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 WI L LI NC O N SO L I DAT I ON AN DNE G AT I VE 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.