessments were issued with no deficiency confirming the figures reported.

In 1999 the tax authorities commenced an audit of 1996 and 1997 for all the taxes applicable to IBERIA, Líneas Aéreas de España, S.A. As a result of the audit, tax assessments relating to personal income tax withholdings and VAT amounting to Ptas. 748 million were issued and accepted, and tax assessments for the same taxes totaling Ptas. 535 million were issued and contested. The directors do not expect any liabilities additional to those recorded as of December 31, 1999, to arise in this connection. The years through 1997 can now no longer be audited for VAT. As a result of the audit of corporate income tax, a certificate was issued documenting the increases of Ptas. 1,884 million and Ptas. 5,826 million in the 1996 and 1997 tax bases, respectively. 1996 and 1997 are open for review for personal income tax withholdings, but only in respect of compensation in kind.

Also, in 1999 the tax authorities commenced a review of 1995, 1996 and 1997 for all the taxes applicable to Bínter Canarias, S.A., as a result of which no tax assessment or penalty has yet been issued against the company.

At the beginning of 2000 the tax authorities commenced a review of 1996, 1997 and 1998 for all the taxes applicable to Aviación y Comercio, S.A. (AVIACO) and of 1995 for corporate income tax.

155 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

- 18 - REVENUES AND EXPENSES

A) NET SALES The breakdown of the consolidable Group companies’ net sales in 1999 and 1999, by type of activity, is as follows:

BY TYPE OF AC T I V I T Y M I L L I O N S O F P E S E TA S 1 9 9 9 1 9 9 8

PA S S E N G E R T IC K E T R E V E N U E S 5 0 8 , 5 1 1 5 2 9 , 1 5 0 CA R G O R E V E N U E S 3 5 , 8 7 6 3 7 , 2 6 5 HA N D L I N G (A I R C R A F T D IS PATC H I N G A N D A I R P O R T S E R V IC E S) 3 9 , 6 2 5 3 6 , 5 6 6 TE C H N IC A L A S S IS TA N C E TO A I R L I N E S 1 7 , 5 9 8 1 7 , 9 0 5 OT H E R R E V E N U E S 2 0 , 9 9 7 2 4 , 0 7 4 TOTA L 6 2 2 , 6 0 7 6 4 4 , 9 6 0

PASSENGER TICKET REVENUES The geographical breakdown of passenger ticket revenues in 1999 and 1998, by network, is as follows:

BY NETWORK M I L L I O N S O F P E S E TA S 1 9 9 9 1 9 9 8

S PA I N A N D E U R O P E 3 5 9 , 5 8 3 3 8 3 , 8 2 8 AT L A N T IC 1 3 6 , 6 0 1 1 2 4 , 4 9 3 FA R E A S T - 1 2 , 3 7 0 AF R IC A A N D MI D D L E EA S T 1 2 , 3 2 7 8 , 4 5 9 TOTA L 5 0 8 , 5 1 1 5 2 9 , 1 5 0

TECHNICAL ASSISTANCE TO AIRLINES This caption includes revenues from aircraft maintenance services rendered to other airlines.

156 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

B) OTHER OPERATING REVENUES The detail of the “Other Operating Revenues” caption in the accompanying 1999 and 1998 consolidated statements of income is as follows:

ITEM M I L L I O N S O F P E S E TA S 1 9 9 9 1 9 9 8

C O M M IS S IO N S 1 1 , 4 5 4 9 , 6 4 6 R E N T 7 , 2 9 7 6 , 8 6 0 O T H E R S U N D R Y R E V E N U E S 4 , 9 6 7 3 , 8 6 8 2 3 , 7 1 8 2 0 , 3 7 4

C) EXTRAORDINARY REVENUES The detail of the balance of the “Extraordinary Revenues” caption in the accompanying 1999 consolidated statement of income is as follows:

E X T R AO R D I N A RY REVENUES MI L L I O N S O F P E S E TA S

EFF E C T OF IM P R O V E D NE T WO R T H PO S I T IO N OF TH E AMA D E U S GRO U P , NE T OF TH E TAX EF F E C T 1 7 , 3 2 9 RE C O V E R Y O F P R O V IS IO N F O R T H I R D -PA R T Y L I A B I L I T Y 2 , 9 2 4 RE C O V E R Y O F C O N T I N G E N C Y-R E L AT E D O P E R AT I N G P R O V IS IO N S 2 , 7 8 8 S U B S I D I E S 5 6 0 OT H E R 1 , 9 4 2 T OTA L 2 5 , 5 4 3

D) PRIOR YEARS’ REVENUES AND INCOME The detail of the balance of the “Prior Years’ Revenues and Income” caption in the accompanying 1999 consolidated statement of income is as follows:

PRIOR YEARS’ REVENUES AND INCOME MILLIONS OF PESETA S A E N A 1 1 , 0 8 0 O T H E R 3 , 2 1 1 TOTA L 1 4 , 2 9 1

The “AENA” account includes Ptas. 7,032 million recovered by IBERIA, Líneas Aéreas de España, S.A. and by Aviación y Comercio S.A. in connection with claims filed with courts and Ptas. 4,048 million relating to a ticket price adjustment.

157 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

E) PURCHASES The detail of the “Purchases” caption in the accompanying 1999 and 1998 consolidated statements of income is as follows:

P U R C H A S E S M I L L I O N S O F P E S E TA S 1 9 9 9 1 9 9 8

AI R C R A F T F U E L 6 1 , 8 3 5 5 9 , 2 6 1 AI R C R A F T S PA R E PA R TS 2 1 , 8 8 9 1 7 , 2 1 2 CAT E R I N G M AT E R I A L S 7 , 8 1 5 6 , 5 1 7 OT H E R P U R C H A S E S 4 , 9 0 7 5 , 2 2 6 9 6 , 4 4 6 8 8 , 2 1 6

F) HEADCOUNT AND PERSONNEL EXPENSES The breakdown of the balance of the “Personnel Expenses” caption in the accompanying consolidated statements of income for 1999 and 1998 is as follows:

PERSONNEL EXPENSES M I L L I O N S O F P E S E TA S 1 9 9 9 1 9 9 8

WAG E S , SA L A R I E S, E TC . 1 5 9 , 4 0 2 1 5 1 , 3 7 2 E M P L OY E E W E L FA R E E X P E N S E S 5 0 , 5 7 9 4 5 , 6 7 1 2 0 9 , 9 8 1 1 9 7 , 0 4 3

The average number of employees at the companies consolidable by the global integration method, measured in terms of equivalent average headcount, by professional category, in 1999 and 1998 was as follows:

E M P L OY E E S N U M B E R O F E M P L OY E E S 1 9 9 9 1 9 9 8

GR O U N D P E R S O N N E L : SE N IO R M A N AG E R S A N D T E C H N IC I A N S 1 , 4 0 5 1 , 3 4 6 CL E R IC A L S TA F F 7 , 2 0 7 6 , 9 0 7 OT H E R 1 2 , 2 3 2 1 1 , 7 9 2 2 0 , 8 4 4 2 0 , 0 4 5 F L I G H T P E R S O N N E L : PI L OTS 1 , 8 1 7 1 , 7 3 5 F L IG H T E N G I N E E R S 2 2 5 2 3 0 CA B I N C R E W 4 , 2 0 4 3 , 8 1 6 6 , 2 4 6 5 , 7 8 1 2 7 , 0 9 0 2 5 , 8 2 6

158 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

In 1999 137 employees of Vuelos Internacionales de Vacaciones, S.A. were terminated for a cost of Ptas. 3,149 million, and this amount was recorded under the “Extraordinary Expenses” caption in the accompanying 1999 consolidated statement of income.

G) OTHER OPERATING EXPENSES The detail of the balances of this caption in the accompanying 1999 and 1998 consolidated statements of income is as follows:

OTHER OPERATING EXPENSES M I L L I O N S O F P E S E TA S 1 9 9 9 1 9 9 8

CO M M E R C I A L E X P E N S E S 6 7 , 1 5 6 7 2 , 7 3 9 AI R T R A F F IC L E V I E S A N D C H A R G E S 4 0 , 6 9 2 4 0 , 7 5 3 MA I N T E N A N C E (a) 3 2 , 3 2 2 2 8 , 5 0 0 NAV IGAT IO N A N D OT H E R C O M M U N IC AT IO N A I D S 3 3 , 8 4 5 3 3 , 1 2 7 AI R C R A F T L E A S E S ( NOT E 8 ) 5 0 , 1 4 4 4 5 , 8 5 8 OT H E R 7 8 , 2 9 6 7 8 , 0 4 4 (a) Including maintenance 3 0 2 , 4 5 5 2 9 9 , 0 2 1 expenses and provision for major repairs.

H) EXTRAORDINARY EXPENSES The detail of the balance of the “Extraordinary Expenses” caption in the accompanying 1999 consolidated statement of income is as follows:

E X T R AO R D I N A RY EXPENSES MI L L I O N S O F P E S E TA S

PR O V IS IO N S F O R T H I R D-PA R T Y L I A B I L I T Y 1 6 , 5 1 1 ME R G E R E X T R A PAY R O L L PAY M E N T M A D E BY IB E R I A, LÍ N E A S AÉ R E A S D E ES PA Ñ A, S.A. 4 , 7 9 2 PR O V IS IO N F O R OT H E R O B L IGAT IO N S TO E M P L OY E E S 1 , 1 3 1 RES T R U C T U R I N G OF TH E LA B O R FO R C E OF VUE L O S INT E R N AC IO N A L E S DE VACAC IO N E S , S.A. 3 , 1 4 9 OT H E R E X T R AO R D I N A R Y E X P E N S E S 2 , 6 1 3 2 8 , 1 9 6

In accordance with the agreements entered into with the workers’ representatives in June 1999 and as a result of the integration of the employees of Aviación y Comercio, S.A. into IBERIA, Líneas Aéreas de España, S.A., on September 1, 1999, the employees of IBERIA, Líneas Aéreas de España, S.A. and of Aviación y Comercio, S.A. were paid a “merger extra payroll payment” totaling Ptas. 5,794 million. The portion relating to the Aviación y Comercio, S.A. employees was paid with a charge to the provisions recorded.

159 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

- 19 - CONTRIBUTION OF GROUP AND ASSOCIATED COMPANIES TO CONSOLIDATED INCOME The contribution of Group and associated companies to the 1999 and 1998 consolidated income was as follows:

C O M PA N Y M I L L I O N S O F P E S E TA S IN C O M E / (LO S S) 1 9 9 9 1 9 9 8

IB E R I A, LÍ N E A S AÉ R E A S D E ES PA Ñ A, S.A. 1 4 , 4 0 4 4 7 , 7 6 1 AV I AC I Ó N Y CO M E R C IO, S.A. 4 , 2 7 7 2 , 4 1 3 BI N T E R CA N A R I A S, S.A. 1 , 5 6 3 1 , 2 6 8 BI N T E R ME D I T E R R Á N E O, S.A. 161 ( 3 9 7 ) CO M PA Ñ Í A AU X I L I A R A L CA R G O EX P R É S, S.A. 4 8 3 9 CA M P O S VE L Á Z Q U E Z, S.A. 2 6 1 9 1 CA R G O S U R, S.A. 1 5 80 IB E R– SW IS S CAT E R I N G, S.A. 8 5 185 VU E L O S IN T E R N AC IO N A L E S D E VAC AC IO N E S, S.A. (2,751) ( 1 , 1 0 8 ) SIS T E M A S AU TO M AT I Z A D O S AG E N C I A S D E VI A J E S, S.A. 2 3 8 180 AM A D E US GR O U P 7 , 6 2 5 2 , 5 8 7 VE N E Z O L A N A IN T E R N AC IO N A L D E AV I AC I Ó N, S.A. (a) - - IB E R B US CO N C H A, LT D. ( 5 ) 3 IB E R B US RO SA L Í A, LT D. ( 7 ) 3 IB E R B US CH AC E L, LT D. ( 1 7 ) (35) IB E R B US AR E N A L, LT D. ( 4 8 ) (63) IB E R B US TE R E SA, LT D. ( 1 6 ) ( 4 0 ) IB E R B US EM I L I A, LT D. ( 1 6 ) ( 3 2 ) IB E R B US AG US T I N A, LT D. 6 ( 9 ) IB E R B US BE AT R I Z LT D. 5 ( 1 ) IB E R B US JUA N A IN É S, LT D. ( 8 ) - (a) As described in Note 3 TO U R O P E R A D O R VI VA TO U R S, S.A. ( 1 1 9 ) - it was not possible to obtain any recent financial statements IN C O M E AT T R I B U T E D TO T H E CO N T R O L L I N G CO M PA N Y 2 5 , 4 6 6 5 3 , 0 2 5 of this company.

160 IBERIA GROUP - ANNUAL REPORT 1999 NOTES TO 1999 - CONSOLIDATED FINANCIAL STA T E M E N T S

The detail of the balances of the “Income Attributed to Minority Interests” caption in the accompanying 1999 and 1998 consolidated statements of income is as follows:

C O M PANY M I L L I O N S O F P E S E TA S IN C O M E / (LO S S) 1 9 9 9 1 9 9 8

AV I AC I Ó N Y CO M E R C IO, S.A. 1 2 2 CO M PA Ñ Í A AU X I L I A R A L CA R G O EX P R É S, S.A. 1 6 1 3 IB E R– SW IS S CAT E R I N G, S.A. 3 6 8 0 VU E L O S IN T E R N AC IO N A L E S D E VAC AC IO N E S, S.A. (15) ( 6 ) SIS T E M A S AU TO M AT I Z A D O S AG E N C I A S D E VI A J E, S.A. 81 5 7 IN C O M E AT T R I B U T E D TO M I N O R I T Y I N T E R E S T S 1 3 0 1 4 6

- 20 - “YEAR 2000 ISSUE” The effect of the Year 2000 issue presented a particularly significant problem for aviation because of its implications for the efficient and normal operation of international air transport.

Since the first half of 1997 the IBERIA Group has been adopting the measures required to tackle the Year 2000 Issue, and implemented a plan for assessing all systems and remedying possible problems, applying the plans and measures established by IATA (International Air Transport Association) and ICAO (International Civil Aviation Organization), and by the main aircraft and aircraft part suppliers.

The IBERIA Group made the transition to the Year 2000 successfully, and it currently has, in addition to certain non-critical systems in the course of being replaced, various warning systems relating to the possible effects of the Year 2000 Issue.

- 21 - DIRECTORS’ COMPENSATION AND OTHER BENEFITS The compensation of all types earned by the directors of IBERIA, Líneas Aéreas de España, S.A. amounted to Ptas. 135 million in 1999.

In 1999 no advances or loans were granted to the directors of IBERIA, Líneas Aéreas de España, S.A. and there are no pension commitments to them.

- 22 - EXPLANATION ADDED FOR TRANSLATTION TO ENGLISH These consolidated financial statements are presented on the basis of accounting principles generally accepted in Spain. Certain accounting practices applied by the Group that conform with generally accepted accounting principles in Spain may not conform with generally accepted accounting principles in other countries.

161

ANNUAL REPORT 1999

1999 CONSOLIDA T E D MANAGEMENT REPORT

D U E T O I T S L E N G T H , T H I S P U B L I C AT I O N I N C L U D E S O N L YA S U M M A R Y O F T H E M A N A G E M E N T R E P O R T . T H E C O M P L E T E T E X T H A S B E E N D E P O S I T E D W I T H T H E M A D R I D M E R C A N T I L E R E G I S T E R . T R A N S L AT I O N O F A R E P O R T O R I G I N A L LY I S S U E D I N S PA N I S H . I N T H E E V E N T O F A D I S C R E PA N C Y, T H E S PA N I S H-L A N G U A G E V E R S I O N P R E VA I L S .

IBERIA GROUP

IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

- 1 - 1999 HIGHLIGHTS

The new era for the Group commenced in 1999 with the second best earnings figures in its TR A N S L AT I O N O F A R E P O RT O R I G I N A L LY I S S U E D I N SPA N I S H. history, namely income before taxes of Ptas. 31,082 million, achieved in a difficult year for the IN T H E E V E N T O F A D I S C R E PA N C Y, industry as a whole, and particularly for IBERIA, as a result of the conflicts during the year and the T H E S PA N I S H-L A N G U A G E V E R S I O N P R E VA I L S. specific problems of airport facilities and air traffic congestion.

Today, the IBERIA Group offers better service and, as a result of its alliances, more destinations and more frequent flights. In short, it is a global operator, which has tailored its supply to the demand of its customers. As a result of the alliances, which culminated in the formalization of the commitment to join the oneworld alliance as a fully-fledged member from September 1, 1999, the Group can cover more than 680 destinations in over 140 countries, i.e. a global network of destinations and frequencies. The bilateral agreements entered into by IBERIA with British Airways have enabled shared-code flights to be offered in reciprocal domestic markets since June 17, 1999.

165 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

166 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

In 1999 IBERIA Cargo maintained its objective of making maximum use of the capacity of passenger aircraft holds and reducing the use of cargo planes, which should help to make supply more stable, flexible and complete. In this regard, in 1999 IBERIA contracted the holds of three aircraft, thereby ensuring a high degree of resource management flexibility.

167 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

168 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

Noteworthy with regard to the subsidiaries was the integration of Aviaco in IBERIA L.A.E. after the Shareholders’ Meeting of Aviaco and after an agreement was reached with the employees of the two companies; from September 1, 1999, all Aviaco’s remaining employees joined IBERIA L.A.E. The merger of the two companies has yet to take place, for which, as a prior step, in 1999 IBERIA L.A.E. acquired most of the production assets of Aviaco. These measures will conclude the process initiated in October 1997, when the program to unify the network, the scheduling and the sales of the two companies was set in motion.

The tour operator Viva Tours (incorporated in November 1998) commenced operations in the Summer of 1999. The objective of IBERIA L.A.E. (which has a holding of 49.04% in this company) is to use this as an instrument for increasing the load factor on its routes at times of low occupancy without triggering an increase in supply, thereby obtaining additional revenues. The other shareholders of this company are the hotel chain Sol Meliá, the Viajes IBERIA Group and the Globalia Group. In 1999 alone Viva Tours became the leading Spanish tour operator, with sales of 127,078 package tours.

Group management was obliged in 1998 to cease the air transport operations of the subsidiary Viva Air, in view of the impossibility of integrating the Company as an operator into the Group’s network, and the related labor force reduction plan was filed prior to the termination of operations at the end of January 1999. In April 1999 this company’s air transport activities were discontinued, and Viva Air continued to exist exclusively as a maintenance company at Palma de Mallorca airport.

Binter Canarias increased the frequency of flights on the Arrecife-Las Palmas and Arrecife- Tenerife (North) routes, and started to offer flights to the new airport on La Gomera. This company reported income before taxes of Ptas. 1,687 million ( 10.14 million) in 1999, as a result of an increase in all its operating parameters. In accordance with the planned divestment in this company, in November 1999 SEPI authorized its sale to a consortium of Canary Islands savings banks and companies.

169 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

In 1999 Binter Mediterráneo increased activity by 36% with respect to 1998, with an increase in the number of weekly flights from Melilla to Almería, Málaga and Madrid. The increase in passenger revenues (59% with respect to 1998), as a result of the improved load factor, which grew by 9 percentage points, enabled this company to improve its operating margin by Ptas. 378 million ( 2.27 million) with respect to 1998.

In October 1999 Amadeus placed on the stock market 3.95% of its capital stock. The sharp increase in this company’s market price enabled its three majority shareholders (IBERIA L.A.E., Air France and Lufthansa) to recognize significant capital gains. Prior to the placement, the company paid an extraordinary dividend of Ptas. 24,958 million ( 150 million) to its shareholders, as a result of which IBERIA L.A.E. received Ptas. 7,287 million ( 43.80 million), corresponding to the 29.2% holding it held at that time. Amadeus used the proceeds from the capital increases to repay part of its debt and to make investments in improving its technological platform.

S U P P LY M I L L I O N S O F A S K S

1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N IBERIA, L.A.E. 5 0 , 2 3 8 4 5 , 5 1 8 4 , 7 2 0 1 0 . 4 AV I ACO (CHARTER) 5 0 2 3 6 ( 1 8 6 ) ( 7 9 . 0 ) V I VA 4 0 0 2 , 6 7 2 ( 2 , 2 7 2 ) ( 8 5 . 0 ) BINTER CANARIAS 4 2 8 3 7 8 5 0 1 3 . 2 BINTER MEDITERRANEO 9 6 7 1 2 5 3 6 . 0 S PANISH GROUP 5 1 , 2 1 2 4 8 , 8 7 5 2 , 3 3 7 4 . 8

170 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

The breakdown of the Spanish’ Group’s supply, by network, is as follows:

BY NETWORK M I L L I O N S O F A S K S AVAILABLE SEATS KILOMETRE

1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N TOTAL OTHER 2.39 %

TOTAL SPAIN MAD-BCN SHUTTLE 1 , 2 3 0 1 , 1 6 6 6 4 5 . 5 26.2 % MAINLAND-CANARIES 5 , 6 0 8 4 , 8 8 8 7 2 0 1 4 . 7 CANARY ISLANDS 4 2 1 3 7 3 4 8 1 2 . 8 OTHER DOMESTIC 6 , 1 5 9 6 , 2 3 5 ( 7 6 ) ( 1 . 2 ) TOTAL ATLANTIC TOTAL SPA I N 1 3 , 4 1 8 1 2 , 6 6 2 7 5 6 6 . 0 47.7 % TOTAL EUROPE A F R ICA AND MIDDLE EAST 9 3 5 8 4 0 9 5 1 1 . 3 23.7 % 1 9 9 9 E U 1 0 , 4 1 6 1 0 , 1 3 5 2 8 1 2 . 8 S PANISH GROUP: 51,212 NON-EU COUNTRIES 7 8 6 8 9 4 ( 1 0 8 ) ( 1 2 . 1 ) TOTAL EUROPE 1 2 , 1 3 7 1 1 , 8 6 9 2 6 8 2 . 3 NORTH AT L A N T IC 7 , 6 4 8 5 , 5 4 9 2 , 0 9 9 3 7 . 8 MID AT L A N T IC 1 0 , 2 5 0 8 , 2 1 2 2 , 0 3 8 2 4 . 8 SOUTH AT L A N T IC 6 , 5 3 4 5 , 8 7 7 6 5 7 1 1 . 2 TOTAL ATLANTIC 2 4 , 4 3 2 1 9 , 6 3 8 4 , 7 9 4 2 4 . 4 SOUTHERN AFRIC A 7 6 8 4 1 8 3 5 0 8 3 . 6 FAR EAST - 1 , 3 7 5 ( 1 , 3 7 5 ) - C H A R T E R 4 5 7 2 , 9 1 3 ( 2 , 4 5 6 ) 8 4 . 3 S PANISH GROUP 5 1 , 2 1 2 4 8 , 8 7 5 2 , 3 3 7 4 . 8

Group production in terms of block hours was similar to that of 1998, due to the discontinuation of Viva Air’s operations during the year. Wet lease transactions continued to be maintained because of the flexibility that they give to the Company’s production.

The variations in 1999 were as follows:

GROUP PRODUCTION B L O C K H O U R S

1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N IBERIA, L.A.E. 4 2 5 , 2 8 3 4 0 0 , 9 5 2 2 4 , 3 3 1 6 . 1 AV I ACO (CHARTER) 5 7 1 3 , 1 3 8 ( 2 , 5 6 7 ) ( 8 1 . 8 ) V I VA 4 , 6 0 2 2 9 , 6 5 7 ( 2 5 , 0 5 5 ) ( 8 4 . 5 ) BINTER CANARIAS 2 3 , 8 9 9 2 0 , 7 6 4 3 , 1 3 5 1 5 . 1 BINTER MEDITERRANEO 7 , 7 1 3 5 , 7 9 3 1 , 9 2 0 3 3 . 1 S PANISH GROUP 4 6 2 , 0 6 8 4 6 0 , 3 0 4 1 , 7 6 4 0 . 4

171 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

Important to note at Group level was the effect of the discontinuation of Viva Air’s operations, which had an impact of over one million passengers.

The breakdown of passengers carried is as follows:

D E M A N D T H O U SA N D S O F P A S S E N G E R S

1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N IBERIA, L.A.E. 2 1 , 8 7 9 2 1 , 7 5 3 1 2 6 0 . 6 AV I ACO (CHARTER) 2 3 1 2 8 ( 1 0 5 ) ( 8 1 . 7 ) V I VA 1 8 3 1 , 3 4 7 ( 1 , 1 6 4 ) ( 8 6 . 4 ) BINTER CANARIAS 1 , 9 0 3 1 , 5 9 0 3 1 3 1 9 . 7 BINTER MEDITERRANEO 2 8 6 1 9 2 9 4 4 9 . 2 S PANISH GROUP 2 4 , 2 7 4 2 5 , 0 1 0 ( 7 3 6 ) ( 2 . 9 )

The breakdown, by network, is as follows:

PASSENGERS CARRIED BY NETWORK T H O U SA N D S O F P A S S E N G E R S

TOTAL OTHER 1.13 % 1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N TOTAL ATLANTIC 9.71 % MAD-BCN SHUTTLE 1 , 8 7 6 1 , 7 9 4 8 2 4 . 6 TOTAL SPAIN TOTAL 62.06 % MAINLAND-CANARIES 2 , 1 8 1 2 , 0 6 2 1 1 9 5 . 8 EUROPE 27.08 % CANARY ISLANDS 1 , 8 9 1 1 , 5 8 3 3 0 8 1 9 . 5 OTHER DOMESTIC 9 , 1 1 7 9 , 5 3 5 ( 4 1 8 ) ( 4 . 4 ) TOTAL SPA I N 1 5 , 0 6 5 1 4 , 9 7 4 9 1 0 . 6 A F R ICA AND MIDDLE EAST 2 9 7 2 6 0 3 7 1 4 . 2 1 9 9 9 S PANISH GROUP: 24,274 E U 5 , 8 9 0 5 , 7 3 8 1 5 2 2 . 7 NON-EU COUNTRIES 3 8 7 4 5 4 ( 6 7 ) ( 1 4 . 8 ) TOTAL EUROPE 6 , 5 7 4 6 , 4 5 2 1 2 2 1 . 9 NORTH AT L A N T IC 8 7 3 6 6 9 2 0 4 3 0 . 4 MID AT L A N T IC 9 9 4 8 3 7 1 5 7 1 8 . 7 SOUTH AT L A N T IC 4 9 2 4 5 8 3 4 7 . 5 TOTAL ATLANTIC 2 , 3 5 9 1 , 9 6 4 3 9 5 2 0 . 1 SOUTHERN AFRIC A 5 8 3 7 2 1 5 6 . 8 FAR EAST - 1 0 0 ( 1 0 0 ) - C H A R T E R 2 1 8 1 , 4 8 3 ( 1 , 2 6 5 ) ( 8 5 . 3 ) S PANISH GROUP 2 4 , 2 7 4 2 5 , 0 1 0 ( 7 3 6 ) (2.9)

172 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

The trend in RPKs was positive, since the increase in activity was centered on longer-haul networks.

The detail by company and network is as follows:

BY COMPANY M I L L I O N S O F R P K S

1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N IBERIA, L.A.E. 3 4 , 6 0 7 3 2 , 5 2 0 2 , 0 8 7 6.4 AV I ACO (CHARTER) 3 1 1 9 3 ( 1 6 2 ) ( 8 3 . 7 ) V I VA 3 3 7 2 , 1 5 7 ( 1 , 8 2 0 ) ( 8 4 . 4 ) BINTER CANARIAS 3 3 6 2 7 4 6 2 2 2 . 6 BINTER MEDITERRANEO 6 8 4 6 2 2 4 7 . 8 S PANISH GROUP 3 5 , 3 7 9 3 5 , 1 9 0 1 8 9 0.5

BY NETWORK M I L L I O N S O F R P K S REVENUE PASSENGERS KILOMETRE

1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N TOTAL OTHER 2.38 %

TOTAL SPAIN MAD-BCN SHUTTLE 9 0 4 8 6 5 3 9 4 . 6 25.62 % M A I N L A N D - C A N A R I E S 3 , 8 5 6 3 , 6 3 7 2 1 9 6 . 0 CANARY ISLANDS 3 3 0 2 7 0 6 0 2 2 . 2 OTHER DOMESTIC 3 , 9 7 7 4 , 1 5 9 ( 1 8 2 ) ( 4 . 4 ) TOTAL ATLANTIC TOTAL SPA I N 9 , 0 6 7 8 , 9 3 1 1 3 6 1 . 5 49.25 % TOTAL EUROPE 22.73 % A F R ICA AND MIDDLE EAST 6 3 0 5 3 8 9 2 1 7 . 1 1 9 9 9 E U 6 , 9 6 0 6 , 9 4 8 1 2 0 . 2 S PANISH GROUP: 35,379 NON-EU COUNTRIES 4 5 3 5 7 5 ( 1 2 2 ) ( 2 1 . 2 ) TOTAL EUROPE 8 , 0 4 3 8 , 0 6 1 ( 1 8 ) (0.2) NORTH AT L A N T IC 5 , 3 3 2 4 , 1 0 8 1 , 2 2 4 2 9 . 8 MID AT L A N T IC 7 , 5 3 7 6 , 2 8 9 1 , 2 4 8 1 9 . 9 SOUTH AT L A N T IC 4 , 5 5 6 4 , 2 3 9 3 1 7 7 . 5 TOTAL ATLANTIC 1 7 , 4 2 5 1 4 , 6 3 6 2 , 7 8 9 1 9 . 1 SOUTHERN AFRIC A 4 7 0 2 9 6 1 7 4 5 8 . 7 FAR EAST - 9 1 3 ( 9 1 3 ) - C H A R T E R 3 7 4 2 , 3 5 3 ( 1 , 9 7 9 ) ( 8 4 . 1 ) S PANISH GROUP 3 5 , 3 7 9 3 5 , 1 9 0 1 8 9 0 . 5

173 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

Also noteworthy was the decrease of almost 3 percentage points in the domestic market, due to the problems caused for the airlines by airport congestion for most of the year. PASSENGER LOAD FACTOR BY COMPANY (IN %) The breakdown by company and network is as follows:

68.9 % IBERIA L.A.E. 71.4 % BY COMPANY L O A D F A C TO R % AVIACO 63.4 % (CHARTER) 81.8 % 1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N 84.2 % VIVA 80.7 % IBERIA, L.A.E. 6 8 . 9 7 1 . 4 ( 2 . 5 ) ( 3 . 6 )

BINTER 78.5 % CANARIAS 72.5 % AV I ACO (CHARTER) 6 3 . 4 8 1 . 8 ( 1 8 . 4 ) ( 2 2 . 5 )

BINTER 70.7 % V I VA 8 4 . 2 8 0 . 7 3 . 5 4 . 4 MEDITERRANEO 64.8 % BINTER CANARIAS 7 8 . 5 7 2 . 5 6 . 0 8 . 3 SPANISH 69.1 % GROUP 72.0 % BINTER MEDITERRANEO 7 0 . 7 6 4 . 8 5 . 9 9 . 1

1999 1998 S PANISH GROUP 6 9 . 1 7 2 . 0 ( 2 . 9 ) ( 4 . 0 )

L O A D F A C TO R % PASSENGER LOAD FACTOR BY NETWORK BY NETWORK (IN %) 1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N

TOTAL 67.6 % SPAIN 70.5 % MAD-BCN SHUTTLE 7 3 . 4 7 4 . 2 ( 0 . 8 ) ( 1 . 0 )

TOTAL 66.3 % EUROPE MAINLAND-CANARIES 6 8 . 8 7 4 . 4 ( 5 . 6 ) ( 7 . 6 ) 67.9 % CANARY ISLANDS 7 8 . 3 7 2 . 4 5 . 9 8 . 1 TOTAL 71.3 % ATLANTIC 74.5 % OTHER DOMESTIC 6 4 . 6 6 6 . 7 ( 2 . 1 ) ( 3 . 1 ) SPANISH 69.1 % GROUP 72.0 % TOTAL SPA I N 6 7 . 6 7 0 . 5 ( 2 . 9 ) ( 4 . 2 )

1999 1998 A F R ICA AND MIDDLE EAST 6 7 . 3 6 4 . 0 3 . 3 5 . 2 E U 6 6 . 8 6 8 . 6 ( 1 . 8 ) ( 2 . 6 ) NON-EU COUNTRIES 5 7 . 6 6 4 . 3 ( 6 . 7 ) ( 1 0 . 4 ) TOTAL EUROPE 6 6 . 3 6 7 . 9 ( 1 . 6 ) ( 2 . 4 ) NORTH AT L A N T IC 6 9 . 7 7 4 . 0 ( 4 . 3 ) ( 5 . 8 ) MID AT L A N T IC 7 3 . 5 7 6 . 6 ( 3 . 1 ) ( 4 . 0 ) SOUTH AT L A N T IC 6 9 . 7 7 2 . 1 ( 2 . 4 ) ( 3 . 3 ) TOTAL ATLANTIC 7 1 . 3 7 4 . 5 ( 3 . 2 ) ( 4 . 3 ) SOUTHERN AFRIC A 6 1 . 1 7 0 . 8 ( 9 . 7 ) ( 1 3 . 6 ) FAR EAST - 6 6 . 4 -- C H A R T E R 8 2 . 0 8 0 . 8 1 . 2 1 . 5 S PANISH GROUP 6 9 . 1 7 2 . 0 ( 2 . 9 ) ( 4 . 0 )

174 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

2.4. AVERAGE YIELD The detail of the variations in the average yield, by area/company, in 1999, and of the AVERAGE YIELD BY COMPANY comparable figures for 1998 is as follows: (IN PTS./RPK)

13.7 IBERIA L.A.E. 14.8 AV E R AGE YIELD P T A S . / R P K - C E N T S . / R P K AVIACO 11.8 (CHARTER) 1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N 9.3 6.8 VIVA IBERIA, L.A.E. 1 3 . 7 8 . 2 1 4 . 8 8 . 9 ( 1 . 1 ) ( 0 . 7 ) ( 7 . 5 ) 8.7

BINTER 39.2 AV I ACO (CHARTER) 1 1 . 8 7 . 1 9 . 3 5 . 6 2 . 5 1 . 5 2 6 . 6 CANARIAS 39.3

V I VA 6 . 8 4 . 1 8 . 7 5 . 2 ( 1 . 9 ) ( 1 . 1 ) ( 2 1 . 6 ) BINTER 48.7 MEDITERRANEO BINTER CANARIAS 3 9 . 2 2 3 . 6 3 9 . 3 2 3 . 6 ( 0 . 1 ) - ( 0 . 3 ) 45.1 SPANISH 13.9 BINTER MEDITERRANEO 4 8 . 7 2 9 . 3 4 5 . 1 2 7 . 1 3 . 6 2 . 2 8 . 0 GROUP 14.6

S PANISH GROUP 1 3 . 9 8 . 4 1 4 . 6 8 . 8 ( 0 . 7 ) ( 0 . 4 ) ( 4 . 8 ) 1999 1998

The detail of the variations in the average yield, by market, in 1999, and of the comparable figures for 1998 is as follows:

AV E R AGE YIELD BY MARKET P T A S . / R P K - C E N T E . / R P K AVERAGE YIELD BY MARKET (IN PTS./RPK) 1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N TOTAL 21.6 SPAIN 21.6 MAD-BCN SHUTTLE 28.8 17.3 27.8 16.7 1.0 0.6 3.5 TOTAL 19.7 EUROPE MAINLAND-CANARIES 11.7 7.0 11.8 7.1 (0.1) (0.1) (1.1) 20.9

TOTAL 7.6 CANARY ISLANDS 39.6 23.8 39.6 23.8 -- 0.1 ATLANTIC 8.3

OTHER DOMESTIC 28.0 16.8 27.7 16.6 0.3 0.2 1.1 SPANISH 13.9 GROUP TOTAL SPAIN 21.6 13.0 21.6 13.0 - (0.1) (0.2) 14.6 AFRICA AND MIDDLE EAST 14.3 8.6 16.0 9.6 (1.7) (1.0) (10.6) 1999 1998 EU 20.1 12.1 21.2 12.7 (1.1) (0.6) (5.1) NON-EU COUNTRIES 22.1 13.3 21.9 13.2 0.2 0.1 0.9 TOTAL EUROPE 19.7 11.8 20.9 12.6 (1.2) (0.8) (5.4) NORTH ATLANTIC 8.1 4.9 8.2 4.9 (0.1) - (1.2) MID ATLANTIC 7.4 4.4 8.4 5.0 (1.0) (0.6) (11.4) SOUTH ATLANTIC 7.2 4.3 8.2 4.9 (1.0) (0.6) (12.1) TOTAL ATLANTIC 7.6 4.5 8.3 5.0 (0.7) (0.5) (8.2) SOUTHERN AFRICA 6.1 3.7 5.9 3.5 0.2 0.2 3.2 FAR EAST -- 10.3 6.2 --- CHARTER 7.5 4.5 8.8 5.3 (1.3) (0.8) (15.2) SPANISH GROUP 13.9 8.4 14.6 8.8 (0.7) (0.4) (4.8)

175 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

Again noteworthy in this area was the increase in the proportion of business-class travelers to 9.82% in 1999 from 9.55% in 1998.

PASSENGER REVENUES M I L L I O N S O F P E S E TA S - M I L L I O N S O F E U R O S

1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N IBERIA, L.A.E. 473,404 2,845.22 481,026 2,891.02 (7,622) (45.80) (1.6) AVIACO (CHARTER) 369 2.22 1,788 10.75 (1,419) (8.53) (79.4) VIVA 2,306 13.86 18,801 113.00 (16,495) (99.14) (87.7) BINTER CANARIAS 13,183 79.23 10,780 64.79 2,403 14.44 22.3 BINTER MEDITERRANEO 3,301 19.84 2,074 12.46 1,227 7.37 59.2 SPANISH GROUP 492,563 2,960.36 514,469 3,092.02 (21,906) (131.66) (4.3)

The detail, by network, of passenger revenues is as follows:

PASSENGER REVENUES BY NETWO R K M I L L I O N S O F P E S E TA S - M I L L I O N S O F E U R O S

TOTAL OTHER 1.14 % 1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N

TOTAL TOTAL SPAIN MAD-BCN SHUTTLE 26,009 156.32 24,077 144.71 1,932 11.61 8.0 ATLANTIC 39.71 % 26.83 % MAINLAND-CANARIES 45,179 271.53 43,075 258.89 2,104 12.64 4.9 CANARY ISLANDS 13,064 78.52 10,699 64.30 2,365 14.22 22.1 OTHER DOMESTIC 111,354 669.25 115,235 692.58 (3,881) (23.33) (3.4)

TOTAL EUROPE TOTAL SPAIN 195,606 1,175.62 193,086 1,160.47 2,520 15.15 1.3 32.30 % AFRICA AND MIDDLE EAST 9,012 54.16 8,606 51.72 406 2.44 4.7 1 9 9 9 S PANISH GROUP: 492,563 EU 140,050 841.72 147,336 885.51 (7,286) (43.79) (5.0) NON-EU COUNTRIES 10,043 60.36 12,593 75.69 (2,550) (15.33) (20.3) TOTAL EUROPE 159,105 956.24 168,535 1,012.92 (9,430) (56.68) (5.6) NORTH ATLANTIC 43,345 260.51 33,507 201.38 9,838 59.13 29.4 MID ATLANTIC 56,018 336.68 52,752 317.05 3,266 19.63 6.3 SOUTH ATLANTIC 32,835 197.34 34,760 208.91 (1,925) (11.57) (5.5) TOTAL ATLANTIC 132,198 794.53 121,019 727.34 11,179 67.19 9.2 SOUTHERN AFRICA 2,860 17.19 1,747 10.50 1,113 6.69 63.7 FAR EAST -- 9,403 56.51 (9,403) (56.51) - CHARTER 2,794 16.79 20,679 124.28 (17,885) (107.49) (86.5) SPANISH GROUP 492,563 2,960.36 514,469 3,092.02 (21,906) (131.66) (4.3)

176 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

- 3 - SUMMARY BY SUBSIDIARY 3.1. AVIACO Aviaco’s employees were integrated into IBERIA L.A.E. on September 1, 1999, following the Shareholders’ Meeting of Aviaco and the agreement reached with the employees of the two companies.

In 1999 the agreements for the integration in L.A.E. of Aviaco’s employees were signed. In June an agreement was reached with the pilots, and in July was reached with the cabin crew, who were included in IBERIA L.A.E.’s single promotion list, and the agreement with the ground personnel was entered into in August.

The merger of the companies in 2000 will complete a process that commenced in October 1997, when the two companies’ network, scheduling and commercial operations were unified.

The main parameters are as follows:

AV I AC O

1999 1998 VAR I AT I O N 99 / 9 8 % VAR I AT I O N

TOTA L BL O C K HO U R S * 52,300 86,685 (34,385) 39.7 OPERATING INCOME (MILLIONS OF PESETAS) 3,938 4,092 (154) (3.7) OPERATING INCOME (MILLIONS OF EUROS) 23.67 24.59 0.93 (3.7) NE T IN C O M E A F T E R TA X E S (M. PTA S. ) 17,590 2,414 15,176 628.8 NE T IN C O M E A F T E R TA X E S (M. EUROS) 105.72 14.51 91.21 628.8

EQ U I VA L E N T F U L L-T I M E EM P L OY E E S 985 1,719 (734) (42.7) (*) Integrated in Iberia L.A.E. since September.

3.2. BINTER CANARIAS There was a major change in the inter-Canary Island transport market in 1999, since in January the main competitor in the air transport market, Canarias Regional, withdrew from the market leaving its market share of around 12% (mainly on the LPA-ACE, TFN-ACE and TFN-SPC routes). Also, competition from smaller, regional companies, mainly Atlantic Airways, grew stronger.

177 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

Competition from shippers grew in both qualitative and quantitative terms. In qualitative terms, mass transport was revolutionized with the introduction of fast ferries, operated on routes such as LPA-TFN and TFS-GMZ by Fred Olsen and Naviera Armas. The overall market is around 5.5 million passengers a year, of which shippers have a share of around 3.5 million and airlines the remaining 2 million.

The air transport market grew with respect to 1999, due mainly to the increase in the percentage of the subsidy offered to Canary Island residents (at inter-Canary Island level) and Binter Canarias’s market also increased as a result of the aforementioned withdrawal of its main competitor. Demand increased by 18.9% to 1,924,680 passengers. The routes that experienced the highest growth were those where the competitor ceased to operate, such as LPA-ACE, TFN- ACE, SPC-TFN; however LPA-TFN had the lowest growth (only 4.7%) due to the excess supply of shippers.

Since there were no longer any major competitors in the air transport market (350,000 fewer seats) and because of the growing demand due to ticket price reductions through the subsidy, two aircraft had to be added to the ATR72 fleet, which as of December 31, 1999, consisted of 11 ATR72 aircraft: 7 owned, 3 operated under operating lease contracts and 1 operated under a financial lease contract.

In November 1999 SEPI authorized the sale of Binter Canarias to a consortium of Canary Islands savings banks and companies for Ptas. 5,500 million, although the sale had not yet taken place as of 1999 year-end.

The detail of this company’s main aggregates is as follows:

BINTER CANARIAS VAR I AT I O N % 1999 1998 99 / 9 8 VAR I AT I O N

MI L L IO N A S KS 4 2 8 3 7 3 5 5 1 4 . 7 MI L L IO N R P KS 3 3 6 2 7 0 6 6 2 4 . 4 LOA D FAC TO R ( % ) 7 8 . 5 7 2 . 5 6 . 0 8 . 3 YI E L D ( PTA S. / R P K ) 3 9 . 2 3 9 . 6 ( 0 . 4 ) ( 1 . 0 ) YI E L D (C E N TS. / R P K ) 2 3 . 5 6 2 3 . 6 2 ( 0 . 0 6 ) ( 0 . 3 ) PA S S E N G E R RE V E N U E S (M. PTA S. ) 1 3 , 1 8 3 1 0 , 6 9 9 2 , 4 8 4 2 3 . 2 PA S S E N G E R RE V E N U E S (M. EU R O S) 7 9 . 2 3 6 4 . 3 0 1 4 . 9 3 2 3 . 2 OP E R AT I N G IN C O M E (M. PTA S. ) 1 , 8 2 9 8 1 3 1 , 0 1 6 1 2 5 . 0 OP E R AT I N G IN C O M E (M. EU R O S) 1 1 . 0 0 4 . 8 9 6 . 1 1 1 2 5 . 0 NE T IN C O M E A F T E R TA X E S (M. PTA S. ) 1 , 5 6 3 1 , 2 6 8 ( 2 9 5 ) ( 2 3 . 2 ) NE T IN C O M E A F T E R TA X E S (M. EU R O S) 9 . 3 9 7 . 6 2 ( 1 . 7 7 ) ( 2 3 . 2 ) EQ U I VA L E N T F U L L-T I M E EM P L OY E E S 3 3 5 3 0 4 3 1 1 0 . 2

178 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

3.3. BINTER MEDITERRANEO In 1999 Binter Mediterráneo’s volume of business increased significantly, and it reported income for the first time in its history.

Supply (in terms of ASKs) grew by 36% with respect to 1998, with increases in the number of flights per week on routes linking Melilla with Almería, Málaga and Madrid. On September 30 the Málaga- Alicante route was abandoned due to its low load factor and, accordi n g l y , two aircraft that had been assigned to Austral were rec o v e r ed, signifying that the current fleet comprises five CN-235 planes.

The average load factor increased by almost nine percentage points, and more than 300,000 passengers were flown in 1999 (57% more than in 1998).

Consequently, Binter Mediterráneo’s operating margin improved by Ptas. 378 million ( 2.27 million) in 1999, as a result of the significant increase in passenger revenues (by nearly 60% with respect to 1998).

The detail of this company’s main aggregates is as follows:

BINTER MEDITERRANEO VAR I AT I O N % 1999 1998 99 / 9 8 VAR I AT I O N

MI L L IO N A S KS 9 6 7 1 2 5 3 6 . 0 MI L L IO N R P KS 6 8 4 6 2 2 4 6 . 7 LOA D FAC TO R ( % ) 7 0 . 7 6 5 . 6 5 . 1 7 . 7 YI E L D ( PTA S. / R P K ) 4 8 . 7 4 4 . 7 4 . 0 8 . 9 YI E L D (C E N TS. / R P K ) 2 9 . 2 7 2 6 . 8 6 2 . 4 1 8 . 9 PA S S E N G E R RE V E N U E S (M. PTA S. ) 3 , 3 0 1 2 , 0 6 5 1 , 2 3 6 5 9 . 8 PA S S E N G E R RE V E N U E S (M. EU R O S) 1 9 . 8 4 1 2 . 4 1 7 . 4 3 5 9 . 8 OP E R AT I N G IN C O M E (M. PTA S. ) 1 0 0 ( 2 7 8 ) 3 7 8 - OP E R AT I N G IN C O M E (M. EU R O S) 0 . 6 0 ( 1 . 6 7 ) 2 . 2 7 - NE T IN C O M E A F T E R TA X E S (M. PTA S. ) 1 6 1 ( 3 9 7 ) 6 1 2 - NE T IN C O M E A F T E R TA X E S (M. EU R O S) 0 . 9 7 2 . 3 9 3 . 3 6 - EQ U I VA L E N T F U L L-T I M E EM P L OY E E S 6 7 5 5 1 2 2 2 . 5

3.4. VIVA AIR Following the discontinuation of its air transport operations on April 30, Viva Air is now a maintenance company that renders services to other airlines (Air Europa, Seven Air, Air Global, etc.) at its base in Palma de Mallorca.

As a result of the discontinuation, the company temporarily leased out its aircraft until the completion of the sale process. Of the nine B-737 aircraft operated in 1998, two of the five that were operated under operating leases were returned to their owner (ILFC), and the other three were subleased to other companies (two to AERIS and one to Seven Air). The two aircraft owned by VIVA were leased to Air Europa until September and October.

179 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

The two B-737 under financial lease contracts were also leased to Air Europa for different periods awaiting their sale.

The sale of the four aircraft (two owned and two under financial lease contracts) to General Electric Capital Aviation Service was formalized in December 1999 (although delivery and payment will take place in early 2000).

Certain of VIVA’s employees joined IBERIA L.A.E. with effect from May 1, 1999.

The 1999 losses arose as a result of the discontinuation of operations. The company’s earnings are initially expected to be around breakeven point until it consolidates its presence in the maintenance market; from which time it is expected to report income.

V I VA AIR VAR I AT I O N % 1999 1998 99 / 9 8 VAR I AT I O N

BL O C K HO U R S 4 , 6 0 2 2 9 , 6 5 7 ( 2 5 , 0 5 5 ) ( 8 4 . 5 ) AV E R AG E R E V E N U E/ BL O C K HO U R (PTAS.) 5 2 2 , 3 9 5 6 4 8 , 9 2 3 ( 1 2 6 , 5 2 8 ) ( 1 9 . 5 ) AV E R AG E R E V E N U E/ BL O C K HO U R (E UR O S ) 3 , 1 3 9 . 6 6 3 , 9 0 0 . 1 1 ( 7 6 0 . 4 5 ) ( 1 9 . 5 ) OP E R AT I N G L O S S (M. PTA S. ) ( 2 , 7 0 9 ) ( 1 , 0 2 0 ) ( 1 , 6 8 9 ) ( 1 6 5 . 6 ) OP E R AT I N G L O S S (M. EU R O S) ( 1 6 . 2 8 ) ( 6 . 1 3 ) ( 1 0 . 1 5 ) ( 1 6 5 . 6 ) NE T L O S S A F T E R TA X E S (M. PTA S. ) ( 2 , 7 6 5 ) ( 1 , 1 1 4 ) ( 1 , 6 5 2 ) ( 1 4 8 . 3 ) NE T L O S S A F T E R TA X E S (M. EU R O S) ( 1 6 . 6 2 ) ( 6 . 7 0 ) ( 9 . 9 2 ) ( 1 4 8 . 3 ) EQ U I VA L E N T F U L L-T I M E E M P L OY E E S 1 9 4 4 3 0 ( 2 3 6 ) ( 5 1 . 3 )

3.5. SAVIA As regards SAVIA, S.A.’s operations, the number of terminals installed at travel agencies increased by 24.2% from 11,392 in 1998 to 14,150 in 1999. The number of agencies connected to the system increased by 15.8% from 4,317 at 1998 year-end to 5,000 in December 1999. 23,363,108 flight reservations were made in 1999, up 9.1% on 1998.

The company’s main aggregates are summarized as follows:

SAVIA VAR I AT I O N % 1999 1998 99 / 9 8 VAR I AT I O N

OP E R AT I N G R E V E N U E S (M. PTA S. ) 8 , 9 2 9 8 , 2 6 8 6 6 1 8 . 0 OP E R AT I N G R E V E N U E S (M. EU R O S) 5 3 . 6 6 4 9 . 6 9 3 . 9 7 8 . 0 OP E R AT I N G I N C O M E (M. PTA S. ) 6 3 3 4 2 8 2 0 5 4 3 8 . 0 OP E R AT I N G I N C O M E (M. EU R O S) 3 . 8 0 2 . 5 7 1 . 2 3 4 8 . 0 EQ U I VA L E N T F U L L-T I M E E M P L OY E E S 6 7 5 4 1 3 2 3 . 0 NE T I N C O M E A F T E R TA X E S (M. PTA S. ) 3 1 9 2 3 8 8 1 3 3 . 9 NE T I N C O M E A F T E R TA X E S (M. EU R O S) 1 . 9 2 1 . 4 3 0 . 4 9 3 3 . 9

180 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

3.6. IBER-SWISS CATERING On January 1, 1999, the new catering center in Barcelona commenced operations, as a result of which the number of trays prepared and the number of flights served increased by 21% and 45%, respectively.

The problems stemming from the start-up of this center had a significant effect on the company’s earnings, reducing 1999 operating income by Ptas. 179 million.

Worthy of mention are the sound performance of the Madrid and Málaga centers and the significant effort made by the latter, which despite the discontinuation of VIVA AIR’s operations, which accounted for 22 % of its revenues, ended the year with income slightly higher than budgeted.

The companies main aggregates are summarized as follows:

IBER-SWISS CAT E R I N G VAR I AT I O N % 1999 1998 99 / 9 8 VAR I AT I O N

PR O D U C T IO N O F F O O D-T R AY S (T HO USA N D S) 1 0 , 9 9 1 8 , 3 6 7 2 , 6 2 4 3 1 . 4 HA N D L I N G O F C AT E R I N G S E R V IC E S (U N I TS) 1 2 9 , 5 0 7 9 7 , 5 3 4 3 1 , 9 7 3 3 2 . 8 AV E R AG E H E A D C O U N T 1 , 3 6 1 1 , 0 7 6 2 8 5 2 6 . 5 FO O D-T R AY S P E R E M P L OY E E 8 , 0 7 8 7 , 7 7 9 2 9 9 3 . 8 OP E R AT I N G R E V E N U E S (M. PTA S. ) 9 , 6 9 7 7 , 6 3 5 2 , 0 6 2 2 7 . 0 OP E R AT I N G R E V E N U E S (M. EU R O S) 5 8 . 2 8 4 5 . 8 9 1 2 . 3 9 2 7 . 0 OP E R AT I N G I N C O M E (M. PTA S. ) 2 1 9 3 9 7 ( 1 7 8 ) ( 4 5 . 1 ) OP E R AT I N G I N C O M E (M. EU R O S) 1 . 3 1 2 . 3 9 ( 1 . 0 8 ) ( 4 5 . 1 ) NE T I N C O M E A F T E R TA X E S (M. PTA S. ) 1 2 2 2 6 5 ( 1 4 3 ) ( 5 3 . 8 ) NE T I N C O M E A F T E R TA X E S (M. EU R O S) 0 . 7 3 1 . 5 9 ( 0 . 8 6 ) ( 5 3 . 8 )

3.7. CACESA Total sales in 1999 amounted to Ptas. 4,146 million, up 10.6% on 1998.

Sales of the Ibexpress product increased by almost 30% with respect to 1999 to Ptas. 1,642 million, although the increase in volume in terms of kilos was approximately 68%.

Sales of all products increased, the most notable being the growth in airport/airport sales (67%) and Ibexpress Internacional sales (44%), both in terms of gross billings. Ibexpress Internacional was introduced on Americas-Spain flights, and contracts were entered into with partners in Mexico and Santo Domingo.

181 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

Work continued in 1999 on developing the International Network in Latin America, broadening the commercial operations carried on locally in these countries.

The detail of this company’s main aggregates is as follows:

C AC E SA VAR I AT I O N % 1999 1998 99 / 9 8 VAR I AT I O N

IB E X P R E S S R E V E N U E S (M. PTA S. ) 1 , 6 4 2 1 , 2 6 4 3 7 8 2 9 . 9 IB E X P R E S S R E V E N U E S (M. EU R O S) 9 . 8 7 7 . 6 0 2 . 2 7 2 9 . 9 IB E R T R A S A É R E O R E V E N U E S (M. PTA S. ) 2 , 0 2 9 2 , 0 3 9 ( 1 0 ) ( 0 . 5 ) IB E R T R A S A É R E O R E V E N U E S (M. EU R O S) 1 2 . 1 9 1 2 . 2 5 ( 0 . 0 6 ) ( 0 . 5 ) IB E R T R A S M A R Í T I MO R E V E N U E S (M. PTA S. ) 7 8 8 3 ( 5 ) ( 6 . 8 ) IB E R T R A S M A R Í T I MO R E V E N U E S (M. EU R O S) 0 . 4 7 0 . 5 0 0 . 0 3 ( 6 . 8 ) EQ U I VA L E N T F U L L-T I M E E M P L OY E E S 1 2 0 1 2 3 ( 3 ) ( 2 . 1 ) OP E R AT I N G I N C O M E (M. PTA S. ) 9 7 7 4 2 3 3 1 . 8 OP E R AT I N G I N C O M E (M. EU R O S) 0 . 5 8 0 . 4 4 0 . 1 4 3 1 . 8 NE T I N C O M E A F T E R TA X E S (M. PTA S. ) 6 4 5 2 1 2 2 4 . 0 NE T I N C O M E A F T E R TA X E S (M. EU R O S) 0 . 3 8 0 . 3 1 0 . 0 7 2 4 . 0

3.8. VIVA TOURS Viva Tours’s objective is to become the largest tour operator in the Spanish tourism market. It commenced operations in the 1999 summer season (in May), and it is the company that sold the most package tours (127,078). Its billings amounted to Ptas. 11,421 million ( 68.64 million) in 1999. As part of these package tours, Viva Tours sold 475,000 flights, thereby contributing significantly to generating traffic for IBERIA.

- 4 - RESOURCES 4.1. FLEET The detail of the passenger aircraft operated by the Group as of December 31, 1998, is as follows:

182 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

F L E E T BI N T E R BI N T E R TOTA L AI R C R A F T TY P E IB E R I A CA N A R I A S ME D I T E R R A N E O OP E R AT E D W E T B - 7 2 7 * 2 3 - - 2 3 - B-737 -- - - 3 B-747 7 - - 7 2 B - 7 5 7 1 5 - - 1 5 6 B - 7 6 7 2 - - 2 - A- 3 0 0 6 - - 6 - A- 3 2 0 3 2 - - 3 2 - A- 3 2 1 2 - - 2 - A- 3 4 0 9 - - 9 - D C - 9 * 1 8 - - 1 8 - DC-10* 5 - - 5 - M D - 8 7 2 4 - - 2 4 - MD-88 1 3 - - 1 3 - C N - 2 3 5 -- 5 5 - * Excluding the inactive aircraft: ATR-72 - 1 1 - 1 1 - eight DC-9, four B-727 and one DC-10. TOTAL* 15 6 1 1 5 172 11 In adition, the holds of cargo freighter are leased, two DC-8 and one B-747.

These numbers are the result of the following changes in 1999:

ADDITIONS - 2 A-321 aircraft owned outright - 19 Aviaco DC-9 transferred to IBERIA outright - 1 Aviaco MD-87 transferred to IBERIA outright (sold previously in May) - 13 Aviaco MD-88 transferred to IBERIA outright - 4 A-320 under operating lease - 6 A-320 under financial lease - 1 A-340 under operating lease - 8 B-757 under operating lease - 2 B-767 under operating lease - BC: 1 ATR-72 under operating lease and 1 owned since December - BM: recovered 2 CN-235 leased to Austral

183 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

RETIREMENTS - Sale of 1 proprietary B-727 - In April Viva Air ceased operating (2 proprietary B-737 and 2 B-737 under financial lease), and sold its aircraft and terminated the contracts for the aircraft that it did not own - Sale of 1 IBERIA MD-87 to Aviaco in May

WET LEASE - Operation of 3 B-737 and 6 B-757 under wet lease from Air Europa - Operation of 2 B-747 under wet lease from Air Atlanta

The usage of the Spanish Group’s aircraft, in terms of total block hours per aircraft per day, was as follows:

FLEET UTILIZAT I O N 1 9 9 9 1 9 9 8 B - 7 2 7 4 . 8 5 . 0 B-737 (VI VA) 4 . 5 8 . 4 B-747 1 1 . 9 1 0 . 5 B-747M 8 . 7 7 . 9 B-757 7 . 1 7 . 6 B - 7 6 7 1 1 . 4 - DC-8 (C A R G O) - 5 . 4 DC-9 5 . 5 6 . 6 DC-10 1 0 . 9 1 0 . 6 MD-87 6 . 3 6 . 9 MD-88 7 . 6 7 . 8 A- 3 0 0 7 . 2 6 . 4 A-320 7 . 3 7 . 0 A- 3 2 1 7 . 9 - A- 3 4 0 1 3 . 4 1 0 . 3 CN-235 BI N T E R ME D I T E R R Á N E O 4 . 5 4 . 4 ATR-72 BI N T E R CA N A R I A S 6 . 4 6 . 2

184 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

4.2. PERSONNEL In performing a comparative analysis of the headcount, it should be taken into account that in September Aviaco’s employees were transferred to IBERIA.

AVERAGE ANNUAL HEADCOUNT

G R O U N D F L I G H T T OT A L 1 9 9 9 1 9 9 8 1 9 9 9 1 9 9 8 1 9 9 9 1 9 9 8

IBERIA, L.A.E. 18,544 17,540 5,420 4,525 23,964 22,065 AVIACO 410 836 575 883 985 1,719 VIVA 76 235 53 195 129 430 BINTER CANARIAS 174 156 163 148 337 304 BINTER MEDITERRANEO 32 25 35 30 67 55 CAMPOS VELAZQUEZ - 9 - - - 9 CACESA 120 122 -- 120 122 IBER-SWISS 1,361 1,068 -- 1,361 1,075 SAVIA 66 54 -- 66 54 VIVA MANTENIMIENTO 61 --- 61 - AIR TRANSPORT GROUP 20,844 20,045 6,246 5,781 27,090 25,833

YEAR-END HEADCOUNT

G R O U N D F L I G H T T OT A L 1 9 9 9 1 9 9 8 1 9 9 9 1 9 9 8 1 9 9 9 1 9 9 8

IBERIA, L.A.E. 20,634 19,139 6,302 4,827 26,936 23,966 AVIACO 1 565 - 876 1 1,441 VIVA - 237 - 177 - 414 BINTER CANARIAS 179 161 164 145 343 306 BINTER MEDITERRANEO 37 24 37 27 74 51 CAMPOS VELAZQUEZ - 9 - - - 9 CACESA 121 121 -- 121 121 IBER-SWISS 1,439 1,337 -- 1,439 1,337 SAVIA 74 61 -- 74 61 VIVA MANTENIMIENTO 91 --- 91 - AIR TRANSPORT GROUP 22,576 21,654 6,503 6,052 29,079 27,706

185 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

- 5 - OPERATING INCOME AT THE AIR TRANSPORT GROUP 5.1. OPERATING INCOME Total operating income for 1999 amounted to Ptas. 9,625 million ( 57.85 million), the detail by unit being as follows (in millions of pesetas):

O P E R ATING INCOME M I L L I O N S O F P E S E TA S 1 9 9 9 1 9 9 8 I B E R I A 5 , 4 7 7 4 7 , 9 7 9 AV I AC O 3 , 9 3 8 4 , 0 9 2 V I VA ( 2 , 7 0 9 ) ( 1 , 0 2 0 ) BINTER CANARIAS 1 , 8 2 9 8 1 3 BINTER MEDITERRANEO 1 0 0 ( 2 7 8 ) C AC E SA 9 7 7 4 C A R G O S U R ( 1 ) 1 0 0 SAV I A 6 3 3 4 2 8 I B E R S W IS S 2 1 9 3 9 8 CAMPOS VELAZQUEZ 4 2 ( 8 8 ) AIR TRANSPORT GROUP 9 , 6 2 5 5 2 , 4 6 1

The summarized detail of the Air Transport Group’s operating account for management accounting purposes, which differs from the statement of income in the Group’s financial statements because the revenue and expense items are aggregated using management accounting criteria, is as follows:

186 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

O P E R ATING ACCOUNT M I L L I O N S O F P E S E TA S - M I L L I O N S O F E U R O S 1 9 9 9 1 9 9 8 % VA R. O P E R ATING REVENUES PA S S E N G E R 5 0 6 , 4 9 8 3 , 0 4 4 . 1 1 5 2 9 , 7 5 7 3 , 1 8 3 . 9 0 ( 4 . 4 ) CA R G O A N D E XC E S S BAG GAG E 3 7 , 9 4 9 2 2 8 . 0 8 3 9 , 3 2 0 2 3 6 . 3 2 ( 3 . 5 ) HA N D L I N G 3 9 , 2 6 2 2 3 5 . 9 7 3 9 , 5 3 0 2 3 7 . 5 8 ( 0 . 7 ) MA I N T E N A N C E 1 8 , 9 9 2 1 1 4 . 1 4 1 8 , 7 1 2 1 1 2 . 4 6 1 . 5 SA L E S C O M M IS S IO N S 1 1 , 4 5 4 6 8 . 8 4 1 0 , 0 0 1 6 0 . 1 1 1 4 . 5 CAT E R I N G SA L E S 3 , 2 8 9 1 9 . 7 7 3 , 8 7 0 2 3 . 2 6 ( 1 5 . 0 ) OT H E R O P E R AT I N G R E V E N U E S 2 8 , 8 8 6 1 7 3 . 6 1 2 3 , 6 3 9 1 4 2 . 0 7 2 2 . 2 6 4 6 , 3 3 0 3 , 8 8 4 . 5 2 6 6 4 , 8 2 9 3 , 9 9 5 . 7 0 ( 2 . 8 ) O P E R ATING EXPENSES FU E L 6 1 , 5 6 5 3 7 0 . 0 1 5 8 , 4 6 5 3 5 1 . 3 8 5 . 3 PE R S O N N E L E X P E N S E S 2 0 9 , 9 8 1 1 , 2 6 2 . 0 1 1 9 7 , 0 4 3 1 , 1 8 4 . 2 5 6 . 6 TR A F F IC S E R V IC E S 5 3 , 2 7 0 3 2 0 . 1 6 5 1 , 6 3 8 3 1 0 . 3 5 3 . 2 IN-F L IG H T S E R V IC E S 1 0 , 4 9 6 6 3 . 0 8 1 2 , 0 7 0 7 2 . 5 4 ( 1 3 . 0 ) CO M M IS S IO N S 7 1 , 3 7 1 4 2 8 . 9 5 7 3 , 7 4 2 4 4 3 . 2 0 ( 3 . 2 ) NAV IGAT IO N C H A R G E S 2 8 , 4 0 8 1 7 0 . 7 4 2 7 , 9 7 0 1 6 8 . 1 0 1 . 6 AI R C R A F T M A I N T E N A N C E 4 9 , 4 1 0 2 9 6 . 9 6 4 0 , 4 8 4 2 4 3 . 3 1 2 2 . 1 AI R C R A F T L E A S E E X P E N S E S 5 0 , 1 4 2 3 0 1 . 3 6 4 5 , 9 9 7 2 7 6 . 4 5 9 . 0 PE R IO D D E P R E C I AT IO N A N D A MO R T I Z AT IO N 2 7 , 1 3 8 1 6 3 . 1 0 2 6 , 3 2 7 1 5 8 . 2 3 3 . 1 RE S E R VAT IO N SY S T E MS 1 4 , 6 6 4 8 8 . 1 3 1 4 , 9 9 0 9 0 . 0 9 ( 2 . 2 ) FE E S 3 , 6 1 0 2 1 . 7 0 5 , 2 5 9 3 1 . 6 1 ( 3 1 . 4 ) OT H E R O P E R AT I N G E X P E N S E S 5 6 , 6 5 0 3 4 0 . 4 7 5 8 , 3 8 3 3 5 0 . 8 9 ( 3 . 0 ) 6 3 6 , 7 0 5 3 , 8 2 6 . 6 7 6 1 2 , 3 6 8 3 , 6 8 0 . 4 1 4 . 0 O P E R ATING INCOME 9 , 6 2 5 5 7 . 8 5 5 2 , 4 6 1 3 1 5 . 3 0 ( 8 1 . 7 )

The main comments on the operating account are as follows:

A) AIR TRANSPORT GROUP OPERATING REVENUES

Operating revenues decreased by 2.8% in 1999. The main variations were as follows:

187 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

PASSENGER REVENUES The difference between the passenger revenue figure shown above and that shown in the activity tables is due to the fact that the latter relates directly to the actual production for each year and does not reflect accounting adjustments and revaluations. The breakdown of the Ptas. 23,256 million ( 139.77 million) decrease in passenger revenues is as follows:

PASSENGER REVENUES M I L L I O N S O F P E S E TA S

VAR I AT I O N IN C A U S E O F T H E V A R I AT I O N VAR I AT I O N IN PAS S E N G E R REV E N U E S PE R REV E N U E S 99 / 9 8 PR I C E VO L U M E PA R I T Y OT H E R* BOO K S 99 / 9 8

IBERIA, L.A.E. (7,622) (27,815) 17,340 2,853 (1,281) (8,903) AVIACO (CHARTER) (1,419) 78 (1,497) - (158) (1,577) VIVA (16,496) (634) (15,862) - (41) (16,537) BINTER CANARIAS 2,403 19 2,384 - 98 2,501 * The “Other” column shows the variation in the difference between BINTER MEDITERRANEO 1,228 274 954 - 32 1,260 revenues per books and the revenues by network, as well as the differences SPANISH GROUP (21,906) (28,078) 3,319 2,853 (1,350) (23,256) due to the adjustment of BPU.

The difference due to volume is the result of the fall in demand, which was 3% in terms of passengers and 0% in terms of RPKs, since there was an greater increase in long-haul traffic, which has a bigger impact on the average haul. In the variation due to price, there are several factors that affect the yield, such as the price mix, with an increase of 2.8% in the proportion of higher class fares with respect to economy-class sales and the commercial yield-enhancement policies (fare redesigns, revenue management computer tools, etc.), the main impact being the across-the-board drop in prices due to the excess supply in the markets and a falling yield as a result of the growth in the long-haul network and the concomitant lengthening of the average haul, which accounts for approximately one-third of the total variation.

Lastly, the parity effect was due mainly to fluctuations in the U.S. dollar with respect to its average value in 1998, with an annual average variation of 2.8%.

CARGO REVENUES The drop in cargo revenues by 3.5% (Ptas. 1,371 million - 8.24 million) was due mainly to the fall in the yield (4.7%), largely as a result of the pressure exerted on prices by the excess supply in transatlantic markets derived from the reallocation of aircraft from the Asian market and the economic crisis in South America, which hit the revenues in these networks.

HANDLING REVENUES The decrease in handling revenues was due mainly to the fact that the 5.4% increase in the activity of other airlines, basically Air Nostrum and Spanish companies, was amply offset by the decrease in unit revenues, relating mainly to Spanish third parties, since lower prices were set to defend market share.

MAINTENANCE Maintenance revenues increased very slightly at consolidated level by Ptas. 280 million ( 1.68 million), and some of the maintenance work was outsourced.

188 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

SALES COMMISSIONS The increase in the volume of business led to an increase of Ptas. 1,453 million ( 8.73 million) in these revenues, due largely to billings relating to ticket sales through the oneworld megacarrier and the growing activity of Air Nostrum.

OTHER OPERATING REVENUES AND CATERING SALES It is important to note the decrease in in-flight sales and other catering revenues as a result of the disappearance of duty-free sales in all EU Member States and, therefore, of duty-free sales on intra-European flights, which reduced these revenues by approximately Ptas. 581 million ( 3.5 million), offset by the increase in the sales of other subsidiaries.

B) OPERATING EXPENSES

Operating expenses increased by 4.0% (Ptas. 24,336 million - 146.26 million), due largely to the increase in fuel costs, to the lease of new aircraft, to the increase in maintenance costs and landing charges (albeit offset by the discontinuation of VIVA’s operations) and to the rise in personnel costs (as a result of the collective labor agreements, and the increases in the number of flight, ground handling and maintenance employees).

The variations in the main expense items were as follows:

FUEL Total fuel expenses in 1999 were 5.3% higher than in 1998 (an increase of Ptas. 3,100 million - 18.63 million), due mainly to the increase in fuel prices and to the 2.8% appreciation in the value of the U.S. dollar. The cost in pesetas/block hour increased by 4.9%, since there was almost no variation in the number of block hours with respect to 1998. It was not possible to offset the increa s e in fuel prices by the saving arising from the use of new aircraft that use fuel more effi c i e n t l y .

The detail of these effects is as follows:

VARIATIONS

MI L L. PTA S.MI L L.

PR IC E ( 2 , 4 1 2 ) ( 1 4 . 4 9 ) VO L U M E 3 , 3 7 3 2 0 . 2 7 PA R I T Y 2 , 1 9 5 1 3 . 1 9 C O N S U M P T IO N / A S K ( 5 6 ) ( 0 . 3 4 ) TOTA L 3 , 1 0 0 1 8 . 6 3

PERSONNEL EXPENSES Personnel expenses increased by 6.6% with respect to 1998, due mainly to the following: - Net increase in the number of direct employees, mainly flight crew and ground personnel, providing incident handling services in the handling area - Salary increase under the collective labor agreements - Length of service, promotions etc. and increases in social security costs

189 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

TRAFFIC AND IN-FLIGHT SERVICE COSTS The increase of 3.2% in traffic service costs was in line with the increase in the Group’s activity (2.2% in terms of take-offs). In-flight service costs, which include costs relating to passengers fell by 13% as a result of the drop in the number of passengers carried and the savings derived from the renegotiation of contracts due to the absorption of the activity of subsidiaries.

The main increases were in crew hotel expenses (19.3%) and the costs incurred as a result of interrupted flights, due to the drop in the quality of our operating parameters.

COMMERCIAL EXPENSES (COMMISSIONS, OVERCOMMISSIONS AND ADVERTISING) The decrease in passenger and cargo revenues was the main reason behind the drop in commercial expenses; however, commercial costs as a proportion of traffic revenues also decreased by 1.3%, since commissions are continuing to fall in relation to passenger revenues (7.5%), due to greater use of the TNM (net market price) method and to the drop in overcommissions, and because the incorporation of new direct selling systems reduced the costs associated with distribution intermediaries.

As a result of the measures taken under the Master Plan, in 1999 the impact of the implementation in Spain of the Valor 98 plan for Spanish travel agencies, which made it possible to cut commercial costs through commercial management based much more on incentives to agencies, was appreciable; however, advertising and promotional expenses increased by Ptas. 322 million ( 1.94 million) and Ptas. 2,219 million ( 13.34 million) (more than 13%), respectively, due to a significant commercial drive.

NAVIGATION CHARGES There was a net increase in air traffic control expenses of 1.6% (Ptas. 438 million) ( 2.63 million), due largely to the increase in take-offs (2.2%), valued at Ptas. 2,552 million ( 15.33 million), and to the impact of the approach charge as a result of the elimination of the second discount bracket (Ptas. 2,085 million - 12.53 million) and, to a lesser extent, of the increase in 1999 in the prices charged by Eurocontrol, which was offset by the disappearance of Viva Air (Ptas. 1,619 million - 9.73 million) and by the savings obtained from the change in authorized maximum take-off weights.

AIRCRAFT MAINTENANCE Aircraft maintenance expenses increased by Ptas. 8,926 million ( 53.65 million) due, among other reasons, to the performance of additional work on aircraft pursuant to air safety legislation and to the outsourcing of engine maintenance, which was partially reflected in the amounts billed to third parties.

AIRCRAFT LEASE EXPENSES The increase of Ptas. 4,145 million ( 24.91 million) in these expenses was due mainly to: - A higher operating lease cost incurred as a result of aircraft additions: A-340 (Ptas. 1,568 million - 9.42 million), A-320 (Ptas. 1,015 million - 6.1 million), B-757 (Ptas. 1,893 million - 11.38 million) and other aircraft, with a total impact of Ptas. 4,491 million ( 27.0 million).

190 IBERIA GROUP - ANNUAL REPORT 1999 C O N S O L I D A TED MANAGEMENT REPORT

- The higher cost incurred in wet lease transactions with Air Atlanta (Ptas. 1,022 million - 6.14 million) and Air Europa (Ptas. 3,648 million - 21.92 million). - A smaller impact or saving on currency risk hedging of the aforementioned transactions (Ptas. 2,088 million - 12.55 million). - The price of contracts for cargo aircraft and cargo hold rental, which increased by Ptas. 651 million ( 3.91 million), relating mainly to the cost of the cargo aircraft leased from Cygnus.

PERIOD DEPRECIATION AND AMORTIZATION There was a small increase of Ptas. 811 million ( 4.87 million) (3.1%) in the charge in this connection.

RESERVATION SYSTEM AND OTHER OPERATING EXPENSES - Reservation system expenses fell by Ptas. 326 million ( 1.96 million) (2.2%) due to the decrease in prices billed by Amadeus. - Fees decreased by Ptas. 1,649 million ( 9.91 million) as a result of the disappearance of charges formerly treated as an expense, which are now passed on to third parties, and of the drop in computer software costs. - Other operating expenses fell by Ptas. 1,733 million ( 10.42 million) as a result of the measures to cut overheads envisaged in the Master Plan.

5.2. AIR TRANSPORT GROUP STATEMENTS OF INCOME

S TATEMENTS OF INCOME M I L L I O N S O F P E S E TA S - M I L L I O N S O F E U R O S 1 9 9 9 1 9 9 8 O P E R ATING INCOME 9 , 6 2 5 5 7 . 8 5 5 2 , 4 6 1 3 1 5 . 3 0 FI N A N C I A L R E V E N U E S 1 4 , 5 2 1 8 7 . 2 7 7 , 3 4 1 4 4 . 1 2 FI N A N C I A L E X P E N S E S ( 7 , 3 2 0 ) ( 4 3 . 9 9 ) ( 6 , 5 8 0 ) ( 3 9 . 5 5 ) PR O V IS IO N TO P E N S IO N A L L O WA N C E ( 2 , 9 1 1 ) ( 1 7 . 5 0 ) ( 3 , 4 7 2 ) ( 2 0 . 8 7 ) EXC H A N G E GA I N S 1 8 , 3 7 7 1 1 0 . 4 5 6 , 5 7 2 3 9 . 5 0 EXC H A N G E L O S S E S ( 1 6 , 0 9 4 ) ( 9 6 . 7 3 ) ( 8 , 8 5 1 ) ( 5 3 . 2 0 ) FINANCIAL INCOME (LOSS) 6 , 5 7 3 3 9 . 5 0 ( 4 , 9 9 0 ) ( 3 0 . 0 0 ) LOSS ON SECURITIES PORTFOLIO ( 4 , 3 1 1 ) ( 2 5 . 9 1 ) ( 6 0 2 ) ( 3 . 6 2 ) A M O R T I Z ATION OF GOODWILL ( 1 , 1 0 0 ) ( 6 . 6 1 ) ( 1 8 3 ) ( 1 . 1 0 ) E X T R AORDINARY INCOME 2 0 , 2 9 5 1 2 1 . 9 8 1 9 , 2 8 2 1 1 5 . 8 9 NET INCOME BEFORE TA X E S 3 1 , 0 8 2 1 8 6 . 8 1 6 5 , 9 6 7 3 9 6 . 4 7 TA X E S ( 5 , 4 8 6 ) ( 3 2 . 9 8 ) ( 1 2 , 7 9 6 ) ( 7 6 . 9 1 ) INCOME BEFORE MINORITY INTERESTS 2 5 , 5 9 6 1 5 3 . 8 3 5 3 , 1 7 1 3 1 9 . 5 6 INCOME ATTRIBUTED TO MINORITY INTERESTS ( 1 3 0 ) ( 0 . 7 8 ) ( 1 4 6 ) ( 0 . 8 8 ) INCOME OF THE CONTROLLING COMPA N Y 2 5 , 4 6 6 1 5 3 . 0 5 5 3 , 0 2 4 3 1 8 . 6 9

191 IBERIA L.A.E. AND IBERIA GROUP

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