PROSPECTUS NOVEMBER 2006

ICELANDAIR GROUP HOLDING HF.

OFFERING OF 185,000,000 SHARES BY GLITNIR BANKI HF. SUBSCRIPTION PERIOD 27 NOVEMBER – 4 DECEMBER

SHARE PRICE ISK 27.0

This page is intentionally left blank TABLE OF CONTENTS

I. Summary

II. Securities Note

III. Registration Document This Prospectus is published on 27 November 2006.

The Prospectus has been scrutinised and approved by the Iceland Stock Exchange (ICEX) on behalf of the Financial Service Authority in Iceland. It was prepared for the expected listing of Icelandair Group Holding hf. on the ICEX Main List and a share offering by Glitnir Banki hf. of 185,000,000 shares prior to the listing.

This Prospectus, published in English only, consists of three documents: Summary, Securities Note and Registration Document.

For the timeframe of 12 months from the date of the Prospectus (lifetime of the document), the Prospectus is available on the website www.icelandairgroup.is and Icelandair Group Holding hf’s registered office Reykjavik Airport, 101 Reykjavik, Iceland. I. SUMMARY

This summary should be read as an introduction to the Prospectus dated 26 November 2006 containing this Summary, a Securities Note and a Registration Document. Prospective investors should read the Prospectus in its entirety. Because this is a summary, it does not contain all the information that may be important to you. You should read this summary in conjunction with the more detailed information in the rest of the Prospectus, including the “Risk Factors” sections and the financial statements and the notes thereto. Any decision to invest in the Shares should be based on consideration of the Prospectus as a whole.

Following the implementation of the relevant provisions of the Prospectus Directive in each member state of the European Economic Area, no civil liability will attach to us or our board of directors in any such member state in respect of this summary, including any translation hereof, unless it is misleading, inaccurate or inconsistent when read together with the other parts of the Prospectus. Where a claim relating to the information contained in the Prospectus is brought before a court in a member state of the European Economic Area, the plaintiff investor may, under the national legislation of the member state where the claim is brought, be required to bear the costs of translating the Prospectus before the legal proceedings are initiated.

LISTING ON ICEX MAIN LIST

This Summary concerns the expected listing of all general public of up to 40 million shares and offer to 1,000,000,000 issued shares in Icelandair Group qualified investors of minimum 110 million shares. Holding hf. on the Iceland Stock Exchange (ICEX) Main List and a share offering of 185 million shares. Icelandair Group Holding The ISIN number of the shares is IS0000013464. Icelandair Group Holding hf., Icelandic ID No. The listing on the ICEX Main List is conditional upon 591006-2150, Reykjavík Airport, 101 Reykjavík, the Company fulfilling ICEX conditions regarding Iceland, telephone number +354 505 0300. number of general shareholders and diversification of ownership. The share offering is to be conducted Glitnir Banki hf. (Manager and Offeror) through three separate tranches prior to the expected Glitnir banki hf., Icelandic ID No. 550500-3530, listing, offer to Icelandair Group Holding’s Kirkjusandi 2, 155 Reykjavík, telephone number: employees of up to 35 million shares, offer to the +354 440 4000.

SHARE OFFERING

The objectives of the proposed listing are to increase Undertakings to subscribe shall be made after the liquidity of the shares, reach a broader range of opening of the subscription period at 10:00 GMT on investors and to get better price information on the November 27, 2006 and no later than 19:00 GMT on shares. In the share offering a total of 185 million 4 December 2006. An agreement on subscription will shares will be offered, all at the price of ISK 27.0 take effect when the Offeror accepts a prospective per share. All proceeds will be received by Glitnir investor's undertaking to subscribe. The Offeror will banki hf. as the Offeror. The Share Offer is a step do so no later than 20:00 GMT on 5 December 2006. towards fulfilling ICEX conditions for listing The outcome of the offering will be published on the regarding the number of general investors and the ICEX news webpage before 10:00 GMT on 6 diversification of ownership. December 2006. The shares will be delivered to the

investor’s account no later than 13 December 2006. If the Company will fulfil the ICEX conditions then 14

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December 2006 will be the earliest date on which the of reserved shares, outstanding shares will be offered shares will be admitted to trading on ICEX. to qualified investors. Offer to the general public The shares are only offered in Iceland. A total of 40 million shares will be offered to the

Subscriptions constitute a legally binding agreement general public. Participation in the offering is pursuant to which those subscribing are bound to available to all individuals holding an Icelandic ID- purchase the shares subscribed for and/or allocated Number, if not prohibited by law. The Offeror’s to. When subscribing the investor declares that he employees are allowed to take part in the offer has familiarised himself with, understood and agreed to the general public. In the event of demand the terms and other aspects of the Prospectus dated being less than the offered amount, outstanding 26 November 2006. shares will be offered via the offer to qualified investors. Offer to Icelandair Group Holding’s employees All Icelandair Group Holding’s employees at 15 Offer to qualified investors November 2006 are entitled to the subscription of a A minimum of 110 million shares will be offered to fixed number of shares without being subject to qualified investors. Only qualified investors as reduction. Taking into account the number of defined in Point 7 of the first paragraph of Article 2 employees and the number of shares reserved for of Act No. 33/2003 on Securities Transactions may each, the maximum number of shares allocated on take part in this part of the Offering. these grounds could amount to 35 million shares. Should demand for shares be less than the number

RISK FACTORS

An investment in the shares of Icelandair Group the Issuer’s competitive position. The structure of involves risks, both general risks relating to investments shareholder ownership and the possibility of dilution of in securities and risks relating to the operations of the shares by new share issue can also be risk factor for Issuer. The risk should be assessed by potential investors. investors before making an investment in the shares and investors are advised to study the discussion of risk Among the important risks to which Icelandair Group is in the Securities Note and the Registration Document directly exposed are risk factors relating to the Company thoroughly. as an airline operator, such as fuel price and availability, seasonality, airport access and security, Examples of risk factors that may have a material effect increased competition and changes in regulations and on the price of the Issuer’s shares, and thereby on the applicable law. Strikes and the risk of key employees investment value, are market risk, liquidity risk and resigning could potentially have material effects on the counterparty risk. The share price can fluctuate Issuer. Tax issues, litigations, exchange rate and considerably due to factors such as variations in interest rate fluctuations and the coverage of insurance operating income or cost, changes in the market agreements are also potential risk factors worth environment, adverse commentary about the Issuer and consideration. its operations and services in the media and changes to

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MARKET MAKING

According to two separate agreements, Glitnir banki hf. and Straumur Burðarás Investment Bank hf. will act as Straumur Burðarás Investment Bank hf. shall through market makers for Icelandair Group Holding hf.'s shares its own account submit daily bids and asks to the ICEX after the expected listing on ICEX Main List. for a minimum of ISK 13.5 million (purchasing price) each side at a price determined by the market maker Glitnir banki hf. shall through its own account submit on any given occasion. The maximum bid/ask spread daily bids and asks to the ICEX for a minimum of ISK may not exceed 1.0% and the difference from the last 15 million (purchasing price) on each side at a price price paid may not exceed 3.0%. Straumur Burðarás determined by the market maker on any given occasion. Investment Bank hf. is obliged to provide liquidity for The maximum bid/ask spread may not exceed 1.0% up to ISK 150 million per day. and the difference from the last price paid may not exceed 3.0%. The market maker is obliged to provide liquidity for up to ISK 150 million per day.

COST OF THE SHARE OFFER

The total cost of the admission to trading of the directly relating to the Share Offer will be covered by share capital on the Main List of the ICEX is the Manager. estimated at ISK 200 million including charges from ICEX, advisory fee to the Manager. All these costs will fall on Icelandair Group Holding hf. All costs

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INFORMATION ON ICELANDAIR GROUP HOLDING

History and development directors to merge Icelandair Group Holding with The history of Icelandair Group Holding's Icelandair Group hf. The merger will be effective as predecessors dates back to 1937, almost as long as of 1 November 2006. However, a formal decision on the history of commercial aviation in Iceland, which the merger will be made by shareholders on a began in 1919, less than 16 years after the Wright sharholders’ meeting after the expected date of brothers made the first ever powered flight. listing on the ICEX Main List. Icelandair Group Holding’s predecessor, Flugleiðir hf., was established in Reykjavik on July 20, 1973, Business overview by a merger of Flugfélag Íslands hf. and Loftleiðir hf. Icelandair Group Holding’s purpose is to provide its Flugleiðir’s main operations during the period 1937- shareholders with good return on their investment. 2005 were in aviation. Flugleiðir was listed on the This is done by owning and operating profitable and ICEX Main List in 1992. dynamic service and trade companies with strong growth potential in the airline, transportation and At Flugleiðir’s annual general meeting in 2005, the tourism industry. company’s name was changed to FL Group hf. and in October 2005, fundamental changes took place by The operation of Icelandair Group Holding is divided which investment activities became FL Group’s main into 13 subsidiaries. Each business is managed to focus. FL Group’s acquisitions and corporations were create value through strategic and business divided into groups, Icelandair Group hf. being one development decisions. Two subsidiaries play a of them and comprising Icelandair, Icelandair supporting role: Fjárvakur and Icecap, an insurance Technical Services, Icelandair Ground Services, company. The other subsidiaries are grouped into Loftleiðir-Icelandic and Icelandair Cargo. In February three focus areas: Scheduled Airline Operations, 2006, the board of directors of FL Group announced Global Capacity Solutions and Aircraft Trading and its intention to list Icelandair Group hf. on the ICEX Travel and Tourism Infrastructure. but postponed it because of unfavourable market conditions. At that time, Air Iceland, Iceland Travel On 31 October, 2006, the Company employed and Icelandair Hotels were transferred to Icelandair 2,717 people. Group hf. as were Bluebird Cargo, Fjárvakur, Icelease, IG Invest and Icecap.

In October 2006, Icelandair Group Holding hf.1 purchased all shares in Icelandair Group hf. at the same time acquiring all the shares in Icelandair Group hf.'s subsidiaries. Icelandair Group Holding owns nothing apart from its shares in Icelandair Group hf. It is the intention of the current board of

1 At that time Icelandair Group Holding hf. was owned by FL Group hf. (49.6% ownership), Langflug ehf. (32.0% ownership), Naust ehf. (11.1% ownership), Urður ehf. (5.6% ownership) and Glitnir banki hf. (1.7%).

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Figure 1. The organizational structure of Icelandair Group Holding.

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Board of Directors The Board of Directors of Icelandair Group Holding hf. has the supreme authority in the Issuer’s general affairs between shareholders' meetings and endeavours to keep the organization and operations on course. The Issuer presently has 7 board members. • Finnur Ingólfsson, chairman of the board of directors • Ómar Benediktsson, vice chairman of the board of directors • Hermann S. Guðmundsson, member of the board of directors • Einar Sveinsson , member of the board of directors • Marta Eiríksdóttir, member of the board of directors • Helgi Sigurður Guðmundsson, member of the board of directors • Jóhann Magnússon, member of the board of directors

Senior Management The Senior Management team, under the leadership of the CEO, Jón Karl Ólafsson, comprises four managing directors. • Jón Karl Ólafsson, CEO • Hlynur Elísson, CFO • Sigþór Einarsson, COO • Guðjón Arngrímsson, VP corporate communication

STATUTORY AUDITORS

The registered auditor of Icelandair Group hf. is compiled the interim consolidated balance sheet of KPMG Endurskoðun hf., Icelandic ID No. 590975- Icelandair Group hf. and its subsidiaries as of 31 0449, Borgartún 27, IS-105 Reykjavík, Iceland. March 2006 and the related consolidated income KPMG Endurskoðun hf. has reviewed the statement and statement of cash flows for the three consolidated pro forma income statement for 2005 months then ended. for Icelandair Group, interim report for Icelandair Group for the first six months of 2006, the opening Grant Thornton endurskoðun ehf., Icelandic ID No. pro forma balance sheet at 1 January for Icelandair 430190-1999, Suðurlandsbraut 20, 108 Reykjavík, Group, 2006 and the balance sheet dated 24 Iceland. Has audited the financial information for October 2006 for Icelandair Group Holding. KPMG Bluebird Cargo ehf. for the years ending December Endurskoðun hf. has furthermore audited the interim 31, 2003, 2004 and 2005. Grant Thornton report of Icelandair Group hf. dated 30 September confirms that all information in this Registration 2006 and the annual accounts of Icelandair, Document regarding financial information for Icelandair Cargo, Loftleiðir-Icelandic and Air Iceland Bluebird Cargo is consistent with the said financial for the years ended December 31, 2003, 2004 and statements it has audited. 2005. KPMG has also audited the income statements, balance sheets and statements of cash flow for the first nine months of 2006 for Icelandair, Icelandair Cargo, Loftleiðir Icelandic, Bluebird Cargo and Air Iceland. In addition to this KPMG has

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LIST OF MAJOR SHAREHOLDERS

Table 1. The major shareholders of the Company as of 26 November 2006 Name Share capital Share capital Langflug ehf. 320,000,000 32.0% Glitnir banki hf. 191,221,296 19.1% Naust ehf. 148,148,148 14.8% Fjárfestingafélagið Máttur ehf. 111,111,111 11.1% Urður ehf. 55,555,556 5.6% GLB Hedge 173,963,889 17.4% GLB Hedge's shares are devided between: Jón Karl Ólafsson* 18,518,519 1.9% Other Management of the Company* 26,556,481 2.7% Other shareholders* 128,888,889 12.9% 1,000,000,000 100% All the shares marked with * are held by GLB Hedge Depository. There is a firm commitment in place to at the issue of this document. The sum of these settle the agreement on behalf of GLB Hedge and shares amounts to 173,963,889 shares or 17.4% of every buyer. the share capital. These shares have all been sold It should be noted that included in Glitnir banki hf.’s with a settlement date which is later than the issue share of 19.1% is the 18.5% share the bank date of this document and are therefore not included intentds to sell in the Share Offering. in shareholder lists from the Icelandic Securities

RELATED PARTY TRANSACTIONS

The Board of Directors of the Company believes that represents approximately 6.5% of the Company’s the Company’s related party transactions described revenue. below are conducted on an arm’s length basis. Icelandair Group Holding hf., Icelandair Group hf. Attention is drawn to the Company‘s recent and its subsidiaries have insurance agreements with agreement with Olíufélagið ehf. regarding fuel Sjóva hf., who is one of the owners of services for Icelandair at Keflavík Airport. This Fjárfestingafélagið Máttur ehf, which is a agreement was reached after seeking offers from all shareholder in the Company. However, the amount major oil distributors in Iceland. The majority owner relating to this agreement is less than 0.05% of the of Olíufélagið ehf. is BNT hf. which also owns Company’s turnover in 2005. 49.9% share in Naust ehf., one of Icelandair Group Holding’s main shareholders. It is the management’s No other material transactions have taken place with opinion that this agreement was reached at fair related parties. value. The amount relating to this agreement

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BORROWING REQUIREMENTS AND FUNDING STRUCTURE

The company recently finalised the purchase of two None of Icelandair Group Holding’s borrowing is 737-400 aircraft in connection with Bluebird’s guaranteed. operations. The purchase price was ISK 2.2 billion and reservations amount to ISK 414 million. ISK 2.1 The following table shows the consolidated billion or 80% of this sum will be financed by new capitalization and indebtedness of Icelandair Group debt. Next year two aircraft will be sold to offset this as of 30 September 2006. The table has been investment. Currently there are no other material adjusted for the purchase of Icelandair Group at 21 borrowing requirements. Borrowings as of 30 October 2006 by the Company and therefore takes September 2006 amounted to ISK 51,280 million. capitalization and indebtedness of the Company into Of total borrowings ISK 24,037 million is secured. account.

Table 2. The adjusted, consolidated capitalization and indebtedness of the Company Current liabilities Guaranteed 0 Secured 8,111 Cash and cash equivalents 5,166 Unguaranteed/Unsecured 22,968 Total current liabilities 31,079 Current financial receivables 7,993 Non-current liabilities Guaranteed 0 Current bank debt( 4,102) Secured 17,343 Current portion of non current debt( 11,110) Unguaranteed/unsecured 2,858 Trade and other payables( 11,858) Total non-current liabilities 20,201 Other current finacial debt( 4,009) Current financial debt( 31,079) Shareholders' equity Share capital 1,000 Non-current bank loans( 17,343) Share premium 25,233 Bonds issued( 1,870) Other reserve 887 Other non-current loans( 988) Total equity 27,120 Non-current financial indebtedness( 20,201)

Total capitalisation 78,400 Net financial indebtedness ( 38,121)

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SELECTED FINANCIAL INFORMATION

Table 3. Key Figures for Icelandair for the period 2003-2005 and the first nine months of 2005 and 2006. Balance Sheet figures are for the end of each period. All figures in ISK million.

2003 2004 2005 1/1-30/9 1/1-30/9 2005 2006 Profit and loss account Transport revenue 18,161 20,409 23,818 18,805 22,408 Aircraft and air crew lease 4,991 6,968 6,161 4,450 5,682 Other operating revenue 2,548 1,680 1,484 1,069 1,437 Operating expenses before depreciation( 24,900 ) ( 27,981 ) ( 30,483 ) ( 22,975 ) ( 26,406 ) Depreciation( 125 ) ( 691 ) ( 684 ) ( 528 ) ( 949 ) EBITDA 800 1,076 980 1,349 3,121 EBIT 675 385 296 821 2,172 Pre-tax profit 613 127 557 825 2,677 Income tax( 111 ) ( 28 ) ( 108 ) ( 155 ) ( 488 ) Profit for the period 502 99 449 670 2,189

Balance Sheet Total assets 9,502 9,339 11,662 29,009 Liabilities 6,226 6,219 8,020 23,076 Equity capital 3,276 3,120 3,642 5,933

Cash flow From operating activities 3,831 1,464 2,781 3,502 5,082

Table 4. Key Figures for Icelandair Cargo for the period 2003-2005 and the first nine months of 2005 and 2006. Balance Sheet figures are for the end of each period. All figures in ISK million.

2003 2004 2005 1/1-30/9 1/1-30/9 2005 2006 Profit and loss account Cargo and mail 2.698 3.207 3.053 2.203 2.923 Aircraft lease 436 442 282 166 710 Service revenue 759 1.096 1.213 876 1.126 Other operating revenue 23 27 34 20 40 Operating expenses before depreciation( 3.723 ) ( 4.449 ) ( 4.550 ) ( 3.218 ) ( 4.654 ) Depreciation( 12 ) ( 21 ) ( 26 ) ( 19 ) ( 14 ) EBITDA 193 323 32 46 145 EBIT 181 302 6 27 131 Pre-tax profit 219 301 9 25 146 Income tax( 1 ) ( 55 ) ( 2 ) ( 5 ) ( 28 ) Profit for the period 218 246 7 20 118

Balance Sheet Total assets 877 958 1.014 1.237 Liabilities 762 604 882 989 Equity capital 115 354 133 248

Cash flow From operating activities 411 162 18 98 ( 2 )

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Table 5. Key Figures for Loftleiðir Icelandic for the period 2003-2005 and the first nine months of 2005 and 2006. Balance Sheet figures are for the end of each period. All figures in ISK million.

2003 2004 2005 1/1-30/9 1/1-30/9 2005 2006 Profit and loss account Aircraft and air crew lease 3.902 5.454 5.573 4.161 4.947 Sale of assets 0 0 0 0 411 Other operating revenue 14 19 36 25 29 Operating expenses before depreciation( 4.160 ) ( 5.365 ) ( 5.248 ) ( 3.895 ) ( 5.093 ) Depreciation( 2 ) ( 5 ) ( 4 ) ( 3 ) ( 15 ) EBITDA( 244 ) 108 361 291 294 EBIT( 246 ) 103 357 288 280 Pre-tax profit( 231 ) 85 325 261 334 Income tax 73 ( 15 ) ( 60 ) ( 49 ) ( 40 ) Profit for the period( 158 ) 70 265 212 294

Balance Sheet Total assets 424 554 1.172 2.671 Liabilities 752 775 1.095 2.351 Equity capital( 328 ) ( 221 ) 77 320

Cash flow From operating activities 58 292 522 429 31

Table 6. Key Figures for Bluebird Cargo for the period 2003-2005 and the first nine months of 2005 and 2006. Balance Sheet figures are for the end of each period. All figures in ISK million.

2003 2004 2005 1/1-30/9 1/1-30/9 2005 2006 Profit and loss account Sales income 1.489 2.136 2.241 1.702 2.164 Other operating income 5 74 21 18 15 Operating expenses before depreciation( 920 ) ( 1.500 ) ( 1.766 ) ( 1.359 ) ( 1.632 ) Depreciation( 251 ) ( 269 ) ( 223 ) ( 186 ) ( 193 ) EBITDA 575 711 496 360 547 EBIT 324 441 273 175 354 Pre-tax profit 150 296 158 85 276 Income tax( 5 ) ( 47 ) ( 35 ) ( 21 ) ( 50 ) Profit for the period 145 249 123 64 226

Balance Sheet Total assets 2.655 2.429 2.409 2.914 Liabilities 2.188 1.778 1.615 1.804 Equity capital 467 651 794 1.109

Cash flow From operating activities 407 468 438 295 570

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Table 7. Key Figures for Air Iceland for the period 2003-2005 and the first nine months of 2005 and 2006. Balance Sheet figures are for the end of each period. All figures in ISK million.

2003 2004 2005 1/1-30/9 1/1-30/9 2005 2006 Profit and loss account Transport revenue 1.972 2.259 2.591 1.885 2.355 Cargo and mail 105 97 103 76 111 Aircraft and air crew lease 408 520 498 415 413 Other operating revenue 438 465 358 337 327 Operating expenses before depreciation( 2.527 ) ( 2.723 ) ( 3.068 ) ( 2.328 ) ( 2.555 ) Depreciation( 132 ) ( 193 ) ( 182 ) ( 137 ) ( 183 ) EBITDA 397 618 483 384 650 EBIT 265 425 302 248 467 Pre-tax profit 227 384 247 214 403 Income tax 158 ( 70 ) ( 46 ) ( 39 ) ( 74 ) Profit for the period 385 314 201 175 329

Balance Sheet Total assets 1.552 1.813 1.218 3.576 Liabilities 687 978 537 2.565 Equity capital 866 835 681 1.011

Cash flow From operating activities 286 877 282 136 238

Table 8. Key figures for Icelandair Group the first three quarters of 2006 and combined for the first nine months of 2006. All figures in ISK million.

Q1 2006 Q2 2006 Q3 2006 2006 1/1-31/3 1/4-30/6 1/7-30/9 1/1-30/9 Profit and loss account Transport revenue 5.555 9.613 12.480 27.648 Aircraft and air crew lease 2.217 2.268 3.290 7.775 Other operating revenue 1.823 2.600 3.707 8.130 Operating expenses before depreciation( 9.860 ) ( 12.917 ) ( 15.056 ) ( 37.833 ) Depreciation( 827 ) ( 409 ) ( 642 ) ( 1.878 ) EBITDAR 304 2.385 5.432 8.121 EBITDA( 265 ) 1.564 4.421 5.720 EBIT( 1.092 ) 1.155 3.779 3.842 Pre-tax profit( 677 ) 1.560 3.056 3.939 Income tax 122 ( 281 ) ( 515 ) ( 674 ) Profit for the period( 555 ) 1.279 2.541 3.265

Balance Sheet Total assets 67.892 Liabilities 44.510 Equity capital 23.382

Cash flow From operating activities 979 3.857 1.557 6.393

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FUTURE OUTLOOK Icelandair Group hf. (and thus Icelandair Group In order to secure the stability of the scheduled Holding as well) has set a goal for 5-7% annual operation, Icelandair Group hf. strives to keep a internal growth, for the coming years, with hopes of reserve of no less than 10% of Icelandair’s ehf. even higher growth for 2006 and 2007. Additionally, annual revenue. This reserve will be kept in a mix of the company does not rule out making acquisitions cash and securities with a maturity less than 90 to bolster its operations. days. This reserve is estimated to be sufficient to meet a conceivable net cash outflow cased by a Icelandair Group hf. (and thus Icelandair Group sudden shock in Icelandair’s ehf. operations. Holding as well) has an objective to have its EBIT 5- 7%, measured against total revenue. EBIT is defined as earnings before interest expense and taxes.

INVESTMENTS

Icelandair Group Holding’s investments are mainly due to investment in aircraft, flight equipment and aircraft engines. Table 9 lists the most significant investments for the past financial years.

Table 9. Icelandair Group Holding’s investments in 2003-2006 Year Investment ISK millions % of capex 2006 2 Boeing 737-400 2.200 40% 2006 Latcharter Airlines 484 9% 2006 2 Dash 8-100 aircraft 1.000 18% 2006 Boeing 757-200 winglets 280 5% 2006 Airline Services Estonia 250 5% 2006 Other 1.338 24% 2005 2 engines 400 20% 2005 Hotel Nordica 300 15% 2005 ITS spare parts 250 13% 2005 Other 1.244 63% 2004 3 F-50 aircraft 400 22% 2004 ITS spare parts 250 14% 2004 Hotel Nordica 120 7% 2004 Other 1.015 57% 2003 Hotel Nordica 600 25% 2003 ITS 600 25% 2003 Other 1.179 50%

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DOCUMENTS ON DISPLAY

For the life of this Summary, the following • The audited annual financial statements for documents may be inspected on Icelandair Group Icelandair, Icelandair Cargo, Loftleiðir Holding hf.’s registered office Reykjavik Airport, 101 Icelandic, Bluebird Cargo and Air Iceland Reykjavik, Iceland and on Icelandair Group Holding for each of the financial years ending 31 December 2003, 31 December 2004 and hf.’s website http://www.icelandairgroup.is: 31 December 2005 (including the audit • The Registration Document, Securities Note reports issued in respect thereof). and Summary dated November 26, 2006 • The audited interim income statements, • Icelandair Group hf.’s reviewed balance sheets and cash flow statements consolidated pro forma income statements for Icelandair, Icelandair Cargo, Loftleiðir for the financial year ending 31 December Icelandic, Bluebird Cargo and Air Iceland 2005 (including the auditors’ reports for the first nine months of 2006. issued in respect thereof). • The interim financial statement for • Icelandair Group hf.’s reviewed Icelandair, Icelandair Cargo, Loftleiðir consolidated pro forma opening balance Icelandic, Bluebird Cargo and Air Iceland sheet at 1 January 2006 (including the for the first nine months of 2005. These auditors’ reports issued in respect thereof). accounts have not been audited. • Icelandair Group Holding hf.’s reviewed • Icelandair Group Holding hf.’s Articles of opening pro forma balance sheet on 24 Association October 2006. • The Merger plan for Icelandair Group • Icelandair Group hf.’s interim report for the Holding hf. and Icelandair Group hf. dated first three months of 2006, reviewed 15 November 2006. interim report for the six months ending 30 • Assessors report on the merger of Icelandair June 2006 and audited interim report for Group Holding hf. and Icelandair Group hf. the nine months ending 30 September 2006.

SHARE CAPITAL The Company was founded on 15 October 2006 with 3,000,000,000 nominal value. The company’s total a total share capital of ISK 4,000,000 nominal share capital was later reduced and is now ISK value. At a shareholders’ meeting held on 24 1,000,000,000 nominal value. October 2006 it was decided to increase the share Neither the Company nor its subsidiaries hold any capital by ISK 996,000,000 nominal value. shares in the Company. Accordingly, the share capital of the Company is ISK 1,000,000,000 nominal value and is divided into On 24 October 2006, the Company issued equal numbers of shares each having a nominal convertible bonds in the nominal amount of ISK value of ISK 1.0. All the shares have been fully paid. 2,000,000,000.

In the capital increase, shares of nominal value of If there will be no dividends paid in the next five ISK 496,296,296 in Icelandair Group Holding were years and no share increase, except to meet the paid for by FL Group with shares in Icelandair Group requirements of the convertible bonds, then, given hf. Reg. No. 631205-1780, of a nominal value of that the owners of the bonds will use all their rights ISK 1,200,000,000. At the time the Icelandair to convert bonds to shares, the total number of Group hf.’s total share capital amounted to ISK shares in the Company, at the maturity of the bond,

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will be 1,067,340,067 and the owners of the bonds Glitnir banki hf. is the owner of all these convertible will therefore hold 67,340,067 of those shares. bonds described.

ARTICLES OF ASSOCIATION

OBJECT AND PURPOSE The Board of Directors elects a chairman and vice The object of the Company, according to Article 3 of chairman from among its members, and otherwise its Articles of Association, is investment in equity allocates its obligations among its members as holdings, particularly holdings in other companies needed. The chairman calls board meetings. A engaged in air carrier operations, tourist services and meeting shall also be held if requested by a member transport operations, buying and selling real estate, of the Board of Directors or the Managing Director. credit operations and other related operations. Meetings of the board are valid if attended by a majority of the members of the board. However, BOARD OF DIRECTORS AND important decisions shall not be taken unless all MANAGEMENT members of the Board have had the chance to The Company’s Board of Directors shall consist of discuss the matter, if possible. The outcome of seven members and two alternate members, elected issues shall be decided by force of vote and in the at the Annual General Meeting for a term of one event of an equality of votes the issue shall be year. Those who intend to stand for election to the regarded as rejected. The Managing Director attends Board of Directors shall inform the Board in writing meetings of the Board of Directors, even though he of their intention at least five days before the Annual or she is not a member of the Board, and has the General Meeting, or Extraordinary Shareholders’ right to debate and submit proposals unless Meeting at which elections are to take place. Only otherwise decided by the Board in individual cases. those who have informed the Board of their A book of minutes shall be kept of proceedings at candidacy are eligible. meetings and shall be signed by participants in the

meeting. A board member, or the Managing Director, The Company’s Board of Directors is the supreme who is not in agreement with a decision by the Board authority in the Company’s affairs between of Directors is entitled to have his or her dissenting shareholders’ meetings and shall ensure that the opinion entered in the book of minutes. organisation and activities of the Company‘s operation are generally in correct and good order. The Managing Director has charge of the day-to-day The Board of Directors shall appoint a Managing operations of the company and shall observe the Director for the Company and decide the terms of his policy and instructions set out by the company’s or hers employment. The Board of Directors and the Board of Directors. Day-to-day operations do not Managing Director are responsible for the include measures which are unusual or extraordinary management of the Company. The company’s Board Such arrangements can only be made by the of Directors shall ensure that there is adequate Managing Director in accordance with special supervision of the company’s accounts and the authority from the Board, unless it is impossible to disposal of its assets and shall adopt working await the decision of the Board without seriously procedures in compliance with the Companies Act. disadvantaging the operation of the Company. In Only the Board of Directors may assign powers of such instances, the Managing Director shall consult procuration. The signatures of the majority of the with the chairman, if possible, after which the Board members of the Board shall bind the Company.

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of Directors shall immediately be notified of the shareholders. A shareholder may appoint a proxy to measures. The Managing Director shall ensure that attend meetings on his/her behalf, in which case the the accounts and finances of the Company conform proxy shall submit a written and dated letter of to the law and accepted practices and that the proxy. Also, shareholders may attend the meeting disposal of the property of the Company is secure. together with an advisor; the advisor, however, does The Managing Director shall provide the Members of not have the right to address the meeting, to submit the Board of Directors and Company auditors with motions or to vote. The Board of Directors may invite any information pertaining to the operation of the experts to attend individual meetings, if their opinion Company which they may request, as required by or assistance is required. law. Shareholders’ meetings shall be called at the RIGHTS, PREFERENCES AND discretion of the Board of Directors, at the request of RESTRICTIONS OF SHARES the Company auditor , or if shareholders controlling All voting shares carry equal rights and no privileges 1/10 of the shares of the Company request a are attached to shares in the Company. All the meeting by a written notice. The request shall shares are freely transferable, unless otherwise include a statement to the Board of Directors provided for by law. explaining the reason for the request, and the Board of Directors shall notify shareholders of the business ACTIONS NECESSARY TO CHANGE on the agenda in the notice of the meeting. When a SHAREHOLDERS’ RIGHTS lawful request for a meeting has been submitted, the According to Article 23 of the Articles of Association Board of Directors shall call a meeting no later than the Articles of Association may only be amended at a fourteen days from the time that the request was lawful Annual General Meeting or extraordinary received. If the Board of Directors has not called a shareholders’ meeting, provided that the notice of meeting within that time, shareholders may require a the meeting clearly indicates that such an meeting to be called pursuant to the provisions of amendment is proposed and outlines the main the Companies Act. substance of the amendment. A decision is valid only if it has the support of at least 2/3 of the cast Shareholders’ meetings, including the Annual votes and the support of shareholders controlling at General Meeting, shall be called by a notice to each least 2/3 of the share capital represented at the shareholder by registered mail, telegram or by other meeting, provided always that no other force of vote verifiable means or, at the discretion of the Board of is required by these Articles or statutory law, cf. Directors, by a notice in the newspapers, with at Article 93 of the Companies Act. least one week's notice. A shareholders' meeting is SHAREHOLDERS’ MEETINGS valid, regardless of attendance, if the meeting has Shareholders exercise their powers at shareholders’ been properly convened. Attendance shall be meetings, which hold the company’s supreme determined based on the number of ballots powers, within the limits provided for in the Articles delivered. of Association and law. All shareholders are permitted to attend shareholders’ meetings, address The notice of a shareholders’ meeting shall specify them and exercise their voting rights. The auditor of the business to be addressed at the meeting. If the the Company and the Managing Director shall have agenda includes motions to amend the Articles of full rights to address and submit motions at the Company, the substance of the motion shall be shareholders’ meetings even if they are not included in the notice of the meeting. Seven days before a shareholders’ meeting, at the latest, an

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agenda, final submissions and, in the case of annual the shareholders in the Company, but a resolution general meetings, the annual accounts, report of the may be passed to provide guidance to the Board of Board of Directors and the auditor’s report shall be Directors of the Company. Lawfully submitted laid open for inspection by shareholders at the motions for amendments may be put to a vote at the Company office. meeting itself, even if they have not been laid open for inspection by shareholders. An Annual General Each shareholder shall be entitled to have a specific Meeting is always permitted to conclude matters item of business included on the agenda of a which it is required to address pursuant to statutory shareholders’ meeting, provided that such law or the Company Articles. shareholder submits a written request to this effect to the Board of Directors of the Company with The Annual General Meeting shall be held before the sufficient advance notice for the item to be included end of May. on the agenda in accordance with these Articles.

Items of business which are not included on the agenda may not be accepted for final decision at a shareholders’ meeting except with the consent of all

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This page is intentionally left blank II. SECURITIES NOTE

TABLE OF CONTENTS

1 RISK FACTORS ...... 3 1.1 RISKS INHERENT IN EQUITY INVESTMENTS...... 3 1.2 FURTHER SHARE CAPITAL INCREASE CAN DILUTE SHAREHOLDINGS ...... 3 1.3 SHAREHOLDER STRUCTURE ...... 4 2 PERSONS RESPONSIBLE ...... 5 2.1 THE ISSUER ...... 5 2.2 GLITNIR BANKI HF. (MANAGER AND OFFEROR) ...... 6 2.3 STATUTORY AUDITORS ...... 6 3 NOTICE TO INVESTORS ...... 7 4 REFERENCES AND GLOSSARY OF ABBREVIATIONS...... 8 5 KEY INFORMATION ...... 9 5.1 WORKING CAPITAL ...... 9 5.2 CAPITALIZATION AND INDEBTEDNESS ...... 9 5.3 INTEREST OF NATURAL AND LEGAL PERSONS INVOLVED IN THE SHARE OFFER ...... 9 5.4 USE OF PROCEEDS ...... 10 5.5 REASONS FOR THE SHARE OFFER...... 10 6 INFORMATION CONCERNING THE SECURITIES ...... 11 6.1 TOTAL SHARE CAPITAL ...... 11 6.2 TYPE AND CLASS OF SHARES...... 11 6.3 LEGISLATION...... 11 6.4 FORM ...... 11 6.5 SHARE RIGHTS...... 11 6.6 SHARE CAPITAL INCREASE – AUTHORIZATION ...... 12 6.7 TRANSFERABILITY OF THE SHARES ...... 12 6.8 MANDATORY TAKEOVER BIDS AND/OR SQUEEZE-OUT AND SELLOUT RULES...... 13 6.9 PUBLIC TAKEOVER BIDS BY THIRD PARTIES ...... 14 6.10 TAX ISSUES...... 14 7 TERMS AND CONDITIONS OF THE SHARE OFFERING ...... 16 7.1 OFFEROR AND MANAGER...... 16 7.2 OFFERING OF SHARES - NOVEMBER 27 – DECEMBER 4...... 16 7.3 UNDERTAKINGS TO SUBSCRIBE ACCEPTED ...... 18 7.4 PAYMENT / SHARE DELIVERY ...... 18 8 ANNOUNCEMENT ...... 19 9 ADMISSION TO TRADING...... 19 9.1 LISTING ON ICEX ...... 19 9.2 ADMISSION TO TRADING...... 19 9.3 REGULATED MARKETS...... 19 9.4 MARKET MAKING...... 19 10 SALES PRIOR TO THE SHARE OFFER...... 20 11 COST OF THE SHARE OFFER ...... 21 12 ADDITIONAL INFORMATION ...... 21

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1 RISK FACTORS

Investors are reminded that investing in shares and thereby on the investment value, are market entails risk, as the decision to invest is based on risk, liquidity risk and counterparty risk. The share expectations and not promises. Investors must rely price can fluctuate considerably due to factors such primarily on their own judgement regarding any as variations in operating income or cost, changes in decision to invest in a company’s shares, bearing in the market environment, adverse commentary about mind the business environment in which the the company and its operations and services in the company operates, anticipated profits, external media and changes to the company’s competitive conditions and the risk inherent in the investment position. Moreover, it must be kept in mind that itself. Prospective investors are advised to contact shares are a subordinated claim on the assets of experts such as licensed financial institutions to companies. This means that in the event of the assist them in their assessment of the shares in the company's liquidation, the shareholders will receive company as an investment option. Investors are what is left after all other claims have been met. In advised to consider their legal status, including many countries, shares have yielded a better return taxation issues that may concern the purchase or than bonds measured over long periods of time. sale of shares in the company and seek external and Nevertheless, long periods can also be found where independent advice in that respect. the return on shares has been worse than on bonds and even negative. Those who intend to invest in the Prior to making any investment decision regarding Company should know that there is no guarantee of a shares in the Company, please consider all the return on their investment in the future and investors information in this document, the Registration should bear in mind that even though stocks can Document of the Prospectus and in particular, the provide a good return in general, there is always a risks and uncertainties described below. The risks risk that an investment in the shares of individual and uncertainties described below are some of those companies will decline in value. It is therefore that may materially affect a company and any suggested that those who intend to invest in shares investment made in its shares. If any combination of pay close attention to diversifying their risk and seek these events occurs, the trading price of the shares investment advice. could decline and investors might lose part of their investment or even all of it. Additional risks and Due to the fact that the Company's shares are uncertainties that do not currently exist, that are not expected to be traded on the ICEX Main List, those presently considered material, or of which the investing in them would thereby become subject to company is unaware may also impair the business public regulation relating to securities transactions, and operations of the company. These risks and such as rules relating to takeover bids, public uncertainties could have a material adverse impact disclosure of ownership stakes, etc. on the business, income, profits, assets, liquidity and share price of the company. 1.2 FURTHER SHARE CAPITAL INCREASE CAN DILUTE 1.1 RISKS INHERENT IN EQUITY SHAREHOLDINGS INVESTMENTS If new shares in the Company are issued, the Equity investments involve a variety of risks. proportional shareholding of those who already hold Examples of such risk factors that may have a shares in the Company will be reduced accordingly, material effect on the price of a company’s shares, unless they themselves acquire the new shares pro

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rata to their existing holdings. The purpose of 1.3 SHAREHOLDER STRUCTURE increasing capital is normally to finance projects The structure of shareholder ownership can be a risk with the long-term intention of making the Company factor for investors. A lack of leading investors or more valuable in the future. Shareholders may large concentrations of ownership are examples of therefore be faced with increased risk to their circumstances that can have negative effects on the investment alongside the dilution of their shares. It operations of the Company. Investors should be is possible that the Company will consider increasing aware of the fact that ownership of the Company can its share capital further in the future in order to change rapidly and without any prior warning. finance its continuing growth.

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2 PERSONS RESPONSIBLE

2.1 THE ISSUER

The Issuer, Icelandair Group Holding hf., Icelandic ID-No. 591006-2150, registered office at Reykjavík Airport, 101 Reykjavík, the Chairman of the Board of Directors and the CEO, whose names appear below, accept responsibility for the information contained in this Securities Note. Having taken all reasonable care to ensure that such is the case, they hereby declare that the information contained in the Securities Note is, to the best of their knowledge, in accordance with the facts and contains no omission likely to affect its import.

Reykjavík, November 26, 2006. On behalf of the board of directors and Icelandair Group Holding hf. Reykjavik Airport, 101 Reykjavik, Iceland

Finnur Ingólfsson Jón Karl Ólafsson Chairman of the board of directors CEO Icelandic ID No. 080854-3829 Icelandic ID No. 120958-2759

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2.2 GLITNIR BANKI HF. (MANAGER AND OFFEROR)

Glitnir banki hf., Icelandic ID-No. 550500-3530, Kirkjusandur 2, 155 Reykjavík, Iceland, is the Manager and has been advisor to the Company on the listing of the shares and the preparation of this Securities Note. Furthermore, Glitnir banki hf., is also the Offeror.

Glitnir banki hf., in its capacity as the Manager and the Offeror declares that in preparing this Securities Note it has gathered the data which, in its estimation, are necessary to provide a true and fair view of the Company, The Shares and the Share Offer. Glitnir banki hf., hereby declares that, having taken all reasonable care to ensure that such is the case, the information contained in this Securities Note is, to the best of its knowledge, in accordance with the facts and contains no omission likely to affect its import.

Reykjavík, November 26, 2006. On behalf of Glitnir banki hf. Kirkjusandur 2, 155 Reykjavík, Iceland

Bjarni Ármannsson CEO Icelandic ID No. 230368-5389

2.3 STATUTORY AUDITORS

The registered auditor of Icelandair Group hf. is KPMG Endurskoðun hf., Icelandic ID No. 590975-0449, Borgartún 27, IS-105 Reykjavík, Iceland. KPMG Endurskoðun hf. has reviewed the balance sheet dated 24 October 2006 for Icelandair Group Holding. KPMG Endurskoðun hf. has furthermore audited the interim report of Icelandair Group hf. dated 30 September 2006.

KPMG confirms that all information in this Securities Note regarding financial information is consistent with the said financial statements.

Reykjavik, November 26, 2006. On behalf of KPMG Endurskoðun hf.

Jón Sigurdur Helgason Sæmundur Valdimarsson, State authorised public accountant State authorised public accountant Icelandic ID No. 050269-3619 Icelandic ID No. 070263-4409

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3 NOTICE TO INVESTORS

This Securities Note and any document forming a Icelandic Law. The ICEX has, in its authority under part of the Prospectus published on 27 November agreement between it and the Icelandic Financial 2006, is not being distributed in, and must not be Supervisory Authority regarding the review and mailed or otherwise distributed or sent in or into any approval of prospectuses, reviewed and approved country in which distribution would require any this Securities Note, which is published in English additional registration measures or other measures to only. be taken, other than as applicable under Icelandic law and regulations, or would be in conflict with any The Company will, in the event of any significant law or regulation in such country. The shares in the new factor, material mistake or inaccuracy relating to Share Offer are only offered in Iceland. information included in this Securities Note which is capable of affecting the assessment of the Shares, The Company’s total issued share capital amounts to prepare a supplement to this Securities Note in 1,000,000,000 shares, each with a nominal value accordance with Article 24 of the Securities Act or of ISK 1.0. The Company has applied for listing on publish a new Securities Note. If a supplement is the ICEX Main List. The Company does currently not prepared, statements contained in any such fulfil the conditions for listing on the ICEX Main List supplement shall, to the extent applicable (whether regarding share distribution and number of expressly, by implication or otherwise), be deemed to shareholders. Following the Share Offer, the modify or supersede statements contained in this Company is expected to fulfil its condition regarding Securities Note. Any statement so modified or the number of shareholders and share distribution. superseded shall not, except as so modified or However, it can not be guaranteed that the superseded, constitute a part of this document. requirements for share distribution will be fulfilled. If these requirements are not fulfilled, the listing on This Securities Note should by no means be viewed ICEX Main List will not take place. or construed as a promise by the Company, Glitnir banki hf. (the Manager and the Offeror) or other All subscriptions in the Share Offer are binding. parties of future success either in operations or return on investments. Investors are reminded that This Securities Note concerns the offering of the investing in shares entails risk, as the decision to Company’s shares in 27 November until 4 invest is based on expectations and not promises. December, 2006, when the Offeror will sell Investors must rely primarily on their own judgement 185,000,000 shares in the Company. This regarding any decision to invest in the Company’s Securities Note also concerns the expected listing of shares, bearing in mind inter alia the business the Shares on the ICEX Main List. The Share Offer is environment in which the Company operates to be conducted through three tranches, an offer to anticipated profits, external conditions and the risk the general public, an offer to Icelandair Group inherent in the investment itself. Prospective Holding’s employees and an offer to qualified investors are advised to contact experts, such as investors. licensed financial institutions, to assist them in their assessment of the shares in the Company as an The admission to trading will proceed pursuant to investment option. Investors are advised to consider Icelandic law and regulations. Directive 2003/71/EC their legal status, including taxation issues that may of the European Parliament and of the Council of 4 concern the purchase or sale of shares in the November 2003 has been implemented into

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Company and seek external and independent advice to Acts passed by the Icelandic parliament and in that respect. regulations issued by Icelandic governmental agencies unless otherwise clear from the context. Not withstanding a special statement to the contrary references to any Acts or regulations are references

4 REFERENCES AND GLOSSARY OF ABBREVIATIONS

References to “Icelandair Group Holding”, “the owned by the Offeror, unless otherwise clear from Group” and “the Company” in this Securities Note the context. The Share Offer is described in section shall be construed as referring to Icelandair Group 7. Holding hf., Icelandic ID No. 591006-2150 and Icelandair Group hf. and its subsidiaries unless References to “the Prospectus” in this Securities otherwise clear from the context. Icelandair Group Note shall be construed as referring to the Holding hf. is the legal Icelandic name of the Company’s prospectus dated 26 November 2006, Company. consisting of this Securities Note, a Registration Document and a Summary, which was made in References to “Icelandair Group Holding’s connection with the Share Offer which will take employees” shall be constructed as referring to place from 27 November until 4 December 2006. employees of Icelandair Group Holding, Icelandair Group and its subsidiaries. References to “ICEX” in this Securities Note shall be construed as referring to the Iceland Stock References to “Icelandair Group” in this Securities Exchange, i.e. to Kauphöll Íslands hf., Icelandic ID Note shall be construed as referring to Icelandair No. 681298-2829, unless otherwise clear from the Group hf., Icelandic ID No. 631205-1780 and its context. References to the “ICEX Main List” in this subsidiaries, unless otherwise clear from the context. Securities Note shall be construed as referring to the Icelandair Group hf. was acquired by Icelandair Main List at the Iceland Stock Exchange, unless Group Holding hf. in October 2006 and is the only otherwise clear from the context. direct subsidiary of the Company. References to “the ISD” in this Securities Note shall References to “the Shares” in this Securities Note be construed as referring to Icelandic Securities shall be construed as referring to the Depository, i.e. to Verðbréfaskráning Íslands hf., 1,000,000,000 shares in Icelandair Group Holding Icelandic ID No. 500797-3209, unless otherwise hf. and which this Securities Note covers, unless clear from the context. otherwise clear from the context. References to “the Manager” and “the Offeror” in References to “the Share Offer” in this Securities this Securities Note shall be construed as referring Note shall be construed as referring to the offering of to Glitnir banki hf., Icelandic ID No. 550500-3530, 185,000,000 shares in the Company, which is unless otherwise clear from the context.

Abbreviations used in this Securities Note The Companies Act Act No. 2/1995 on Public Limited Companies CEO Chief Executive Officer The Securities Act Act No. 33/2003 on PAYE Pay-As-You-Earn Securities Transactions

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5 KEY INFORMATION

5.1 WORKING CAPITAL 5.2 CAPITALIZATION AND It is the Company’s opinion that the working capital INDEBTEDNESS is sufficient for its present requirements. The The following table shows the consolidated Company has on average negative working capital capitalization and indebtedness of Icelandair Group requirement since the international flight operations as of 30 September 2006. The table has been receive advance payments but pay costs after the adjusted for the purchase of Icelandair Group at 15 service has been provided. October 2006 by the Company and therefore takes capitalization and indebtedness of the Company into account.

Table 1. The adjusted, consolidated capitalization and indebtedness of the Company Current liabilities Guaranteed 0 Secured 8,111 Cash and cash equivalents 5,166 Unguaranteed/Unsecured 22,968 Total current liabilities 31,079 Current financial receivables 7,993 Non-current liabilities Guaranteed 0 Current bank debt( 4,102) Secured 17,343 Current portion of non current debt( 11,110) Unguaranteed/unsecured 2,858 Trade and other payables( 11,858) Total non-current liabilities 20,201 Other current finacial debt( 4,009) Current financial debt( 31,079) Shareholders' equity Share capital 1,000 Non-current bank loans( 17,343) Share premium 25,233 Bonds issued( 1,870) Other reserve 887 Other non-current loans( 988) Total equity 27,120 Non-current financial indebtedness( 20,201)

Total capitalisation 78,400 Net financial indebtedness ( 38,121)

Glitnir banki hf. holds 50.0% of the share capital in 5.3 INTEREST OF NATURAL AND Fjárfestingafélagið Máttur ehf., which holds LEGAL PERSONS INVOLVED IN THE 111,111,111 shares in Icelandair Group Holding hf. SHARE OFFER Glitnir banki hf. directly holds 30.1% of the share Glitnir banki hf., Icelandic ID No., 550500-3530, capital in Naust ehf. which holds 148,148,148 reg. office Kirkjusandur 2, 155 Reykjavík, Iceland. shares in Icelandair Group Holding hf. Glitnir banki Glitnir banki hf. is the Manager and the Offeror of all hf. also holds 12% of the share capital in BNT hf., the 185,000,000 shares offered in the Share Offer. which holds 49.9% of the share capital in Naust In addition to the offered shares, Glitnir banki hf. ehf. Furthermore, Glitnir banki hf. holds 50% of the directly holds 6,221,296 shares. share capital in Fjárfestingafélagið Máttur ehf. which

in turn has 12% ownership in BNT hf.

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has already purchased all unsold Icelandair Group All figures are as of 26 November 2006. Voting Holding hf. shares which it previously underwrote, rights are held by the majority of each company based on the underwriting agreement. However, directly owning shares in Icelandair Group Holding. Glitnir banki hf. purchased these share with the intention of selling most of them in the Share Offer. Einar Sveinsson, a member of the Board of Directors of the Company is also a member of the Board of It should be noted that FL Group is a significant Directors of Glitnir banki hf. shareholder in Glitnir banki hf. According to the last notification of FL Group´s trade in Glitnir banki hf. to The Company does not hold any shares in Glitnir the Iceland Stock Exchange, FL Group or related banki hf. and Glitnir banki hf. is not the main parties hold 4,180,168,495 shares in Glitnir banki commercial bank used by the Company. hf. Skarphéðinn Berg Steinarsson is a Member of the Board of Glitnir banki hf. and the Chairman of There is no other material interest of natural and the Board of FL Group hf. Jón Sigurðsson is a legal persons involved in the Share Offer. Member of the Board of Glitnir banki hf. and a Managing Director for FL Group hf. 5.4 USE OF PROCEEDS

The proceeds from the Share Offer will be received Following this process, Glitnir banki hf. agreed to by Glitnir banki hf. as the Offeror. All costs directly take on the role as manager regarding a proposed related to the Share Offer will be covered by the listing on the ICEX Main List. The listing was Manager. proposed by the board of directors of the Company in order to increase liquidity of the shares, reach a 5.5 REASONS FOR THE SHARE OFFER broader range of investors and to get better price information on the shares. This proposal was Three qualified investors, Langflug ehf., Naust ehf. supported by the Company’s management, since it and Ómar Benediktsson founded Icelandair Group would give employees, customers and other Holding hf. with the goal of purchasing Icelandair interested parties the chance to buy a stake in the Group hf. On 15 October, 2006 they committed company and thus have vested interest in its well themselves to invest 50.5% of the equity required in being. Icelandair Group Holding hf. to purchase all shares of Icelandair Group, under the current financial The Share Offer is a step towards fulfilling ICEX structure. These investors are now represented in the conditions for listing regarding the number of shareholder base as controlling shareholders of general investors and the diversification of investment companies Langflug ehf., Naust ehf. and ownership. Urður ehf. who now collectively own 52.4% of the Company’s share.

On 15 October 2006 the Manager underwrote 49.5% of Icelandair Group Holding as a part of the transaction where Icelandair Group Holding hf. bought Icelandair Group hf. from FL Group. At the date of this document, the Manager

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6 INFORMATION CONCERNING THE SECURITIES

6.1 TOTAL SHARE CAPITAL 6.5 SHARE RIGHTS

The total number of issued shares in the Company is All the shares of the Company carry equal rights. The 1,000,000,000 all of same class. All shares in the Company's shares carry no special rights and no Company are issued in ISK. restrictions are placed on them. A party acquiring a share in the Company cannot exercise its right as a 6.2 TYPE AND CLASS OF SHARES shareholder unless its name has been registered in The Company’s share capital consists of one class of the share registry or it has announced and proven its shares, each share having a nominal value of ISK ownership of the share. 1.0. The ISIN number of the shares is IS0000013464. The shares' ticker symbol in the Owners of the Company’s share capital have the right trading system of the ICEX, if listed, will be ICEAIR. to vote at shareholders' meetings, the right to receive dividends when declared, enjoy pre-emptive rights to 6.3 LEGISLATION new shares, unless waived, and the right to a portion

The Company is registered in Iceland and operates of the Company’s assets upon liquidation, all pursuant to the Companies Act, No 2/1995. All according to share ownership, statutes and the shares in the Company have been issued under the Company’s Articles of Association in effect at any Companies Act. given time.

6.4 FORM A resolution on the distribution of dividends shall be made at an annual general meeting, which shall be The Company’s shares are all issued electronically at held before the end of May each year. A shareholder the ISD, which is located at Laugavegur 182, 105 who owns shares on the date when the dividend Reykjavik, Iceland. All shares are registered under payment falls due is entitled to the dividend. the name and Icelandic ID Number of the relevant However, if dividends have not been paid to shareholders or their nominees. shareholders, then they may collect their dividends

at the Company’s office within four years of payment The electronic registration of securities is governed being due. This right to a dividend lapses four years by the Act on Electronic Registration of Titles to later according to the Act No. 14/1905 on the Expiry Securities, No. 131/1997 and Regulation No. of Debts and Other Claim Rights. The Company and 397/2000, which is issued in accordance with that its subsidiaries are subject to legal restrictions on Act. A printout from the ISD on the ownership of the amount of dividends that can be paid to shares in the Company is considered a valid proof of shareholders according to the Companies Act. There registration of the shares. The Company shall are no special restrictions og procedures regarding consider the share registry as full proof of ownership dividend payment for non-resident shareholders. The to shares and attached rights. Dividends and Company has no formal dividend policy although the announcements shall at any given time be sent to Company’s board of directors has the intention to set the party registered in the Company’s share register a policy of paying 35-50% of each year’s earnings as owner of the shares in question. The Company before interest and taxes in dividends to shall be in no way liable if payments or shareholders. announcements do not reach their recipients because a change of address has not been notified.

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Rights to electronic shares must be registered at the Company at the base rate of 29.7 which will be as ISD if they are to enjoy legal protection against legal amended in accordance with dividend payments and executions and disposal by means of an agreement. share capital increase as described in the Company’s It is forbidden to issue share certificates for articles of association. registered rights according to an electronic share or endorse them, and such transactions are void. If there will be no dividends paid in the next five Registration of the ownership of an electronic share years and no share increase, except to meet the at the ISD, subsequent to a Securities Depository requirements of the convertable bonds, then, given final entry, formally gives a registered owner legal that the owners of the bonds will use all their rights authorization to the rights for which he is registered. to convert bonds to shares, the total number of Priority of incompatible rights is determined by the shares in the Company, at the maturity of the bond, chronological order of requests from the Banks’ Data will be 1,067,340,067 and the owners of the bonds Central reaching the Securities Depository. No will therefore hold 67,340,067 of those shares. redemption provisions, conversion provisions or special restrictions regarding dividends has been Glitnir banki hf. is the owner of all the convertible attached to the securities. bonds described in this subsection.

6.6 SHARE CAPITAL INCREASE – AUTHORIZATION 6.7 TRANSFERABILITY OF THE

The Company was founded on 15 October 2006 with SHARES a total share capital of ISK 4,000,000 nominal There are no limitations on the transferability of the value. At a shareholders’ meeting held on 24 Company’s shares, and shareholders may pledge October 2006 it was decided to increase the share their shares unless prohibited from doing so by law. capital by ISK 996,000,000 nominal value. Only general legislative rules apply to the transfer of Accordingly, the share capital of the Company is ISK shares in the Company. Nevertheless, it should be 1,000,000,000 nominal value and is divided into noted that individual shareholders may have agreed equal numbers of shares each having a nominal that their shares are subject to certain restrictions. value of ISK 1.0. All the shares have been fully paid. Langflug ehf., Naust ehf. and Urður ehf. have all In the capital increase, shares of nominal value of made lock-up agreements with the Manager. Both ISK 496,296,296 in Icelandair Group Holding were Langflug ehf. and Urður ehf. have a lock-up on all paid for by FL Group with shares in Icelandair Group their shares for 12 months from the date of listing. hf. Reg. No. 631205-1780, of a nominal value of Naust ehf. has lock-up on 1/2 of its shares for 12 ISK 1,200,000,000. At the time the Icelandair months from the date of listing, and lock-up on ¼ on Group hf.’s total share capital amounted to ISK its shares for 6 months but other parts of the shares 3,000,000,000 nominal value. The company’s total are not subject to lock-up. The total number of share capital was later reduced and is now ISK shares subject to 12 month lock-up is 449,629,630 1,000,000,000 nominal value. and the total number of shares subject to 6 month lock up is 37,037,037. This totals 486,666,667 The Company has on the 24 October 2006, issued shares or 48.7% of the total share capital. bonds in the nominal amount of ISK 2,000,000,000 Information about the companies subject to lock-up that give the owner the right to convert the principal on their shares is provided in the following of the claim under the bonds to shares in the subsections.

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6.7.1 LANGFLUG EHF. Council of 21 April 2004 on takeover bids (the

Langflug ehf. Icelandic ID No. 660906-1500, reg. Takeover Directive). Under the Securities office Suðurlandsbraut 18, 108 Reykjavík, Iceland is Transactions Act, if a party, directly of indirectly, an investment company entirely owned by acquires control of the Company, it is obliged to Eignarhaldsfélagið Samvinnutryggingar svf., make an offer, within four weeks, to the other Icelandic ID No. 550269-0589, reg. office Kringlan shareholders to acquire their shares at a price not 7, 103 Reykjavík, Iceland. less than the highest price paid for the shares by the acquirer or its concert parties during the previous 6.7.2 NAUST EHF. twelve months. ‘Control’ means that the party and

Naust ehf., Icelandic ID No. 460906-0320, reg. any party acting in concert with it has acquired (i) in office Suðurlandsbraut 18, 108 Reykjavík, Iceland is total at least 40% of the voting rights in the an investment company. The company is jointly Company, (ii) under an agreement with other owned by the following parties: shareholders, the right to control at least 40% of the voting rights in the Company, (iii) the right to • BNT hf. Icelandic ID No. 530206-0250, reg. office Suðurlandsbraut 18, 108 Reykjavík, appoint or dismiss the majority of the board of Iceland, owns 49.9% of the share capital in directors of the Company. Naust ehf. • Glitnir banki hf., Icelandic ID No.550500-3530, If the Company will fulfil ICEX conditions on listing reg. office Krikjusandur, 155 Reykjavík, Iceland, after the Share Offer no party will, directly of owns 30.1% of the share capital in Naust ehf. indirectly, own a controlling stake in the Company. • Hrómundur ehf., Icelandic ID No. 491188-

2519, reg. office Bakkaflöt 10, 210 Garðabæ, Iceland, owns 10.0% of the share capital in Squeeze-out / sell-out Naust ehf. Hrómundur ehf. is owned by Einar Under The Securities Act, if the acquirer, or any of Sveinsson. its concert parties, acquires more than 90% of the • Hafsilfur ehf., Icelandic ID No. 610469-0199, shares or voting rights of the Company, the acquirer reg. office Lindarflöt 51, 210 Garðabæ, Iceland, and the board of directors of the Company may owns 10.0% of the share capital in Naust ehf. decide to redeem the remaining shares. Notice of Hafsilfur ehf. is owned by Benedikt Sveinsson. such decision, including the terms of the 6.7.3 URÐUR EHF. redemption, shall be given by means of an Urður ehf., Icelandic ID No., 681290-1689, reg. advertisement in a daily newspaper or in another office Austurstræti 5, 155 Reykjavík, Iceland, is fully verifiable manner. If the acquirer demands the owned, directly and indirectly, by Ómar redemption within three months from the end of the Benediktsson, Icelandic ID No.221059-4689. takeover period, the price offered in the takeover bid shall be considered a fair redemption price, unless 6.8 MANDATORY TAKEOVER BIDS the acquirer, or any of its concert parties, has paid a AND/OR SQUEEZE-OUT AND higher price during the takeover period or during the three months following on from the end of the SELLOUT RULES takeover period. In the notice of the decision, Mandatory bid shareholders shall be encouraged to transfer their If the Company will fulfil ICEX conditions for listing, shares to the acquirer within four weeks. If they do it will be subject to Section VI of the Securities not transfer their shares within four weeks, the Transactions Act, No. 33/2003, with subsequent redemption price shall be deposited in an account in amendments, which implemented Directive their name, on which the acquirer shall becomes the 2004/25/EC of the European Parliament and of the rightful owner of the shares and the share

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certificates of former shareholders shall become 6.10.1 TAX CONSIDERATIONS FOR RESIDENTS void. OF ICELAND

Individuals Should the acquirer, or any of its concert parties, Capital gains from sale of shares are taxable in acquire more than 90% of the shares or voting rights Iceland pursuant to current laws. For individuals, of the Company, any one of the minority capital income such as interest, dividends (see "- shareholders shall be able to demand that the Taxation of Dividends") and capital gains are taxed acquirer redeem his shares. If the minority as income from capital. The tax rate is 10%. Upon shareholder demands redemption within three sale of shares, the shareholder's average acquisition months of the end of the takeover period, the price costs for all shares of the same class and type will offered in the takeover bid shall be considered a fair be used as the tax base on which the capital gain of redemption price, unless the acquirer, or any of its the sale is calculated. Individuals can use losses concert parties, has paid a higher price during the from sale of shares in limited liability companies takeover period or during the three months following within the same calendar year and offset them on from the end of the takeover period. More against capital gains from sale of shares. Losses detailed provisions on redemption, including the from sale of shares can not be carried forward and appointment of valuators if no agreement is reached offset against future capital gains from sale of on the redemption price, can be found in the shares. Companies Act. Taxable Legal Entities 6.9 PUBLIC TAKEOVER BIDS BY THIRD For taxable legal entities, all gains from sale of PARTIES shares will be taxed as income from business

There have not been any public takeover bids since activities at a rate of 18% in the case of a limited the foundation of the Company by third parties in liability company. respect of the Company’s equity. Gains on shares are taxable in full regardless of how 6.10 TAX ISSUES long the company has owned the shares. A gain is calculated as the difference between the sale price The following is a summary of certain Icelandic tax and average cost price of all shares of the same class consequences for shareholders. The summary does and type. not cover tax issues in cases where securities are held as assets in business operations or by a Taxable legal entities may postpone the payment of partnership. The tax treatment for holders depends the tax of capital gains from the sale of shares for a in part on their particular circumstances. Each period of up to two years starting at the end of the shareholder should consult a tax advisor regarding year when the shares are sold. In the case of shares the tax consequences which may arise for such in limited liability companies (domestic or foreign) person as a result of buying or selling our Shares, acquired within the same period, the tax base of including the applicability and effect of foreign those shares is reduced by the capital gains, which income tax regulations and provisions contained in in turn will not be taxed until the sale of such treaties to avoid double taxation. Foreign parties shares. When shares are sold the taxable amount is should obtain information on a possible double the sale price less the tax base used to buy the taxation treaty with the country of residence. If such shares. If taxable legal entities do not invest the a treaty has been made, the party should establish proceeds of the sale of shares in limited liability which country has the right to tax.

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companies within the required timeframe, the is a tax treaty in place lowering the percentage. capital gains are taxed on the second year from the Qualified companies may apply for a reimbursement sale. and/or an advance relief under relevant provisions in double taxation treaties. Capital losses from sale of shares within the same tax year may be offset only against the capital gains Gains from the sale of shares in Icelandic companies on shares. Losses from sales of shares cannot be by residents of non treaty countries are subject to carried forward as losses from regular activities. taxation in Iceland. The tax rate is 10% for individuals and 15% for legal entities. Specific tax consequences may be applicable to certain categories of companies, such as mutual Icelandic brokers as well as Icelandic persons acting funds and investment companies. as intermediaries are technically required to withhold the tax from the sale price unless they have been Taxation of Dividends furnished with the Director of Internal Revenue's The Company is obligated to withhold 10% tax on confirmation of the seller's exemption from such paid out dividends in the case of individuals and taxation prior to the transaction. Residents of treaty resident companies. Companies may have a countries can apply for formal confirmation of their deduction of the same amount as the dividends exemption from such taxation from the Director of received and consequently there is no effective tax Internal Revenue. burden for companies. The 10% withheld by the Company is in accordance with the Company’s legal 6.10.3 STAMP DUTY responsibilities under law respecting withholding The Company's shares are subject to stamp duty in taxes. If the withholding tax is higher than levied tax, Iceland, which the Company shall pay within two then the difference will be refunded upon months of the issue of the shares. Stamp duty has assessment of tax returns. been paid on all issued shares. Transfer of shares is not subject to stamp duty. 6.10.2 TAX CONSIDERATIONS FOR NON- RESIDENTS OF ICELAND

The Company is obligated to withhold 10% tax on dividends paid to individuals not residents of Iceland (absent treaty provisions to the contrary). The Company is obligated to withhold 15% tax on dividends paid to foreign legal entities unless there

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7 TERMS AND CONDITIONS OF THE SHARE OFFERING

shareholders paid for their shares. This price is in 7.1 OFFEROR AND MANAGER line with Glitnir banki hf.’s valuation of the Glitnir banki hf., Icelandic ID No. 550500-3530, company, based on cash flow analysis and Kirkjusandur 2, 155 Reykjavík, telephone number: comparison to other western-european airlines. +354 440 4000. No direct taxes or expenses are specifically charged 7.2 OFFERING OF SHARES - to subscribers in the Share Offer or the resulting NOVEMBER 27 – DECEMBER 4 purchase of shares. However, subscribers might bear indirect costs, such as costs relating to opening a VS The offering will be done in three tranches, an offer account. to Icelandair Group Holding’s employees, an offer to the general public and an offer to qualified investors. 7.2.2 OFFER TO ICELANDAIR GROUP Each group will be allocated a portion of the total HOLDING’S EMPLOYEES number of shares on offer. The offer to employees All employees of Icelandair Group and its and general public described in this Securities Note subsidiaries as of 15 November 2006 are entitled to will constitute a public offering pursuant to Article the subscription of a fixed number of shares1 without 21 of the Securities Act. being subject to reduction. Taking into account the

number of employees and the number of shares Undertakings to subscribe shall be made after the reserved for each, the maximum number of shares opening of the subscription period at 10:00 GMT on allocated on these grounds is 35 million shares. 27 November 2006 and no later than 19:00 GMT on Should demand for shares be less than the number 4 December 2006. Each investor may subscribe of reserved shares, outstanding shares will be offered more than once although total amount subscribed for to qualified investors. may not exceed the maximum subscription amount as described in sections 7.2.1 - 7.2.3 for individual MINIMUM REQUESTED SUBSCRIPTION tranches of the Share Offer. However, each The minimum individual subscription required for subscription is binding and investors are not allowed Icelandair Group’s employees is 3,704 shares. Any to reduce subscriptions already made. Undertakings subscriptions exceeding the fixed amount reserved to subscribe can only be made by the means for each employee is subject to the same conditions described in sections 7.2.1 - 7.2.3. as apply to the general public as described in

section 7.2.3. Subscriptions constitute a legally binding agreement pursuant to which those subscribing are bound to REGISTERING SUBSCRIPTIONS purchase the shares subscribed. When subscribing the investor declares that he has familiarized himself with, understood and agreed the terms and other 1 Each employee can sign up for a minimum of aspects of the Prospectus. 3,704 shares and up to 11,112 shares. In

7.2.1 OFFERED AMOUNT AND SHARE PRICE addition, certain employees with management

A total of 185 million shares or 18.5% of the issued responsibilities can sign up for up to 92,593 share capital will be offered at the price of ISK 27.0 shares. Total number of employees who can per share, which is the same price as all the current subscripe in the offer to employees is 2,717.

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Subscription for shares in the offering can be made MINIMUM AND MAXIMUM REQUESTED electronically via a special subscription form on the SUBSCRIPTION website of Glitnir Banki hf., www.glitnir.is. Every The minimum and maximum subscription amount employee was sent a letter 16 November 2006 required for the general public is 3,704 shares and containing a username and a password, which are 1,851,852 shares respectively. required for identification when login in to the subscription form. From investors subscribing for over 185,185 shares the Manager reserves the right to demand payment Electronic verification is a precondition for a valid security which he considers adequate. Adequate proof of the subscription. Verification of the payment security could be a pledge in other subscription which appears at the end of the securities, a pledge in a bank account or a custody subscription can be printed out and will be sent to account. The payment security (e.g. pledge) would the legal residence of the subscriber. From the time be cancelled upon payment of the subscription. of subscription until 14 December 2006 the electronic verification can also be obtained from the REGISTERING SUBSCRIPTIONS website using the same login details as when Subscription for shares in the offering can be made subscribing. electronically via a special subscription form on the website of Glitnir Banki hf., www.glitnir.is. Before Employees that do not have access to the Internet subscribing, an investor must identify himself with can subscribe by calling Glitnir banki hf.’s Customer login details in the form of an ID-No. and a password Service Centre by telephone on +354 440 4920. ordered at the beginning of the internet subscription Employees must identify themselves with the form and sent instantaneously to an e-mail address username and password contained in the letter sent provided. to employees. Verification of the subscription will be sent via e-mail, if applicable, and to the legal Electronic verification is a precondition for a valid residence of the subscriber. proof of the subscription. Verification of the subscription which appears at the end of ENQUIRES subscription can be printed out and will be sent to Glitnir Banki hf.’s Customer Service Centre will the legal residence of the subscriber. From the time provide information on the offering to participants in of subscription until 14 December 2006 the the employee share offer by telephone on +354 440 electronic verification can also be obtained from the 4920, between 9:00 GMT and 17:00 GMT during website, using the same login details as when the subscription period. subscribing.

7.2.3 OFFER TO THE GENERAL PUBLIC Prospective investors that do not have access to the A total of 40 million shares will be offered to the Internet can subscribe by calling Glitnir banki hf.’s general public. Participation in the offering is Customer Service Centre by telephone on +354 440 available to all individuals holding an Icelandic ID- 4920. Verification of the subscription will be sent Number, if not prohibited by law. The Offeror’s via e-mail, if applicable, and to the legal residence employees are allowed to take part in the offer to the of the subscriber. general public. In the event of demand being less than the offered amount, outstanding shares will be offered via the offer to qualified investors.

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ALLOCATION TO SUBSCRIBERS ALLOCATION If there is excess demand in this phase of the The Offeror reserves the right to accept or decline offering, issued shares will be allocated to individual any subscription without providing a reason for the subscribers as follows: decision. I. Individual subscriptions will be reduced on a pro rata basis by up to 50% of the ENQUIRES individual subscriptions, which will then be Glitnir banki hf.’s Capital Markets will provide deemed as each individual’s subscription; information on the offering to qualified investors by and telephone on +354 440 4499, between 9:00 GMT II. if after these adjustments the aggregate and 17:00 GMT, weekdays, during the subscription number of shares subscribed for is greater period. than the number of shares allocated to the general public, the maximum individual 7.3 UNDERTAKINGS TO SUBSCRIBE subscription permitted will be lowered to a ACCEPTED level at which the aggregate number of An agreement on subscription will take effect when shares subscribed for equals the number of the Offeror accepts a prospective investor's shares offered. undertaking to subscribe. The Offeror will do so no

later than 20:00 GMT on 5 December 2006. ENQUIRES Notification of allocation and payment instructions Glitnir banki hf.’s Customer Service Centre will will be sent by payment slips, either electronically or provide information on the public offering by by mail, to subscribers no later than 6 December telephone on +354 440 4920, between 9:00 GMT 2006. For investors subscribing online, the and 17:00 GMT during the subscription period. information will also be accessible from 6 December 2006 until 13 December 2007 via the website 7.2.4 OFFER TO QUALIFIED INVESTORS www.glitnir.is, using the same login details as when A minimum of 110 million shares will be offered to subscribing. qualified investors. Only qualified investors as defined in Point 7 of the first paragraph of Article 2 7.4 PAYMENT / SHARE DELIVERY of the Securities Act may take part in this part of the Investors participating in the offer must pay with Offering. cash in accordance with the subscription agreement

no later than 11 December 2006. If payment is not MINIMUM REQUESTED SUBSCRIPTION received on the due date it may be collected in a The minimum individual subscription amount manner provided for by Icelandic law. The Offeror required for qualified investors is 370,370 shares. also reserves the right to cancel unilaterally unpaid

subscriptions on the due date instead of collecting REGISTERING SUBSCRIPTIONS the debt and to reallocate the subscription at the Qualified investors must submit a binding Company’s discretion. application for subscription by contacting Glitnir banki hf.’s Capital Markets by telephone on +354 Shares subscribed and paid for will be delivered to 440 4499, between 9:00 GMT and 17:00 GMT, each investor no later than December 13, 2006. weekdays, during the subscription period.

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8 ANNOUNCEMENT

The outcome of the offering will be published on the ICEX news webpage before 10:00 GMT on 6 December 2006.

9 ADMISSION TO TRADING

9.3 REGULATED MARKETS 9.1 LISTING ON ICEX The shares have not been admitted to trading on a The Board of Directors was authorised by the regulated market. The Company's board of directors shareholder’s meeting on October 15, 2006 to list the has not made any resolution on seeking an Company on the ICEX Main List. The objectives of the admission to trading for the Company’s shares on listing are to increase liquidity of the shares, reach a other regulated markets than the ICEX. broader range of investors and to get better price information on the shares. 9.4 MARKET MAKING

The Board of ICEX has agreed to the listing of the According to two separate agreements, Glitnir banki Company’s entire issued shares on the ICEX Main hf. and Straumur Burðarás Investment Bank hf. will List, subject to the Company fulfilling conditions for act as market makers for the Company’s shares after listing on the ICEX Main List after the Share Offer. the expected listing on ICEX Main List. The Company currently fulfils the condition regarding size but conditions regarding share Glitnir banki hf. shall through its own account distribution and number of shareholders are submit daily bids and asks to the ICEX for a expected to be fulfilled after the Share Offer. minimum of ISK 15 million (purchasing price) on each side at a price determined by the market maker The Manager feels confident that the Company will on any given occasion. The maximum bid/ask spread meet ICEX conditions on diversification of ownership may not exceed 1.0% and the difference from the after the Share Offer. The Company expect that 32% last price paid may not exceed 3.0%. The market of the share capital will be owned by more than 300 maker is obliged to provide liquidity for up to ISK general investors. Current ownership, based on 150 million per day. binding purchasing agreements, of general investors is 13.5% and the number of shareholders behind Straumur Burðarás Investment Bank hf. shall that amount is 41. through its own account submit daily bids and asks to the ICEX for a minimum of ISK 13.5 million 9.2 ADMISSION TO TRADING (purchasing price) each side at a price determined The Shares will to be admitted to trading on ICEX by the market maker on any given occasion. The Main List if the Company will fulfil ICEX conditions for maximum bid/ask spread may not exceed 1.0% and listing after the Share Offer, regarding share the difference from the last price paid may not distribution and number of general investors. If the exceed 3.0%. Straumur Burðarás Investment Bank is Company will fulfil the ICEX conditions then 14 obliged to provide liquidity for up to ISK 150 million December 2006 will be the earliest date on which the per day. shares will be admitted to trading on ICEX.

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10 SALES PRIOR TO THE SHARE OFFER

Three qualified investors, Langflug ehf., Naust ehf. Of the 365,185,185 shares currently held by Glitnir and Ómar Benediktsson founded Icelandair Group banki hf., 185,000,000 shares will be offered via Holding hf. with the goal of purchasing Icelandair the Share Offer, Glitnir banki hf. intends to own in Group hf. On 15 October, 2006 they committed its own account 6,221,296 shares and themselves to invest 50.5% of the equity required in 173,963,889 shares are now owned by GLB Hedge. Icelandair Group Holding hf. to purchase all shares However, for all the shares owned by GLB Hedge a of Icelandair Group, under the current financial binding agreement has been made, whereby the structure. These investors are now represented in the buyer buys shares and GLB Hedge is the seller. In all shareholder base as controlling shareholders of of these instances, the settlement date is at a date investment companies Langflug ehf., Naust ehf. and after the issuance of this document. As a result of Urður ehf. who now collectively own 52.4% of the this, GLB Hedge is the registered owner of the Company’s share. shares which have been sold, but a firm commitment is in place to settle the agreement on behalf of GLB On 15 October 2006 the Manager Hedge and every buyer. underwrote 49.5% of Icelandair Group Holding as a part of the transaction where Icelandair Group From 15 October, 2006 the Manager introduced Holding hf. bought Icelandair Group hf. from FL Icelandair Group Holding to a few selected investors Group. At the date of this document, the Manager and offered them to purchase shares prior to the has already purchased all unsold Icelandair Group anticipated Share Offer. Among them are the top Holding hf. shares which it previously underwrote, management level of Icelandair Group and based on the underwriting agreement. The unsold subsidiaries who have collectively purchased shares Glitnir banki hf. purchased came to 45,075,000 shares. Six major pension funds 365,185,185 shares. purchased a total of 66,666,667 shares in the Company after getting a presentation from the Glitnir banki hf. has decided to make a distinction Company and the Manager. A selection of Glitnir between shares which are held to hedge the Banks´ banki hf.’s most affluent Private Banking clients got risk in connection with forward contracts and other a presentation and have decided to purchase a total equities owned by the Bank, respectively. of 40,000,000 shares, and two other investors made Consequently, this distinction will be reflected in purchases of 22,222,222 shares. The sum of the company shareholders’ registries where Glitnir banki shares purchased by these four groups equals the hf. holds shares. number of shares currently held by GLB Hedge.

In order to achieve this goal Glitnir banki hf., has GLB Hedge holds at the issue of this document established an entity named GLB Hedge, Id No 173,963,889 shares in Icelandair Group Holding hf. 620906-9990, and the former shares have been or 17.4%. These shares have all been sold but have registered to GLB Hedge. settlement dates which are after the issue of this Securities Note but no later than 11 December The purpose of this exercise is to increase the 2006 and are therefore not included in the list of transparency of the Bank’s equity holdings. shareholders held by the Icelandic Securities Depository.

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11 COST OF THE SHARE OFFER 12 ADDITIONAL INFORMATION

The total cost of the admission to trading of this The Manager has been advisor to the Company on share capital on the Main List of the ICEX is the listing of the shares and the preparation of the estimated at ISK 200 million, including charges Prospectus. from ICEX and advisory fee to the Manager. All costs of the admission to trading will fall on the Company.

All costs directly relating to the Share Offer will be covered by the Manager.

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This page is intentionally left blank III. REGISTRATION DOCUMENT

TABLE OF CONTENTS

1 RISK FACTORS...... 5 1.1 GENERAL RISKS ASSOCIATED WITH INVESTMENTS IN EQUITIES...... 5 1.2 RISKS RELATING TO THE AIRLINE INDUSTRY...... 5 1.3 OTHER OPERATIONAL RISKS ...... 7 1.4 FINANCIAL RISK...... 8 1.5 REGULATORY AND LEGAL RISK...... 8 2 PERSONS RESPONSIBLE ...... 10 2.1 THE ISSUER ...... 10 2.2 GLITNIR BANKI HF. (MANAGER AND OFFEROR) ...... 11 2.3 STATUTORY AUDITORS ...... 12 3 DOCUMENTS ON DISPLAY...... 13 4 REFERENCES ...... 13 5 THIRD PARTY INFORMATION ...... 14 6 NOTICE TO INVESTORS...... 14 7 SELECTED FINANCIAL INFORMATION...... 16 7.1 ANNUAL ACCOUNTS OF SELECTED SUBSIDIARIES ...... 16 7.2 2006 INTERIM REPORT ...... 19 8 INFORMATION ABOUT THE COMPANY ...... 20 8.1 HISTORY AND DEVELOPMENT ...... 20 8.2 MERGER OF ICELANDAIR GROUP HOLDING HF. AND ICELANDAIR GROUP HF...... 20 8.3 NAME AND PLACE OF REGISTRATION AND REGISTRATION NUMBER...... 21 8.4 KEY MILESTONES...... 22 8.5 PRINCIPAL ACTIVITIES...... 22 9 ORGANISATIONAL STRUCTURE...... 23 10 SUBSIDIARIES ...... 24 11 ICELANDAIR GROUP HOLDING...... 25 11.1 SCHEDULED AIRLINE OPERATIONS...... 26 11.2 GLOBAL CAPACITY SOLUTIONS AND AIRCRAFT TRADING...... 35 11.3 TRAVEL & TOURISM INFRASTRUCTURE...... 38 11.4 OTHER SUBSIDIARIES ...... 40 12 OPERATING ASSETS...... 42 12.1 BUILDINGS...... 42 12.2 AIRCRAFT AND FLIGHT EQUIPMENT...... 43 12.3 OTHER PROPERTY AND EQUIPMENT ...... 43 13 INVESTMENTS...... 44 13.1 HISTORICAL INVESTMENTS ...... 44 13.2 CURRENT INVESTMENTS ...... 44 13.3 FUTURE INVESTMENT ...... 46 14 BOARD OF DIRECTORS AND MANAGEMENT...... 47 14.1 BOARD OF DIRECTORS...... 47 14.2 SENIOR MANAGEMENT...... 50 14.3 CONFLICT OF INTEREST...... 51 14.4 CONFIRMATIONS ...... 51 15 BOARD PRACTICES...... 52 15.1 THE BOARD OF DIRECTORS ...... 52 15.2 SERVICE CONTRACTS ...... 52 15.3 AUDIT COMMITTEE AND REMUNERATION COMMITTEE ...... 52 15.4 COMPLIANCE...... 52

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16 EMPLOYEES, REMUNERATION AND BENEFITS...... 53 16.1 REMUNERATION AND BENEFITS...... 53 16.2 PENSION LIABILITY ...... 53 16.3 NUMBER OF EMPLOYEES...... 53 16.4 ARRANGEMENTS FOR INVOLVING THE EMPLOYEES IN THE CAPITAL OF THE COMPANY ...... 54 17 SHAREHOLDERS...... 54 17.1 LIST OF MAJOR SHAREHOLDERS ...... 54 17.2 SALES PRIOR TO THE SHARE OFFER...... 56 17.3 SHARE DISTRIBUTION ...... 56 17.4 VOTING RIGHTS...... 57 17.5 CHANGE IN CONTROL OF THE COMPANY...... 57 17.6 DIRECT OR INDIRECT OWNERSHIP OR CONTROL BY INDIVIDUAL SHAREHOLDERS...... 57 17.7 CONVERTIBLE BOND...... 57 18 RELATED PARTY TRANSACTIONS...... 57 19 FINANCIAL INFORMATION ...... 58 19.1 IFRS...... 58 19.2 EXPLANATORY NOTES...... 58 19.3 DIVIDEND POLICY ...... 58 19.4 OPERATING INCOME AND EXPENCES ...... 58 19.5 SIGNIFICANT CHANGE IN THE COMPANY’S FINANCIAL POSITION...... 58 20 SELECTED SUBSIDIARIES...... 59 20.1 ICELANDAIR ...... 59 20.2 ICELANDAIR CARGO...... 63 20.3 LOFTLEIÐIR-ICELANDIC ...... 66 20.4 BLUEBIRD CARGO ...... 70 20.5 AIR ICELAND ...... 75 21 NINE MONTHS REPORT FOR ICELANDAIR GROUP ...... 79 21.1 INTERIM INCOME STATEMENT...... 79 21.2 INTERIM BALANCE SHEET ...... 80 21.3 CASH FLOW ...... 81 22 2005 PRO FORMA FINANCIAL INFORMATION ...... 82 22.1 REVIEW OF HISTORICAL FINANCIAL INFORMATION ...... 82 22.2 AUDITOR’S REVIEW REPORT ...... 83 22.3 PRO FORMA INCOME STATEMENT...... 84 22.4 PRO FORMA BALANCE SHEET ...... 87 23 LEGAL AND ARBITRATION PROCEEDINGS...... 90 23.1 IGS...... 90 23.2 ICELANDAIR ...... 90 24 CAPITAL RESOURCES ...... 90 24.1 BORROWING REQUIREMENTS...... 90 24.2 THE FUNDING STRUCTURE...... 90 25 SHARE CAPITAL...... 91 25.1 ABOUT THE SHARE CAPITAL...... 91 25.2 CONVERTIBLE BONDS...... 91 25.3 ACQUISITION RIGHTS AND CAPITAL INCREASE ...... 93 25.4 OPTIONS ...... 93 26 ARTICLES OF ASSOCIATION...... 94 26.1 OBJECT AND PURPOSE ...... 94 26.2 BOARD OF DIRECTORS AND MANAGEMENT...... 94 26.3 RIGHTS, PREFERENCES AND RESTRICTIONS OF SHARES ...... 94

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26.4 ACTIONS NECESSARY TO CHANGE SHAREHOLDERS’ RIGHTS...... 95 26.5 SHAREHOLDERS’ MEETINGS...... 95 27 ABBREVIATIONS USED IN THIS REGISTRATION DOCUMENT ...... 96 28 APPENDICES ...... 97 28.1 ICELANDAIR GROUP HOLDING HF.’S ARTICLES OF ASSOCIATION...... 97 28.2 MERGER PLAN FOR ICELANDAIR GROUP HOLDING HF. AND ICELANDAIR GROUP HF. AND KPMG REPORT ON THE MERGER OF ICELANDAIR GROUP HOLDING HF. AND ICELANDAIR GROUP HF...... 97 28.3 FINANCIAL REPORTS FOR ICELANDAIR EHF...... 97 28.4 FINANCIAL REPORTS FOR FLUGLEIÐIR FRAKT EHF. (ICELANDAIR CARGO)...... 97 28.5 FINANCIAL REPORTS FOR LOFTLEIÐIR-ICELANDIC EHF...... 97 28.6 REPORTS FOR AIR ICELAND...... 97 28.7 REPORTS FOR BLUEBIRD CARGO...... 97 28.8 ICELANDAIR GROUP’S INTERIM STATEMENTS FOR 2006...... 97 28.9 ICELANDAIR GROUP’S PRO-FORMA STATEMENTS...... 97 28.10 PRO FORMA BALANCE SHEET 24 OCTOBER 2006...... 97

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1.2.1 COMPETITION 1 RISK FACTORS The level of competition amongst airlines is high and Investing in shares is subject to numerous risks. pricing decisions are heavily dependent on Prior to making any investment decision regarding competition from other airlines. The low marginal shares in the Company, please consider all the costs relating to servicing additional customers on information in this document and, in particular, the scheduled flights, compared to flying with vacant risks and uncertainties described below. The risks seats, has also resulted in the airline industry being and uncertainties described below may materially susceptible to fare discounting. On-line sales have affect the Company and any investment made in its increased the price transparency in the air travel shares. If any combination of these events occurs, market, which has in turn resulted in more intense the trading price of the shares could decline and competition. The Company is also to some extent investors might lose part or even all of their subject to competition from alternative ways of investment. Additional risks and uncertainties that travelling, such as buses and private cars. Should do not currently exist, that are not presently competition increase even further in any of the considered material, or of which the Company is Company's key markets, including the Icelandic unaware, may also impair the business and market, this might have a considerable effect on the operations of the Company. These risks and Company's profitability. uncertainties could have a material adverse impact on the business, income, profits, assets, liquidity 1.2.2 FUEL PRICE AND AVAILABILITY and share price of the Company. As an airline operator, the Company is highly sensitive to jet fuel prices and availability. Jet fuel 1.1 GENERAL RISKS ASSOCIATED WITH INVESTMENTS IN EQUITIES has been, and is expected in the future to be, subject to significant price volatility and fluctuations Experience shows that equities are generally a more in supply and demand. Increased costs and/or profitable investment than bonds in the long term. restricted availability of aviation fuel may affect the Yield on equities consists of dividend payments, on profitability of the Company. In order to control the one hand, and of the change in share prices on better the Company’s risks relating to volatile fuel the other, profit or loss resulting from the difference prices, the Company has a policy of hedging a between the price per share on purchase and at sale. portion of its projected aviation fuel requirements.

However, hedging is also subject to risks. If fuel It must be borne in mind that, all other things being prices continue to rise, this will damage the equal, investing in equities involves greater risk than Company's cost structure and its competitiveness investing in bonds. Equity prices generally undergo vis-à-vis its competitors which have greater hedging. greater fluctuations than do bond values. The risk If prices were to fall at the same time as the involved in investing in individual companies can be Company has a higher level of hedging than its spread by investing in a portfolio of companies of competitors, this would damage its competitiveness. different types. Nevertheless, it is not possible to Recently, when high fuel prices have prevailed, avoid risks that affect the equity market as a whole, airlines have been more efficient in passing price e.g. currency exchange fluctuations, changes in increases on to their customers through fuel general interest rates, risks accompanying political surcharges and other methods. If fuel prices developments, changes in the economic outlook, etc. continue to rise, there is no guarantee that the increase in cost can be passed on to customers due 1.2 RISKS RELATING TO THE AIRLINE to the competitive nature of the airline industry, and INDUSTRY therefore the Company could be affected adversely. The Company owns and operates companies in the If fuel prices remain high for an extended period, airline, transportation and tourism industries. long-haul flights will become proportionally more expensive to operate, and therefore leisure travellers may prefer travelling shorter distances due to the lower cost involved.

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1.2.3 SEASONALITY bring together the world's two largest aviation The Company operates in a seasonal industry where markets, allowing EU and US airlines to fly to any there has traditionally been higher demand for air destination and charge prices at their own discretion. travel in the summer. This seasonal pattern explains If the agreement materializes, competition on why the Company operates more aircraft during the transatlantic flights is likely to increase, which could summer season than during other seasons and has adversely affect the profitability of business of the relatively better results in the second and third Company, which is competing on transatlantic quarters of the year than in the first and fourth. markets. These negotiations are still in progress, Lower demand for air travel, flight cancellations or however, and their outcome is difficult to predict. other factors affecting aircraft utilization would 1.2.6 AIRPORT ACCESS therefore have a proportionately greater impact on the Company during the summer than during other At some airports, an air carrier needs landing and periods. takeoff authorisations (slots) before being able to introduce new services or expand existing ones. The 1.2.4 REGULATIONS Company is dependent on its slots in order to be Air transportation is subject to intensive regulations. able to compete. If the Company is not able to An Air Operator’s Certificate (AOC) has been issued secure and retain slots, this could limit its ability to to the relevant subsidiaries1 of Icelandair Group compete in certain markets. Generally, access to authorising it to conduct its airline operations. There airports is furthermore vital to minimize the is no guarantee that the Company will be issued likelihood of delays, which can be detrimental to the such licenses in the future. Occasionally the FAA Company's profitability. (Federal Aviation Administration, a US government 1.2.7 ECONOMICAL EFFECTS agency responsible for overseeing air transportation in the USA) and its European counterparts issue Generally, the airline industry tends to experience directives and other regulations relating to the greater profitability during times of economic maintenance of aircraft that result in significant prosperity. Consequently, the Company is dependent costs for the Company. There is no guarantee that on the state of the economy in the countries in the Company will be compensated for this through which it operates. In a depressed economy, higher ticket prices, and so it is likely that the consumers are likely to reduce air travel, which Company will be adversely affected. The Company's could affect both load factors and yield. Even though operating authority is subject to aviation agreements the Company has worked extensively on reducing its between governmental authorities of the European fixed costs to reduce the adverse effects of reduced Union and the respective countries. Those demand, it will most likely be negatively affected in agreements are periodically subject to renegotiation. the case of a depressed economy. Changes in the aviation policies of those countries could result in the termination of such agreements 1.2.8 STRIKES and adversely affect the Company’s operations. The airline industry is an inherently labour-intensive Individual airline regulators, including the one in industry. The majority of the Company's employees Iceland, may impose restrictions and requirements are unionized, and are represented by several that would impact the Company's profitability. unions, each of which has its own contract on salaries and benefits with the Company. Each 1.2.5 “OPEN SKIES” AGREEMENT contract comes up for renegotiation every few years, The United States and Europe have been conducting and every time this happens there is a risk that the negotiations regarding an “open skies” agreement parties will not reach an agreement; such situations between the two markets. The agreement would may end in a strike. Strikes can affect the Company heavily and in the worst case halt the operation of one or more of its subsidiaries. Strikes in the 1 Icelandair, Bluebird Cargo, Air Iceland and aviation industry can be extremely expensive for LatCharter (owned by Loftleiðir-Icelandic) have been airlines due to the nature of the business, which is issued an AOC.

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burdened with high fixed costs. Additionally, the 1.3 OTHER OPERATIONAL RISKS Company could be adversely affected by strikes of airport employees or any other employee group that 1.3.1 AIRCRAFT PRICING AND AVILABILITY it depends on but does not constitute part of its own Aircraft prices and leasing are cyclical by nature. If staff. In addition to relying on hired personnel, the the value of a type of aircraft drops due to lower Company relies on third parties to provide its demand for air travel or any other reason, the value customers with services on behalf of and in of those craft and their leasing rates will be affected. cooperation with it. Any inability of the relevant third If this happens, the Company's profitability could be parties to provide such services may impact the adversely affected. On the other hand, when the business. Company needs to replace the aircraft which it is currently operating, add new aircraft or renegotiate 1.2.9 TERRORIST INCIDENTS AND EPIDEMICS leasing agreements, the Company’s aircraft operating Following the terrorist attacks of 11 September cost could increase or decrease depending on the 2001, demand for airline travel dropped. Similarly, market conditions at that time, which would affect many airlines were affected by the outbreak of SARS its profitability. The Company owns a number of (Severe Acute Respiratory Syndrome) in 2003. The aircraft, the value of which will have to be tested for occurrence of another large scale terrorist attack or impairment when there is an indicator of an outbreak of a disease that resulted in fear of impairment. Such impairment tests could result in travelling could depress the aviation industry and the writing down of the aircraft if the market value affect the Company adversely. and the value in use are below the carrying value of the aircraft. 1.2.10 AIRPORT SECURITY Security measures have in the past disrupted airline The Company owns approximately 50% of its aircraft business on temporary or long-term grounds and operating in scheduled flights (see section 13 for have the potential to do so in the future. For details) while the other are leased with various time instance, a terrorism alert in the United Kingdom in span for flexibility, should the Company need to August this year led to additional security react to lower demand. restrictions at UK airports and delays and cancellation of certain flights. Such increased The Company mainly uses Boeing aircraft, since the security measures may affect the Company’s Company’s management believes that they profitability. satisfactorily meet its objectives of minimizing costs while maximizing passengers' security. Generally, 1.2.11 ACCIDENTS having only one aircraft supplier makes the Company Icelandair Group Holding, like all airline operators, dependent on the supplier to a certain extent. could be affected adversely if one of its aircraft were to be involved in an accident or crash. This may 1.3.2 INTERNATIONAL OPERATIONS involve not only the repair or replacement of Operating in foreign markets exposes the Company damaged or lost aircraft and the consequent to various risks. There is a risk that its prospects in temporary or permanent loss from services, but also some markets could diminish due to various factors, claims from injured passengers and the surviving including political changes, exchange controls and relatives of deceased passengers. Even though the taxation. Company is insured, the insurance cover may be inadequate, in which case it might face significant 1.3.3 KEY EMPLOYEES losses. Additionally, if an aircraft from the Company The Company is dependent on its key employees and is involved in an accident, this might create a public their willingness to continue working for it. There is, perception that the Company's aircraft are not however, no guarantee that it will be able to retain reliable, which in turn could harm the business. all of them in the future. If the Company loses any of them, it could be adversely affected. Should members of key personnel decide to join competitors

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or start competing independently with the Company, Icelandic market. Furthermore, the Company is from this may have consequences for the Company's time to time involved in disputes with its competitors business. over alleged breaches of anti-trust regulations. Should the competition authorities reach the In order to reduce the risk of losing key employees, conclusion that the Company has breached such the company aims to offer competitive salary regulations, this may have serious consequences for packages to its key employees. This includes linking the Company which may include substantial fines the management’s salary to results of individual and affect its ability to conduct its business in the subsidiaries. Furthermore, the Company actively usual manner. Current legal and arbitration manages its information systems to keep know-how proceedings are detailed in section 23. within the company. Employment agreements with certain key employees also contain provisions that 1.4 FINANCIAL RISK exclude them from working for competitors for up to 24 months after their resignation. Both these factors 1.4.1 EXCHANGE-RATE AND INTEREST-RATE should reduce the consequences for the company if RISKS one of its key employees decides to resign. Fluctuations in exchange rates and interest rates, and exchange-rate risk posed by trading between 1.3.4 COMPUTER AND COMMUNICATION Group companies with different functional SYSTEMS currencies, can materially impact the Company's An increasing proportion of ticket sales take place profitability. The Company aims to reduce as much over the internet. The Company's planning, as possible of any such risk by actively managing its communication and revenue management systems currency balance and interest-rate risk. are also computer based. These systems are vulnerable to disruptions that are beyond the 1.4.2 LIQUIDITY RISK Company's control. Possible disruptions could result The Company faces the risk of having insufficient from viruses, hackers, equipment failure, power working capital to meet present requirements, e.g. failure, natural disasters and human errors. The due to inability or difficulties in liquidating its Company has various initiatives in place to minimize assets. This risk is mitigated to some extent by the risk of failure to those systems but there can be maintaining liquid assets. Liquidity risk is also no assurance that these initiatives will adequately reduced to some extent by the nature of the prevent disruption to its systems. Company’s business, as it realises income before paying the cost associated with providing the 1.3.5 INSURANCES services. The Company carries insurance for passenger liability, property damage, public liability and all-risk 1.5 REGULATORY AND LEGAL RISK cover for damaged aircraft. There may be losses 1.5.1 APPLICABLE LAW which the business may suffer that are not covered by insurance. Furthermore, individual losses may The Company and its subsidiaries are subject to exceed the cover under applicable insurance. In both various laws and regulations. Changes to the Group's cases, losses may subject the Company to applicable laws, or it becoming subject to different considerable financial harm. laws, might have an impact on how it continues to conduct its business. 1.3.6 ANTI-TRUST REGULATIONS 1.5.2 COVENANTS – CONTRACTUAL RISK Due to the favourable market position of some of Icelandair Group Holding’s subsidiaries in Iceland, The Company is contractually bound to honour Icelandair Group Holding is subject to even more various contracts in leasing and financing stringent anti-trust regulations than a company with agreements. Should the Company become unable to a smaller market share would be. This places some fulfil the relevant covenants, or for some reason limitation on the Company's ability to grow in the discontinue to do so, the lessors and financiers may

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become entitled to rescind these agreements, which controls relating to the handling of electronic might have financial consequences for the Company. documents. The Company has focused on strengthening such controls. Should such controls 1.5.3 SECURITIES REGULATION prove, however, to be insufficient, this may have a Since the Company's shares are expected to be negative impact on the Company. traded on the Iceland Stock Exchange, it will be subject to Icelandic securities regulations, e.g. those 1.5.8 TAX in the Securities Act, government regulations and The Company could be affected by changes in tax rules adopted by the Iceland Stock Exchange. If the legislation in any country that affects its financial Company will be listed on the Iceland Stock results. Icelandair Group Holding is not aware of any Exchange it will endeavour to comply with the said current tax inspection concerning the Group which provisions, and any violation of these provisions may may have a material impact on its shares, and has have a financial impact on it. Serious breaches may no reason to believe that any such inspection is result in the Iceland Stock Exchange’s ceasing to list imminent. Investigation of the Company's tax filings, the Company's securities. Should the Company as for any other company, may be initiated at a later violate the relevant rules, this may furthermore stage in accordance with relevant regulations and impact its reputation and consequently result in the affect its prospects. price of its shares dropping. There could be some tax risks regarding withholding 1.5.4 REGULATIONS tax. In the Company’s Senior Management opinion The airline operations and other aspects of the there is uncertainty regarding its duty to withhold tax Company's business, such as the segments relating on lease payments of aircraft leased from foreign to tourism, are subject to the condition that various lessors from countries that don’t have a tax treaty regulations and public permits have been issued. If with Iceland. In practice the Company has never any regulations were changed, or permits cancelled done so. Management has taken steps to clarify the or not renewed, this might affect the Company situation and they believe that they are using the adversely. same approach as has been used in the past by Icelandic companies but the risk is that tax 1.5.5 LITIGATION authorities would conclude that the Company's Given the Company's size and the scope of its approach to withholding tax issues do not fully operations, it tends to be involved in some form of comply with tax legislation applicable in this context. litigation at any given time. Currently the Company is involved in various legal disputes, including cases The Manager has not independently verified these before the Competition authorities. Current legal and issues and recommends that any potential investor arbitration proceedings are detailed in section 23. investigate this issue in general. No assurance can be given on the likelihood of payments having to be 1.5.6 TRADEMARKS AND INTELLECTUAL made in this respect, or on the possible scale of PROPERTY such payments. When FL Group sold its shares in The Company owns a number of trademarks and the Company they agreed to compensate Icelandair other intellectual property through its operational Group Holding hf. fully for any payments above ISK subsidiaries. It has used all means available to 500 million which might be paid by the Company or secure legal rights to such trademarks and subsidiaries because of tax obligations prior to the intellectual property. Should it, for some reason, be sale and thereby limiting the Company’s risk to ISK unable to continue to rely on the relevant intellectual 500 million. property rights, this could impact its business. Currently there are no tax disputes in progress 1.5.7 INTERNAL CONTROLS between the Company and tax authorities. The Company is dependent on having sufficient internal controls in place in various areas, including

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2 PERSONS RESPONSIBLE

2.1 THE ISSUER The Issuer, Icelandair Group Holding hf., Icelandic ID-No. 591006-2150, registered office at Reykjavík Airport, 101 Reykjavík, the Chairman of the Board of Directors and the CEO, whose names appear below, accept responsibility for the information contained in this Registration Document. Having taken all reasonable care to ensure that such is the case, they hereby declare that the information contained in the Registration Document is, to the best of their knowledge, in accordance with the facts and contains no omission likely to affect its import.

Reykjavík, 26 November 2006. On behalf of the board of directors and Icelandair Group Holding hf. Reykjavik Airport, 101 Reykjavik, Iceland

Finnur Ingólfsson Jón Karl Ólafsson Chairman of the board of directors CEO Icelandic ID No. 080854-3829 Icelandic ID No. 120958-2759

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2.2 GLITNIR BANKI HF. (MANAGER AND OFFEROR)

Glitnir banki hf., Icelandic ID-No. 550500-3530, Kirkjusandur 2, 155 Reykjavík, Iceland, is the Manager and has been advisor to the Company on the listing of the shares and the preparation of this Registration Document. Furthermore, Glitnir banki hf., is also the Offeror.

Glitnir banki hf., in its capacity as the Manager and the Offeror declare that in preparing this Registration Document it has gathered the data which, in its estimation, are necessary to provide a true and fair view of the Company, The Shares and the Share Offer. Glitnir banki hf., hereby declare that, having taken all reasonable care to ensure that such is the case, the information contained in this Registration Document is, to the best of its knowledge, in accordance with the facts and contains no omission likely to affect its import.

Reykjavík, November 26, 2006. On behalf of Glitnir banki hf. Kirkjusandur 2, 155 Reykjavík, Iceland

Bjarni Ármannsson CEO Icelandic ID No. 230368-5389

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2.3 STATUTORY AUDITORS The registered auditor of Icelandair Group hf. is KPMG Endurskoðun hf., Icelandic ID No. 590975-0449, Borgartún 27, IS-105 Reykjavík, Iceland. KPMG Endurskoðun hf. has reviewed the consolidated pro forma income statement for 2005 for Icelandair Group, interim report for Icelandair Group for the first six months of 2006, the opening pro forma balance sheet at 1 January for Icelandair Group, 2006 and the balance sheet dated 24 October 2006 for Icelandair Group Holding. KPMG Endurskoðun hf. has furthermore audited the interim report of Icelandair Group hf. dated 30 September 2006 and the annual accounts of Icelandair, Icelandair Cargo, Loftleiðir Icelandic and Air Iceland for the years ended December 31, 2003, 2004 and 2005. KPMG has also audited the income statements, balance sheets and statements of cash flow for the first nine months of 2006 for Icelandair, Icelandair Cargo, Loftleiðir-Icelandic, Bluebird Cargo and Air Iceland. In addition to this KPMG has compiled the interim consolidated balance sheet of Icelandair Group hf. and its subsidiaries as of 31 March 2006 and the related consolidated income statement and statement of cash flows for the three months then ended.

KPMG confirms that all information in this Registration Document regarding financial information is consistent with the said financial statements.

Reykjavik, November 26, 2006. On behalf of KPMG Endurskoðun hf.

Jón Sigurdur Helgason Sæmundur Valdimarsson, State authorised public accountant State authorised public accountant Icelandic ID No. 050269-3619 Icelandic ID No. 070263-4409

Grant Thornton endurskoðun ehf., Icelandic ID No. 430190-1999, Suðurlandsbraut 20, 108 Reykjavík, Iceland. Has audited the financial information for Bluebird Cargo ehf. for the years ending December 31, 2003, 2004 and 2005. Grant Thornton confirms that all information in this Registration Document regarding financial information for Bluebird Cargo is consistent with the said financial statements it has audited.

Reykjavik, November 26, 2006. On behalf of Grant Thornton endurskoðun ehf.,

Theódór S. Sigurbergsson State authorised public accountant Icelandic ID No. 060459-3049

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4 REFERENCES 3 DOCUMENTS ON DISPLAY References to “Icelandair Group Holding”, “the For the life of this Registration Document, the Group” and “the Company” in this Registration following documents may be inspected on Icelandair Document shall be construed as referring to Group Holding hf.’s registered office Reykjavik Icelandair Group Holding hf., Icelandic ID No. Airport, 101 Reykjavik, Iceland and on Icelandair 591006-2150 and Icelandair Group hf. and its Group Holding hf.’s website subsidiaries unless otherwise clear from the context. http://www.icelandairgroup.is: Icelandair Group Holding hf. is the legal Icelandic name of the Company. • The Registration Document, Security Note and Summary dated November 26, 2006 References to “Icelandair Group Holding’s • Icelandair Group hf.’s reviewed consolidated pro employees” shall be constructed as referring to forma income statements for the financial year employees of Icelandair Group Holding, Icelandair ending 31 December 2005 (including the Group and its subsidiaries. auditors’ reports issued in respect thereof). • Icelandair Group hf.’s reviewed consolidated pro References to “Icelandair Group” in this Registration forma opening balance sheet at 1 January 2006 Document shall be construed as referring to (including the auditors’ reports issued in respect Icelandair Group hf., Icelandic ID No. 631205- thereof). 1780 and its subsidiaries, unless otherwise clear • Icelandair Group Holding hf.’s reviewed opening from the context. Icelandair Group hf. was acquired pro forma balance sheet on 24 October 2006. by Icelandair Group Holding hf. in October 2006 • Icelandair Group hf.’s interim report for the first and is the only direct subsidiary of the Company. three months of 2006, reviewed interim report for the six months ending 30 June 2006 and References to “FL Group” in this Registration audited interim report for the nine months Document shall be construed as referring to FL ending 30 September 2006. GROUP hf., Icelandic ID No. 601273-0129 and its • The audited annual financial statements for subsidiaries, unless otherwise clear from the context. Icelandair, Icelandair Cargo, Loftleiðir-Icelandic, When referred to FL Group it applies to the company Bluebird Cargo and Air Iceland for each of the after the annual meeting in 2005 when the name of financial years ending 31 December 2003, 31 the company was changed to FL GROUP hf. December 2004 and 31 December 2005 (including the audit reports issued in respect References to “Flugleiðir” in this Registration thereof). Document shall be construed as referring to FL • The audited interim income statements, balance GROUP hf., Icelandic ID No. 601273-0129 and its sheets and cash flow statements for Icelandair, subsidiaries, unless otherwise clear from the context. Icelandair Cargo, Loftleiðir-Icelandic, Bluebird When referred to Flugleiðir it applies to the company Cargo and Air Iceland for the first nine months of before the annual meeting in 2005 when the name 2006. of the company was changed to FL GROUP hf. • The interim financial statement for Icelandair, Icelandair Cargo, Loftleiðir Icelandic, Bluebird References to “the Shares” in this Registration Cargo and Air Iceland for the first nine months of Document shall be construed as referring to the 2005. These accounts have not been audited. 1,000,000,000 issued shares in Icelandair Group • Icelandair Group Holding hf.’s Articles of Holding hf., unless otherwise clear from the context. Association • The Merger plan for Icelandair Group Holding hf. References to “the Share Offer” in this Registration and Icelandair Group hf. dated 15 November Document shall be construed as referring to the 2006. offering of 185,000,000 shares in the Company, • Assessors report on the merger of Icelandair which is owned by the Offeror, unless otherwise clear Group Holding hf. and Icelandair Group hf. from the context. The Share Offer will be conducted

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which is owned by the Offeror, unless otherwise clear With respect to the merger plan of Icelandair Group from the context. The Share Offer will be conducted Holding and Icelandair Group, at the request of through three tranches. An offer to the general Icelandair Group Holding’s board of directors, a public of a maximum of 40 million shares, an offer report was prepared by KPMG Endurskoðun hf. to Icelandair Group Holding’s employees of a Icelandic ID No. 590975-0449, Borgartún 27, IS- maximum of 35 million shares and an offer to 105 Reykjavík, Iceland. This report is included in qualified investors of a minimum of 110 million the Appendix as part of the merger plan. shares. The Share Offer will take place from 27 November until 4 December 2006. The Share Offer is described in details in the Securities Note dated 6 NOTICE TO INVESTORS 26 November 2006, see chapter “Documents on This Registration Document and any document Display”. forming a part of the Prospectus published on November 27, 2006, is not being distributed in, and References to “ICEX” in this Registration Document must not be mailed or otherwise distributed or sent shall be construed as referring to the Iceland Stock in or into any country in which distribution would Exchange, i.e. to Kauphöll Íslands hf., Icelandic ID require any additional registration measures or other No. 681298-2829, unless otherwise clear from the measures to be taken, other than as applicable context. References to the “ICEX Main List” in this under Icelandic law and regulations, or would be in Registration Document shall be construed as conflict with any law or regulation in such country. referring to the Main List at the Iceland Stock The shares in the Share Offer are only offered in Exchange, unless otherwise clear from the context. Iceland.

References to “the ISD” in this Registration The Company’s total issued share capital amounts to Document shall be construed as referring to 1,000,000,000 shares, each with a nominal value Icelandic Securities Depository, i.e. to of ISK 1.0. The Company has applied for listing on Verðbréfaskráning Íslands hf., Icelandic ID No. the ICEX Main List. The Company does currently not 500797-3209, unless otherwise clear from the fulfil the conditions for listing on the ICEX Main List context. regarding share distribution and number of shareholders. Following the Share Offer, the References to “the Manager” and “the Offeror” in Company is expected to fulfil its condition regarding this Registration Document shall be construed as the number of shareholders and share distribution. referring to Glitnir banki hf., Icelandic ID No. However, it can not be guaranteed that the 550500-3530, unless otherwise clear from the requirements for share distribution will be fulfilled. context. If these requirements are not fulfilled, the listing on ICEX Main List will not take place. 5 THIRD PARTY INFORMATION Where third party information has been used in this All subscriptions in the Share Offer are binding. The Registration Document, the source of such Offeror’s employees are allowed to take part in the information has been identified. As far as the offer to the general public. Company is aware and able to ascertain from information published by those third parties, no facts Notwithstanding a special statement to the contrary have been omitted which would render the references to any Acts or regulations are references reproduced information inaccurate or misleading. to Acts passed by the Icelandic parliament and regulations issued by Icelandic governmental Three third party sources are used in relations to agencies unless otherwise clear from the context. market information, those are Icelandic Tourist Board, Icelandic Civil Aviation Administration and The Boeing Company. This Registration Document concerns the offering of the Company’s shares in 27 November until 4

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December, 2006, when the Offeror will sell these statements give clear and thorough historical 185,000,000 shares in the Company. This financial information for investors. Registration Document also concerns the expected listing of the Shares on the ICEX Main List. The The Company will, in the event of any significant Share Offer is to be conducted through three new factor, material mistake or inaccuracy relating to tranches, an offer to the general public, an offer to information included in this Registration Document Icelandair Group Holding’s employees and an offer which is capable of affecting the assessment of the to qualified investors. Shares, prepare a supplement to this Registration Document in accordance with Article 24 of the The admission to trading will proceed pursuant to Securities Act or publish a new Registration Icelandic law and regulations. Directive 2003/71/EC Document. If a supplement is prepared, statements of the European Parliament and of the Council of 4 contained in any such supplement shall, to the November 2003 has been implemented into extent applicable (whether expressly, by implication Icelandic Law. The ICEX has, in its authority under or otherwise), be deemed to modify or supersede agreement between it and the Icelandic Financial statements contained in this Registration Document. Supervisory Authority regarding the review and Any statement so modified or superseded shall not, approval of prospectuses, reviewed and approved except as so modified or superseded, constitute a this Registration Document, which is published in part of this document. English only. This Registration Document should by no means be This Registration Document has been prepared to viewed or construed as a promise by the Company, provide clear and thorough information on the Glitnir banki hf. (the Manager and the Offeror) or consolidated company Icelandair Group Holding hf. other parties of future success either in operations or Investors are encouraged to acquaint themselves return on investments. Investors are reminded that thoroughly with this Registration Document. They are investing in shares entails risk, as the decision to advised to pay particular attention to the chapter invest is based on expectations and not promises. Risk Factors. Investors should note that the Investors must rely primarily on their own judgement Company was founded in October 2006 and its only regarding any decision to invest in the Company’s subsidiary Icelandair Group was founded in shares, bearing in mind inter alia the business December 2005. Icelandair Group Holding does not environment in which the Company operates have any employees or operations other than being a anticipated profits, external conditions and the risk holding company for Icelandair Group. All financial inherent in the investment itself. Prospective information for Icelandair Group and its subsidiaries investors are advised to contact experts, such as are therefore representative for Icelandair Group licensed financial institutions, to assist them in their Holding. Financial audited information for Icelandair assessment of the shares in the Company as an Group only exists for the first nine months of 2006. investment option. Investors are advised to consider However, financial information for Icelandair Group’s their legal status, including taxation issues that may largest subsidiaries (Icelandair, Icelandair Cargo, concern the purchase or sale of shares in the Loftleiðir-Icelandic, Bluebird Cargo and Air Iceland) Company and seek external and independent advice undertaking for last three years are included in this in that respect. Registration Document as well as accounts for the first nine months of 2005 and 2006. These Not withstanding a special statement to the contrary subsidiaries represent approximately 88% of the references to any Acts or regulations are references Company’s revenue and therefore represent the to Acts passed by the Icelandic parliament and operations of Icelandair Group Holding and its only regulations issued by Icelandic governmental asset Icelandair Group. The Company believes that agencies unless otherwise clear from the context.

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7 SELECTED FINANCIAL INFORMATION Detailed information concerning the Company’s financial position is presented in sections 19 to 22. Information on the five largest subsidiaries of Icelandair Group is presented in section 20, containing each company’s income statement and statement of cash flow for the years 2003-2005 and the first nine months of 2005 and 2006 and each companies balance sheet for the years 2003-2005 and the first nine months of 2006. Information on the Group’s performance for the first 9 months of 2006 is given in section 21, while discussion on pro forma statement of earnings for the year 2005 and a pro forma balance sheet at 15 October 2006 is provided in section 22. These pro forma accounts are provided for illustrative purposes only. This section provides selected information from the sections mentioned above.

7.1 ANNUAL ACCOUNTS OF SELECTED SUBSIDIARIES Table 1. Key Figures for Icelandair for the period 2003-2005 and the first nine months of 2005 and 2006. Balance Sheet figures are for the end of each period. All figures in ISK million.

2003 2004 2005 1/1-30/9 1/1-30/9 2005 2006 Profit and loss account Transport revenue 18,161 20,409 23,818 18,805 22,408 Aircraft and air crew lease 4,991 6,968 6,161 4,450 5,682 Other operating revenue 2,548 1,680 1,484 1,069 1,437 Operating expenses before depreciation( 24,900 ) ( 27,981 ) ( 30,483 ) ( 22,975 ) ( 26,406 ) Depreciation( 125 ) ( 691 ) ( 684 ) ( 528 ) ( 949 ) EBITDA 800 1,076 980 1,349 3,121 EBIT 675 385 296 821 2,172 Pre-tax profit 613 127 557 825 2,677 Income tax( 111 ) ( 28 ) ( 108 ) ( 155 ) ( 488 ) Profit for the period 502 99 449 670 2,189

Balance Sheet Total assets 9,502 9,339 11,662 29,009 Liabilities 6,226 6,219 8,020 23,076 Equity capital 3,276 3,120 3,642 5,933

Cash flow From operating activities 3,831 1,464 2,781 3,502 5,082

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Table 2. Key Figures for Icelandair Cargo for the period 2003-2005 and the first nine months of 2005 and 2006. Balance Sheet figures are for the end of each period. All figures in ISK million.

2003 2004 2005 1/1-30/9 1/1-30/9 2005 2006 Profit and loss account Cargo and mail 2.698 3.207 3.053 2.203 2.923 Aircraft lease 436 442 282 166 710 Service revenue 759 1.096 1.213 876 1.126 Other operating revenue 23 27 34 20 40 Operating expenses before depreciation( 3.723 ) ( 4.449 ) ( 4.550 ) ( 3.218 ) ( 4.654 ) Depreciation( 12 ) ( 21 ) ( 26 ) ( 19 ) ( 14 ) EBITDA 193 323 32 46 145 EBIT 181 302 6 27 131 Pre-tax profit 219 301 9 25 146 Income tax( 1 ) ( 55 ) ( 2 ) ( 5 ) ( 28 ) Profit for the period 218 246 7 20 118

Balance Sheet Total assets 877 958 1.014 1.237 Liabilities 762 604 882 989 Equity capital 115 354 133 248

Cash flow From operating activities 411 162 18 98 ( 2 )

Table 3. Key Figures for Loftleiðir-Icelandic for the period 2003-2005 and the first nine months of 2005 and 2006. Balance Sheet figures are for the end of each period. All figures in ISK million.

2003 2004 2005 1/1-30/9 1/1-30/9 2005 2006 Profit and loss account Aircraft and air crew lease 3.902 5.454 5.573 4.161 4.947 Sale of assets 0 0 0 0 411 Other operating revenue 14 19 36 25 29 Operating expenses before depreciation( 4.160 ) ( 5.365 ) ( 5.248 ) ( 3.895 ) ( 5.093 ) Depreciation( 2 ) ( 5 ) ( 4 ) ( 3 ) ( 15 ) EBITDA( 244 ) 108 361 291 294 EBIT( 246 ) 103 357 288 280 Pre-tax profit( 231 ) 85 325 261 334 Income tax 73 ( 15 ) ( 60 ) ( 49 ) ( 40 ) Profit for the period( 158 ) 70 265 212 294

Balance Sheet Total assets 424 554 1.172 2.671 Liabilities 752 775 1.095 2.351 Equity capital( 328 ) ( 221 ) 77 320

Cash flow From operating activities 58 292 522 429 31

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Table 4. Key Figures for Bluebird Cargo for the period 2003-2005 and the first nine months of 2005 and 2006. Balance Sheet figures are for the end of each period. All figures in ISK million.

2003 2004 2005 1/1-30/9 1/1-30/9 2005 2006 Profit and loss account Sales income 1.489 2.136 2.241 1.702 2.164 Other operating income 5 74 21 18 15 Operating expenses before depreciation( 920 ) ( 1.500 ) ( 1.766 ) ( 1.359 ) ( 1.632 ) Depreciation( 251 ) ( 269 ) ( 223 ) ( 186 ) ( 193 ) EBITDA 575 711 496 360 547 EBIT 324 441 273 175 354 Pre-tax profit 150 296 158 85 276 Income tax( 5 ) ( 47 ) ( 35 ) ( 21 ) ( 50 ) Profit for the period 145 249 123 64 226

Balance Sheet Total assets 2.655 2.429 2.409 2.914 Liabilities 2.188 1.778 1.615 1.804 Equity capital 467 651 794 1.109

Cash flow From operating activities 407 468 438 295 570

Table 5. Key Figures for Air Iceland for the period 2003-2005 and the first nine months of 2005 and 2006. Balance Sheet figures are for the end of each period. All figures in ISK million.

2003 2004 2005 1/1-30/9 1/1-30/9 2005 2006 Profit and loss account Transport revenue 1.972 2.259 2.591 1.885 2.355 Cargo and mail 105 97 103 76 111 Aircraft and air crew lease 408 520 498 415 413 Other operating revenue 438 465 358 337 327 Operating expenses before depreciation( 2.527 ) ( 2.723 ) ( 3.068 ) ( 2.328 ) ( 2.555 ) Depreciation( 132 ) ( 193 ) ( 182 ) ( 137 ) ( 183 ) EBITDA 397 618 483 384 650 EBIT 265 425 302 248 467 Pre-tax profit 227 384 247 214 403 Income tax 158 ( 70 ) ( 46 ) ( 39 ) ( 74 ) Profit for the period 385 314 201 175 329

Balance Sheet Total assets 1.552 1.813 1.218 3.576 Liabilities 687 978 537 2.565 Equity capital 866 835 681 1.011

Cash flow From operating activities 286 877 282 136 238

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7.2 2006 INTERIM REPORT Table 6. Key figures for Icelandair Group the first three quarters of 2006 and combined for the first nine months of 2006. All figures in ISK million.

Q1 2006 Q2 2006 Q3 2006 2006 1/1-31/3 1/4-30/6 1/7-30/9 1/1-30/9 Profit and loss account Transport revenue 5.555 9.613 12.480 27.648 Aircraft and air crew lease 2.217 2.268 3.290 7.775 Other operating revenue 1.823 2.600 3.707 8.130 Operating expenses before depreciation( 9.860 ) ( 12.917 ) ( 15.056 ) ( 37.833 ) Depreciation( 827 ) ( 409 ) ( 642 ) ( 1.878 ) EBITDAR 304 2.385 5.432 8.121 EBITDA( 265 ) 1.564 4.421 5.720 EBIT( 1.092 ) 1.155 3.779 3.842 Pre-tax profit( 677 ) 1.560 3.056 3.939 Income tax 122 ( 281 ) ( 515 ) ( 674 ) Profit for the period( 555 ) 1.279 2.541 3.265

Balance Sheet Total assets 67.892 Liabilities 44.510 Equity capital 23.382

Cash flow From operating activities 979 3.857 1.557 6.393

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8 INFORMATION ABOUT THE COMPANY

8.1 HISTORY AND DEVELOPMENT 8.2 MERGER OF ICELANDAIR GROUP The history of Icelandair Group Holding's HOLDING HF. AND ICELANDAIR predecessors dates back to 1937, almost as long as GROUP HF. the history of commercial aviation in Iceland, which began in 1919, less than 16 years after the Wright 8.2.1 REASON FOR THE MERGER brothers made the first ever powered flight. Icelandair Group Holding was founded by Langflug Icelandair Group Holding’s predecessor, Flugleiðir ehf., Ómar Benediktsson and Naust ehf., as an hf., was established in Reykjavik on July 20, 1973, acquisition vehicle for the purchase of all shares of by a merger of Flugfélag Íslands hf. and Loftleiðir hf. Icelandair Group with close to 80% equity and the Flugleiðir’s main operations during the period 1937- remainder with debt. The main purpose of having an 2005 were in aviation. Flugleiðir was listed on the acquisition vehicle was to reduce the amount of ICEX Main List in 1992. equity required for the purchase of all shares of Icelandair Group. At Flugleiðir’s annual general meeting in 2005, the company’s name was changed to FL Group and in In the process leading up to the public offer and a October 2005, fundamental changes took place by proposed listing on the Iceland Stock Exchange, the which investment activities became FL Group’s main board of Directors and the Management of Icelandair focus. FL Group’s acquisitions and corporations were Group Holding and Icelandair Group came to the divided into groups, Icelandair Group hf. being one conclusion that it would best serve the company and of them and comprising Icelandair, Icelandair its shareholders if the two companies, Icelandair Technical Services, Icelandair Ground Services, Group Holding and Icelandair Group were to be Loftleiðir-Icelandic and Icelandair Cargo. In February merged effective as of 1 November 2006. By doing 2006, the board of directors of FL Group announced this, the annual statements of 2006, for the then its intention to list Icelandair Group hf. on the ICEX presumably listed company, will best reflect its but postponed it because of unfavourable market operational results. If the two companies are not conditions. At that time, Air Iceland, Iceland Travel merged, the income statement of Icelandair Group and Icelandair Hotels were transferred to Icelandair Holding will only reflect the operations of the Group hf. as were Bluebird Cargo, Fjárvakur, subsidiaries of Icelandair Group since 15 October Icelease, IG Invest and Icecap. 2006 when Icelandair Group Holding acquired Icelandair Group. With the two companies merged In October 2006, Icelandair Group Holding hf. before year end 2006, the statements will reflect the purchased all shares in Icelandair Group hf. at the operations for the whole of 2006. This gives same time acquiring all the shares in Icelandair investors, creditors and all those who have made Group hf.'s subsidiaries. At that time Icelandair significant agreements with Icelandair Group or any Group Holding hf. was owned by FL Group hf. of its subsidiaries a better view of the operational (49.6% ownership), Langflug ehf. (32.0% results. This is especially important with regards to ownership), Naust ehf. (11.1% ownership), Urður communications with leasing companies and ehf. (5.6% ownership) and Glitnir banki hf. (1.7%). creditors. Icelandair Group Holding owns nothing apart from its shares in Icelandair Group hf. It is the intention of Icelandair Group has made various contracts and the current board of directors to merge Icelandair guarantees on behalf of its subsidiaries in its normal Group Holding with Icelandair Group hf., as is course of business, while Icelandair Group Holding discussed in detail in the following section. has not, as it was only established on 15 October 2006. Therefore it is proposed that the shareholders of Icelandair Group Holding will receive shares in Icelandair Group in the merger, and thus Icelandair

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Group will effectively purchase Icelandair Group not find any complications in relations to the Holding. proposed merger.

Both the decision to pursue the merger and the As a result of this merger Icelandair Group Holding proposed structure of the merger are aimed at hf., which has applied for listing on the Iceland benefiting Icelandair Group in its communications Stock Exchange, would be delisted in early 2007 with creditors and other intuitions with which it has after approval from the shareholders and Icelandair major agreements and furthermore to best inform Group hf. would be listed following an issue of an investors of the operational results of their updated prospectus for Icelandair Group hf. investment. Opening balance sheet for the merged company will 8.2.2 THE MERGER PLAN be introduced to the companies’ shareholders in mid A joint plan2 dated 15 November 2006 has been December, before a formal decision on the merger prepared by the board of directors of Icelandair will be made by shareholders on a shareholders’ Group Holding hf. and the board of directors of meeting. It is the intention of the current board of Icelandair Group hf. concerning the merger of the directors that the merger will be completed before companies. An assessors’ report has also been the end of January 2007. prepared for the merger. The companies will be merged under the name of Icelandair Group hf., Icelandair Group Holding hf. will be acquired by Icelandic ID No. 631205-1780. On the merger, the Icelandair Group hf. if agreed by a shareholders shareholders of Icelandair Group Holding hf. will meeting after the Share Offer. Icelandair Group receive shares in the nominal value of ISK Holding will then be liquidated and its ownership 1,000,000,000 in Icelandair Group hf., the take- transferred directly to its shareholder. Following this, over company in exchange for their shares in steps towards listing Icelandair Group hf. on the Icelandair Group Holding in the same nominal value. ICEX Main List will be made.

The merger is effective as of November 1, 2006. The only assets of Icelandair Group Holding hf. are 8.3 NAME AND PLACE OF shares in Icelandair Group hf. On the day of the REGISTRATION AND merger, Icelandair Group Holding hf. owned shares REGISTRATION NUMBER in the nominal value of ISK 1,000,000,000 in The legal name of the Company is Icelandair Group Icelandair Group, i.e. 100% of the shares. The Holding hf. The Company is registered with the shares were financed 80% with equity and 20% with Registry of Enterprises in Iceland, under registration debt. number 591006-2150. Icelandair Group Holding’s domicile and headquarters are at Reykjavík Airport, On the merger of Icelandair Group Holding hf. and IS-101 Reykjavík, Iceland, telephone +354 50 50 Icelandair Group hf. the former company will be 300. Icelandair Group Holding is a public limited liquidated and its shareholders will receive shares in company incorporated in Iceland and operates Icelandair Group hf. in the nominal value of ISK pursuant to the Companies Act. The date of 1,000,000,000 as payment for their shares in incorporation is 15 October 2006. Icelandair Group Holding hf. As there are also 1,000,000,000 shares in Icelandair Group hf. shareholders will receive one share in Icelandair Group hf. for every share they hold in Icelandair Group Holding hf. before the merger. KPMG Endurskoðun hf. acting as advisor on the merger did

2 See detailed Merger plan included in the Appendix. The Merger plan was originally in Icelandic but has been translated to English.

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8.4 KEY MILESTONES

1937 Flugfélag Akureyrar founded in Akureyri, on 2003 Flugleiðir becomes a holding company with the north coast of Iceland. 11 subsidiaries in the travel and tourist industry in Iceland; Flugleiðir’s operations are divided into 1943 Its name is changed to Flugfélag Íslands Icelandair, Icelandair Technical Services and (Air Iceland) and headquarters moved to Reykjavík. Icelandair Shared Services (Fjárvakur). Icelandair is the largest subsidiary. 1944 Loftleiðir (later also known as Icelandic Airlines), is founded. 2004 Flugleiðir acquires an 8.4% holding in easyJet (current ownership is 0%). 1945 Flugfélag Íslands makes its first international flights; Loftleiðir follows in 1947. 2005 Flugleiðir becomes FL Group. The holding company announces its emphasis on investment. 1953 Loftleiðir pioneers low-fare services across This is followed by increased investment activities the North Atlantic. and the acquisitions of Bluebird Cargo and Sterling Airlines A/S. 1973 Loftleiðir and Flugfélag Íslands merge to form Flugleiðir. 2005 Fundamental changes take place in October whereby investments become the focus of FL Group 1979 Flugleiðir assumes operating and its airline and tourist service operations are responsibilities of its two parent companies; divided between two subsidiaries: Icelandair Group Icelandair becomes its international name. and FL Travel Group.

1992 Flugleiðir is listed on the ICEX Main List. 2006 In February the current structure of Icelandair Group hf. is formed. In 15 October, 1993 Total renewal of the older aircraft fleet, Icelandair Group Holding hf. is established and at begun in 1989, reaches a conclusion. the same day acquires Icelandair Group hf. and the

1997 Flugfélag Norðurlands and Flugleiðir‘s board of directors decides to seek listing of the domestic flight operations merge to form Air Iceland shares of Icelandair Group Holding on ICEX Main (Flugfélag Íslands), a wholly-owned subsidiary of List. Flugleiðir. 8.5 PRINCIPAL ACTIVITIES 1998 Icelandair Hotels (Flugleiðahótel) founded: The object of the Company, according to Article 3 of the hotels that had been part of Flugleiðir become a its Articles of Association, is investment in equity distinct subsidiary. holdings, particularly holdings in other companies engaged in air carrier operations, tourist services and 2000 Icelandair Cargo (Flugleiðir Frakt) founded: transport operations, buying and selling real estate, the cargo business of Flugleiðir becomes a distinct credit operations and other related operations. subsidiary.

2001 IGS (Flugþjónustan Keflavíkurflugvelli) founded: Flugleiðir ground services becomes a distinct subsidiary.

2002 Loftleiðir-Icelandic founded: the wet lease and charter arm of Icelandair becomes a distinct subsidiary.

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9 ORGANISATIONAL STRUCTURE Icelandair Group Holding has only one subsidiary, Icelandair Group. The operation of Icelandair Group is divided into 13 subsidiaries. Each business is managed to create value through strategic and business development decisions. Two subsidiaries play a supporting role: Fjárvakur and Icecap, an insurance company. The other subsidiaries are grouped into three focus areas: Scheduled Airline Operations, Global Capacity Solutions and Aircraft Trading and Travel and Tourism Infrastructure.

Figure 1. Icelandair Group Holding’s organizational structure.

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10 SUBSIDIARIES The most significant subsidiaries of Icelandair Group, the only subsidiary of the Company, are listed in Table 7. Icelandair Group or the Company do not hold any material stake in other companies. All the subsidiaries are fully owned by Icelandair Group. All the subsidiaries except Icecap are incorporated in Iceland. Icecap is incorporated in the Channel Islands.

Table 7. Subsidiaries of Icelandair Group.

Name Operations Icelandair ehf. International full service airline with hub in ID No. 461202-3490 Iceland. Reg.Office: Reykjavík Airport, 101 Reykjavik, Iceland Managing Director: Jón Karl Ólafsson Number of employees: 1056 English brand name: Icelandair

Flugþjónustan Keflavíkurflugvelli ehf. Ground handling for airlines and passengers ID No. 551200-3530 at Keflavik Airport. Reg.Office: Heiðarból 43, 230 Reykjanesbær, Iceland Managing Director: Gunnar S. Olsen Number of employees: 571 English brand name: Icelandair Ground Services (IGS)

Tækniþjónustan á Keflavíkurflugvelli ehf Maintenance and technical services for ID No. 511202-2990 Icealndair and otherairlines. Reg.Office: Keflavíkurflugvöllur, 235 Keflavíkurflugvöllur, Iceland Managing Director: Jens Bjarnason Number of employees: 253 English brand name: Icelandair Technical Services (ITS)

Flugleiðir-Frakt ehf. Low asset transportation company, leasing ID No. 471299-2359 and outsourcing space, handling and sales. Reg.Office: Reykjavík Airport, 101 Reykjavik, Iceland Managing Director: Pétur J. Eiríksson Number of employees: 57 English brand name: Icelandair Cargo

Loftleiðir-Icelandic ehf. Capacity provider for the international airline ID No. 571201-4960 and tour operator industry. Reg.Office: Reykjavík Airport, 101 Reykjavik, Iceland Managing Director: Guðni Hreinsson Number of employees:11 English brand name: Loftleiðir-Icelandic

Bláfugl ehf. Transportation services provider. Fleet of ID No. 460899-2229 freighter aircraft. Air cargo sales agency. Reg.Office: Hlíðarsmári 15, 20 Kópavogur, Iceland Managing Director: Þórarinn Kjartansson Number of employees: 65 English brand name: Bluebird Cargo

Icelease ehf. Buying, selling and leasing of aircraft. ID No. 670505-0140. Arrangement of aircraft trading transactions. Reg.Office: Reykjavík Airport, 101 Reykjavik, Iceland Managing Director: Kári Kárason Number of employees: 1 English brand name:Icelease

Flugfélag Íslands ehf. Sceduled domestic carrier. Flights to ID No. 530575-0209. Faeroes and Greenland. Managing Director: Árni Gunnarsson Reg.Office: Akureyri Airport, 600 Akureyri, Iceland Number of employees: 279 English brand name: Air Iceland

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Name Operations Flugleiðahótel ehf. Markets and operates two hotel chains. ID No. 621297-6949 Managing Director: Magnea Hjálmarsdóttir Reg.Office: Reykjavík Airport, 101 Reykjavik, Iceland Number of employees: 276 English brand name: Icelandair Hotels

Íslandsferðir ehf. Tour operator and travel agency in incoming ID. No. 410791-1379 tourism. Reg.Office: Lágmúli 4, 108 Reykjavík, Iceland Managing Director: Jóhann Kristjánsson Number of employees: 52 English brand name: Iceland Travel

Fjárvakur-fjármálaþjónusta ehf. Financial services for Icelandair Group ID. No. 521202-2620 Managing Director: Magnús Ingason Number Reg.Office: Reykjavík Airport, 101 Reykjavik, Iceland of employees: 83 English brand name: Icelandair Shared Services

Icecap Insurance PCC limited Insurance services for Icelandiar Group. Reg.Office: Polygon Hall PO Box 225 Marchant Street Operations included in Fjárvakur St. Peter Port Guernsey GY 4HY Channel Islands English brand name: Icelandair Shared Services

IG Invest ehf. ID. No. 490905-0730 Holding company managed by Icelease. All Reg.Office: Reykjavík Airport, 101 Reykjavik, Iceland operations covered by Icelease. English brand name: IG Invest

strategy. All operational companies of the Group 11 ICELANDAIR GROUP HOLDING have their individual management with executives in Icelandair Group Holding is a holding company for charge of the daily business, supported by the Group Icelandair Group which owns 13 independent management. To enhance the Group’s performance subsidiaries. The largest subsidiary is the further, it has been structured in three main areas of international airline Icelandair, which accounts for focus: approximately 53% of the Group's turnover. Other companies are Icelandair Technical Services, • Scheduled Airlines Operations Icelandair Ground Services, Lofteiðir-Icelandic, • Global Capacity Solutions and Aircraft Trading Icelandair Cargo, Bluebird Cargo, Air Iceland, • Travel and Tourism Infrastructure Iceland Travel, Icelandair Hotels, Icelease, IG Invest and Fjárvakur and Icecap. Icelandair Group Holding The airline, transportation and tourism sectors are is an international service and trade company, with expanding both in and around Iceland and firm roots in Iceland. On 31 October, 2006, the throughout the world, and Icelandair Group Holding Company employed 2,717 people. has the means to participate actively in this dynamic market. All areas present opportunities for both The management of Icelandair Group Holding is led organic and acquired growth. Icelandair's route by Jón Karl Ólafsson, Chief Executive Officer of network, which forms the basis of the Group’s Icelandair Group Holding, Icelandair Group and scheduled airlines operations, has grown in recent Icelandair. The goals for the corporate management years and has the potential to grow further into within the Group are to increase shareholder value, international markets. Cargo and charter operations harnessing the potential synergy effects, to organise have achieved an even faster growth rate within overall operational network, to ensure efficient Icelandair Group Holding in recent years. Travel financial management and to push the overall services within Iceland have been growing steadily;

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the current situation is good and the number of 11.1.1 ICELANDAIR tourists travelling to Iceland is growing. Icelandair Purpose of the Company has a long history of successful trading with aircraft Icelandair is the largest subsidiary of Icelandair that has been gaining momentum through the Group. The purpose of company is to be a profitable incorporation of Icelease and IG Invest and the international full-service airline which offers its numerous aircraft trades that have been handled customers quality service. In 2005, Icelandair during the last 18 months. In general, Icelandair carried about 1.5 million passengers; during the first Group Holding has developed a healthy business nine months of this year the figure was 1.2 million. which generates more than 70% of its revenue In 2006 the company has offered daily scheduled outside Iceland. flights from Iceland to Europe and North America to a total of 22 destinations. The company operates a Icelandair Group Holding has earned profits in fleet of 11 aircraft for its scheduled operations. recent years by achieving improved operating efficiency and cost control, focussed distribution, History marketing, sales and revenue management, and has As an airline, Icelandair traces its roots to the year shown strength in a time that has been volatile for 1937, when Flugfélag Akureyrar was founded in many airline-related industries. The company has a Akureyri on the north coast of Iceland. In 1943 the workforce of considerable experience and expertise company moved its headquarters to the capital, in the airline, transportation and tourism sectors, Reykjavík, and changed its name to Flugfélag which is a prerequisite for running a profitable Íslands, which later assumed the international brand business in a very competitive environment. name Icelandair. Throughout its long history, the company has consistently been able to renew itself and adapt to Another important milestone was passed in 1944, change, and this has been one of its key strengths. when three young Icelandic pilots, returning from In the management’s opinion, the Company has the flight training in Canada, founded Loftleiðir, later ability to expand, both in Iceland and internationally. also known as Icelandic Airlines. Initially, both companies concentrated on Icelandic domestic air 11.1 SCHEDULED AIRLINE OPERATIONS services. However, in 1945 Flugfélag Íslands made Four companies are categorized as being part of the its first international flights, to Scotland and Scheduled Airline Operation focus of the group: Denmark. Loftleiðir began international operations in Icelandair, the international full-service airline with a 1947, and its pioneering low-fare services across the hub in Iceland; Icelandair Cargo, a full-service air- North Atlantic commenced in 1953. freight company; Icelandair Ground Services, which handles airlines and passenger services at Keflavik In 1973 Flugfélag Íslands and Loftleiðir merged Airport and Icelandair Technical Services, which under a new holding company named Flugleiðir. In provides maintenance for Icelandair and other October 1979 Flugleiðir assumed all operating airlines. These companies work closely together and responsibilities of its two predecessors, and decided have long historical ties. In 2005 they represented to use Icelandair as its international brand name, roughly 65% of the Group's income according to the retaining the name Flugleiðir only in the Icelandic Pro Forma Income Statement. domestic market. On the 50th anniversary of the company in 1987, a breakthrough agreement was Their main common task is to run a profitable airline signed with Boeing to renew Icelandair’s network operation with growth potential. This is done international aircraft fleet and a new route network by sales and marketing activity on behalf of all was established. A new generation of Boeing jets, companies, as well as putting emphasis on revenue Boeing 757-200s and 737-400s, replaced the older management and cost control throughout the fleet gradually from 1989 to 1993, and then a operation. single-type fleet of Boeing 757s was established in the years preceding 2003.

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Guðmundur Pálsson In 1997, Flugfélag Norðurlands and Flugleiðir’s Guðmundur Pálsson is the SVP of Flight Operations. domestic flight operations were merged to form Air Guðmundur was appointed to his current position in Iceland, a wholly-owned subsidiary of Flugleiðir. 1996. He joined Flugleiðir in 1974, and served Loftleiðir-Icelandic was founded in 2002 when the initially in the Budget and Long Range Planning wet-lease and charter arm of Flugleiðir became a Department. In 1980 he became Director of Cash distinct subsidiary. In January 2003, Flugleiðir Management and Insurance, serving in that position became a holding company with 11 subsidiaries in until 1986 when he was appointed SVP Operations, the travel and tourist industry in Iceland. At that in which capacity he worked until 1988, when he time the company that handles international airline was appointed SVP Technical. operations was named Icelandair. Una Eyþórsdóttir Icelandair has been a member of International Air Una Eyþórsdóttir is the VP of Human Resources. Transport Association (IATA) since 1950, a member Una was appointed her current position in 2001. of the Association of European Airlines (AEA) since She joined Flugleiðir in 1975, first in Human 1957, and a member of the Flight Safety Foundation Resources, from 1983 to 1987 in Information (FSF) since 1966. Technology department, first as a supervisor and later a divisional manager, and then in Information Management department 1987-1996 as a divisional manager. Icelandair’s management team has years of She was appointed manager of Employee experience with the company and within the Development in 1996 and Personnel Manager in industry. Jón Karl Ólafsson is the CEO of Icelandair 2001. Una studied English and Psychology at the ehf. University of Iceland and earned an MBA degree from the same university in 2002. Gunnar Már Sigurfinnsson Gunnar Már Sigurfinnsson is the Senior Vice Hjörtur Þorgilsson President (SVP) of Sales and Marketing. Gunnar Már Hjörtur Þorgilsson is the VP Information Technology. was appointed his current position in March 2005. Hjörtur was appointed his current position in January He started at Icelandair Domestic in 2006. He joined Flugleiðir in 1985, started in Vestmannaeyjar, the islands off the south coast of Technical department's cost control unit, became Iceland, in 1986 and in 1994 he became sales and divisional manager in the Planning Department marketing manager for Air Iceland. In 1997 he 1988 and Manager in 1994, and then Manager of became the sales manager for Icelandair in the Information Development in 1997. Hjörtur Germany, based in Frankfurt. Gunnar Már became received his Cand.Oceon from the University of Director of Sales Planning and Control in 2000 and Iceland in 1985. in 2001 he became General Manager of the Germany, Netherlands & Central Europe region. Operation Icelandair uses the location of Iceland in the North Andri Áss Grétarsson Atlantic between North America and Europe as the Andri Áss Grétarsson is the SVP of Finance and key to the company's network strategy and Resource Management. Andri was appointed to his operations. By using Keflavik International Airport as current position in April 2006. He joined Flugleiðir a hub, it serves three market segments, i.e. in 1998, first in the Management and Financial customers travelling from Iceland, customers Information department and then worked in the travelling to Iceland and customers crossing the Strategic and Finance division at Flugleiðir. He holds Atlantic via Iceland. By tuning and adding to this a Cand.Oceon degree from the University of Iceland, network over two decades the company has and has worked in accounting since 1993. multiplied the frequency of trips to and from Iceland – and thus formed the foundation of the Icelandic travel and tourism industry, and at the same time offered the population of Iceland (300,000) more air

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travel destinations than it sould otherwise be able to Five Boeing 757 cargo aircraft are operated on sustain in terms of its size. behalf of Icelandair Cargo. Icelandair has ordered and confirmed four Boeing 787 aircraft – The design of Icelandair's network allows the Dreamliners – for delivery in 2010-12. The airline company to increase its product offering has also confirmed options for three more such considerably. For example, by enabling passengers to aircraft, for possible delivery in 2012-2013. These catch a connecting flight in Iceland, a flight arriving new aircraft will open up new markets for the airline, from the USA not only carries passengers who are as the range will be extended to almost the whole going to Iceland but also passengers heading for world. At the same time, these new aircraft will be other European destinations served by Icelandair. state-of-the-art technically, more efficient, with lower fuel consumption and lower maintenance Owing to this network structure, Icelandair is able to costs. The airline is considering options regarding offer flights on a wider variety of routes than the the replacement of the Boeing 757 fleet in 7-12 number of destinations implies. By matching US years’ time. flights with European flights, Icelandair is able to offer flights on 54 routes in the winter and 89 during the summer, with 14 and 22 routes from Iceland USA KEF EUR respectively. 08:00 13:00 14:00 09:00 14:00 15:00

10:00 15:00 16:00 As of summer 2007, Icelandair will introduce a new 11:00 16:00 17:00 Bank into the Route Network. By introducing the 12:00 17:00 18:00 new Bank Icelandair is improving its product in all 13:00 18:00 19:00 14:00 19:00 20:00 three markets, To, From and Via Iceland, by offering 15:00 20:00 21:00 flights at times that it has not covered in the past 16:00 21:00 22:00 years and increase frequency to Scandinavia and 17:00 22:00 23:00 18:00 23:00 00:00 North America. The new Bank offers the following 19:00 00:00 01:00 addition to the Route Network: Early morning 20:00 01:00 02:00 departures from Scandinavia (Copenhagen, 21:00 02:00 03:00 Stockholm and Oslo) to Keflavik and late morning 22:00 03:00 04:00 23:00 04:00 05:00 departures to North America (Boston and New York) 00:00 05:00 06:00 from Keflavik. Afternoon departures from North 01:00 06:00 07:00 America (Boston and New York) to Keflavik and night 02:00 07:00 08:00 03:00 08:00 09:00 departures from Keflavik to Scandinavia 04:00 09:00 10:00 (Copenhagen, Stockholm and Oslo). Therefore, the 05:00 10:00 11:00 new Bank will not only offer additional operating 06:00 11:00 12:00 times between Iceland. North America, and 07:00 12:00 13:00 Scandinavia: it will also give Icelandair customers the option of travelling between Scandinavia and Figure 2. Icelandair’s route network as of summer North America via Iceland at times that have not 2007 been offered in the past. Icelandair’s crews are experienced and are Flight operations considered one of the many assets of the company. In additon to aircraft flown on Icelandair's scheduled Initial pilot training is mostly done in-house, but network, Icelandair Flight Operations operates simulator training is done in various places, mostly aircraft on behalf of Loftleiðir-Icelandic ehf. and in Europe. Iceland has a long aviation history, and Icelandair Cargo ehf., thus securing large economies Icelandair employs experienced aviators. Icelandair’s of scale. Icelandair’s network has mostly been served current union agreements with its pilots and cabin by eight to ten Boeing 757 aircraft and one Boeing attendants are valid until the end of 2007. 767-300ER, while the Loftleiðir-Icelandic contract includes four Boeing 757s and two Boeing 767s.

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Sales and marketing Icelandair’s own websites and the websites of For an Icelandic company, Icelandair is unique for others. Icelandair has a net club of about its decades of experience in selling its products 543,000 active members, who receive special globally on the general consumer market. Among offers and information on a regular basis. airlines, Icelandair has an unusually high percentage (70%) of its customers outside its home market. Revenue management and distribution The foundation of the distribution of Icelandair’s Icelandair is a full-service airline which offers its products throughout the world is its partnership in customers a variety of services related to air travel, the Amadeus booking and distribution engine, and but has, like many other airlines, categorized these numerous interline agreements with other leading services into two key products, Saga Business Class airlines. This makes it possible for Icelandair to sell and Economy Class. Icelandair reaches its customers its products simultaneously all over the world through four main channels: through millions of computer screens, telephone call centres, offices and websites. For example, the last 1. Own sales offices three available seats on a particular flight can be Icelandair runs its own sales offices in key sold at the same time, one through an agent in markets, i.e. Iceland, the USA, the UK, China, one through the internet in Kansas and one at Denmark, Sweden, Norway, Finland, France, the sales office in Copenhagen. In all instances the Holland, Germany, Spain and Italy. The biggest financial transaction can be concluded and everyone of these offices are in Iceland, the USA, the UK involved will then know that this particular flight is and Denmark. The role of the sales offices in full. At the same time, Icelandair can sell airline selling tickets to customers has decreased, but tickets and other services with airlines and service they still play an important role in customer providers in all parts of the world. relations, especially with corporate clients and larger groups and as a foundation for marketing A key ingredient of a successful airline is its revenue and sales activity in each market. Icelandair has management, the strategy of maximizing revenue by general sales agents in 28 countries of which controlled booking and pricing. Icelandair has used eight are in the Far East. proven airline systems and methods in this field; since the end of September it has used a new and 2. Telephone call centres more advanced revenue management system from Icelandair operates call centres in its key markets PROS, a world leading provider of revenue with staff speaking local languages, and connects management systems. Improvements have also been these call centres so that when all lines are busy made to Icelandair's revenue integrity system, the in one country, calls can be transferred to purpose of which is to locate and cancel false another. bookings automatically, with evident revenue benefits. Revenue management is most effective 3. Travel agents during strong demand periods. These Icelandair products are sold by leading travel implementations should therefore yield significant agents, tour operators and airlines all over the revenue improvements during the next peak demand world through various contracts and agreements period, in the summer of 2007. to which Icelandair is a party. Icelandair uses the Amadeus CRS system which enables travel The company’s load factor follows the seasonality in agents to book tickets in their offices or websites demand. Icelandair operates more aircraft during the with Icelandair simultaneously. In 2005 about high season and the load factor is highest during the 12,000 agencies sold tickets with Icelandair. summer peak. The company had an average load factor of 77.8% for the first nine months this year, 4. Internet compared to 77.6% for the whole year 2005, which Icelandair has web sites in local languages in all in turn represented an improvement over the 75.4% its key markets and an increasing number of load factor during 2004. This is in line with the tickets are sold through the internet, both on increase in the break-even load factor, which grew by

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1% from 2004 to 2005. The break-even load factor makes the company less sensitive to the economy in is the balance point between the average seat price the areas of specific destinations; if there is a and the load factor needed for the airline to break slowdown in one destination the company can even. The company controls the break-even load reduce the frequency of flights and increase the factor by managing its seat price and availability. capacity in another market area instead. Icelandair has successfully improved its load factor at the same time as the number of flights rose Transatlantic passengers travelling via Iceland considerably. The transatlantic market is the second largest air travel market in the world after the US domestic Market and current market position market, and ahead of the western European market Icelandair defines its customer base in terms of measured in revenue passenger kilometres, three main markets: according to the International Air Transport • Passengers from Iceland (about 28% of Association. Revenue passenger kilometres are passengers) computed by multiplying the total number of paying • Passengers to Iceland (about 36% of passengers) passengers by the kilometres they have flown. The • Transatlantic passengers travelling via Iceland market over the Atlantic was deregulated in the (about 36% of passengers) 1990s, which resulted in reduced fares, stimulated new traffic and shifted traffic more into the hub-and- Passengers from Iceland spoke system rather than point-to-point. Icelandair's There has been strong demand for air travel from main focus is on city pairs between which there are Iceland recently. On most of its routes from Iceland limited direct flights. The transatlantic market is the Company is the only airline operating. For most growing, and Boeing Market Outlook4 forecasts that business travellers Icelandair is the only option in this market will grow 4.6% annually over the next 20 terms of the frequency of flights and the number of years. destinations. The Icelandair frequent flyer program (Vildarklúbbur), which has over 100,000 members Icelandair's strength in crossing the Atlantic lies in in Iceland, also helps attract business travellers. The the company's network utilizing the geographical company's pricing policy is designed to capture position of Iceland on the flight route between some of the value that business travellers see in Europe and the eastern shore of the USA. The North being able to schedule their trip at short notice and Atlantic market is very competitive, with numerous return promptly. Icelandair’s revenue from market players. Due to this, Icelandair faces fierce passengers from Iceland has grown by 15-20% competition in pricing, especially in winter time (low annually for the last 3 years. season). Icelandair's market share on the North Atlantic market is below 1%. On routes where the Passengers to Iceland company is competing with direct flights and over- Iceland has enjoyed increasing popularity as a tourist capacity, it has no pricing power and tries to destination over the past 25 years. The number of concentrate on customers in other areas instead. The tourists visiting Iceland grew from 72,194 in 1981 North Atlantic market helps Icelandair to operate to 369,400 in 2005 according to ITB immigration efficiently. Due to the immense size of this market figures3, which is an increase of 7.0% annually. Over and the nominal market share by Icelandair, the this time the vast majority of the tourists have market virtually serves as a gigantic reservoir of travelled to Iceland by Icelandair. The company has passengers. Access to this market is essential for the fuelled this increase by the establishment and company to be able to maximize its yield. When it development of a network with a very high frequency encounters difficulties in selling the seats on a flight of flights to Iceland and by strong marketing efforts to passengers who are travelling to and from Iceland, in Europe and United States. Tourists visiting the company is able to offer competitive prices on Iceland come from several economic areas, which

3 These figures can be found on the website 4 The Outlook can be found on the website http://www.ferdamalastofa.is/displayer.asp?cat_id=503 http://www.boeing.com/commercial/cmo/

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the North Atlantic market and obtain revenue from less vulnerable to fluctuations in demand for any seats that would otherwise be empty. particular market segment.

Due to the nature of the North Atlantic market and In all its markets, Icelandair’s destinations and the marginal market share of Icelandair, the North products are in direct competition with other Atlantic market serves as a buffer. If, for some destinations and products. A customer in London reason, there were to be a slow-down in the markets contemplating a "city-break" can choose a four-day for travel by air to and from Iceland, the proportion trip to Reykjavik, but he can also pick a large of passengers from the North Atlantic market would number of other cities in all European countries with grow, and vice versa. Icelandair has many options to numerous airlines and tour operators offering very expand its network, for example by flying further east similar packages. In Iceland, customers looking for and thereby offering flights from the USA and summer vacation trips abroad have a wide variety of Europe to Asia with a short stopover in Iceland. options other than the 22 Icelandair destinations, such as the many offers from travel agencies using Competition charter, and scheduled flights of other airlines. Icelandair faces competition in all its markets and Despite this competition, Icelandair has been always has done; however, the company has shown growing at a steady pace and the market has been the ability to grow and profit in this competitive growing in general due to increased availability of air environment. Furthermore, history shows that transport to and from Iceland. This total growth of increased capacity has increased the overall market the market has enabled growth for the players on the size, as there are more contact points with market without direct conflict over market shares. customers. The company’s main competitors in Iceland are Icelandair is by far the largest operator offering Iceland Express and charter operators. Iceland flights between Europe and Iceland. It is the only Express is a marketing vehicle that leases aircraft airline that offers scheduled flights between Iceland from a wet-lease operator and has recently and North America. The company is the market announced expansion to its current network of leader in flights to and from Iceland with a market destinations for scheduled flights. Iceland Express share of about 59%, according to the management’s offers daily flights to London and Copenhagen and estimates. Based on this, the management believes flights up to two times a week to Alicante, Berlin and that Icelandair is well positioned to meet the Frankfurt Hahn. This summer, Iceland Express increased competition in the market, and it sees an increased its number of flights and offered flights to opportunity for Iceland as a travel destination to tap a total of eight destinations. Iceland Express is into the large customer base of the foreign airline planning to fly to a total of 14 destinations in Europe operators entering the market periodically. during the summer of 2007. Fons ehf., the majority owner of Iceland Express, recently acquired the Even though most of Icelandair's passenger traffic is British airline Astreus, which operates ten Boeing leisure traffic, with only about 15% being "must go" 737 and 757 aircraft. business traffic, it has tripled its passengers numbers over a 15-year period. Operating on Two airlines started scheduled flights to Iceland this different and independent passenger markets (The summer. British Airways flew five times a week North Atlantic market, From Iceland market and To between Gatwick and Keflavik until the end of Iceland market) gives the company more options September, when the number of flights was when allocating the number of available seats on decreased to four. The flight leaves Gatwick at 7:30 routes and deciding on price strategy. Apart from in the morning, which indicates that the schedule is marketing and sales efforts, demand for air travel more geared towards the needs of passengers mainly depends on the economy, exchange rates, travelling to Iceland than passengers who begin their destination popularity and the cost of flying. journey in Iceland. SAS Braathens started flying Operating in variable markets makes the Company from Oslo to Iceland three times a week in March

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2006. Both airlines are likely to continue flying to IGS was formed in 2001, but airport and ground Iceland. operations in Iceland have been a part of the airline operation from the foundation of Icelandair Group Icelandair’s market share on the market to and from Holding’s predecessors. Iceland was not affected by increased number of flights in 2006 and it seems that the rivals’ market Management share was mainly at the expense of charter flights. Gunnar S. Olsen The Managing Director of IGS is Gunnar S. Olsen. Like the number of Icelandair’s international Gunnar was appointed Managing Director when an passengers, the number of passengers who pass independent company was formed to handle through Icelandair's hub in the past 20 years has Icelandair's ground services in Keflavík in 2001. He more than tripled. The management of Leifur has held various managerial positions within Eiríksson International Air Terminal has had BAA Icelandair Group hf. in Iceland and abroad. conduct a 10-year traffic forecast, which predicts that the traffic will grow to 3.2 million passengers by Operation 2015. Currently contractors are enlarging the hub to IGS provides aircraft ground handling services for all be better positioned to serve the expected increase types of aircraft, a first-class flight kitchen and in the number of travellers. bonded stores, a new state-of-the-art cargo centre and a restaurant division in the Leifur Eiriksson Air Icelandair’s competitive position has been strong in Terminal. All these units are organised and settled the past few years. The company has been profitable as profit units. when the industry in general has been struggling. It has effectively worked on reducing its fixed costs, Market and current market position which makes it more competitive in today's aviation IGS is a service provider enabling airlines and other market. It is now more flexible and can more customers to obtain all services required through one effectively add or reduce capacity depending on service provider. IGS competes with two other market conditions. suppliers of ground handling services at Keflavík Airport. The company has been profitable throughout Future strategy its history, with the exception of the year of Icelandair aims to continue to grow and improve its foundation (2001). Icelandair is by far the biggest current scheduled-passenger network. The new Hub client of IGS, but the company has been contracting planned for the summer of 2007 forms part of this with other airlines as well. future strategy. The company's focus over the next few months will be on simplifying processes and Future strategy products and reducing unit costs within the business IGS has contracts with most airlines using Keflavik model as it is today. The company is constantly Airport and aims to maintain its market share. optimizing the network and looking at new markets. Opportunities for growth go hand in hand with the The Boeing 767 and later the Boeing 787 will open expected growth in the number of passengers up new growth opportunities for the company in passing through the airport. more distant markets, e.g. Asia. 11.1.3 ICELANDAIR TECHNICAL SERVICES (ITS) 11.1.2 ICELANDAIR GROUND SERVICES (IGS) Purpose of the Company Purpose of the company Icelandair Technical Services’ core business is to Icelandair Ground Services provides comprehensive provide Icelandair Group Holding and its subsidiaries airport ground handling services for airlines and with high-quality maintenance and technical passengers at Keflavík International Airport. services. However, it is planned to merge ITS back into Icelandair, at the end of this year, as a profit History centre to simplify the operational processes further.

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History Icelandair. Aircraft maintenance, warehousing, cargo Icelandair Technical Services began operations at handling and part of cargo sales are outsourced. the end of 2002; before becoming an independent subsidiary it was a part of Icelandair. History Icelandair Cargo was established in late 1999, Management though cargo transport had been a part of the Jens Bjarnason airline’s core business since its foundation. The Managing Director of ITS is Jens Bjarnason. Icelandair Cargo is the largest air freight service Jens was appointed to his current position on 20 provider in Iceland. September 2005. He joined Flugleiðir in September 1996 as Director of Flight Operations after working Management for the Icelandic CAA as Director of Flight Safety. He Pétur J. Eiríksson is an aeronautical engineer and received his Ph.D. The Managing Director of Icelandair Cargo is Pétur J. from Northwestern University in the USA in 1992. Eiríksson. Pétur was appointed to his present position in January 2000. He joined Flugleiðir in Operation June 1981 and has held several positions, including ITS provides aircraft maintenance and technical Director for Scandinavia and Finland, Senior Vice services for Icelandair, Loftleiðir – Icelandic and President of Marketing and Senior Vice President of Icelandair Cargo. The Company also provides Business Development before taking over his present services to aircraft that land in Keflavík, heavy position when Icelandair Cargo was founded. Pétur maintenance in Keflavík and technical services for holds a B.Sc degree in economics from the several operators. It is also active in maintenance at University of Edinburgh and a master’s degree from several locations abroad. the University of Gothenburg, Sweden.

Market and current market position Operation ITS is Iceland’s largest company within its field, The company bases its business on scheduled operating a first-rate maintenance centre for aircraft services between Iceland, Europe and North America in Iceland. The market in Iceland has been growing, supported by charters and wet leases (aircraft, crew, as Icelandair has increased its operations every year. maintenance and insurance). In addition to However, the company is also an experienced Boeing marketing and selling space on its own freighters, 757 service provider and has offered its services to Icelandair Cargo sells the cargo hold space on other such operators in cooperation with Volvo and Icelandair´s passenger aircraft. Icelandair Cargo has British Airways Maintenance – called the Team 757. five Boeing 757-200 freighters in its fleet. There are This is a new service, but it has already created nine flights per week to Liege in Belgium, four to some interest in the market. Brussels, four to Humberside in the UK, and one to the East Midlands, two to Jönköping and one to Future strategy Malmö in Sweden. In North America, New York, JFK In the near future, ITS will be merged into Icelandair is served six times per week, and Charlotte, NC and ehf., as part of which it will concentrate on growth Halifax in Canada once per week. This network of with Icelandair Group Holding and its subsidiaries, freighter aircraft is enhanced with 22 destinations in as the plans for increased numbers of aircraft call for the Icelandair passenger network. Icelandair Cargo growth at ITS. has 58 employees, most of who are in sales and marketing, finance and freight operations. 11.1.4 ICELANDAIR CARGO Purpose of the Company Market and current market position Icelandair Cargo is a low-asset company, leasing Icelandair Cargo offers its customers competitive and aircraft and buying capabilities from other sources. quick global services through extensive interline and The freighters are placed on Icelandair´s air special pro-rate agreements with other airlines. The operating certificate and crews are leased from company also operates trucking network in Europe and by demand in the USA. Sales are made by its

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own staff in Iceland, the Benelux countries and consequences for the company’s bottom line. For a North America and by general sales agents (GSAs) in number of years, Icelandair Cargo has carried other markets. The company has a number of GSAs express freight for TNT to Iceland and over the in all of the larger or growing markets Asia and in Atlantic, and it also counts DHL and FedEx as most countries in Europe. among its most important customers.

In 2006 the management of Icelandair Cargo Future strategy expects the company to carry 39,000 tons, of which The management of Icelandair Cargo is expecting to 20,000 are expected to be exports from Iceland, increase the company’s turnover over the next five 11,000 imports and 8,000 tons moved between years, partly through growth in existing markets but Europe and North America. Eighty-five per cent of mainly through extension into other geographical the exports consist of fresh seafood, whereas the areas. This calls for larger and longer-range aircraft imports are produce, high-tech products and spare than the Boeing 757-200. Current analysis is mainly parts. There was a sharp decline in fish exports from centred on the Boeing 767-300 or Boeing 777-200. Iceland in 2005 due to currency issues, with serious

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Control and from 2000-2003 he worked at The 11.2 GLOBAL CAPACITY SOLUTIONS Icelandic Web Agency. Since 2003 Guðni has been AND AIRCRAFT TRADING Director Marketing at Loftleiðir-Icelandic. Guðni The four companies forming this part of the holds a Bachelor’s degree in Humanistic Informatics Icelandair Group Holding are Loftleiðir-Icelandic, a & Communication from Aalborg University, Denmark. capacity provider for the international airline and tour operator industry, Bluebird Cargo, a Operation transportation services provider and Icelease, which The Company currently operates AM (aircraft and handles the buying, selling and leasing of aircraft maintenance), ACMI (aircraft, crew, maintenance using IG Invest as its holding company. and insurance) and full charter contracts in Europe, Africa, the Middle East and North and South The four companies are grouped together to America. Furthermore Loftleiðir-Icelandic has emphasize Icelandair Group Holding’s increased established itself as a business class operator focus on international expansion in this field. Their serving one of the most prestigious operators in the role is to capitalize on internal know-how by offering USA, A&K (Abercrombie & Kent), by operating first- aircraft operation services to third parties and taking class flights around the world on which all seats are advantage of trading opportunities in a fast-growing business class. The Company has five Boeing 757- world market, as well as looking for opportunities for 200 and three Boeing 767-300ER aircraft, all but mergers and acquisitions. one of which are operated under Icelandair’s AOC (Air Operator’s Certificate). In addition, the company 11.2.1 LOFTLEIÐIR – ICELANDIC has two Airbus 320 aircraft, operated under the Purpose of the Company LatCharter Airlines AOC. Loftleiðir–Icelandic is a capacity solution company for the international passenger airlines and tour Market and current market position operator industries. Current market conditions are favourable especially on the wide-body market due to a lack of aircraft History availability. Thus, the wide-ranging aircraft market Loftleiðir-Icelandic was formed as a subsidiary of FL knowledge accumulated within Loftleiðir-Icelandic Group in 2002, though international charter has put the company in a good position to meet operations had been a part of the general operations demand. In mid-2003, the Company added the first of the airline and its predecessors for decades. It has wide-body aircraft by introducing a Boeing 767 to its developed from being a marketing vehicle operating fleet, which opened up new markets. This led to an in the international ACMI (Aircraft Crew Maintenance increase in the proportion of ACMI projects at the and Insurance) and charter markets, to become a expense of all-inclusive projects, which has helped capacity solution provider, thus expanding its to increase profitability and reduce sensitivity horizon above the aircraft types traditionally operated towards external fluctuations. under the Icelandair AOC. In early 2006, the company bought a majority of the shares in the The company has had success in establishing itself Latvian charter operator LatCharter Airlines as part on the European market and enjoys increasing of Loftleiðir-Icelandic´s strategy to strengthen its awareness in both the North- and South American position in the Baltic and CIS region and add the markets. Furthermore, the company has been eyeing Airbus family into its worldwide ACMI product line. the CIS (Commonwealth of Independent States) market for future growth; this formed the basis for Management the purchase of LatCharter. Guðni Hreinsson Guðni Hreinsson took over as Managing Director of Future strategy Loftleiðir-Icelandic in 2006. Guðni joined Flugleiðir Loftleiðir-Icelandic currently seeks to use its in 1997 as a marketing representative in Sales extensive market knowledge to widen its spectrum of

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services further, so that continued growth in revenue cargo to and from Iceland. The main general cargo and profitability can be secured. In addition to the clients of Bluebird Cargo are Icelandic freight current charter and ACMI operations, the company forwarders, most major international freight has increased its brokering activities, both in terms forwarders and many large Icelandic exporters. of arranging for third-party dry and wet leases and aircraft brokering. Market and current market position Bluebird Cargo has carved out a niche operating 11.2.2 BLUEBIRD CARGO short-haul freighter flights in time-sensitive markets Purpose of the Company within Europe. As such, the company enjoys a fairly Bluebird Cargo is a transportation services provider, favourable market position. The target customer operating a fleet of narrow-body freighter aircraft, an group consists of express service companies, post air cargo sales agency, and related peripheral offices and airlines operating their own overnight services. networks within Europe. Competition within this segment is mostly limited to other European airlines History operating freighter aircraft of similar size and Founded in the 2000, Bluebird Cargo commenced capacity, of which there are not many. flight operations in March 2001 with a single Boeing 737-300 freighter aircraft. Services were initially The air cargo sales-agency arm of Bluebird Cargo in offered on a route from Iceland, via the UK, to Iceland dates back to 1994, providing local sales Cologne, Germany, in co-operation with the and marketing representation for airlines such as international express parcel company United Parcel Cargolux Airlines, UPS Air Cargo, LTU, Luxair and Service, UPS. The operation grew steadily by one others. Through these companies, Bluebird Cargo aircraft per year and by early 2005, Bluebird Cargo gains access to the world-wide air cargo networks of was operating five B737-300 freighter aircraft. some of the world’s leading air freight companies. Bluebird Cargo was acquired by FL Group in 2005. Bluebird Cargo therefore offers the Icelandic market reliable and fast access to almost any major Management destination in the world. Þórarinn Kjartansson The Managing Director of Bluebird Cargo is Þórarinn Future strategy Kjartansson. Þórarinn has been the Managing Most leading experts agree that the global air freight Director of Bluebird Cargo since its incorporation in market will grow rapidly in the coming years. Air early 2001. He has been involved in the airline freight is projected to grow considerably faster than business for over two decades working for Loftleiðir the passenger side of the industry. The future growth and Cargolux in operations, scheduling and strategy of Bluebird Cargo is based on a two-pronged marketing and finally as managing director for North approach to the market. On the one hand, potential America and South America. He was one of the lies in providing aircraft and air freight capacity to founders of Flugflutningar ehf. (Air Cargo), Bluebird the various segments of the air freight industry on a Cargo and Vallarvinir ehf. (Airport Associates, an global basis, including wet-lease services to other independent ground handling service company). He airlines, contract operations for freight forwarders, received his B.Sc. in economics from the University and dedicated services to express parcel of Gothenburg in 1978. corporations. On the other, the company will continue to grow with the Icelandic air freight Operation market, building on the strengths outlined above. In addition to air freight services to and from Iceland, Bluebird Cargo operates aircraft on a wet- 11.2.3 ICELEASE AND IG INVEST lease basis to three key customers: UPS, TNT, and Purpose of the Company Alitalia. The wet-lease part of the operation accounts Icelease is an aircraft trading arrangement company for close to 80% of the total revenue, with the which ties together and utilizes the knowledge, remaining 20% generated by the carriage of general experience and business contacts within Icelandair

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Group Holding in the business of buying, selling and company increases the likelihood of being able to leasing of aircraft. exit when the market cycle is favourable.

History Additionally, Icelease arranges back-to-back aircraft Icelease was formally founded in early 2005 as a trading, where aircraft are sold immediately upon separate business unit specialising in aircraft purchase, thereby eliminating the need for the SPC- trading. IG Invest was established in April 2006 as a structure. holding company for Icelease assets. The rate of return on aircraft leasing is most Management sensitive to the purchase price and residual value of Kári Kárason an aircraft when it is sold off. Aircraft prices are Kári Kárason is the Managing Director of Icelease cyclical due to the fact that supply is mostly fixed and IG Invest. Kári was appointed managing director while demand changes frequently; also, the residual of aircraft trading and leasing on 1 June 2006. He value of an aircraft is influenced by its age and joined FL Group in 1994 and was most recently the characteristics, airline preferences and regulations. CFO of Icelease. He received his Cand.Oecon from the University of Iceland. Icelease has been involved in 27 aircraft transactions (23 purchases and 4 sales) since its Operation foundation. These deals have so far taken place in Whenever Icelease arranges an aircraft purchase, a Europe and in Asia. new limited-liability company (special purpose company, SPC) is set up in co-operation with outside The assets investors. Icelease manages a special holding The current portfolio consists of eleven passenger company, IG-Invest, that again holds the shares of aircraft, one cargo freighter and 11 future deliveries the SPC’s. The aircraft is then leased to financially of passenger aircraft with additional three purchase sound airlines on a long-term lease agreement that options. Four of the future deliveries and all three fully covers the aircraft investment company’s purchase options are B787-8 Dreamliner aircraft, operations. The SPC’s will eventually be sold out of part of which are intended for Icelandair’s operation. Icelandair Group Holding with the attached leasing The options on the Dreamliners are valuable, as the contract when market conditions are right, yielding a price of these aircraft is currently higher than the profit. By attaining long-term lease agreements, the price specified in the option agreements, according

Table 8. IG Invest’s assets

Operator Share Type of aircraft Number of aircraft Air China 40% B737-800 5 Air Baltic 49% 737-500 3 Icelandair 49% 757-200ER 3 Singapore Airlines 49% B747-400F 1 Upcoming contracts Operator Share Type of aircraft Number of aircraft Hainan Airlines 40% B737-800 2 Hainan Airlines 100% B737-801 3 Air Berlin 100% B737-800 2 Aircraft orders Operator Share Type of aircraft Number of aircraft To be decided 100% B787-8 4 Aircraft options Operator Share Type of aircraft Number of aircraft To be decided 100% B787-8 3

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to the management. The company will actively search for equity partners In 2006 and 2007 Boeing is delivering 15 new in its aircraft investments. The Company ideally Boeing 737-800 aircraft. The Company has already wishes to have less than a 50% stake in each leased five of them to Air China, seven to Hainan investment. Airlines and placed two with a European carrier. The Company reinforced its relationship with Boeing by placing an order for the 737-800 aircraft in the first 11.3 TRAVEL & TOURISM half of 2005. INFRASTRUCTURE Three companies (Iceland Travel, a tour operator and Market and current market situation travel agency in in-coming tourism, Icelandair Aircraft leasing is a large-scale worldwide branch of Hotels, which markets and operates two hotel financial services. During the past 25 years, the chains, Icelandair Hotels and Edda Hotels, and Air number of aircraft owned by leasing companies has Iceland a scheduled domestic carrier which also been on the rise. Both the world fleet of aircraft and offers regular flights to Greenland and the Faeroe the proportion of the fleet owned by leasing Islands) form the travel and tourism part of the companies have increased in size. Today, about 35% Group. of the world's commercial fleet is owned by leasing companies. Aircraft are critical assets for airlines Even though these companies all provide strategic and they pay about USD 115 billion annually in support to the international scheduled operations, leases. Many companies have seen opportunities to their main focus is on profitable operations. All these enter the aircraft leasing business. These companies companies have recently seen an improvement in include General Electric, Daimler Chrysler and Royal results and are now able to profitably harvest the Bank of Scotland. growth in tourists coming to Iceland.

Boeing Market Outlook forecasts the average annual 11.3.1 AIR ICELAND (FLUGFÉLAG ÍSLANDS) passenger and cargo growth over the next 20 years at Purpose of the Company 4.8% and 6.2% respectively. Such growth will in Air Iceland is a market-driven service company turn increase the size of the aircraft market, responsible for seven scheduled domestic flights as resulting in improved liquidity of assets. well as routes from Iceland to the Faroe Islands and Greenland. Future strategy Icelease is aware that the success of its operations is History highly dependent on the market cycle. The company Air Iceland was formed in 1997 when Icelandair intends to utilize the market cycle to maximize its Domestic was merged with Flugfélag Norðurlands, return on equity. The company seeks long-term but the airline traces its roots back to 1937. leasing contracts on its aircraft, preferably 5-10 year contracts, except in cases when the market is very Management weak. Having a long-term contract on the aircraft Árni Gunnarsson increases the odds that the market will peak while The Managing Director of Air Iceland is Árni the asset is under contract. In order to be able to sell Gunnarsson. Árni was appointed to his current an asset with an attached leasing contract in a peak position in March 2005. He previously worked as market, the company needs to discount it to make Director of Sales and Marketing at Air Iceland, up for the difference between current market leasing Managing Director at Ferðaskrifstofa Íslands / ITB, rates and the contract lease rate. It is difficult to Managing Director of Iceland Travel and as Director time the market peak, and therefore the company of Icelandair Holidays. He worked for the German reduces its overall risk by entering into long-term Tour Operator FTI in Münich as director of Risk contracts instead of running the risk of a contract Management in 1993-1997. Árni is MSc. in expiring when the market is at a low and no lessee Economics from Augsburg University, Germany. can be found.

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11.3.2 ICELANDAIR HOTELS Operation Purpose of the Company The company operates flights on seven domestic Icelandair Hotels aims to market and operate routes and two international routes, and on one profitably two hotel chains: All-year hotels under the additional international route over the summer. trademark Icelandair Hotels, and summer hotels About 90% of its passenger traffic is on the routes under the trademark Edda Hotels. between Reykjavík, Akureyri, Ísafjörður and Egilsstaðir. In 2005, flight operations were extended History to the Faroe Islands in co-operation with Atlantic The airline Loftleiðir started to operate a small hotel Airways, and to Greenland. Air Iceland has entered at Keflavik Airport in 1962 and built Hotel Loftleiðir into a five year agreement with Greenland's local in 1966 in Reykjavik. After being a part of the authorities on flights between Reykjavík and Kulusuk airline’s general operations for over 30 years, the and Constable Point. In 2004 the company acquired hotel arm was turned into a separate and distinct three Fokker 50 aircraft and currently has six such subsidiary in 1998. aircraft in operation. The company purchased two DASH 8-100 aircraft which started operation this Management year. In addition the company operates smaller Magnea Þórey Hjálmarsdóttir aircraft, namely Twin Otter. The Managing Director of Icelandair Hotels is Magnea Þórey Hjálmarsdóttir. Magnea was appointed Market and current market position in July 2005 but joined Icelandair Hotels in 1994. Air Iceland holds a strong position on the Icelandic Magnea has worked in the hotel industry since 1991 5 domestic air transport market and has operated and held management positions within hotels in profitably over the past three years. With the strong Iceland, Switzerland and Japan. She received her economy and large-scale industrial projects in MBA from the University of Surrey UK in 2003 progress in Eastern Iceland, demand has been high on main routes and is expected to remain high. The Operation busiest routes are to Ísafjörður, Egilsstaðir and Icelandair hotels run eight Icelandair hotels and 15 Akureyri; despite the industrial activity in Eastern- Edda hotels. All the hotels, apart from five outside Iceland, the frequency of flights to Akureyri has Reykjavik, are operated by Icelandair Hotels. They increased more than to Egilsstaðir since operations are run according to a franchise agreement which went underway in the eastern part of Iceland. Air allows them to use the trademark Icelandair Hotels. Iceland also operates flights to Greenland and the Icelandair Hotels are: Nordica Hotel, Hotel Loftleiðir, Faroe Islands. Flughótel, Hotel Flúðir, Hotel Rangá, Hotel Kirkjubæjarklaustur, Hotel Hérað and Hotel Hamar. Future strategy The Hotel Edda chain has a total of 15 hotels around Air Iceland plans to grow and increase profitability the country which are open during the summer. Most by offering the Icelandic market and the tourism of them use the student quarters of schools, with the market in Iceland the best possible service. Demand number of guestrooms ranging from 20–204 and of is good and growing on all destinations within differing quality. Icelandair Hotels rents all real Iceland and to Greenland, which is the most estate that it uses for its operations. promising external market. Air Iceland aims to become a West Nordic airline. Market and current market position The number of tourists in Iceland has grown rapidly6, and Icelandair Hotels has more than doubled its capacity in the last five years. The two hotels in 5 In 2005 the total number of passengers on domestic flights was Reykjavik account for approximately 75% of 411,639 according to information from the Icelandic Civil Aviation Administration available via the website http://www.caa.is/media/files/flugt_isl_2005.pdf. In 2005 Air 6 Figures for number of tourist visiting Iceland can be found via the Iceland transferred around 321,001 passengers on domestic routes. website http://www.ferdamalastofa.is/displayer.asp?cat_id=503

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Icelandair Hotels’ revenue: Hotel Lofteiðir, a four- He received his Cand.Oecon from the University of star hotel with 220 rooms and the recently-renovated Iceland in 1992 and an MBA degree from Nordica Hotel, a four-star 252-room hotel with Copenhagen Business School (CBS) in 1997. convention facilities. The main competitors of Icelandair Hotels are more centrally located 3 and 4 Operation star hotels in Reykjavik; the main competitors of the Iceland Travel operation is producing, marketing, Edda hotels are the Foss Hotel chain and Icelandic distributing and selling package tours to foreign Farm Holidays. The market has expanded, due both tourists in Iceland. It specializes in advanced to the growth in tourism in recent years and also services and working with almost all licensed increased capacity. vendors operating in the tourist industry in Iceland - from car rentals to hotels and accommodation Future strategy providers, professional guides, etc. Iceland Travel's With clear focus on cost and aggressive marketing, well-educated, experienced and creative team is the Icelandair Hotels expects to return to profitability key to its high standards of service and successful this year and grow over the next few years. It is operation. The aim is to offer high quality service at looking closely at developments in Reykjavik with the competitive prices at all times. intention of being an active partner in hotel operations in the city centre. Market and current market position Iceland Travel is providing travel and MICE services in Iceland. The focus is on profitable packages and 11.3.3 ICELAND TRAVEL increasing focus on internet sales channels. About Purpose of the Company 75% of Iceland Travel's customers are contracted Iceland Travel is a tour operator and travel agency in customers, foreign travel wholesalers and Icelandic incoming tourism, conferences and incentives in companies and institutions. Iceland. Its main goal is to offer a wide range of services in order to meet the needs of its customers. Future strategy In January 2006, a new managing director, Jóhann History Kristjánsson, was engaged at Iceland Travel and his For over 30 years, the company has grown and new management will focus its attention on using prospered; in 2005, over 35,000 visitors travelled to the Internet as a sale channel more effectively and Iceland with Iceland Travel. The company's turnover highlighting products that have the highest margin, has increased each year and was just under ISK 2 high-end conference and incentive markets and new billion in 2005. Iceland Travel is a member of the markets such as the Far East (China). Iceland still Icelandic Travel Industry Association, SAF (The has a great deal of potential as a destination for Icelandic Travel Industry Association) and the tourists, conferences and incentives, as the Iceland Convention and Incentive Bureau, IC&IB. In infrastructure is improving. New hotels, routes, addition, Iceland Travel is a member of "Destinations places and activities are being brought to the market Unlimited" and "Prestige Resorts and Destinations", and the knowledge needed to provide a professional associations operating on the convention and service to the market is developing. Iceland Travel’s incentive market. mission is to lead that market growth.

Management Jóhann Kristjánsson 11.4 OTHER SUBSIDIARIES The Managing Director of Iceland Travel is Jóhann 11.4.1 ICELANDAIR SHARED SERVICES Kristjánsson. Jóhann was appointed in January 2006 after over 10 years as a manager in the information Purpose of the company technology business at Skyrr and Glitnir banki hf.. Fjárvakur handles the accounting, reporting and Previously he had obtained some hands-on salary processing for the companies within Icelandair experience within the travel industry from Denmark. Group Holding. Icecap handles some of the Group’s

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passenger insurance business. Fjárvakur and Icecap Operation together form Icelandair Shared Services. When it was established, the company was one of the largest companies in Iceland specializing in this History area of business and is intended to operate a support Icelandair Shared Services was established in 2002 department for finances with the shared services with the merger of FL Group’s and its subsidiaries' concept as a cornerstone. This service involves accounting departments. accounting, collection, payments, payroll, tax reporting and preparation of financial statements, in Management addition to other specialised services for managers of Magnús Kr. Ingason the group. Icelandair Shared Services is a The Managing Director of Icelandair Shared Services frontrunner in Iceland in its field of operation and its is Magnús Kr. Ingason. Magnús has been the 80 employees possess extensive knowledge of this General Manager of the Company Shared Services area of business. since its incorporation in the year end 2002. He joined Flugleiðir in 1998 and was previously Director Future strategy of Flugleiðir’s accounting department. Magnús Icelandair Shared Services aims to continue process- received his Cand.Oceon from the University of smoothing and simplification with unit-cost Iceland in 1993 and became a certified public reduction as a main target and to push forward accountant in 1999. timelines for publication of financial data, both internal and external, in order to increase the value of financial information within the group.

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12 OPERATING ASSETS Table 9. The Company’s property, plant and equipment as of September 30, 2006. All figures in ISK millions.

Aircraft and flight Aircraft and equipmentEngines engines Buildings Other Total Cost Balance at 1 January 2006 17.053 920 17.973 2.204 2.664 22.841 Exchange rate difference 1.189 76 1.265 0 (0) 1.265 Additions through business combinations 8 0 8 0 10 18 Additions during the year 2.699 944 3.644 0 232 3.875 Sales and disposals during the period (1.551) 0 (1.551) 0 (57) (1.608) Balance at 30 September 2006 19.398 1.940 21.338 2.204 2.849 26.391

Depreciation and impairment losses Balance at 1 January 2006 1.024 0 1.024 61 1.160 2.245 Exchange rate diference 1 0 1 0 0 1 Depreciation 921 314 1.235 80 250 1.565 Sales and disposals during the period (52) 0 (52) 0 (52) (104) Balance at 30 September 2006 1.894 314 2.208 141 1.358 3.707

Net 1.1.2006 16.029 920 16.949 2.143 1.504 20.596 30.9.2006 17.504 1.626 19.130 2.063 1.491 22.684

Depreciation ratio 4-10% 4-10% 2-4% 12-33%

12.1 BUILDINGS On September 30, 2006 the book value of total real estate property of Icelandair Group Holding amounted to ISK 2,063 million and total lease obligations amounted to ISK 5,344 million. The most significant buildings are listed in Table 10 below.

Table 10. Icelandair Group Holding’s material real estate property. All figures in ISK million.

book value Hótel Nordica, Suðurlandsbraut 2, Reykjavík Leased Hotel Loftleidir, Reykjavik airport, Reykjavík Leased Hotel Herad, Midvangi 5-7, Egilsstadir Leased Icelandair Sales office, Baltimore, USA Leased Icelandair Sales office, London, UK Leased Icelandair Sales office, Copenhagen, Denmark Leased Maintenance Hangar at Keflavik airport 669 Freightcenter at Keflavík airport 340 Officebuilding at Reykjavík airport 320 Servicebuilding at Keflavík airport 267 Hangar 4 and other buildings at Reykavik airport 340 Skútuvogur 13A, Reykjavík 118

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12.2 AIRCRAFT AND FLIGHT EQUIPMENT The total fleet connected to Icelandair Group Holding’s subsidiaries amounts to 60 aircraft, including 197 aircraft managed by Icelease, some of which have not yet been delivered. The fleet connected to Icelandair Group Holding is listed in Table 11. The ownership of aircraft related to Icelease are explained in section 11.2.3. For other subsidiaries owned aircraft are:

• Five Boeing 757 – 200 operated by Icelandair • Two Boeing 757 – 200 operated by Icelandair Cargo • Two Boeing 737 – 400 operated by Bluebird Cargo • Ten aircraft operated by Air Iceland

On September 30, 2006 the combined value of all owned aircraft and flight equipment amount to ISK 19,130 million. Total lease obligations relating to aircraft and flight equipment came to ISK 15,112 million.

Table 11. Total fleet connected to Icelandair Group Holding.

Icelandair Loftleiðir Bluebird Icelandair Cargo Icelandic Cargo Icelease Air Iceland 5 Boeing 737-300 5 21 Boeing 757-200 9 5 4 3 3 Boeing 767-300 1 2 1 Boeing 747-300 1 1 Boeing 757-300 1 6 Fokker Friendship, 2 Twinotter, 2 Dash 10 2 Airbus 320-200 2 2 Boeing 737-400 2 3 Boeing 737-500 3 12 Boeing 737-800 12 Total: 60 11 5 8 7 19 10

12.3 OTHER PROPERTY AND EQUIPMENT The combined value of all owned property and equipment outside buildings and aircraft and flight equipment is ISK 1,491 million and ISK 228 million for leased property. The most significant tangible assets other than buildings and aircraft and flight equipment are listed in Table 12.

Table 12. The most significant other property and equipment

Book value Interiors at Nordica Hotel 646 Interiors at Loftleidir Hotel 59 Interiors at Officebuilding at Reykjavik airport 146 Interiors at Keflavik airport 111 Airport equipment at Keflavík airport 119 Artwork and paintings 100

7In addition to the 19 aircraft, Icelease has made a binding agreement to purchase four Boeing 787-8 Dreamliner aircraft

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13 INVESTMENTS Table 13. Investments in each of the years 2003-2005 and year to date 2006, total amount invested and percentage of the total capital expenditure for the year.

Year Investment ISK millions % of capex 2006 2 Boeing 737-400 2,200 40% 2006 Latcharter Airlines 484 9% 2006 2 Dash 8-100 aircraft 1,000 18% 2006 Boeing 757-200 winglets 280 5% 2006 Airline Services Estonia 250 5% 2006 Other 1,338 24% 2005 2 engines 400 20% 2005 Hotel Nordica 300 15% 2005 ITS spare parts 250 13% 2005 Other 1,244 63% 2004 3 F-50 aircraft 400 22% 2004 ITS spare parts 250 14% 2004 Hotel Nordica 120 7% 2004 Other 1,015 57% 2003 Hotel Nordica 600 25% 2003 ITS 600 25% 2003 Other 1,179 50%

Metro23 aircraft and two Twin Otter aircraft for ISK 13.1 HISTORICAL INVESTMENTS 400 million. All investments of Icelandair Group Holding for the period 2003-2005 were financed internally. In 2004, total investments amounted to ISK 1,785 Investments are mainly due to investment in aircraft, millions. Air Iceland bought 3 F-50 aircraft for ISK flight equipment and aircraft engines. Aircraft 400 million and ITS bought spare parts for ISK 250 engines and aircraft spare parts are stated at cost million and invested ISK 120 million in Hotel less accumulated depreciation and impairment Nordica. losses. When aircraft are acquired the purchase price is divided between the aircraft itself and engine In 2005 total investments was ISK 2,194 with hours. Aircraft are depreciated over the estimated material investment consisting of 2 engines for ISK useful life of the relevant aircraft until a residual 400 million and an ISK 300 million investment in value is met. Engine hours are depreciated according Hotel Nordica. ITS purchased spare parts for ISK to flown hours. When an engine is overhauled the 250 million. cost of the overhaul is capitalised and the remainder of the cost of the previous overhaul that has not 13.2 CURRENT INVESTMENTS already been depreciated, if there is any, is expensed Investments in 2006 are estimated at ISK 5,974 in full. million which is unusually high due to exceptional items. All investments except the purchase of two In 2003 total investment in property plant and Boeing 737-400 aircraft are financed internally. equipment came to ISK 2,379 millions. The Icelandair Group Holding acquired the majority of Company’s principal investments that year were the shares in the Latvian charter operator LatCharter mainly due to Hotel Nordica for ISK 600 million and Airlines for ISK 484 million and committed itself to ITS for ISK 600 million. Air Iceland bought one acquire the remaining shares in the future. The Company also purchased two used, but completely

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overhauled, DASH 8-100 aircraft from the Canadian CIS region and to add the Airbus family into its aircraft producer Bombardier, representing a total world-wide ACMI product line. investment of ISK 1,000 million. The aircraft are to be used mainly in relation to contracts that Air LatCharter Airlines has built up a solid and positive Iceland has with the government in Greenland but reputation in the Baltic region and has close also on domestic routes. Other material investments relations with the local charter market. Furthermore, this year include ISK 280 million for winglets for the company has gained extensive knowledge of the Boeing 757-200 aircraft and ISK 250 million in CIS market, which will undoubtedly be of benefit to Airlines Services Estonia (ASE) which is based in Lofleidir Icelandic in the near future, opening the Tallinn, Estonia. ASE is a specialist in airline window for its current product line. revenue accounting. LatCharter Airlines was established in Latvia in 13.2.1 TWO BOEING 737 – 400 AIRCRAFT 1992. The company started its operations with The two Boeing 737-400 aircraft were purchased to several Soviet-built aircraft, but gradually changed renew the fleet of Bluebird Cargo and to exchange its fleet to two modern Airbus-A320s. By 2006 the two of the Boeing 737-300 aircraft of the company. company had grown substantially, both in terms of The plan is to sell the Boeing 737-300, but it will the number of passengers carried and of the number probably not be finalised before year end 2006. The of destinations served, and it has become the sales price of the Boeing 737-300 is estimated USD leading provider of charter flights in Latvia. 12 million per aircraft. The new Boeing 737-400 Meanwhile, the company has also started to offer have 35% more carrying capacity which opens up wet-lease services outside Latvia. In 2005, the the opportunity of longer and more efficient company carried 100,000 passengers and its contracts with suppliers, than their predecessors. In turnover reached EUR 17 million (up from EUR 13 addition, they are relatively more practical in million in 2004). Currently LatCharter Airlines operation which will improve Bluebird Cargo's employs 87 people. performance. 13.2.3 AIRLINE SERVICES ESTONIA (ASE) 13.2.2 LATCHARTER AIRLINES Icelandair Shared Services, one of the Icelandair Loftleiðir-Icelandic, the charter and ACMI-marketing Group Holding companies, has bought Airline subsidiary of the Icelandair Group Holding, bought Services Estonia (ASE) which is based in Tallinn, 55% of the shares in LatCharter in June 2006 and Estonia. ASE is a specialist in airline revenue has signed an obligation to buy the remaining 45%. accounting. The price of the remaining shares is dependant on the EBITDA results of LatCharter for the years 2006, The company will, on behalf of Icelandair Shared 2007 and 2008. A minimum and a maximum price Services, be responsible for the sales and revenue has been set in the contract, the minimum being accounting for Icelandair and this merger creates EUR 4.5 million and maximum EUR 13.5 million. further opportunities for this area. The purchase price of the 55% of the shares has been accounted for in Loftleiðir’s books, as has also The operation of ASE, which specialises in sales and the minimum price of the remaining shares, EUR revenue accounting for airlines, is an important part 4.5 million, which is still unpaid. The final purchase of the services that Icelandair Shared Services offer. price will be set after the audited accounts for 2008 This purchase will increase the operational are available. efficiencies and lower costs by moving this part of the operations to Estonia. There will also be many The acquisition comes as a result of the ongoing co- opportunities for increased business in this area. operation between the two companies announced ASE is already providing revenue accounting for earlier this year and is part of Loftleiðir-Icelandic’s other airlines, and there are opportunities to increase strategy to strengthen its position in the Baltic and the revenue.

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Icelandair Shared Services currently employs 83 internally generated funds. No other material persons and ASE about 40. investments in tangible fixed assets are planned.

13.3 FUTURE INVESTMENT Icelandair has ordered and confirmed four Boeing The company plans to invest in new seats and 787 aircraft – Dreamliners – for delivery in 2010- interiors for Icelandair Boeing 757 aircraft for a total 12. The airline has also confirmed options for 3 of ISK 750 million per year in 2007 and 2008. The more such aircraft, for possible delivery in 2012- Company envisages financing these investments by 2013. The management of the Company has not decided on method of financing the aircraft.

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14 BOARD OF DIRECTORS AND MANAGEMENT

14.1 BOARD OF DIRECTORS FINNUR INGÓLFSSON, Jöklafold 15, 112 The Board of Directors of the Company has supreme Reykjavík, Iceland authority in the Company’s general affairs between Chairman of the board of directors since October shareholders meetings and endeavours to keep its 2006 organization and operations on course. The Finnur Ingólfsson was the CEO of VÍS - the Icelandic Company’s Board of Directors directs company Insurance Company from 2002 until May 2006. In affairs and sets its objective and future vision, the years 2000-2002 Finnur was the Director of the dealing with the annual budgets and company's Central Bank of Iceland and in the years 1995- goals presented by the CEO and the strategy to be 1999, Finnur was Iceland's Minister of Industry and taken to reach them. The Board of Directors is Commerce. He was a member of Parliament, expected to ensure that the Company's strategy is in Reykjavík constituency, for the Progressive Party in accordance with its vision and overall goals. The Iceland. Finnur was a Special Assistant to the Company's Board of Directors ensures the sufficient Minister of Health and Social Security in the years supervision of the accounting and handling of the 1987-1991 and a Special Assistant to the Minister Company’s funds. of Fisheries in the years 1983-1987. He was a teacher of economy at the Flensborg Secondary The Board of Directors takes decisions on all matters School in Hafnarfjörður in the years 1977-1978 and that are deemed extraordinary or significant. The the Managing Director of the Dyngja Knitting Co. in Board of Directors may grant the CEO the authority the years 1977-1978 and of Katla Knitting Co. in to resolve such issues. The CEO may also execute the years 1975-1976. Finnur holds a BS degree in such matters if there is no opportunity to wait for the Business from the University of Iceland. Board of Directors' approval without this resulting in great disadvantage to the operations of the Company. Current board positions: In such instances, the CEO is to report promptly to Current member of the board of directors of the chairman of the Board of Directors. Only the Icelandair Group hf., Langflug ehf., Kaupþing banki Company's Board of Directors can grant power of hf., Íshestar ehf., Bolmagn ehf., FISK- procuration. eignarhaldsfélag ehf., Íslensk endurtrygging ehf., Hvanná ehf., Fikt ehf. and Foldás ehf. The Board of Directors appoints the Company’s CEO and decides on the terms of his or her employment Past board positions: or entrusts the Chairman of the Board of Directors Lýsing hf., Vátryggingarfélag Íslands hf., with this task. Öryggismiðstöð Íslands hf., VÍS International Invest ehf., Íslenskar endurtryggingar hf., Líftryggingarfélag The Working Procedures of the Board of Directors Íslands hf. and Flutningar ehf. state that board members are to familiarise themselves with the provisions of law, the Company’s Other information: Articles of Association, general securities regulations CEO of Vátryggingarfélag Íslands from 2002-2006, and regulations on the handling of inside information CEO of Líftryggingarfélag Íslands from 2005-2006 and insider trading. and member of the board of governors of the Central Bank of Iceland from 2000-2002. The following section lists the current members of the Board of Directors and their activities for the Own holding of shares: None past five years. Holdings of financially related parties: Finnur is member of the board of directors of Langflug ehf. Langflug ehf. owns 320 million shares or 32.0% of the total share capital of Icelandair Group Holding

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hf. Langflug ehf. is owned by Eignarhaldsfélagið the year 2002. In the years 1994-2002, Hermann Samvinnutryggingar svf. worked as a sales represtentative and later the CEO Call or put options: None of Slípivörur og verkfæri ehf. Hermann studied Development and Leadership at the IESE business school in Barcelona in the year 2005, and AMP ÓMAR BENEDIKTSSON, Ægissíða 58, 107 studies from the Business School in Barcelona in Reykjavík, Iceland the years 2004-2005. In the years 1978-1984, Vice-chairman of the board of directors since Hermann studied at Icelands's Hotel and Catering October 2006 Academy. Ómar Benediktsson was the CEO of Islandsflug from 1997 until 2004 when the company merged with Air Current board positions: Atlanta Icelandic and became the CEO of the joint Current member of the board of directors of company. After the merger was complete he left the Icelandair Group hf., Naust ehf., Drang-hlutur ehf., company at the end of 2005. He was the MD of Tunguós ehf., Hjólbarðahöllin ehf., Ísdekk ehf., Island Tours in Germany 1986-1992. After that he Fjárfestingarsjóður Stórkaupmanna (an investment was involved in several companies as an investor and fund), AT Toolcentre Ltd. and Bílanaust hf. a board member. Ómar was one of the founders of Icelandair Group Holding hf. on its date of Past board positions: establishment on 15 October 2006. Ómar has a Strax-fast ehf. and Slípivörur og verkfæri ehf. degree in Business Administration from the University of Iceland. Other information: Hermann is the current CEO of Olíufélagið hf. and Current board positions: BNT hf. and former CEO of Bílanaust hf. and Current member of the board of directors of Slípivörur og verkfæri hf. Icelandair Group hf., Penninn hf., Flugfjarskipti ehf. and Eignarhaldsfélagið City Star Airlines hf. Own holding of shares: None Holdings of financially related parties: Past board positions: CEO and owner of 1.3% of the share capital in BNT Íslandsflug hf., Flugfélagið Air Atlanta hf., Avion hf., which owns 49.9% share in Naust ehf. Naust Aricraft Trading hf. and Suðurflug hf. ehf. holds 148,148,148 shares in Icelandair Group Holding hf. or 14.8% of the total share capital. Other information: Call or put options: None Former CEO of Íslandsflug hf. (later named Air Atlanta Icelandic hf.) JÓHANN MAGNÚSSON, Suðurlandsbraut 18, 108 Own holding of shares: None Reykjavík, Iceland Holdings of financially related parties: Member of the board of directors since November Majority owner of Blue Sky Transport Holding SA 2006 which owns 66.7% in Urður ehf. Urður ehf. holds Jóhann Magnússon was Managing Director of FBA 55,555,556 shares in Icelandair Group Holding hf. Corporate Advisory Ltd. and subsequently ISB or 5.6% of the total share capital. (Íslandsbanki now Glitnir banki hf.) Corporate Call or put options: None Advisory from 1999 until 2002. Previously, Jóhann was Managing Director of Ker ehf., which was then a HERMANN S. GUÐMUNDSSON, Suðurlandsbraut subsidiary of Olíufélagið hf. A Management 18, 108 Reykjavík, Iceland Consultant at Stuðull ehf. for 14 years, Jóhann was Member of the board of directors since October one of its two founders and owners. Prior to that, he 2006 was a Management Consultant at Hagvangur hf. for Hermann Guðmundsson was appointed CEO of 1 year and Marketing Manager at Vífilfell hf. (Coca Olíufélagið hf. and BNT hf. in 2006 after being the Cola - Iceland) for 4 years. Currently Jóhann is the CEO of Bílanaust hf., BNT hf.'s subsidiary, from

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CEO of Carta Capital. He holds a Cand.Oecon. Other information: degree from the University of Iceland. Head of Marketing and Business Relations of Landsnet ehf. Current board positions: Current member of the board of directors of Carta Own holding of shares: None Capital ehf., Carta Capital LTD. UK, J.K.B. ehf., Holdings of financially related parties: None Investor ehf. and Aptom Holdings Limited, Jersey. Call or put options: None

Past board positions: EINAR SVEINSSON, Bakkaflöt 10, 210 Garðabær, Basisbank A/S and Smartkort hf. Iceland Member of the board of directors since November Other information: 2006 CEO of J.K.B ehf. Einar Sveinsson graduated from Menntaskólinn í Reykjavík in 1968. Einar is the former CEO of the Own holding of shares: None Sjóvá-Almennar insurance company. He was Holdings of financially related parties: None employed at Sjóvátryggingarfélag Íslands hf. from Call or put options: None 1972 to 2004 (Sjóvá-Almennar tryggingar hf. from 1989), as Chief Executive Officer from 1984 to MARTA EIRÍKSDÓTTIR, Vesturbrún 33, 104 2004. Einar is the chairman of the board of Glitnir Reykjavík, Iceland banki hf. He was Chairman of the Iceland Chamber Member of the board of directors since November of Commerce from 1992 to 1996. Among other 2006 things, he has been Chairman of the Board of the Marta Eiríksdóttir is currently Head of Marketing and life insurance company Sameinaða líftryggingafélagið Business Relations for Landsnet which is the hf., fisheries company Haraldur Böðvarsson hf., Transmission Service Operator of electricity in Frumherji hf., NAIG (Nordic aviation insurance Iceland. Prior to that Marta was Executive Director of group), and the Association of Icelandic Insurance Marketing of Consumer Products at Íslandssími. Companies. He has also served on the Board of During 1994-2000 Marta Eiríksdóttir worked as Directors of the fisheries companies Grandi hf. and Manager Commercial Programmes for Europay Útgerðarfélag Akureyringa hf., and the financing International, European headquarters of MasterCard, company Lýsing hf. Maestro and eurocheque. Before joining Europay Int. she worked for five years as Head of the Marketing at Current board positions: Eurocard Iceland. Marta has also worked as a Current chairman of the board of directors of Glitnir consultant on several projects in the credit card banki hf., Íslensk endurtrygging hf., Birnir sf., industry. Marta holds a degree in Economics and Hrómundur ehf., Áning fjarfestingarfélag ehf. and Business Administration from the University of Gildruklettar ehf. and member of the board of Sjóvá- Iceland. She also holds a B.Ed. degree from the Almennar tryggingar hf., BNT hf., BNB ehf. and University College of Education in Iceland. Olíufélagið ehf.

Current board positions: Past board positions: Current member of the board of directors of Netorka Hf. Eimskipafélag Íslands in 2003. hf. and Lítill heimur ehf. and alternate member of the board of directors of Kaupþing Banki hf. Other information: Former CEO of Sjóvá-Almennar tryggingar hf. Past board positions: Visa Ísland, EJS (Chairman of the board from Own holding of shares: None October 2005 to March 2006) and EFIL (European Holdings of financially related parties: Federation for Intercultural Learning). Owner of 7.0% of the share capital in BNT hf., which owns 49.9% share in Naust ehf. and the owner of Hrómundur ehf. which holds 10% of the

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share capital in BNT hf. The Chairman of the Board Senior managers are persons who are relevant to of Directors of BNT hf. is Bjarni Benediktsson, who establishing that the Company has the appropriate is the son of Benedikt Sveinsson. Benedikt is the expertise and experience for the management of its brother of Einar Sveinsson. Benedikt Sveinsson is business. The following section lists the current the owner of Hafsilfur ehf., which owns 10% of the Senior Managers and their activities over the last five share capital in Naust ehf. Furthermore, Einar years. Sveinsson is the Chairman of the Board of Directors of Glitnir banki hf. which is the owner of 30.1% of JÓN KARL ÓLAFSSON, Reykjavík Airport, 101 the share capital in Naust ehf. Glitnir banki hf.’s Reykjavík, Iceland shareholdings are explained in section 17.1. CEO of Icelandair Group Holding hf., Icelandair Group hf. and Icelandair ehf. Naust ehf. holds 148,148,148 shares in Icelandair Jón Karl was appointed chief executive officer of Group Holding hf. or 14.8% of the total share Icelandair on 1 June 2005 and became the CEO of capital. Icelandair Group in October 2005. He joined Flugleiðir in 1984, first in the finance department, Call or put options: None then as the manager of Flugleiðir's route network. He then served as the general manager of Flugleiðir’s HELGI SIGURÐUR GUÐMUNDSSON, Barónsstíg 47, office in Frankfurt, Germany, for 5 years. Before 101 Reykjavík, Iceland being appointed the CEO of Icelandair he had been Member of the board of directors since November managing director of Air Iceland since 1999. He 2006 received his Cand.Oecon from the University of Helgi Sigurdur Gudmundsson was appointed the Iceland in 1984. Director of Operations at the Primary Health Care of the Capital Area in the year 1999. In the years Current board positions: 1989-1998 he was the Director of Sales at Iceland Íslenska óperan, Útflutningsráð (Trade Council of Insurance Company Ltd. and a Sales Manager at Iceland), Golf ehf., Flugval ehf., and various board Samvinn Mutual Insurance in the years 1982-1989. positions of current subsidiaries of Icelandair Group. Helgi holds a degree from the Icelandic Management Academy, where he took a program in marketing and Past board positions: insurance management. None other than subsidiaries of Icelandair Group.

Current board positions: Own holding of shares: Chairman of the board of directors of the Central 18,518,519 shares or 1.9% of the total share Bank of Iceland and member of the board of capital. directors of Foldás ehf. Holdings of financially related parties: None Call or put options: None Past board positions: Reykjavík Health Clinic, Landsbanki Íslands hf., HLYNUR ELÍSSON, Reykjavík Airport, 101 Lífeyrissjóður Bankamanna (pension fund), Síminn Reykjavík, Iceland hf. and the Central Bank of Iceland. CFO Icelandair Group Holding hf.

Own holding of shares: None Hlynur was appointed Chief Financial Officer of Holdings of financially related parties: None Icelandair Group in 2006 after being Icelandair’s Call or put options: None Senior Vice President of Finance and Resource Management since 1 April 2005. He joined 14.2 SENIOR MANAGEMENT Flugleiðir in 1995 as Director of Finance of the The Senior Management team, under the leadership domestic airline operation and of Air Iceland from of the CEO, Jón Karl Ólafsson, comprises four 1997. He holds a BS degree in Business from managing directors, as is described in Section 11. Rockford College, Illinois since 1991.

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Board positions: Communications in 2006. Gudjón’s background is in Hlynur holds, and has in the past five years held, TV and print journalism, advertising and PR. various board positions within Icelandair Group’s subsidiaries. He is also a member of the board of Current board positions: None EFIA (the Icelandic Pilots’ Pension Fund). Past board positions: None Own holding of shares: 2,222,222 shares or 0.2% of the total share capital. Own holding of shares: In the share holders list, Hlynur’s shareholdings fall 1,111,111 shares or 0.1% of the total share capital. under “Other Management of the Company”. In the share holders list, Guðjón’s shareholdings fall Holdings of financially related parties: None under “Other Management of the Company”. Call or put options: None Holdings of financially related parties: None Call or put options: None SIGÞÓR EINARSSON, Reykjavík Airport, 101 Reykjavík, Iceland COO Icelandair Group Holding hf. 14.3 CONFLICT OF INTEREST BNT hf. is the majority owner of Olíufélagið ehf., Sigþór was appointed Chief Operating Officer of which is the Company’s main fuel supplier. Icelandair Group in March 2006. He was managing Therefore, attention is drawn to Hermann S. director of Loftleiðir-Icelandic from its foundation on Guðmundsson’s relations to BNT hf. Hermann is a January 1, 2002 until 2006. He joined Flugleiðir in member of the Board of Directors of the Company. April 1996, first in positions related to strategic Einar Sveinsson, a member of the Board of Directors planning, but as of May 1999 he served as Director of the Company is also a member of the Board of of Resource Management where he assumed Directors of Glitnir banki hf. which is the Offeror and responsibility for management of all flight-related the Manager and of BNT hf. costs, including aircraft leasing, station management and fuel purchasing. He holds a master’s degree in Langflug ehf., Naust ehf. and Urður ehf. have all industrial engineering and management. made lock-up agreements with the Manager. Both Langflug ehf. and Urður ehf. have a lock-up on all Board positions: their shares for 12 months from the date of listing. Sigþór holds, and has in the past five years held, Naust ehf. has lock-up on 1/2 of its shares for 12 various board positions within Icelandair Group’s months from the date of listing, and lock-up on ¼ on subsidiaries. its shares for 6 months but other parts of the shares are not subject to lock-up. The total number of Own holding of shares: shares subject to 12 month lock-up is 449,629,630 3,703,703 shares or 0.4% of the total share capital. and the total number of shares subject to 6 month In the share holders list, Sigþór’s shareholdings fall lock up is 37,037,037. This totals 486,666,667 under “Other Management of the Company”. shares or 48.7% of the total share capital. Holdings of financially related parties: None Information about the companies subject to lock-up Call or put options: None on their shares is provided in sections 17.1.1, 17.1.3 and 17.1.4. GUÐJÓN ARNGRÍMSSON, Reykjavík Airport, 101 Reykjavík, Iceland No other Director or member of Senior Management VP Corporate Communications Icelandair Group has any potential conflict of interest between their Holding hf. duties to the Company and their private interests or other duties. Gudjón joined Flugleiðir in 2000 as Manager of Public Relations and Company Spokesman. He was appointed Vice President of Corporate

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14.4 CONFIRMATIONS authority (including any designated professional In the past five years none of the board members or body) or have ever been disqualified by a court members of the senior management have been: from acting as a director or member of the • Convicted in relation to a fraudulent offence. administrative, management or supervisory • Associated with companies that have gone into bodies of a company or from acting in the bankruptcy, receivership or liquidation. management or conduct of the affairs of a • Subject to any official public incrimination company. and/or sanctions by any statutory or regulatory

15 BOARD PRACTICES directors: Ómar Benediktsson (chairman), Jóhann 15.1 THE BOARD OF DIRECTORS Magnússon and Marta Eiríksdóttir. The main tasks of The members of the Board of Directors are elected at the committee include co-ordination on auditing the Annual General Meeting (or other shareholders’ within the Group, in co-operation with the meetings). Company’s internal auditors, and acting in an advisory capacity to the board of directors with No member of the Company’s Board of Directors or respect to report making. management has stated his intention of leaving his post. The purpose of installing a remuneration committee is to avoid having the management control its own 15.2 SERVICE CONTRACTS remuneration and furthermore to ensure that the No specific agreements providing for benefits upon management’s remuneration is structured so as to termination of employment exist between the serve the long-term interests of the shareholders. Company and the members of the Senior The main tasks of the remuneration committee are Management or the Board of Directors other than policy making with respect to the management’s mentioned below. performance-related bonuses, including stock option purchases. The committee performs evaluations on Jón Karl Ólafsson, the CEO, has a notice period of the management’s remuneration and monitors the 24 months. Other mentioned members of the management’s stock purchases. The current management have a notice period of 12 months. The members of the committee are three members of the employment agreements contain no provisions for board of directors: Finnur Ingólfsson (chairman), other retirement benefits. Hermann S. Guðmundsson and Helgi Sigurður Guðmundsson. 15.3 AUDIT COMMITTEE AND REMUNERATION COMMITTEE 15.4 COMPLIANCE The current board of directors has recently installed The Company does not comply with the Guidelines of both an auditing committee and a remuneration Corporate Governance issued by the Iceland Stock committee. Exchange (ICEX), Iceland Chamber of Commerce and the Confederation of Icelandic Employers. Out of The auditing committee will be appointed by the seven members of the Board of Directors, only three Company’s Board of Directors. The current members are independent. of the committee are three members of the board of

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16 EMPLOYEES, REMUNERATION AND BENEFITS Holding, Icelandair Group and its subsidiaries to the 16.1 REMUNERATION AND BENEFITS Board members. For the first nine months of 2006, Jón Karl Ólafsson’s remunerations and benefits amounted to 16.2 PENSION LIABILITY ISK 27.2 million. Jón Karl is the CEO of Icelandair The total pension liability of Icelandair Group Group Holding, Icelandair Group and Icelandair ehf. towards former employees amounts to ISK 53 The total amount paid to Guðjón Arngrímsson, VP million. No pension liability exists towards current Corporate Communications, Hlynur Elísson, CFO and Directors of the Board or management. Sigþór Einarsson, COO, in the same period was ISK 45.0 million. No material changes regarding 16.3 NUMBER OF EMPLOYEES remuneration for these individuals have taken place The Company and Icelandair Group believe that one from the year 2005. of its principal strengths lies in its employees. Its operations require a wide range of knowledge and Remuneration for the Board of Directors will be specialised personnel within aviation technology, decided at annual general meetings which will be international marketing, finance and management. held before the end of May each year. However, from Employee numbers since 2003 are presented in 1 November 2006 until the next shareholders Table 14. Due to seasonal fluctuations, the meeting, all the members of the Board of Directors Icelandair Group’s subsidiaries employ more people will be paid ISK 200,000 per month, except the during the summer than during other periods. In the Chairman who will receive ISK 400,000 per month, summer 2006 the increase in total number of as agreed by shareholders on the shareholders Icelandair Group’s employees amounted to around meeting on 15 November 2006. These figures 500-600 people. Most of this increase was due to represent all payments from Icelandair Group increase in number of Icelandair’s employees.

Table 14. Number of employees

31/12 2003 31/12 2004 31/12 2005 31/10 2006 Icelandair Group - - - 14 Icelandair 867 959 1018 1056 Icelandair Ground Services (IGS) 337 360 404 571 ITS Technical Services 185 209 217 253 Icelandair Cargo 50505257 Loftleiðir-Icelandic ehf. 5 5 8 11 Bluebird Cargo 28304065 Icelease - - - 1 Air Iceland 214 226 239 279 Icelandair Hotels 237 276 255 276 Iceland Travel 48 73 57 52 Icelandair Shared Services 55 60 68 83

There has been no material change in the number of employees since 31 October 2006. Icelandair Group Holding’s employees are included in Icelandair Group.

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Table 15. Geographical location of Icelandair Group Holding’s employees

31/10 2006 Iceland 2,564 USA 73 Scandinavia 31 Central-Europe 21 South-Europe 13 UK 11 Finnland 4

16.4 ARRANGEMENTS FOR INVOLVING THE EMPLOYEES IN THE CAPITAL OF THE COMPANY In the Share Offer from 27 November until 4 In addition, certain employees with management December 2006, all employees of Icelandair Group responsibilities can sign up for up to 92,593 shares. and its subsidiaries will be given the opportunity to The price of each share is the same as in the Share acquire certain amount of shares in the Company Offer. However, Glitnir banki hf. will offer employees without being subject to reduction. The total number financing for share purchase on favourable terms. In of shares reserved for this purpose is 35 million or addition to this, employees can sign up for shares in 18.9% of the total number of shares offered in the the offer to the general public part of the Share Share Offer. Each employee can sign up for a Offer. minimum of 3,704 shares and up to 11,112 shares.

17 SHAREHOLDERS

17.1 LIST OF MAJOR SHAREHOLDERS Table 16. The major shareholders of the Company as of 26 November 2006

Name Share capital Share capital Langflug ehf. 320,000,000 32.0% Glitnir banki hf. 191,221,296 19.1% Naust ehf. 148,148,148 14.8% Fjárfestingafélagið Máttur ehf. 111,111,111 11.1% Urður ehf. 55,555,556 5.6% GLB Hedge 173,963,889 17.4% GLB Hedge's shares are devided between: Jón Karl Ólafsson* 18,518,519 1.9% Other Management of the Company* 26,556,481 2.7% Other shareholders* 128,888,889 12.9% 1,000,000,000 100%

All the shares marked with * are held by GLB Hedge Depository. There is a firm commitment in place to at the issue of this document. The sum of these settle the agreement on behalf of GLB Hedge and shares amounts to 173,963,889 shares or 17.4% of every buyer. the share capital. These shares have all been sold with a settlement date which is later than the issue date of this document and are therefore not included in shareholder lists from the Icelandic Securities

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17.1.1 LANGFLUG EHF. owns 10.0% of the share capital in Naust ehf. Langflug ehf. Icelandic ID No. 660906-1500, reg. Hafsilfur ehf. is owned by Benedikt Sveinsson. office Suðurlandsbraut 18, 108 Reykjavík, Iceland is an investment company entirely owned by It should be noted that Hrómundur ehf. owns a Eignarhaldsfélagið Samvinnutryggingar svf., 2.6% share in Glitnir banki hf., Hafsilfur ehf. owns a Icelandic ID No. 550269-0589, reg. office Kringlan 1.01% share in Glitnir banki hf. and 7, 103 Reykjavík, Iceland. Langflug was founded by Fjárfestingafélagið Máttur ehf. and Glitnir banki hf. Kristinn Hallgrímsson hrl. acting as an attorney on each own 12% share in BNT hf. behalf of Eignarhaldsfélagið Samvinnutryggingar svf. 17.1.4 URÐUR EHF.

Eignarhaldsfélagið Samvinnutryggingar svf. is a Urður ehf., Icelandic ID No., 681290-1689, reg. holding company with the purpose of participating in office Austurstræti 5, 155 Reykjavík, Iceland, is insurance related operations, purchases, sales and owned 66.7% by Blue Sky Transport Holding S.A. a ownership of stocks and bonds, lending and real company owned 100% by Ómar Benediktsson, estates. Icelandic ID No.221059-4689 and 33.3% by FSP hf. Icelandic ID No. 510400-2670, Skógarhlíð 12, The Chairman of the Company, Finnur Ingólfsson, is 105 Reykjavík, Iceland. a member of the Board of Directors of Langflug ehf. Ómar Benediktsson is a member of the Board of Directors of the Company. 17.1.2 FJÁRFESTINGAFÉLAGIÐ MÁTTUR EHF. Fjárfestingafélagið Máttur ehf., Icelandic ID No. 17.1.5 GLITNIR BANKI HF. 511105-1610, reg. office Suðurlandsbraut 12, 108 Reykjavík, Iceland, is an investment company owned Glitnir banki hf., Icelandic ID No., 550500-3530, in equal parts, 50% by Sjóvá hf., Icelandic ID No. reg. office Kirkjusandur 2, 155 Reykjavík, Iceland. 701288-1739, reg. office Kringlunni 5, 103 Glitnir banki hf. is the Manager and the Offeror of all Reykjavík, Iceland and 50% by Glitnir banki hf. the 185,000,000 shares offered in the Share Offer. In addition to the offered shares, Glitnir banki hf. directly holds 6,221,296 shares. 17.1.3 NAUST EHF. Naust ehf., Icelandic ID No. 460906-0320, reg. • Glitnir banki hf. holds 50.0% of the share capital office Suðurlandsbraut 18, 108 Reykjavík, Iceland is in Fjárfestingafélagið Máttur ehf., which holds an investment company. The company is jointly 111,111,111 shares in Icelandair Group Holding owned by the following parties: hf. • BNT hf. Icelandic ID No. 530206-0250, reg. office Suðurlandsbraut 18, 108 Reykjavík, • Glitnir banki hf. directly holds 30.1% of the Iceland, owns 49.9% of the share capital in share capital in Naust ehf. which holds Naust ehf. 148,148,148 shares in Icelandair Group Holding • Glitnir banki hf., Icelandic ID No.550500-3530, hf. Glitnir banki hf. also holds 12% of the share reg. office Krikjusandur, 155 Reykjavík, Iceland, capital in BNT hf., which holds 49.9% of the owns 30.1% of the share capital in Naust ehf. share capital in Naust ehf. Furthermore, Glitnir • Hrómundur ehf., Icelandic ID No. 491188- banki hf. holds 50% of the share capital in 2519, reg. office Bakkaflöt 10, 210 Garðabæ, Fjárfestingafélagið Máttur ehf. which in turn has Iceland, owns 10.0% of the share capital in 12% ownership in BNT hf. Naust ehf. Hrómundur ehf. is owned by Einar Sveinsson. • All figures are as of 26 November 2006. Voting • Hafsilfur ehf., Icelandic ID No. 610469-0199, rights are held by the majority of each company reg. office Lindarflöt 51, 210 Garðabæ, Iceland, directly owning shares in Icelandair Group Holding.

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Of the 365,185,185 shares currently held by Glitnir The Company does not hold any shares in Glitnir banki hf., 185,000,000 shares will be offered via banki hf. Einar Sveinsson, a member of the Board of the Share Offer, Glitnir banki hf. intends to own in Directors of the Company is also a member of the its own account 6,221,296 shares and Board of Directors of Glitnir banki hf. 173,963,889 shares are now owned by GLB Hedge. However, for all the shares owned by GLB Hedge a 17.2 SALES PRIOR TO THE SHARE binding agreement has been made, whereby the OFFER buyer buys shares and GLB Hedge is the seller. In all Three qualified investors, Langflug ehf., Naust ehf. of these instances, the settlement date is at a date and Ómar Benediktsson founded Icelandair Group after the issuance of this document. As a result of Holding hf. with the goal of purchasing Icelandair this, GLB Hedge is the registered owner of the Group hf. On 15 October, 2006 they committed shares which have been sold, but a firm commitment themselves to invest 50.5% of the equity required in is in place to settle the agreement on behalf of GLB Icelandair Group Holding hf. to purchase all shares Hedge and every buyer. of Icelandair Group, under the current financial structure. These investors are now represented in the From 15 October, 2006 the Manager introduced shareholder base as controlling shareholders of Icelandair Group Holding to a few selected investors investment companies Langflug ehf., Naust ehf. and and offered them to purchase shares prior to the Urður ehf. who now collectively own 52.4% of the anticipated Share Offer. Among them are the top Company’s share. management level of Icelandair Group and subsidiaries who have collectively purchased On 15 October 2006 the Manager 45,075,000 shares. Six major pension funds underwrote 49.5% of Icelandair Group Holding as a purchased a total of 66,666,667 shares in the part of the transaction where Icelandair Group Company after getting a presentation from the Holding hf. bought Icelandair Group hf. from FL Company and the Manager. A selection of Glitnir Group. At the date of this document, the Manager banki hf.’s most affluent Private Banking clients got has already purchased all unsold Icelandair Group a presentation and have decided to purchase a total Holding hf. shares which it previously underwrote, of 40,000,000 shares and two other investors made based on the underwriting agreement. The unsold purchases of 22,222,222 shares. The sum of the shares Glitnir banki hf. purchased came to shares purchased by these four groups equals the 365,185,185 shares. number of shares currently held by GLB Hedge.

Glitnir banki hf. has decided to make a distinction GLB Hedge holds at the issue of this document between shares which are held to hedge the Banks´ 173,963,889 shares in Icelandair Group Holding hf. risk in connection with forward contracts and other or 17.4%. These shares have all been sold but have equities owned by the Bank, respectively. settlement dates which are after the issue of this Consequently, this distinction will be reflected in Registration Document but no later than 11 company shareholders’ registries where Glitnir banki December 2006 and are therefore not included in hf. holds shares. the list of shareholders held by the Icelandic Securities Depository. In order to achieve this goal Glitnir banki hf., has established an entity named GLB Hedge, Id No 620906-9990, and the former shares have been 17.3 SHARE DISTRIBUTION registered to GLB Hedge. Following the Share Offer, the Company is expected to fulfil its condition regarding the number of The purpose of this exercise is to increase the shareholders. However it can not be guaranteed that transparency of the Bank’s equity holdings. the requirements for share distribution and number of shareholders will be fulfilled, which will result in

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the Company’s shares not being listed on the ICEX 17.6 DIRECT OR INDIRECT OWNERSHIP Main List. All subscriptions are binding. OR CONTROL BY INDIVIDUAL SHAREHOLDERS The Manager feels confident that the Company will The Company’s management states that, as far as it meet ICEX conditions on diversification of ownership is aware, the Company is not directly or indirectly after the Share Offer. The Company expect that 32% owned or controlled by parties other than the listed of the share capital will be owned by more than 300 shareholders. general investors. Current ownership, based on binding purchasing agreements, of general investors is 13.5% and the number of shareholders behind 17.7 CONVERTIBLE BOND that amount is 41. On 24 October 2006, the Company issued bonds in the nominal amount of ISK 2,000,000,000 that give 17.4 VOTING RIGHTS the owner the right to convert the principal of the Each issued share carries one vote. Accordingly, claim under the bonds to shares in the Company at a major shareholders do not have voting rights that are pre determined price per share as described in different from those of other shareholders. section 25.2. The right to convert the claim to shares is acquired proportionally to the term of the 17.5 CHANGE IN CONTROL OF THE Bonds, which is five years. Accordingly the owner COMPANY acquires the right to convert 20% of the principal The Company does not know of any arrangements annually. Investors should note that if the owner of between shareholders or other parties that may result the shares chooses to convert the bond it will cause in a change in control of the Company. dilution of shareholdings.

18 RELATED PARTY TRANSACTIONS The Board of Directors of the Company believes that represents approximately 6.5% of the Company’s the Company’s related party transactions described revenue. below are conducted on an arm’s length basis. Icelandair Group Holding hf., Icelandair Group hf. Attention is drawn to the Company‘s recent and its subsidiaries have insurance agreements with agreement with Olíufélagið ehf. regarding fuel Sjóva hf., who is one of the owners of services for Icelandair at Keflavík Airport. This Fjárfestingafélagið Máttur ehf, which is a agreement was reached after seeking offers from all shareholder in the Company. However, the amount major oil distributors in Iceland. The majority owner relating to this agreement is less than 0.05% of the of Olíufélagið ehf. is BNT hf. which also owns Company’s turnover in 2005. 49.9% share in Naust ehf., one of Icelandair Group Holding’s main shareholders. It is the management’s No other material transactions have taken place with opinion that this agreement was reached at fair related parties. value. The amount relating to this agreement

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19 FINANCIAL INFORMATION Information concerning the Company’s financial documents not used within nine months from the position is presented in the following three sections. month of sale are recognised as revenue. Revenue Information on the five largest subsidiaries of from mail and cargo transportation is recognised in Icelandair Group is presented in section 20, the income statement after transportation has been containing each company’s income statement, provided. balance sheet and statement of cash flow for the years 2003-2005 and the first nine months of 2005 19.4.2 AIRCRAFT AND AIRCREW LEASE and 2006. Information on the Group’s performance Revenue from aircraft and aircrew lease is for the first 9 months of 2006 is given in section 21, recognised in the income statement at the end of while discussion on pro forma statement of earnings each charter flight. for the year 2005 and a pro forma balance sheet at 15 October 2006 is provided in section 22. These 19.4.3 OTHER OPERATING REVENUE pro forma accounts are provided for illustrative Revenue from other services rendered is recognised purposes only. in the income statement after the service has been provided. 19.1 IFRS The financial statements of the companies that Gain on sale of operating assets is recognised in the comprise Icelandair Group Holding hf., for the years income statement after the risks and rewards of 2004 and 2005 and the first nine months of 2006 ownership have been transferred to the buyer. were prepared in accordance with International Financial Reporting Standards (IFRS) but 2003 was 19.4.4 OPERATING LEASE PAYMENTS prepared in accordance with Icelandic GAAP. Payments made under operating leases are recognised in the income statement on a straight- 19.2 EXPLANATORY NOTES line basis over the term of the lease. Detailed information regarding the items in the income statements, cash flow and balance sheets 19.5 SIGNIFICANT CHANGE IN THE are accessible in the policies and explanatory notes COMPANY’S FINANCIAL POSITION in each annual and interim report available via the The purchase of Icelandair Group hf. by Icelandair Appendix. Group Holding hf. resulted in a significant change in the Group’s financial positions. These changes are 19.3 DIVIDEND POLICY accounted for in section 22 by pro-forma accounts From the time of incorporation on October 15, adjusting for the purchase. 2006, no dividends have been paid. It should also be noted that Icelandair Group hf. did not pay any On 24 October 2006, the Company issued bonds in dividends because of the financial year 2005. the nominal amount of ISK 2,000,000,000 that give the owner the right to convert the principal of the The Company’s board of directors has the intention claim under the bonds to shares in the Company as to set a policy of paying 35-50% of each year’s described in section 25.2. earnings before interest and taxes in dividends to shareholders. In early November 2006, the Company agreed to purchase two Boeing 737-400 aircraft as discussed 19.4 OPERATING INCOME AND in section 13.2.1. The purchases will result in EXPENCES increased borrowing requirements as mentioned in section 24.1. Other significant changes have not 19.4.1 TRANSPORT REVENUE occurred since the last interim report. Passenger ticket sales are not recognised as revenue until transportation has been provided. Sold

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20 SELECTED SUBSIDIARIES This section provides a description of the financial 15% from 2003 to 2005 which is primarily condition of the Company’s five most important attributable to the ISK appreciation as roughly 75% subsidiaries, which combined represent around 88% of the companies costs are in foreign currencies. of the Company’s turnover for the years 2003, 2004 and 2005 and the first nine months of 2005 and EBITDA totalled ISK 980 million for the year 2005 2006 for all the five subsidiaries. which is a ISK 180 million increase since 2003. EBIT was ISK 296 million in 2005 which is ISK Accounts for 2003, 2004 and 2005 were audited. 379 million lower than in 2003 due to more The interim accounts for the first nine months of depreciation. The decrease is a result of changes in 2005 were not audited but are, in this document, accounting methods, e.g. an overhaul in owned presented in the same form as annual accounts. The aircraft engines is booked as maintenance costs in income statements, balance sheets and statements both 2003 and 2004 but in 2005 the overhaul were of cash flow for the first nine months of 2006 were booked as assets and depreciated. audited. Icelandair’s revenue in the first nine months of 2006 20.1 ICELANDAIR totalled ISK 29.5 billion and approximately 76% of Icelandair’s revenue in 2005 amounted to ISK 31.5 the revenues are related to the transportation of billion, roughly 76% of which is transport revenue, people and freight. The revenue increase was ISK i.e. transportation of people and freight. Revenues 5.2 billion or 21% from the same period in 2005. increased by ISK 5.8 billion or 22% from 2003 to The increase is mostly attributable to more revenues 2005. Approximately 75% of the revenue is in from passenger travel and an increase of the fuel foreign currency and as the ISK strengthened by surcharge in line with fuel cost increase. Further, the 14% from 2003 to 2005, revenue on fixed rate ISK has depreciated in the period and thus increase was more than 22%. The revenue increase revenues, in ISK terms, were higher. Increase in is mainly due to an increase in passenger numbers. revenue due to intra company business is The number of passengers travelling from Iceland approximately 27%. increased by 42% and the number of passengers travelling via Iceland increased by 48%. Further, the Available seat kilometres in the company’s flight airline added fuel surcharge to ticket prices in mid schedule were almost as many as in the same period 2004 to meet higher fuel prices. Loftleiðir-Icelandic of 2005. The company’s costs amounted to ISK hf. and Icelandair Cargo operate under Icelandair’s 26.4 billion. The operational costs increased by ISK AOC and thus all aircraft operating costs of these 3.4 billion or 15% from the same period in previous firms are registered in Icelandair’s books which are year. Excluding fuel costs the costs increased 9% later charged to the companies. These transactions from the same period the year before. The increase are netted out in Icelandair Group’s statement of is mostly attributable to higher personnel costs, e.g. income. a company wide payroll changes on 1 July 2006, as well as increased maintenance following the lease of Capacity has been increasing in recent years and aircraft and large scale maintenance checks. available seat kilometres in the company’s flight Further, the ISK depreciation in the period increases schedule increased by 28% from 2003 to 2005. costs in ISK. Aircraft rental costs are lower as the Total costs in 2005 increased by ISK 5.6 billion or company purchased aircraft which were previously 22% compared to 2003, mainly due to higher fuel leased from FL Group. Leasing cost in 2005, for the prices. Together with more activity the over 93% aircraft the company now owns, was ISK 1,116 increase in fuel prices from 2003 to 2005 explains million. the cost increase. Excluding fuel costs operational costs increased by 11% from 2003 to 2005. The company leases most of the operating assets it Therefore, Icelandair’s costs per available seat requires in its business. At 31 December 2005 total kilometres, excluding fuel costs, has decreased by assets amounted to ISK 11.662 million compared to

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ISK 9.502 million in 2003. This 23% increase provided. As the company was established in 2003, comes almost all from an increase in outstanding the company invested heavily that year in operating trade and other receivables which can be explained assets. Cash from operating activities at year end with 23 % revenue turnover increase over same 2005 amounted to ISK 2,781 million, cash used in period. investing activities, mainly engine overhaul, amounted to ISK 629 million and cash from Assets from 31 December 2005 until 30 September financing activities amounted to ISK 1,126 million 2006 increased considerably mainly due to the leaving cash at year end 2005 at ISK 6,542 million. purchase of operating assets, including aircraft and real estate from FL Group. The purchases were Operating cash at 30 September 2006 is ISK 5,082 financed by taking over liability obligations in the million, which is an increase by ISK 1,580 million amount of ISK 12,000 million and ISK 3,000 from the same period in 2005. Net capital million internally with equity. This furthermore investment is ISK 21,226 million and financing explains the increase in the company’s debt. activities are positive by ISK 11,315 million due to new liabilities. Cash and cash equivalents decreases Equity at year end 2005 is ISK 3,642 million of from year end 2005 until 30 September 2006 by which share capital is ISK 3,000 million. ISK 4,829 million and is ISK 1,713 million.

The cash flow from operating activities reflects cash Icelandair paid dividends in April 2004 in the generous operations. On regular the company amount of ISK 525 million. collects money from its customers before service is

Table 17. The following table is based on audited Income Statements of Icelandair for 2003-2005 and for the first nine months of 2006 and the Income Statement for the first nine months of 2005. All figures in ISK million.

2003 2004 2005 2005 2006 1/1-31/12 1/1-31/12 1/1-31/12 1/1-30/9 1/1-30/9 Operating income: Transport revenue 18,161 20,409 23,818 18,805 22,408 Aircraft and aircrew lease 4,991 6,968 6,161 4,450 5,682 Other operating revenue 2,548 1,680 1,484 1,069 1,437 Net operating income: 25,700 29,057 31,463 24,324 29,527

Operating expenses: Salaries and other personnel expenses 6,401 7,572 8,451 6,252 6,901 Aircraft fuel 3,442 5,352 6,740 5,050 6,899 Aircraft and aircrew lease 3,348 3,108 3,228 2,411 1,907 Aircraft servicing, handling and communication 3,922 4,555 3,786 2,999 3,490 Aircraft maintenance expenses 2,528 2,333 2,827 2,128 2,579 Other operating expenses 5,259 5,061 5,451 4,135 4,630 Net operating expenses: 24,900 27,981 30,483 22,975 26,406

Operating profit before depreciation and rent (EBITDAR) 4,148 4,184 4,208 3,760 5,028 Operating profit before depreciation (EBITDA) 800 1,076 980 1,349 3,121 Depreciation( 125 ) ( 691 ) ( 684 ) ( 528 ) ( 949 ) Operating profit before net financial income (EBIT) 675 385 296 821 2,172 Net financial income (expenses)( 62 ) ( 258 ) 261 4 505 Profit before tax 613 127 557 825 2,677 Income tax expense( 111 ) ( 28 ) ( 108 ) ( 155 ) ( 488 ) Profit 502 99 449 670 2,189

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Table 18. The following table is based on Icelandair’s audited Balance Sheet on 31 December 2003-2005 and on September 30, 2006. All figures in ISK million.

2003 2004 2005 2006 31/12 31/12 31/12 30/09 Assets: Operating assets 1.296 1.598 1.622 15.215 Intangible assets 70 110 121 186 Investments in associates 7 4 2 4 Long-term receivables 309 296 244 524 Total non-current assets 1.682 2.008 1.989 15.929

Inventories 158 172 156 221 Trade and other receivables 2.720 2.082 2.060 3.464 Intra company receivables 698 1.813 915 1.020 Interest bearing intra company receivables 6.662 Cash and cash equivalents 4.244 3.264 6.542 1.713 Total current assets 7.820 7.331 9.673 13.080

Total assets 9.502 9.339 11.662 29.009

Equity: Share capital 3.000 3.000 3.000 3.000 Reserves 50 ( 31 ) 87 189 Retained earnings 226 151 555 2.744 Total equity 3.276 3.120 3.642 5.933

Liabilities: Deferred income tax liability 140 153 89 577 Credit institutions 10.254 Total non-current liabilities 140 153 89 10.831

Crediti institutions 1.165 Intra company loans 508 Trade and other payables 4.512 4.428 5.838 7.124 Prepaid income 1.574 1.638 2.093 3.449 Total current liabilities 6.086 6.066 7.931 12.245

Total liabilities 6.226 6.219 8.020 23.076

Total equity and liabilities 9.502 9.339 11.662 29.009

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Table 19. The following table is based on Icelandair’s audited Cash Flow Statements for the years 2003, 2004 and 2005 and the first nine months of 2006 and the Cash Flow Statement for the first nine months of 2005. All figures in ISK million.

2003 2004 2005 2005 2006 1/1-31/12 1/1-31/12 1/1-31/12 1/1-30/9 1/1-30/9 Cash flow from operating activities: Profit 502 99 449 670 2,189 Adjustments for: Depreciation 125 691 684 528 949 Other operating items 994 173 62 160 319 Working capital from operations 1,621 963 1,195 1,358 3,457

Net change in operating assets and liabilities 2,210 501 1,586 2,144 1,625 Net cash from operating activities 3,831 1,464 2,781 3,502 5,082

Cash flow from investing activities Acquisition of operating assets( 2,343 ) ( 563 ) ( 594 ) ( 198 ) ( 14,682 ) Acquisition of intangible assets ( 101 ) ( 90 ) ( 141 ) ( 134 ) Proceeds from the sale of assets 4 1 4 3 Investments( 248 ) 36 51 24 ( 250 ) Intra company interest bearing receivables ( 6,160 ) Net cash used in investing activities( 2,587 ) ( 627 ) ( 629 ) ( 312 ) ( 21,226 )

Cash flow from financing activities: Dividends paid ( 525 ) Proceeds from issue of share capital 3,000 New long term debt 12,273 Repayment of borrowings ( 879 ) Short term receivables, change 42 Interest bearing loan due to parent company ( 1,292 ) 1,126 ( 121 ) Net cash used in financing activities 3,000 ( 1,817 ) 1,126 11,315

Increase (decrease) in cash and cash equivalents 4,244 ( 980 ) 3,278 3,190 ( 4,829 )

Cash and cash equivalents at January 1 4,244 3,264 3,264 6,542

Cash and Cash equivalents at the end of period 4,244 3,264 6,542 6,454 1,713

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20.2 ICELANDAIR CARGO Icelandair Cargo’s operating income for the year nine months of 2006 compared to the same period 2005 amounted to ISK 4.6 billion, increasing by in 2005. ISK 665 million or 17% from 2003. This increase can be explained by increased income from both Operating expenses amounted to ISK 4.6 billion for import and export and by income from operations for the first nine months of 2006, increasing by 45% the delivery company TNT that did not exist in from the same period in 2005. Larger fleet, 2003. In addition other income factors, such as fuel increased number of flights and increasing fuel and insurance surcharges, have increased. In 2005 prices explain most of this increase. larger freight aircraft were in operations than in 2003. However, due to the delay of delivery of two In the first nine months of 2006, EBIT amounted to aircraft being modified for cargo operations, ISK 131 million compared to ISK 27 million in the operating income increased less than could have same period 2005. been expected. The company’s revenue decreased by ISK 191 million or 4% from 2004 to 2005, caused The company leases most of the operating assets it mainly by less exports to USA and Europe resulting requires in its business. At 31 December 2005 total from the strength of the ISK currency. assets amounted to ISK 1,014 million compared to ISK 877 million at the end of 2003. This 16% Operating expenses for the year 2005 amounted to increase comes all from an increase in outstanding ISK 4.6 billion, increasing by ISK 827 million from trade and other receivables which can be explained 2003. This increase can be explained by increased with 17% revenue turnover increase over same cost relating to larger fleet and the cost related to period. the for mentioned delay of two aircraft from modification. Additionally, crew related expenses Assets did increase by 22% from year end 2005 and maintenance costs increased over the period as until 30 September 2006. This can be explained by did fuel costs. 48% increase in revenues resulting in an increase in outstanding trade and other receivables. Approximately 6% of Icelandair Cargo’s expenses are due to intra Group transactions. This is explained by Total equity is similar in 2003 and 2005 since the cargo operations for ITS and IGS and sale of cargo company paid ISK 236 million, retained earnings, in space to Bluebird Cargo. dividends to the Parent for the years 2003 and 2004. Liabilities increased by 16% from year end EBIT amounted to ISK 6 million in 2005 compared 2003 until 31 December 2005 and by 12% from to ISK 182 million in 2003. year end 2005 until 30 September 2006. This reflects the growing operation. For the first nine months of 2006, Icelandair Cargo’s operating income came to ISK 4.8 billion, increasing The company does not invest in assets as it leases by 47% from the first nine months of 2005. This them, therefore the cash flow from operating increase is mostly due to increased number of flights activities reflects the profit or loss for each year. At and larger fleet. In the first nine months of 2006, year end 2005 the cash from operating activities the company had on average 3.6 aircraft in operation amounted to ISK 18 million. Net cash used in compared to 2.4 aircraft in the first nine months of investing activities amounted to ISK 18 million and 2005. Imports increased largely because of a new cash used in financing activities came to ISK 71 agreement with the delivery company TNT and the million. effects of the agreement with TNT were not fully effective in the first nine months of 2005. Income Operating cash at 30 September 2006 is ISK 2 from leasing activities was also greater in the first million, which is a decrease by ISK 100 million from the same period in 2005, which can be explained by

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an increase by ISK 160 million in receivables compared to an ISK 28 million increase in short Icelandair Cargo paid dividends in April 2004 and term liabilities. Net capital investment is ISK 43 2005 in the amount of ISK 10 million and 226 million and financing activities are positive by ISK million respectively. 80 million due to new liabilities. Cash and cash equivalents increases from year end 2005 until 30 Minority shareholdings are due to Icelandair Cargo’s September 2006 by ISK 35 million and is ISK 211 ownership in Icelandair Logistics SA. million.

Table 20. The following table is based on the audited Income Statements of Icelandair Cargo for the years 2003- 2005 and the first nine months of 2006 and the Income Statement for the first nine months of 2005. All figures in ISK million.

2003 2004 2005 2005 2006 1/1-31/12 1/1-31/12 1/1-31/12 1/1-30/9 1/1-30/9 Operating income: Cargo and mail 2,698 3,207 3,053 2,203 2,923 Aircraft lease 436 442 282 166 710 Service revenue 759 1,096 1,213 876 1,126 Other operating revenue 23 27 34 20 40 Net operating income: 3,916 4,772 4,581 3,264 4,800

Operating expenses: Aircraft operating expenses 2,762 3,422 3,502 2,463 3,683 Warehouse related expenses 392 431 414 316 427 Delivery expenses 105 123 92 66,525 93 Salaries and other personnel expenses 219 240 294 185,553 240 Sales and marketing expenses 74 80 64 56 52 Administrative expenses 171 153 184 131 159 Net operating expenses: 3,723 4,449 4,550 3,218 4,654

Operating profit before depreciation (EBITDA) 193 323 32 46 145 Depreciation( 12 ) ( 21 ) ( 26 ) ( 19 ) ( 14 ) Operating profit before net financial income (EBIT) 181 302 6 27 131 Net financial income (expenses) 38 ( 1 ) 3 ( 2 ) 15 Profit before tax 219 301 9 25 146 Income tax expense( 1 ) ( 55 ) ( 2 ) ( 5 ) ( 28 ) Profit 218 246 7 20 118

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Table 21. The following table is based on Icelandair Cargo’s audited Balance Sheet on 31 December, 2003, 2004 and 2005 and the Balance Sheet on 30 September 2006. All figures in ISK million.

2003 2004 2005 2006 31/12 31/12 31/12 30/09 Assets: Operating assets 16 12 26 49 Intangible assets 20 24 13 19 Insurance fees 11 Total non-current assets 36 47 39 68

Trade and other receivables 672 665 798 928 Intra company receivables 21 Prepaid cost 1 9 Cash and cash equivalents 168 247 176 211 Total current assets 840 912 975 1.169

Total assets 877 958 1.014 1.237

Equity: Share capital 100 100 100 100 Share reserve 25 25 25 Translation reserves 1 1 Retained earnings 15 227 7 125 115 352 132 251 Minority shareholdings 2 ( 3 ) Total equity 115 354 133 248

Liabilities: Deferred income tax liability 1 8 7 7 Total non-current liabilities 1 8 7 7

Credit institutions 11 91 Trade and other payables 351 439 307 456 Intra company payables 410 157 556 435 Total current liabilities 761 596 875 982

Total liabilities 762 604 882 989

Total equity and liabilities 877 958 1.014 1.237

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Table 22. The following table is based on Icelandair Cargo’s audited Cash Flow Statement for the years 2003, 2004 and 2005 and the Cash Flow Statement for the first nine months of 2005 and 2006. All figures in ISK million.

2003 2004 2005 2005 2006 1/1-31/12 1/1-31/12 1/1-31/12 1/1-30/9 1/1-30/9 Cash flow from operating activities: Profit for the period 218 246 7 20 118 Adjustments for: Depreciation 12 21 26 19 14 Other operating items( 12 ) 5 ( 1 ) 3 Working capital from operations 218 272 31 42 132

Net change in operating assets and liabilities 193 ( 110 ) ( 13 ) 56 ( 134 ) Net cash from operating activities 411 162 18 98 ( 2 )

Cash flow from investing activities Acquisition of operating assets( 6 ) ( 3 ) ( 25 ) ( 24 ) ( 30 ) Acquisition of intangible assets( 38 ) ( 5 ) ( 3 ) ( 3 ) ( 10 ) Long-term receivables, change ( 10 ) 11 1 ( 3 ) Net cash used in investing activities( 43 ) ( 18 ) ( 18 ) ( 26 ) ( 43 )

Cash flow from financing activities: Dividends ( 10 ) ( 226 ) ( 226 ) Repayment of long-term borrowings( 79 ) ( 56 ) Short-term borrowings, change( 241 ) 11 Interest bearing loan due to parent company 144 14 80 Net cash used in financing activities( 320 ) ( 66 ) ( 71 ) ( 212 ) 80

Increase (decrease) in cash and cash equivalents 48 79 ( 71 ) ( 140 ) 35

Cash and cash equivalents at January 1 120 168 247 247 176

Cash and Cash equivalents at December 31 168 247 176 107 211

20.3 LOFTLEIÐIR-ICELANDIC It should be noted that Loftleiðir-Icelandic reports in increased by ISK 1.1 billion or 26% and were ISK USD and all figures below, both in the text and in 5.2 billion in the year 2005. the tables, have been converted from USD to ISK. In the profit and loss account the conversion rate is the EBITDA in 2005 amounted to ISK 361 million, average exchange rate over the accounting period increasing by ISK 605 million from 2003. EBIT and for the balance sheet the conversion rate is the came to ISK 357 million in 2005 compared to exchange rate on 31 December, of each year, as negative ISK 246 million in 2003. published by Landsbanki Íslands hf. Loftleiðir- Icelandic’s audited annual reports and interim Improved operating results can be explained by reports in USD may be found in the Appendix. better utilization of the company's aircraft, less deduction of receivables in addition to increased Loftleiðir-Icelandic's operating income for the year demand resulting in higher prices. The structure of 2005 amounted to ISK 5.6 billion, representing an the company’s operation has also shifted from all increase of ISK 1.7 billion or 43% from the year inclusive leasing agreements to so called ACMI 2003. For the same period, operating expenses (Aircraft, Crew, Maintenance, Insurance)

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agreements, which has proven to provide better at considerably favourable terms which the company operating results. will benefit from in near future. In addition to this cost increases because of the weaker ISK versus The addition of Boeing 767 aircraft to the company's USD. assets has also provided increased operating income. The demand for Boeing 767 aircraft has been high The company leases most of the operating assets it and more stable over the year than the other aircraft requires in its business. At 31 December 2005 total the company had in operations. assets amounted to ISK 1,172 million compared to ISK 424 million at 2003 year end. The increase Approximately 1% of the company's operating comes mainly from operating profits these years revenue are intra group related, resulting from which are still in the company. aircraft leasing to Icelandair. Increase in operating assets from 31 December For the first nine months of 2006 Loftleiðir- 2005 until 30 September 2006 can be explained by Icelandic's operating income amounted to ISK 5.4 the purchase of LatCharter, which increased goodwill billion, increasing by 1.2 billion or 29% from the by ISK 889 million. In addition to this, the company same period in 2005. EBIT amounted to ISK 280 prepaid aircraft leases in the amount of ISK 251 million in the first nine months of 2006 compared to million. Finally, the change in working capital can be ISK 288 million for the first nine months of 2005. explained by the incorporation of LatCharter’s Balance Sheet into Loftleiðir-Icelandic’s accounts. In June 2006 Loftleiðir-Icelandic purchased majority shares in The Latvian operator LatCharter who The company’s debt increased by ISK 1,256 million operates two Airbus 320´s on Wet Lease and Charter or 115% from 31 December 2005 until 30 operations. The revenue increase by Loftleiðir September 2006, mainly due to the incorporation of connected to that is ISK 825 million. In 2006 the LatCharter’s Balance Sheet into Loftleiðir-Icelandic’s company returned one Boeing 767-300 aircraft and accounts. Additionally, ISK 405 million of the sold another Boeing 767-300. The sales profit was purchase price of LatCharter are still to paid. booked as extraordinary revenue and explains Prepaid income increases by ISK 228 million. approximately ISK 387 million revenue increase between years. In addition the exchange rate for The cash flow from operating activities reflects a very USD was 11% higher than at the same time in cash generous operation. On regular the company 2005. collects money from its customers before service is provided. Net cash from operating activities The cost by Loftleiðir was ISK 5.1 billion in the first amounted to ISK 522 million at year end 2005. nine months of 2006 compared with ISK 3.9 billion in the same period in 2005. The biggest part can be Operating cash at 30 September 2006 is ISK 31 explained by the acquisition of LatCharter million, which is a decrease by ISK 382 million from (approximately ISK 935 million). In return for the the same period in 2005. This can mostly be two Boeing 767-300 aircraft the company explained by the costs associated with the introduced two new aircraft to the fleet, a Boeing modification of two aircraft. Cash and cash 767-300 and a Boeing 757-200. The introduction equivalents decreases from year end 2005 until 30 cost of these aircraft has a negative effect on both September 2006 by ISK 43 million and amount to the overall production and the financial performance ISK 597 million. of the company in the first nine months as a considerable investment was necessary in order to Loftleiðir-Icelandic paid no dividends for the years bring both aircraft up to standards (approximately covered by historical financial information. ISK 90 million). Both aircraft were however leased in

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Table 23. The following table is based on the audited Income Statement of Loftleiðir-Icelandic for 2003-2005 and the Income Statement for the first nine months of 2005 and 2006. All figures in ISK millions. Accounts for 2004 and 2005 and first nine months for 2005 and 2006 were reported in USD and are adjusted according to the average rate of USD/ISK for each period.

2003 2004 2005 2005 2006 1/1-31/12 1/1-31/12 1/1-31/12 1/1-30/9 1/1-30/9 Operating income: Aircraft and air crew lease 3,902 5,454 5,573 4,161 4,947 Sale of assets 411 Other operating revenue 14 19 36 25 29 Net operating income: 3,915 5,473 5,609 4,186 5,387

Operating expenses: Aircraft operating expenses 3,765 5,022 4,980 3,737 4,662 Passenger services 177 134 89 59 63 Salaries and other personel expenses 39 56 116 53 154 Administrative expenses 179 153 63 46 213 Net operating expenses: 4,160 5,365 5,248 3,895 5,092

Operating profit (loss) before depreciation (EBITDA) ( 244 ) 108 361 291 295 Depreciation( 2 ) ( 5 ) ( 4 ) ( 3 ) ( 15 ) Operating profit (loss) before net financial income (EBIT ( 246 ) 103 357 288 280 Net financial income(expenses) 15 ( 18 ) ( 32 ) ( 27 ) 54 Profit (loss) before tax ( 231 ) 85 325 261 334 Income tax expense 73 ( 15 ) ( 60 ) ( 49 ) ( 41 ) Profit (loss) ( 158 ) 70 265 212 294

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Table 24. The following table is based on Loftleiðir Icelandic’s audited Balance Sheet on 31 December 2003, 2004 and 2005 and the audited Balance Sheet on 30 September 2006. All figures in ISK millions. Accounts for 2004, 2005 and 2006 were reported in USD and are adjusted according to the rate of USD/ISK on 31 December for each year.

2003 2004 2005 2006 31/12 31/12 31/12 30/09 Assets: Operating assets 13 15 14 38 Intangible assets 890 Insurance fees 251 Tax assets 73 6 6 6 Total non-current assets 86 21 20 1.184

Inventories 16 Interest bearing intra company receivables 447 99 Trade and other receivables 118 100 185 775 Cash and cash equivalents 220 433 521 597 Total current assets 338 533 1.152 1.487

Total assets 424 554 1.172 2.671

Equity: Share capital 4 4 4 4 Share reserve 1 1 Other equity 38 ( 9 ) Retained earnings (Accumulated deficit)( 332 ) ( 225 ) 34 324 Total equity( 328 ) ( 221 ) 77 320

Liabilities: Credit institutions 77 Trade and other payables 95 72 177 969 Intra company payables 495 418 564 699 Aircraft lease insurance deposits 41 130 134 176 Tax deficit 21 58 41 Prepaid income 121 134 162 390

Total liabilities 752 775 1.095 2.351

Total equity and liabilities 424 554 1.172 2.671

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Table 25. The following table is based on Loftleiðir-Icelandic’s audited Cash Flow Statement for the years 2003, 2004 and 2005 and for the first nine months of 2006 and the Cash Flow Statement for the first nine months of 2005. All figures in ISK millions. Accounts for 2004, 2005 and 2006 were reported in USD and are adjusted according to the average rate of USD/ISK for each period.

2003 2004 2005 2005 2006 1/1-31/12 1/1-31/12 1/1-31/12 1/1-30/9 1/1-30/9 Cash flow from operating activities: Profit (loss) ( 158 ) 70 265 212 294 Adjustments for: Depreciation 2 5 4 3 15 Profit (loss) from sale of assets( 73 ) 1 ( 411 ) Other operating items( 7 ) ( 9 ) 1 109 Working capital from operations( 236 ) 67 270 324 ( 102 )

Net change in operating assets and liabilities 294 225 252 105 133 Net cash from operating activities 58 292 522 429 31

Cash flow from investing activities: Acquisition of operating assets( 9 ) ( 13 ) ( 3 ) ( 3 ) ( 1.476 ) Acquisition of intangible assets ( 372 ) Proceeds from the sale of assets 3 1.868 Acquisition of subsidiaries, less cash acquired 119 Short term receivables, change ( 98 ) Intra company receivables, change ( 445 ) Net cash used in investing activities( 9 ) ( 10 ) ( 448 ) ( 3 ) 41

Cash flow from financing activities: Borrowings, change 30 Net cash from financing activities 30

Increase (decrease) in cash and cash equivalents 49 282 74 426 102

Cash and cash equivalents at January 1 171 220 433 433 521

Effect of exchange rate fluctuations on cash held ( 69 ) 14 15 ( 26 )

Cash and Cash equivalents at December 31 220 433 521 844 597

20.4 BLUEBIRD CARGO It should be noted that Bluebird Cargo reports in Operational revenues amounted to ISK 2.3 billion in USD and all figures below, both in the text and in 2005, an ISK 767 million increase or 51% from the tables, have been converted from USD to ISK. In 2003. Total costs were ISK 1.8 billion, which is an the profit and loss account the conversion rate is the increase of ISK 846 million or 92% from 2003. average exchange rate over the accounting period EBIT results were ISK 273 in 2005 million and for the balance sheet the conversion rate is the compared to ISK 324 million in 2003. exchange rate on December 31, of each year, as published by Landsbanki Íslands hf. Bluebird In the beginning of 2003 Bluebird Cargo operated Cargo’s annual and interim reports in USD may be two Boeing 737-300 freight aircraft. In the end of found in the Appendix. 2003 two Boeing 737-300 freight aircraft were added to the fleet and a fifth in the start of 2005.

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All five freight aircraft are operated through fixed 27% increase in revenues. The reason behind the lease projects abroad and one aircraft serves the increase in both assets and liabilities is the merger Icelandic freight market as well. of Flugflutningar hf. into Bluebird Cargo on 1 January 2006. The revenue increase during the period is attributable to more aircraft in operation, more Equity increased by ISK 327 million from 31 assignments, and sales of freight capacity to and December 2003 to 31 December 2005, which can from Iceland. The operational costs have increased be explained by new equity and retained earnings. in line with more activity No dividends were paid out for the year 2005.

Revenue in the first nine months of 2006 amounted Long term debt decreased by 48.9% from year end to ISK 2.2 billion which is an increase of ISK 459 2005 to 30 September 2006. The decrease is million or 27% from the same period in 2005. Total mainly due to difference in the USD/ISK exchange costs in the period were ISK 1.6 billion, a ISK 273 rate. million or 20% increase from the year before. EBIT decreased from ISK 324 million in 2003 to ISK 273 At year end 2005 the cash from operating activities million in 2005. amounted to ISK 438 million. Net cash used in investing activities amounted to ISK 308 million and Better results are due to increased revenue and cash used in financing activities came to ISK 253 synergies from the merger of Bluebird Cargo and million. Operating cash at 30 September 2006 is Flugflutningar ehf. Further, the flight schedule was ISK 570 million, which is an increase by ISK 275 reorganized which yielded considerably better million from the same period in 2005. Net capital utilization and improved margins. investment is ISK 300 million and cash flow from financing activities is negative by ISK 178 million Bluebird Cargo’s total operating assets came to ISK due to the repayment of non current liabilities. Cash 2.4 billion at year end 2005 compared to ISK 2.7 and cash equivalents increases from year end 2005 billion at the end of 2003. Aircraft and aircraft until 30 September 2006 by ISK 104 million and related assets were 80% of assets in 2005 and 85% amount to ISK 219 million. in 2003. Bluebird Cargo paid no dividends for the years Assets did increase by 21% from year end 2005 covered by historical financial information. until 30 September 2005. This can be explained by

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Table 26. The following table is based on the audited Income Statement of Bluebird Cargo for 2003-2005 and for the first nine months of 2006 and the Income statement for the first nine months of 2005. All figures in ISK millions. Accounts were reported in USD and are adjusted according to the average rate of USD/ISK for each period.

2003 2004 2005 2005 2006 1/1-31/12 1/1-31/12 1/1-31/12 1/1-30/9 1/1-30/9 Operating income: Sales income 1,490 2,136 2,241 1,702 2,164 Other revenue 5 74 21 18 15 Net operating income: 1,495 2,210 2,262 1,720 2,179

Operating expenses: Salaries, aircrew lease and other personnel expense 245 371 415 323 413 Aircraft maintenance expenses 121 250 248 201 221 Aircraft lease 55 185 400 295 350 Aircraft fuel 145 215 265 193 202 Other operating expenses 354 479 438 347 446 Net operating expenses: 920 1,500 1,766 1,359 1,632

Operating profit before depreciation (EBITDA) 575 710 496 361 547 Depreciation( 251 ) ( 269 ) ( 223 ) ( 186 ) ( 193 ) Operating profit before net financial income (EBIT) 324 441 273 175 354 Net financial income (expenses)( 174 ) ( 145 ) ( 115 ) ( 90 ) ( 78 ) Profit before tax 150 296 158 85 276 Income tax expense( 5 ) ( 47 ) ( 35 ) ( 21 ) ( 50 ) Profit 145 249 123 64 226

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Table 27. The following table is based on Bluebird Cargo’s audited Balance Sheet on 31 December, 2003, 2004 and 2005 and the audited Balance Sheet on 30 September 2006. All figures in ISK million. Accounts were reported in USD and are adjusted according to the average rate of USD/ISK for each period.

2003 2004 2005 2006 31/12 31/12 31/12 30/09 Assets: Operating assets 2.266 1.758 1.941 2.255 Long term receivables 153 209 172 204 Total non-current assets 2.419 1.967 2.113 2.459

Inventories 1 3 7 10 Trade receivables 91 133 130 199 Other receivables 55 94 44 27 Cash and cash equivalents 89 232 115 219 Total current assets 236 462 296 455

Total assets 2.655 2.429 2.409 2.914

Equity: Share capital 351 323 333 370 Share reserve 26 39 43 Other equity 26 64 66 74 Retained Earnings 90 238 356 622 Total equity 467 651 794 1.109

Liabilities: Credit institutions 1.854 1.344 1.170 542 Deferred Income Taxes 5 40 76 96 Total non-current liabilities 1.859 1.384 1.246 637

Trade and other payables 98 78 99 205 Current maturities of non-current liabilities 205 247 215 821 Other current liabilities 26 69 55 141 Total current liabilities 329 394 369 1.167

Total liabilities 2.188 1.778 1.615 1.805

Total equity and liabilities 2.655 2.429 2.409 2.914

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Table 28. The following table is based on Bluebird Cargo’s audited Cash Flow Statement for the years 2003, 2004 and 2005 and for the first nine months of 2006 and the Cash Flow Statement for the first nine months of 2005. All figures in ISK millions. Accounts were reported in USD and are adjusted according to the average rate of USD/ISK for each period.

2003 2004 2005 2005 2006 1/1-31/12 1/1-31/12 1/1-31/12 1/1-30/9 1/1-30/9 Cash flow from operating activities: Profit for the period 145 249 123 64 226 Adjustments for: Depreciation 251 269 223 186 193 Other operating items 5 25 31 21 49 Working capital from operations 401 543 377 271 468

Net change in operating assets and liabilities 6 ( 75 ) 61 24 102 Net cash from operating activities 407 468 438 295 570

Cash flow from investing activities Acquisition of operating assets( 6 ) ( 52 ) ( 353 ) ( 292 ) ( 289 ) Pre payments( 117 ) ( 90 ) 45 ( 53 ) ( 11 ) Net cash used in investing activities( 123 ) ( 142 ) ( 308 ) ( 345 ) ( 300 )

Cash flow from financing activities: Dividends ( 17 ) Repayment of long-term borrowings( 274 ) ( 204 ) ( 253 ) ( 148 ) ( 178 ) Increase in equity 74 74 Net cash used in financing activities( 200 ) ( 147 ) ( 253 ) ( 148 ) ( 178 )

Increase (decrease) in cash and cash equivalents 84 179 ( 123 ) ( 198 ) 92

Cash and cash equivalents at January 1 12 89 232 232 115

Effect of exchange rate fluctuations on cash held ( 7 ) ( 36 ) 6 5 12

Cash and Cash equivalents at December 31 89 232 115 39 219

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20.5 AIR ICELAND Operating revenues in 2005 were ISK 3.6 billion, an million including aircraft and real estate form FL increase of ISK 626 million from 2003 or 21%. The Group in the amount of ISK 1,115 million on 1 main reason for this increase is increased demand in January 2006. These purchases were primarily air travel, with passenger increase of 18% over the financed with new non current liabilities in the period. amount of ISK 1,503 million. Working capital increases by 54% from year end 2005 to 30 Operating expenses for 2005 were ISK 3.1 billion, September 2006 and current liabilities increase by an increase of 541 million or 21% from 2003, 101% over the same period. This increase is mostly which can be explained by increase in personnel due to an increase in operations and the seasonality expenses, both due to increase in operation and of the operations, since the third quarter is usually increase in salary according to contracts, and cost of the most profitable. fuel due to increased world market prices. Equity at year end 2005 is ISK 681 million of which Operating revenues for the first nine months of 2006 share capital is ISK 420 million. The dividend policy were ISK 3.2 billion, an increase of 492 million or in the Group has been to pay retained earnings to 18% from the same period in 2005. This increase the Parent company. can be explained by increasing number of passenger and increasing demand for charter flights with new The cash flow from operating activities reflects a projects on the west coast of Greenland serviced by cash generous operation. On regular the company the Dash 8 aircraft. collects money from its customers before service is provided. Cash flows from operating activities at year Operating expenses were 2.6 billion for the first nine end 2005 amounted to ISK 282 million. Cash flow months of 2006, an increase of 227 million or 10% from investing activities amounted to ISK 130 from the same period in 2005. Two Dash 8 aircraft million. Cash flow to financing activities amounted were introduced and salary cost increased, partly to ISK 764 million leaving cash on hand at year end because of training cost. Aircraft lease decreased 2005 at ISK 32 million. between years. The company leased all its aircraft from FL Group for 2006, but they have all been Operating cash at 30 September 2006 is ISK 238 bought back, which will result in increase of million, which is an increase by ISK 102 million deprecation and financing cost. Fuel cost has also from the same period in 2005. Net capital increased due to increase in world market price. investment is ISK 1,688 million and cash flow from financing activities is ISK 1,750 million due to an Total assets of the company amounted to ISK 1,218 increase in liabilities. Cash and cash equivalents million at year end 2005 going from ISK 1,552 increases from year end 2005 until 30 September million in 2003. In 2004 the company purchased 3 2006 increases by ISK 299 million and is ISK 332 F-50 aircraft for just over ISK 390 million but in million. 2005 sold those aircraft to the Parent company FL Group and paid off outstanding liabilities for over Air Iceland paid dividends in April 2003, 2004 and ISK 400 million. 2005 in the amount of ISK 16 million, 315 million and 355 million respectively. From 1 January 2006 to 30 September 2006 the company purchased operating assets for ISK 1,687

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Table 29. The following table is based on the audited Income Statements of Air Iceland for the years 2003-2005 and for the first nine months of 2006 and the Income Statement for the first nine months of 2005. All figures in ISK million.

2003 2004 2005 2005 2006 1/1-31/12 1/1-31/12 1/1-31/12 1/1-30/9 1/1-30/9 Operating income: Transport revenue 1.972 2.259 2.591 1.885 2.355 Cargo and mail 105 97 103 76 111 Aircraft and air crew lease 408 520 498 415 413 Other operating revenue 438 465 358 337 327 Net operating income: 2.925 3.341 3.551 2.713 3.205

Operating expenses: Salaries and other personnel expenses 1.166 1.402 1.573 1.189 1.436 Aircraft fuel 180 230 311 230 289 Aircraft and air crew lease 292 233 281 215.409 91 Aircraft servicing, handling and communication 97 98 98 75 100 Aircraft maintenance expenses 220 199 214 165 151 Other operating expenses 573 560 591 453 489 Net operating expenses: 2.527 2.723 3.068 2.328 2.555

Operating profit before depreciation (EBITDA) 397 618 483 384 650 Depreciation( 132 ) ( 193 ) ( 182 ) ( 137 ) ( 183 ) Operating profit before net financial income (EBIT) 265 425 302 248 467 Net financial income (expenses)( 38 ) ( 42 ) ( 55 ) ( 33 ) ( 64 ) Profit before tax 227 384 247 214 403 Income tax expense 158 ( 70 ) ( 46 ) ( 39 ) ( 74 ) Profit 385 314 201 176 329

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Table 30. The following table is based on Air Iceland’s Balance Sheet on 31 December, 2003, 2004 and 2005 and the Balance Sheet at 30 September 2006. All figures in ISK million.

2003 2004 2005 2006 31/12 31/12 31/12 30/09 Assets: Operating assets 557 923 565 2.279 Intangible assets 10 3 1 Long term receivables 19 8 Tax assets 158 Investments 22 6 6 6 Total non-current assets 756 946 574 2.286

Inventories 131 94 95 129 Trade receivables 343 334 395 715 Other receivables 118 55 69 94 Intra company receivables 20 Assets for sale 52 Cash and cash equivalents 205 384 32 332 Total current assets 797 866 644 1.290

Total assets 1.552 1.813 1.218 3.576

Equity: Share capital 420 420 420 420 Share reserve 62 77 87 77 Retained Earnings 384 339 175 514 Total equity 866 835 681 1.011

Liabilities: Credit institutions 225 304 1.507 Deferred income tax liability 9 21 21 Total non-current liabilities 225 314 21 1.528

Trade and other payables 162 162 171 233 Current maturities of non-current liabilities 66 104 Tax payables 2 62 31 74 Other payables 175 259 244 363 Prepaid income 48 51 64 111 Intra company payables 9 27 5 256 Total current liabilities 462 664 515 1.037

Total liabilities 687 978 537 2.565

Total equity and liabilities 1.552 1.813 1.218 3.576

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Table 31. The following table is based on Air Iceland’s audited Cash Flow Statement for the years 2003, 2004 and 2005 and for the first nine months of 2006 and the Cash Flow Statement for the first nine months of 2005. All figures in ISK million.

2003 2004 2005 2005 2006 1/1-31/12 1/1-31/12 1/1-31/12 1/1-30/9 1/1-30/9 Cash flow from operating activities: Profit 385 314 201 176 329 Adjustments for: Depreciation 132 193 182 137 183 Profit from sale of assets( 2 ) ( 1 ) ( ) ( ) Other operating items( 82 ) 18 14 5 ( 22 ) Working capital from operations 434 524 396 318 491

Net change in operating assets and liabilities( 147 ) 353 ( 115 ) ( 181 ) ( 253 ) Net cash from operating activities 286 877 282 136 238

Cash flow from investing activities Acquisition of operating assets( 355 ) ( 516 ) ( 249 ) ( 171 ) ( 1.687 ) Acquisition of intangible assets ( 7 ) ( 1 ) Proceeds from the sale of assets 2 1 374 373 Acquisition of shares in other comapnies( 2 ) ( 2 ) Long-term receivables, change 5 5 7 4 Net cash used in investing activities( 349 ) ( 517 ) 130 206 ( 1.688 )

Cash flow from financing activities: Dividends( 16 ) ( 315 ) ( 355 ) ( 355 ) New long term debt 456 200 1.503 Repayment of borrowings( 310 ) ( 66 ) ( 409 ) ( 380 ) Intra company debt, change 157 247 Net cash used in financing activities 130 ( 181 ) ( 764 ) ( 578 ) 1.750

Increase (decrease) in cash and cash equivalents 67 179 ( 352 ) ( 236 ) 299

Cash and cash equivalents at January 1 138 205 384 384 32

Cash and Cash equivalents at the end of period 205 384 32 148 332

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21 NINE MONTHS REPORT FOR ICELANDAIR GROUP In this section interim accounts for Icelandair Group Icelandair Group compared to ISK 1,475 million for for the year 2006 are provided. The interim accounts all Icelandair Group´s subsidiaries for the full year for the three months ending 31 March 2006 were 2005 according to the 2005 pro forma accounts. compiled. The interim accounts for the six months Adjustment to the EBIT in the full year 2005 pro ending 30 June 2006 were reviewed and the interim forma accounts for Icelandair Group were 1,116 accounts for the nine months ending 30 September million, raising the combined EBIT of the 2006 were audited. subsidiaries comprising Icelandair Group from 1,475 to 2,591. The single largest adjustment is due to Icelandair, Icelandair Cargo, Loftleiðir Icelandic, lease payments for aircraft made to FL Group in Bluebird Cargo and Air Iceland contributed 88% of 2005, which are corrected for in the pro forma Icelandair Group's revenues in the first 9 months of accounts since Icelandair Group now owns these 2006. During the same period, these companies aircraft. The five subsidiaries thus contributed contributed 3,404 million of EBIT to Icelandair slightly higher EBIT to Icelandair Group in the first Group, out of the 3,842 million of EBIT that nine months of 2005, than all of Icelandair Group's Icelandair Group had for the period. subsidiaries did in the whole of 2005, according to the 2005 pro forma accounts. During the first nine months of 2005, these companies contributed ISK 1,559 million of EBIT to

21.1 INTERIM INCOME STATEMENT Table 32. The income statement for the first, second and third quarters of 2006 and the combined income statement for the first nine months of 2006. All figures in ISK millions.

Q1 2006 Q2 2006 Q3 2006 2006 1/1-31/3 1/4-30/6 1/7-30/9 1/1-30/9 Operating income: Transport revenue 5.555 9.613 12.480 27.648 Aircraft and air crew lease 2.217 2.268 3.290 7.775 Other operating revenue 1.823 2.600 3.707 8.130 Net operating income: 9.595 14.481 19.477 43.553

Operating expenses: Salaries and other personnel expenses 3.840 4.447 4.721 13.008 Aircraft fuel 1.654 2.575 3.160 7.389 Aircraft and air crew lease 875 1.253 1.460 3.588 Aircraft servicing, handling and communication 608 1.049 1.290 2.947 Aircraft maintenance expenses 695 808 862 2.365 Other operating expenses 2.188 2.785 3.563 8.536 Net operating expenses: 9.860 12.917 15.056 37.833

Operating profit/(loss) before depreciation (EBITDA) ( 265 ) 1.564 4.421 5.720 Depreciation( 827 ) ( 409 ) ( 642 ) ( 1.878 ) Operating profit/(loss) before net financial income (EBIT) ( 1.092 ) 1.155 3.779 3.842 Net financial income 406 347 ( 747 ) 6 Share of profit of associates 9 58 24 91 Profit/(loss) before tax ( 677 ) 1.560 3.056 3.939 Income tax expense 122 ( 281 ) ( 515 ) ( 674 ) Profit/(loss) for the period ( 555 ) 1.279 2.541 3.265

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21.2 INTERIM BALANCE SHEET Table 33. The table is based on the audited balance sheet for 30 September 2006. All figures in ISK millions.

Icelandair Group hf. 30.9.2006 Assets: Operating assets 22,684 Intangible assets 15,969 Investments in associates 1,744 Prepaid aircraft acquisitions 11,499 Long-term receivables 2,071 Total non-current assets 53,967

Inventories 1,156 Trade and other receivables 7,793 Cash and cash equivalents 4,976 Total current assets 13,925

Total assets 67,892 Equity: Share capital 3,000 Share premium 16,350 Other reserves 767 Retained earnings 3,265 Total equity 23,382

Liabilities: Interest bearing loans and borrowings 12,643 Deferred income tax liability 988 Total non-current liabilities 13,631

Interest bearing loans from parent company 4,102 Trade and other payables 11,658 Current maturities of non-current liabilities 11,110 Prepaid income 4,009 Total current liabilities 30,879

Total liabilities 44,510

Total equity and liabilities 67,892

The Company’s assets 30 September 2006 are ISK purchases decrease by ISK 5,386 million, because 67,892 million, including ISK 53,967 million in of aircraft deliveries during the period. Working fixed assets. The Company’s assets increase by 6% capital increased by ISK 3,374 million, mostly due from 1 January 2006. In this period, the Company to seasonality. purchased LatCharter and Airline Services Estonia, which are included in the audited accounts for the The Company’s liabilities decrease by 1% from year nine months ending 30 September 2006. Pre end 2005 until 30 September 2006. The total delivery payments (PDP’s) because of aircraft equity is ISK 23,382 million.

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21.3 CASH FLOW Table 34. Icelandair Group hf.’s cash flow statement for the nine months ended September 30, 2006. All figures in ISK millions.

2006 2006 2006 1/1-31/3 1/1-30/6 1/1-30/9 Cash flow from operating activities: Profit (loss) for the period( 555 ) 724 3,265 Adjustments for: Depreciation 827 1,236 1,878 Other operating items( 692 ) ( 662 ) ( 28 ) Working capital from operations( 420 ) 1,298 5,115

Net change in operating assets and liabilities 1,399 2,559 1,278 Net cash from operating activities 979 3,857 6,393

Cash flow from investing activities Acquisition of operating assets( 1,851 ) ( 1,931 ) ( 3,875 ) Acquisition of intangible assets( 41 ) ( 67 ) ( 517 ) Acquisition of subsidiary, net of cash acquired 5,023 5,023 4,571 Proceeds from the sale of assets 1,746 1,906 1,896 Receivables, change( 1,505 ) ( 276 ) ( 372 ) Net cash from investing activities 3,372 4,655 1,703

Cash flow from financing activities: Repayment of borrowings( 786 ) ( 1,284 ) ( 1,996 ) Repayment of parent company loan 0 0 ( 1,148 ) Net cash used in financing activities( 786 ) ( 1,284 ) ( 3,144 )

Decrease in cash and cash equivalents 3,565 7,228 4,952

Effect of exchange rate fluctuations on cash held 65 178 24

Cash and cash equivalents at 31 December 0 0 0

Cash and Cash equivalents at the end of period 3,630 7,406 4,976

In the nine months ending September 30, 2006 net advance payments but pay costs after the service has cash provided by operating activities came to ISK been provided. For the period January 1 – 6,393 million, net cash provided by investing September 30 cash flows from operating activities activities ISK 1,703 million and net cash used by have been relatively stable. Working capital from financing activities amounted to ISK 3,144 million. operations amounted to ISK 5 billion and cash from It should be noted that the cash flow for the Group operating activities amounted to ISK 6 billion. The in 2007 will include repayments of the loans related performance of the Group is very seasonal to the acquisition of Icelandair Group hf. throughout the year, as most passenger traffic is generated during the summer months making third Operating cash flows for the consolidated company quarter the best quarter for the company. portray a very cash generative operation. The Group has on average negative working capital requirement Cash flows from investing activities generated ISK 2 since the international flight operations receive billion and repayment of borrowings represented ISK

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3 billion leaving cash on hand 5 billion at 30 Company bought all its subsidiaries and acquired the September 2006. net cash of the subsidiaries, amounting to ISK 5,023 million. Icelandair Group had no cash or cash equivalents at 1 January 2006. However, that same day the

22 2005 PRO FORMA FINANCIAL INFORMATION Icelandair Group hf. was established in December Technical Services (ITS), Icelandair Ground Services 2005 and started its operation on 1 January 2006. (IGS), Icelandair Cargo, Loftleiðir-Icelandic, Bluebird Its current structure was completed in February Cargo, Icelandair Hotels, Iceland Travel, Air Iceland, 2006 when it finalised taking over the 13 Icelease, IG Invest and Icelandair Shared Services companies, properties, equipments, shares and including the following adjustments that were made contracts relating to aircraft trading from FL Group in order to have the accounts comparable for the hf. No historical audited accounts therefore exist for year 2005. Icelandair Group hf. as such for the past years. To give indication on how Icelandair Group hf. would Operating assets, aircraft and real estate, that have have performed a pro forma income statement has been purchased from FL Group by the Group, but been prepared, for illustrative purposes, for the year have historically been leased from FL Group, are 2005. The pro forma income statement is based on assumed to have belonged to the Group in the pro the consolidated audited annual reports of the forma accounts to make them comparable and companies that comprise Icelandair Group hf. for the resemble the current structure of the Group. year 2005. All major intra-company transactions have been eliminated from revenue and costs. Since Intra company business has been estimated and Icelandair Group hf. is the only asset of Icelandair eliminated from both revenue and costs. All the Group Holding hf., the pro forma accounts for Group’s companies were in similar operations over Icelandair Group hf. give a clear indication on how the period. Icelandair Group Holding hf. would have performed. However, because of its nature, the pro forma FL Group hf. had net operating costs that arose financial information addresses a hypothetical because of FL Group hf.’s role as a parent company situation and, therefore, does not represent the for the Group companies, those costs have been company’s actual financial position or results. added on as cost within the Group as it has now taken over as a parent company for these companies. 22.1 REVIEW OF HISTORICAL FINANCIAL INFORMATION This section on historical financial information is The operation of Iceland Travel offices in Europe has based on the pro forma consolidated income been eliminated, as the offices were sold at the end statement for Icelandair Group hf. for the year 2005 of 2005. and an opening balance sheet for the Company as of September 30, 2006 adjusted for the purchase of October 15, 2006 Icelandair Group Holding's equity Icelandair Group hf. at October 15, 2006, when a is ISK 27 billion and its share capital is ISK 1 group of investors acquired the majority billion. shareholdings in the Company from FL Group hf. The pro forma income statement for 2005 is in The pro forma statements are the sum of all audited accordance with IFRS. annual reports of companies comprising Icelandair Group Holding hf., i.e. Icelandair, Icelandair

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22.2 AUDITOR’S REVIEW REPORT We have reviewed the accompanying pro forma consolidated balance sheet of Icelandair Group hf. as of 1 January 2006 and pro forma consolidated income statement for the year 2005. This consolidated financial information is the responsibility of the Company’s management. Our responsibility is to issue a report on this pro forma financial information based on our review.

We have conducted certain procedures which involved comparison to the audited financial statements for the year 2005 for each of the Companies in Icelandair Group hf., consideration of the evidence supporting the necessary adjustments, recalculating the amounts presented in the pro forma balance sheet and income statement based on the information obtained and discussing the pro forma financial information with the directors of Icelandair Group hf. Our review is limited and thus provides less assurance than an audit and accordingly, we do not express an audit opinion.

Based on our review procedures, nothing has come to our attention that causes us not to believe that: the pro forma financial information has been properly compiled on the basis stated such basis is consistent with the accounting principles used by the Companies in Icelandair Group hf. the adjustments are appropriate for the purposes of the pro forma financial information as disclosed. financial information for 2005 is prepared in accordance with IFRS.

We consent to the inclusion of this letter and the reference to our opinion in the Registration Document to be issued by Icelandair Group Holding hf. in the form and context in which it appears.

Reykjavík, November 26, 2006 On behalf of KPMG Endurskodun hf.

Jón Sigurdur Helgason Sæmundur Valdimarsson, State authorised public accountant State authorised public accountant Icelandic ID No. 050269-3619 Icelandic ID No. 070263-4409

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22.3 PRO FORMA INCOME STATEMENT Table 35. The Company’s pro forma Income statement for the year 2005. All figures in ISK millions.

Scheduled Capacity airline solutions & Travel and Shared Pro forma operations ac trading tourism services Total Adjustment account OPERATING REVENUE Operating revenue Passengers 23,007 0 2,592 0 25,599 (50) 25,549 Cargo and mail 3,863 686 103 0 4,652 (753) 3,899 Charter revenue and aircraft lease 6,443 7,814 639 0 14,897 (6,805) 8,092 Other operating revenue 8,330 378 4,199 575 13,481 (5,427) 8,055 41,643 8,878 7,533 575 58,629 0 45,595 OPERATING COST Salaries and related expenses 11,810 655 2,781 315 15,562 ( 78 ) 15,483 Aircraft fuel 6,740 265 311 0 7,315 0 7,315 Aircraft lease 6,730 5,882 281 0 12,893 ( 9,904 ) 2,989 Aircraft service, handling and communication 3,786 225 98 0 4,110 ( 519 ) 3,591 Aircraft maintenace expenses 3,838 248 214 0 4,299 ( 2,405 ) 1,894 Booking fees and commission expenses 1,310 0 182 0 1,492 0 1,492 Other operating cost 6,121 500 3,302 61 9,982 ( 2,105 ) 7,878 40,333 7,775 7,169 376 55,653 0 40,642

Operating profit excluding depreciation 1,310 1,103 364 199 2,976 1,977 4,953

Depreciation 892 229 372 9 1,501 861 2,362

Operating profit before financial expence 418 874 ( 8 ) 190 1,475 1,116 2,591

item has however been decreasing from 2004 which 22.3.1 REVENUE AND EXPENSES is mainly due changes in Loftleiðir´s operations. The Companies largest cost item is salaries and Loftleiðir had more projects in 2005 that did not related expense. As a percentage of total operating include "full charter" and the cost of airport services revenue, salaries are 33.9% in 2005. This cost is was therefore borne by the customer, instead of primarily related to the workforce in Iceland. Loftleiðir.

Aircraft fuel has been the single most decisive factor As Icelandair Group Holding hf., like most airlines, regarding the development of the operational cost carries a substantial part of operating assets off base. Aircraft fuel as a percentage of total operating balance sheet (operating leases on aircraft), revenue of the Group was 16.0% in 2005. The EBITDAR (earnings before interest, taxes, market price for aircraft fuel has a major impact on depreciation, amortization and operating leases) is overall income. The Company uses effective risk used as an approximate measure of operating cash management processes to reduce economic flows. It is also general practice to use EBITDAR as uncertainty and it hedges from 40-80% of fuel a benchmark indicator when comparing companies, purchases 12-18 months in advance. as this eliminates to a great extent the affects of the decision to purchase or lease operating assets. For Aircraft leasing expenses have been increasing, Icelandair Group EBITDAR was ISK 7,013 million in mainly due to the fact that in 2005 all new capacity 2005 and the EBITDAR margin amounted to 15.4% was leased instead of new aircraft being purchased. in 2005. Reasons for changes in the margin are Another relatively large cost item is airport servicing, related to increase in fuel cost. In the long run which amounted to 7.9% of cost in 2005. That cost increased fuel unit cost will largely be offset by fuel

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surcharge (higher unit revenue). The surcharges do Revenues by subsidiaries not immediately compensate for higher fuel price as 4% airlines have been conservative in adding the 4% surcharge and also because air travel is paid for in advance. 12%

The Group´s earnings before interest and taxes 8% 53% (EBIT) have been rather stable in recent years, despite the volatility in the industry in which the Company operates. The EBIT margin was 5.7% in 9%

2005. The Company has been actively cutting costs 6% and increasing efficiency in its operations to counter Icelandair Bluebird Icelandair cargo rising fuel costs and increased competition. The Air Iceland Loftleiðir Icelandair hotels Company has increased flexibility in its operations and has been able to grow revenue with less Iceland Travel IGS ITS investments by better utilisation of assets and the ratio of variable cost has been increasing to make the company capable of expanding or subtracting its In order to enhance focus the 13 subsidiaries are operations with respect to market conditions at each grouped into three focus areas, Scheduled Airline time. Operations, Global Capacity Solutions and Aircraft Trading and Travel and Tourism Infrastructure. In The segments share of revenue has remained addition two subsidiaries play a supporting role. relatively constant in the period with scheduled Scheduled airline operations account for 65% of airline operations as the largest revenue centre. revenue in 2005 and Icelandair accounted for 53% of Icelandair Groups revenue that year. Figure 3. Icelandair Group Holding's revenue by business segment and subsidiaries in 2005 Scheduled airline operations Total revenue of the Schedule airline operations Revenues by business segment segment in 2005 was ISK 29,834 million. Despite an increase in revenue for the past years, EBITDA 16% decreased from 2003 to 2005. The decrease in EBITDA can mainly be explained by the unit costs of Icelandair rising from the year 2003. The reason behind this increase can be traced to increase in 18% fuel prices over the period. Therefore, since 2003, several projects have aimed at reducing the 65% company’s operating expenses to meet higher fuel cost. By reducing sales and administration costs and cost of fleet ownership unit costs have successfully Scheduled Airline Operations been decreased over the period and if the effect of Global Capacity Solutions & Aircraft Trading fuel prices is removed, unit cost actually decreased.

Travel & Touristic Infrastructure Despite the higher fuel price and more competition in the market the Schedule airline operation was profitable for all the years from 2003 to 2005.

Icelandair is the largest subsidiary in the Scheduled airline operations segment accounting for around 77% of EBITDA in 2005. The last few years Icelandair increased the networks capacity by 15%

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in 2005 and this expansion will continue to pay off new markets and started to become well known in in 2006. The last few years have been a period of the international wet-lease market. The company has changes in the operating environment of airlines, been taking more profitable projects and gaining new both in Europe and North America. Growth in low- customers. Icelease was founded in the year 2005 fare airlines, on both sides of the Atlantic, has as an aircraft trading company and IG Invest as its altered the environment for traditional airlines. holding company. The market has been very Icelandair´s environment is no exception, and the favourable for last few years and Icelease has been company is constantly making efforts to restructure able to take advantage of this market situation. and reduce costs. The primary projects of the Bluebird Cargo has been a profitable company for company include increasing the share of sales over some years and it is still doing well. the Internet, simplifying accounting processes, reducing fuel consumption in flights and continuing Travel and Tourism infrastructure to increase the productivity of employees. This gives Total revenue of the Travel and Tourism the company an opportunities to enter into new infrastructure segment was ISK 7,343 million in markets and increase the number of passengers to 2005. The companies have gone through some current destinations. major changes in recent years. Icelandair Hotel opened a modernized Nordica hotel as its flagship Global capacity solutions and aircraft trading and in 2005 Iceland Travel closed all its offices Total revenue of the Global capacity solutions and outside Iceland. However, all companies within this aircraft trading segment was ISK 8,265 million in segment have performed relatively well for the past 2005. EBITDA was ISK 1,103 million in 2005. years and have taken advantage of the increased During the period Loftleiðir-Icelandic advanced into numbers of tourists to Iceland.

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22.4 PRO FORMA BALANCE SHEET

22.4.1 OPENING PRO FORMA BALANCE SHEET Icelandair Group hf. was established in its current operations but were, in the past, owned by FL Group form on January 1, 2006. At that time, the assets of hf. The following table shows the derivation of the the Icelandair Group hf’s subsidiaries were pro forma opening balance sheet of Icelandair Group transformed to Icelandair Group hf. along with fixed hf. as on January 1, 2006. assets that have been used in the companies

Table 36. Derivation of the Icelandair Group hf. pro forma balance sheet for January 1, 2006 in ISK millions. Scheduled Capacity airline solutions & Travel and Shared Total operations ac trading tourism services Transfer operations Assets Intangible assets 145 69 107 1 ( 67 ) 255 Property and equipment 2,904 1,963 1,389 61 0 6,318 Aircraft purchase prepayments 0 0 0 0 0 0 Interest bearing assets 246 172 131 0 0 550 None interest bearing assets 4,991 898 1,061 111 ( 923 ) 6,139 Cash 6,786 837 117 670 0 8,409 Total assets 15,073 3,939 2,805 843 ( 990 ) 21,671

Stockholders equity Capital stock and other equity 4,391 1,128 125 533 0 6,176

Liabilities Interest bearing debt, excl. PDP 1,622 1,974 1,792 0 ( 923 ) 4,466 Pre delivery financing of aircraft 0 0 0 0 0 0 None interest bearing liabilities 9,059 837 888 311 ( 67 ) 11,028

Total equity and liabilities 15,073 3,939 2,805 843 ( 990 ) 21,671 Asset Total Total parent purchase Subsidiaries company Offset entry Pro forma account Assets Intangible assets 0 255 0 14,295 14,549 Property and equipment 14,276 20,595 0 0 20,595 Aircraft purchase prepayments 16,886 16,886 0 0 16,886 Interest bearing assets 1,139 1,689 20,471 ( 20,471 ) 1,689 None interest bearing assets 8 6,147 0 ( 614 ) 5,533 Cash 0 8,409 0 ( 3,386 ) 5,023 Total assets 32,309 53,980 20,471 ( 10,176 ) 64,274

Stockholders equity Capital stock and other equity 0 6,176 19,350 ( 6,176 ) 19,350

Liabilities Interest bearing debt, excl. PDP 18,364 22,830 1,121 ( 4,000 ) 19,951 Pre delivery financing of aircraft 13,890 13,890 0 0 13,890 None interest bearing liabilities 55 11,083 0 0 11,083

Total equity and liabilities 32,309 53,980 20,471 ( 10,176 ) 64,274

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In October 2006, Icelandair Group Holding hf. October 2006 for Icelandair Group Holding hf. is purchased all shares in Icelandair Group hf. from FL derived from the audited accounts for the first nine Group and acquired at the same time all the shares months ending 30 September 2006 for Icelandair in Icelandair Group's subsidiaries. A pro forma Group hf. The accounts are reviewed by KPMG. opening consolidated balance sheet dated 24

Table 37. Derivation of Icelandair Groups Holding hf. consolidated pro forma balance sheet at October 15, 2006 in ISK millions.

Icelandair Group Consolidation Group hf. Holding hf. Eliminations Pro forma 30.9.2006 24.10.06 Assets:

Operating assets 22,684 0 22,684 Intangible assets 15,969 0 10,118 26,087 Investment in subsidiary 33,500 ( 33,500 ) 0 Investments in associates 1,744 0 1,744 Prepaid aircraft acquisitions 11,499 0 11,499 Long-term receivables 2,071 0 2,071 Total non-current assets 53,967 33,500 ( 23,382 ) 64,085

Inventories 1,156 0 1,156 Trade and other receivables 7,793 200 7,993 Cash and cash equivalents 4,976 190 5,166 Total current assets 13,925 390 0 14,315

Total assets 67,892 33,890 ( 23,382 ) 78,400

Equity:

Share capital 3,000 1,000 ( 3,000 ) 1,000 Share premium 16,350 25,990 ( 17,117 ) 25,223 Other reserves 767 120 887 Retained earnings 3,265 0 ( 3,265 ) 0 Total equity 23,382 27,110 ( 23,382 ) 27,110

Liabilities:

Interest bearing loans and borrowings 12,643 4,700 17,343 Subordinated convertible bonds 1,880 1,880 Deferred income tax liability 988 0 988 Total non-current liabilities 13,631 6,580 0 20,211

Loans from credit institutions 4,102 4,102 Trade and other payables 11,658 200 11,858 Current maturities of non-current liabilities 11,110 0 11,110 Prepaid income 4,009 0 4,009 Total current liabilities 30,879 200 0 31,079

Total liabilities 44,510 6,780 0 51,290

Total equity and liabilities 67,892 33,890 ( 23,382 ) 78,400

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Icelandair Group Holding hf. has an opening cash 22.4.2 EQUITY AND LIABILITIES balance of ISK 5.2 billion. Total share capital of Icelandair Group Holding hf., including share premium, is ISK 27 billion and long The balance sheet is strong with an equity ratio of term liabilities after the purchase of Icelandair 35% but 40% excluding PDP financing which does Group hf. are ISK 20 billion compared to Icelandair not affect the ongoing operations of The Group. Group hf.’s ISK 14 billion debt to credit institutions Icelandair Group Holding hf. has on average negative at September 30, 2006. Increase in liabilities and working capital requirement since the international equity is due to the purchase of Icelandair Group hf. flight operations receive advance payments but pay by Icelandair Group Holding hf. and result in costs after the service has been provided. increased book value of goodwill. 22.4.3 FUTURE OUTLOOK On the balance sheet there are intangible assets Icelandair Group hf. (and thus Icelandair Group amounting to ISK 26 billion. ISK 10.1 billion is due Holding as well) has set a goal for 5-7% annual to the purchase of Icelandair Group hf. at October internal growth, for the coming years, with hopes of 15, 2006, ISK 14.4 billions of intangible assets even higher growth for 2006 and 2007. Additionally, were created when subsidiaries were transferred from the company does not rule out making acquisitions FL Group hf. to Icelandair Group hf. to bolster its operations.

Operating assets consist mainly of aircraft and Icelandair Group hf. (and thus Icelandair Group buildings. The Group’s fleet of aircraft consists of Holding as well) has an objective to have its EBIT 5- five Boeing 757 used by Icelandair, two Boeing 737 7%, measured against total revenue. EBIT is defined – 300 and two Boeing 737-400 freight aircraft used as earnings before interest expense and taxes. by Bluebird Cargo, six F-50, two Twin Otter and two Dash 8 all used by Air Iceland. In order to secure the stability of the scheduled operation, Icelandair Group hf. strives to keep a Around ISK 10 billion of interest bearing debt is due reserve of no less than 10% of Icelandair’s ehf. to pre-delivery financing of Boeing 737-800 aircraft annual revenue. This reserve will be kept in a mix of and is solely used to finance these aircraft. This debt cash and securities with a maturity less than 90 and assets are only temporarily on the balance sheet days. This reserve is estimated to be sufficient to as the aircraft will be sold on delivery to third party meet a conceivable net cash outflow cased by a airlines when delivered from now and until October sudden shock in Icelandair’s ehf. operations. 2007. Other interest bearing debt is ISK 5 billion.

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23 LEGAL AND ARBITRATION PROCEEDINGS Given the size and the scope of the operations of Icelandair Group Holding, Icelandair Group and its 23.2 ICELANDAIR subsidiaries, there tends to be some type of litigation The Union of Flight Attendants recently brought a relating to the Company at any given time. Following case against Icelandair before the Labour Court is a review of the most significant legal disputes regarding two disputes as to the interpretation and relating to the Company at this time. performance of the parties’ collective bargaining agreement. The action will have negligible, if any, 23.1 IGS financial consequences for Icelandair. IGS is preparing a writ to bring a court action to overturn the ruling of the Competition Appellate There is a case pending before the competition Committee in Case No. 3/2006, or alternatively to authorities regarding a complaint from Iceland have the fine reduced. The Competition Appellate Express relating to Icelandair’s pricing methods with Committee ordered IGS to pay ISK 60 million in an respect to Icelandair’s operation of its frequent flyer administrative fine. This fine was imposed because club (Vildarklúbbur Icelandair). Iceland Express filed of an abuse of a dominant market position and the complaint for alleged predatory pricing by predatory pricing. The writ has not yet been filed, Icelandair and demands that the appropriate but is expected to be filed shortly. sanctions be imposed. It is difficult to predict the consequences if this complaint proves successful, but it seems clear that it would reduce Icelandair’s competitiveness and flexibility.

24 CAPITAL RESOURCES

24.1 BORROWING REQUIREMENTS 01.01.06 30.09.06 pro-forma The company recently finalised the purchase of two Total assets 64,280 67,892 78,400 737-400 aircraft in connection with Bluebird Equity 19,350 23,382 27,120 Cargo’s operations. The purchase price was ISK 2.2 billion and reservations amount to ISK 414 million. Long term liabilities 14,861 13,631 20,201 ISK 2.1 billion or 80% of this sum will be financed Short term liabilities 30,069 30,879 31,079 by new debt. Next year two aircraft will be sold to offset this investment. Currently there are no other material borrowing requirements. Borrowings as of The pro forma opening Consolidated Balance Sheet 30 September 2006 amounted to ISK 51,280 for the Company is derived from the audited million. Of total borrowings ISK 24,037 million is accounts for Icelandair Group hf. dated 30 secured. None of Icelandair Group Holding’s September 2006. The accounts, reviewed by KPMG, borrowing is guaranteed. are adjusted for the purchase of Icelandair Group hf. on 15 October 2006, when Icelandair Group Holding 24.2 THE FUNDING STRUCTURE acquired all the shares in the company from FL Table 38. The Consolidated assets, equity and Group. liabilities of the Company, based on the Balance Sheet on 1 January and 30 September 2006 and a Total share capital of Icelandair Group Holding hf., pro-forma Balance Sheet adjusted for the purchase including share premium, comes to ISK 27 billion of Icelandair Group hf. by Icelandair Group Holding and long-term liabilities, after the purchase of hf. Icelandair Group hf. on 15 October 2006, to ISK 20 billion compared to Icelandair Group’s ISK 14 billion debt to credit institutions as of 30 September 2006.

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Therefore, Icelandair Group Holding’s new debt The increase in liabilities and equity is due to the amounts to ISK 7 billion. purchase of Icelandair Group by Icelandair Group Holding on 15 October 2006 and results in an increased book value of goodwill.

25 SHARE CAPITAL in the authorised share offering. The authorisation is 25.1 ABOUT THE SHARE CAPITAL permitted for 5 years from 23 November 2006. The Company was founded on 15 October 2006 with a total share capital of ISK 4,000,000 nominal In the event that the Board of Directors exercises the value. At a shareholders’ meeting held on 24 authority granted in Paragraph 2 of Article 4 in the October 2006 it was decided to increase the share Company’s articles of association, the phrasing of capital by ISK 996,000,000 nominal value. the conversion option of the convertible bonds shall Accordingly, the share capital of the Company is ISK be as follows: 1,000,000,000 nominal value and is divided into equal numbers of shares each having a nominal (a) The owners of the bonds (“Owners”) are value of ISK 1.0. All the shares have been fully paid. entitled to convert the principal of the debt into equity in Icelandair Group Holding (“Issuer”). The In the capital increase, shares of nominal value of conversion option accrues pro rata over the lifetime ISK 496,296,296 in Icelandair Group Holding were of the bond, so that an Owner earns the option of paid for by FL Group with shares in Icelandair Group converting 20% of the principal of the debt into hf. Reg. No. 631205-1780, of a nominal value of shares for each passed year of the lifetime of the ISK 1,200,000,000. At the time the Icelandair bond. Thus, the owner will acquire a 20% conversion Group hf.’s total share capital amounted to ISK option on the date (“Option Date”) when one year 3,000,000,000 nominal value. The company’s total has passed from the issue of the bond, an additional share capital was later reduced and is now ISK 20% on the date when two years have passed from 1,000,000,000 nominal value. the issue of the bond etc.

Neither the Company nor its subsidiaries hold any The Owner shall have a conversion option at the shares in the Company. price of 29.7 (“Conversion Price”), as adjusted pursuant to subsection (b) below. The number of the 25.2 CONVERTIBLE BONDS shares to which an Owner is entitled shall be On 24 October 2006, the Company issued bonds in determined in accordance with the formula below: the nominal amount of ISK 2,000,000,000, which shall carry six-month REIBOR interest with a 3.5% H = HST / BG premium for a term of five years; the number of bonds issued shall be at the discretion of the Board, where: with interest payment dates every six months with the exception that the first interest period shall H represents the number of shares in the debtor to extend for 15 months, with the option of conversion which an Owner is entitled; into shares in the Company at the price of 29.7. The Board of Directors of the Company are authorised to HST represents the principal of the debt under the issue new shares in accordance with the aforesaid bond; and authorisation of bondholders and issue new shares to owners of the convertible bonds who exercise their BG represents the Conversion Price, taking into conversion right in accordance with the following account any adjustments pursuant to subsection (b). rules. The shareholders waive their pre-emptive right

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(b) The Conversion Price shall be adjusted as receipt of such notice to decide whether the debt provided below: pursuant to this bond is immediately converted into shares or not. In such an event, the debtor shall be (i) If dividends are paid to shareholders during entitled to convert the entire principal of the debt the term of the bond, the Conversion Price shall be into shares, regardless of the 20% pro rata rule of reduced in accordance with the following formula: subsection (a) above. If an Owner decides to convert the debt into shares, the Issuer shall ensure that the ABG = BG – (A / H ) debt is converted into shares in the Issuer in such a way that the rights of the Owner in the takeover where: company or new company are the same as those of other shareholders in the Issuer. ABG represents the adjusted Conversion Price based on the dividend payments; (d) An increase in the share capital of the Issuer pursuant to Chapter V of the Companies Act BG represents the original Conversion Price, as No. 2/1995, where payment is made for the new adjusted, if applicable, in accordance with shares, shall not have any effect on the conversion subsection (b) at the time of payment of the option of an Owner, provided that the payment for dividend; the shares is not less than 85% of the market price of the Issuer at the time of determining the price of A represents the total amount of the dividend paid; the new shares. If the price of the new shares is and lower than the price specified above, the Owner shall be notified of the proposed increase and granted 14 H represents the number of outstanding shares in days to convert the debt into shares in order to be the Issuer at the time of payment of the dividend. able to participate in the increase.

If a dividend is paid in a medium other than cash, (e) Any other events relating to the Issuer, the total amount of the dividend shall be based on including the following, shall not affect the the value of the dividend on the day that it is conversion option of an Owner: disbursed. (i) A reduction in the share capital of the (ii) If the share capital of the debtor is Issuer by a payment to shareholders pursuant to increased through the issue of bonus shares, cf. subsection (1) of paragraph 2 of article 51 of the Chapter V of the Companies Act No. 2/1995, or Companies Act No. 2/1995; reduced for the purpose of balancing losses, cf. subsection (1) of paragraph 2 of Article 51 of the (ii) The issue of new convertible bonds Companies Act No. 2/1995, the Conversion Price pursuant to Chapter VI of the Companies Act No. shall be adjusted in direct proportion to the resulting 2/1995; change in the number of shares in the Issuer. (iii) The issue of subscription rights pursuant to (iii) In the event that changes are made in the Chapter V of the Companies Act No. 2/1995; nominal value of each share in the Issuer, the Conversion Price shall be adjusted in direct (iv) The merger of the Issuer with another proportion to the change in the nominal price of the company/other companies pursuant to Chapter XIV of shares. the Companies Act No. 2/1995, where the Issuer continues to operate under its current State (c) In the event that the Issuer is dissolved or Registration Number. merged with or taken over by another company so that the operation of the Issuer is continued in (f). An Owner shall exercise his conversion another company, Owners shall be notified in writing option by sending a notice to such effect to the of such plans. An Owner shall have 14 days from the Issuer during the two-week period preceding an

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Option Date. An owner may only exercise the entire 25.3 ACQUISITION RIGHTS AND part of the conversion option earned, and not a part CAPITAL INCREASE of it. A notice by an Owner shall be regarded as a The Company has not issued any kind of acquisition binding subscription to the shares in question. The rights. No decisions or authorisations have been Issuer is under obligation to increase his share made regarding the issue of new shares, other than capital by a number corresponding to the number of those relating to the convertible bonds as described shares to which an Owner has an option pursuant to above. subsection (a) above and deliver the shares to the Owner within 14 days of the Option Date. 25.4 OPTIONS A group of Icelandair Group employees have (g) When a claim pursuant to this Bond has purchased or made binding agreements to purchase been converted into a share in the Issuer pursuant to shares in the Company through privately owned the above, the part of the debt which has been companies, formed with the only intention of buying converted shall be regarded as paid in full. A shares in the Company. Should one or more of these provision for this conversion option has been made employees decide to leave his/her post during 12-18 in the Articles of Association of the Debtor in months from the date of each purchase agreement in accordance with Chapter VI of the Companies Act No October 2006, the Company will have a call option 2/1995. on the shares owned by the company of that employee proportional to the employees holdings in If there will be no dividends paid in the next five that company. The call option agreement has the years and no share increase, except to meet the same price as paid by the companies, ISK 27.0 per requirements of the convertible bonds, then, given share, plus financing cost. Table 39 accounts for the that the owners of the bonds will use all their rights volume of the call option agreements. to convert bonds to shares, the total number of shares in the Company, at the maturity of the bond, Table 39. Total call options will be 1,067,340,067 and the owners of the bonds will therefore hold 67,340,067 of those shares. Number of

employees Total number of Glitnir banki hf. is the owner of all the convertible (companies) shares Matures in bonds described in this subsection. 12 11,407,407 12 months 5 30,740,741 18 months

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26 ARTICLES OF ASSOCIATION important decisions shall not be taken unless all 26.1 OBJECT AND PURPOSE members of the Board have had the chance to The object of the Company, according to Article 3 of discuss the matter, if possible. The outcome of its Articles of Association, is investment in equity issues shall be decided by force of vote and in the holdings, particularly holdings in other companies event of an equality of votes the issue shall be engaged in air carrier operations, tourist services and regarded as rejected. The Managing Director attends transport operations, buying and selling real estate, meetings of the Board of Directors, even though he credit operations and other related operations. or she is not a member of the Board, and has the right to debate and submit proposals unless 26.2 BOARD OF DIRECTORS AND otherwise decided by the Board in individual cases. MANAGEMENT A book of minutes shall be kept of proceedings at The Company’s Board of Directors shall consist of meetings and shall be signed by participants in the seven members and two alternate members, elected meeting. A board member, or the Managing Director, at the Annual General Meeting for a term of one who is not in agreement with a decision by the Board year. Those who intend to stand for election to the of Directors is entitled to have his or her dissenting Board of Directors shall inform the Board in writing opinion entered in the book of minutes. of their intention at least five days before the Annual General Meeting, or Extraordinary Shareholders’ The Managing Director has charge of the day-to-day Meeting at which elections are to take place. Only operations of the company and shall observe the those who have informed the Board of their policy and instructions set out by the company’s candidacy are eligible. Board of Directors. Day-to-day operations do not include measures which are unusual or extraordinary The Company’s Board of Directors is the supreme Such arrangements can only be made by the authority in the Company’s affairs between Managing Director in accordance with special shareholders’ meetings and shall ensure that the authority from the Board, unless it is impossible to organisation and activities of the Company‘s await the decision of the Board without seriously operation are generally in correct and good order. disadvantaging the operation of the Company. In The Board of Directors shall appoint a Managing such instances, the Managing Director shall consult Director for the Company and decide the terms of his with the chairman, if possible, after which the Board or hers employment. The Board of Directors and the of Directors shall immediately be notified of the Managing Director are responsible for the measures. The Managing Director shall ensure that management of the Company. The company’s Board the accounts and finances of the Company conform of Directors shall ensure that there is adequate to the law and accepted practices and that the supervision of the company’s accounts and the disposal of the property of the Company is secure. disposal of its assets and shall adopt working The Managing Director shall provide the Members of procedures in compliance with the Companies Act. the Board of Directors and Company auditors with Only the Board of Directors may assign powers of any information pertaining to the operation of the procuration. The signatures of the majority of the Company which they may request, as required by members of the Board shall bind the Company. law.

The Board of Directors elects a chairman and vice 26.3 RIGHTS, PREFERENCES AND chairman from among its members, and otherwise RESTRICTIONS OF SHARES allocates its obligations among its members as All voting shares carry equal rights and no privileges needed. The chairman calls board meetings. A are attached to shares in the Company. All the meeting shall also be held if requested by a member shares are freely transferable, unless otherwise of the Board of Directors or the Managing Director. provided for by law. Meetings of the board are valid if attended by a majority of the members of the board. However,

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26.4 ACTIONS NECESSARY TO CHANGE meeting within that time, shareholders may require a SHAREHOLDERS’ RIGHTS meeting to be called pursuant to the provisions of According to Article 23 of the Articles of Association the Companies Act. the Articles of Association may only be amended at a lawful Annual General Meeting or extraordinary Shareholders’ meetings, including the Annual shareholders’ meeting, provided that the notice of General Meeting, shall be called by a notice to each the meeting clearly indicates that such an shareholder by registered mail, telegram or by other amendment is proposed and outlines the main verifiable means or, at the discretion of the Board of substance of the amendment. A decision is valid Directors, by a notice in the newspapers, with at only if it has the support of at least 2/3 of the cast least one week's notice. A shareholders' meeting is votes and the support of shareholders controlling at valid, regardless of attendance, if the meeting has least 2/3 of the share capital represented at the been properly convened. Attendance shall be meeting, provided always that no other force of vote determined based on the number of ballots is required by these Articles or statutory law, cf. delivered. Article 93 of the Companies Act. The notice of a shareholders’ meeting shall specify 26.5 SHAREHOLDERS’ MEETINGS the business to be addressed at the meeting. If the Shareholders exercise their powers at shareholders’ agenda includes motions to amend the Articles of meetings, which hold the company’s supreme the Company, the substance of the motion shall be powers, within the limits provided for in the Articles included in the notice of the meeting. Seven days of Association and law. All shareholders are before a shareholders’ meeting, at the latest, an permitted to attend shareholders’ meetings, address agenda, final submissions and, in the case of annual them and exercise their voting rights. The auditor of general meetings, the annual accounts, report of the the Company and the Managing Director shall have Board of Directors and the auditor’s report shall be full rights to address and submit motions at laid open for inspection by shareholders at the shareholders’ meetings even if they are not Company office. shareholders. A shareholder may appoint a proxy to attend meetings on his/her behalf, in which case the Each shareholder shall be entitled to have a specific proxy shall submit a written and dated letter of item of business included on the agenda of a proxy. Also, shareholders may attend the meeting shareholders’ meeting, provided that such together with an advisor; the advisor, however, does shareholder submits a written request to this effect not have the right to address the meeting, to submit to the Board of Directors of the Company with motions or to vote. The Board of Directors may invite sufficient advance notice for the item to be included experts to attend individual meetings, if their opinion on the agenda in accordance with these Articles. or assistance is required. Items of business which are not included on the Shareholders’ meetings shall be called at the agenda may not be accepted for final decision at a discretion of the Board of Directors, at the request of shareholders’ meeting except with the consent of all the Company auditor , or if shareholders controlling the shareholders in the Company, but a resolution 1/10 of the shares of the Company request a may be passed to provide guidance to the Board of meeting by a written notice. The request shall Directors of the Company. Lawfully submitted include a statement to the Board of Directors motions for amendments may be put to a vote at the explaining the reason for the request, and the Board meeting itself, even if they have not been laid open of Directors shall notify shareholders of the business for inspection by shareholders. An Annual General on the agenda in the notice of the meeting. When a Meeting is always permitted to conclude matters lawful request for a meeting has been submitted, the which it is required to address pursuant to statutory Board of Directors shall call a meeting no later than law or the Company Articles. fourteen days from the time that the request was received. If the Board of Directors has not called a The Annual General Meeting shall be held before the end of May.

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27 ABBREVIATIONS USED IN THIS REGISTRATION DOCUMENT ACMI Aircraft Crew Maintenance and Insurance AOC Air Operators Certificate ASE Airlines Services Estonia BAA BAA plc., a British airport company Bank Combination of routes via a specific airport at a specific time CAA Civil Aviation Authority CAGR Compounded Average Growth Rate Capex Capital expenditure CEO Chief Executive Officer CFO Chief Financial Officer COO Chief Operating Officer EBIT Earnings Before Interest and Taxes EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization EBITDAR Earnings Before Interest, Taxes, Depreciation, Amortization and Rent EUR Euro, the currency of certain European Union member states FSA The Financial Supervisory Authority, Iceland GAAP Generally Accepted Accounting Principles GSA General Sales Agent Hub An airport serving as a connection point in a route network ICEX Iceland Stock Exchange IFRS International Financial Reporting Standards IGS Icelandair Ground Service ISD Icelandic Securities Depository ISK Icelandic króna, the currency of Iceland ITB Icelandic Tourist Board ITS Icelandair Technical Service MD Managing Director MICE Meetings Incentives Conference Events PAYE Pay-As-You-Earn PDP Pre Delivery Payment Q1, Q2, Q3, Q4 Different quarters of the year The Companies Act Act No. 2/1995 on Public Limited Companies The Securities Act Act No. 33/2003 on Securities Transactions USD United States Dollar VP Vice President

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28 APPENDICES 28.1 ICELANDAIR GROUP HOLDING HF.’S ARTICLES OF ASSOCIATION 28.2 MERGER PLAN FOR ICELANDAIR GROUP HOLDING HF. AND ICELANDAIR GROUP HF. AND KPMG REPORT ON THE MERGER OF ICELANDAIR GROUP HOLDING HF. AND ICELANDAIR GROUP HF. 28.3 FINANCIAL REPORTS FOR ICELANDAIR EHF. 28.3.1 AUDITED 2003 – 2005 ANNUAL REPORTS 28.3.2 INTERIM INCOME STATEMENT, BALANCE SHEET AND CASH FLOW STATEMENT FOR THE NINE MONTH PERIOD ENDING 30 SEPTEMBER 2005 28.3.3 AUDITED INTERIM INCOME STATEMENT, BALANCE SHEET AND CASH FLOW STATEMENT FOR THE NINE MONTH PERIOD ENDING 30 SEPTEMBER 2006 28.4 FINANCIAL REPORTS FOR FLUGLEIÐIR FRAKT EHF. (ICELANDAIR CARGO) 28.4.1 AUDITED 2003 – 2005 ANNUAL REPORTS 28.4.2 INTERIM INCOME STATEMENT, BALANCE SHEET AND CASH FLOW STATEMENT FOR THE NINE MONTH PERIOD ENDING 30 SEPTEMBER 2005 28.4.3 AUDITED INTERIM INCOME STATEMENT, BALANCE SHEET AND CASH FLOW STATEMENT FOR THE NINE MONTH PERIOD ENDING 30 SEPTEMBER 2006 28.5 FINANCIAL REPORTS FOR LOFTLEIÐIR-ICELANDIC EHF. 28.5.1 AUDITED 2003 – 2005 ANNUAL REPORTS 28.5.2 INTERIM INCOME STATEMENT, BALANCE SHEET AND CASH FLOW STATEMENT FOR THE NINE MONTH PERIOD ENDING 30 SEPTEMBER 2005 28.5.3 AUDITED INTERIM INCOME STATEMENT, BALANCE SHEET AND CASH FLOW STATEMENT FOR THE NINE MONTH PERIOD ENDING 30 SEPTEMBER 2006 28.6 FINANCIAL REPORTS FOR AIR ICELAND 28.6.1 AUDITED 2003 – 2005 ANNUAL REPORTS 28.6.2 INTERIM INCOME STATEMENT, BALANCE SHEET AND CASH FLOW STATEMENT FOR THE NINE MONTH PERIOD ENDING 30 SEPTEMBER 2005 28.6.3 AUDITED INTERIM INCOME STATEMENT, BALANCE SHEET AND CASH FLOW STATEMENT FOR THE NINE MONTH PERIOD ENDING 30 SEPTEMBER 2006 28.7 FINANCIAL REPORTS FOR BLUEBIRD CARGO 28.7.1 AUDITED 2003 – 2005 ANNUAL REPORTS 28.7.2 INTERIM INCOME STATEMENT, BALANCE SHEET AND CASH FLOW STATEMENT FOR THE NINE MONTH PERIOD ENDING 30 SEPTEMBER 2005 28.7.3 AUDITED INTERIM INCOME STATEMENT, BALANCE SHEET AND CASH FLOW STATEMENT FOR THE NINE MONTH PERIOD ENDING 30 SEPTEMBER 2006 28.8 ICELANDAIR GROUP’S INTERIM STATEMENTS FOR 2006 28.8.1 COMPILED INTERIM ACCOUNT FOR THE PERIOD ENDING 31 MARCH 2006 28.8.2 REVIEWED INTERIM ACCOUNT FOR THE PERIOD ENDING 30 JUNE 2006 28.8.3 AUDITED INTERIM ACCOUNT FOR THE PERIOD ENDING 30 SEPTEMBER 2006 28.9 ICELANDAIR GROUP’S PRO-FORMA STATEMENTS 28.9.1 PRO FORMA STATEMENT OF EARNINGS FOR THE YEAR 2005 28.9.1 PRO FORMA OPENING BALANCE SHEET 1 JANUARY 2006 28.10 PRO FORMA BALANCE SHEET 24 OCTOBER 2006

The audited income statements, balance sheets and cash flow statements for Icelandair, Icelandair Cargo, Loftleiðir Icelandic, Bluebird Cargo and Air Iceland for the first nine months of 2006 are audited, but no interim financial statements were prepared. These figures are part of the audited consolidated interim financial statements for Icelandair Group hf.

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28.1 ICELANDAIR GROUP HOLDING HF.’S ARTICLES OF ASSOCIATION

ARTICLES OF ASSOCIATION

OF

ICELANDAIR GROUP HOLDING HF.

Chapter I Name of the Company, Domicile and Object

Chapter II Share Capital and Procedures Relating to Shares

Chapter III Shareholders’ Meetings

Chapter IV The Board of Directors of the Company etc.

Chapter V Accounts, Auditing etc.

Part VI Amendment of the Articles, Dissolution of the Company etc. Chapter I Company Name, Domicile and Object

Article 1 The Company is a limited liability company. The name of the Company is Icelandair Group Holding hf.

Article 2 The domicile of the Company is at Reykjavíkurflugvöllur, 101 Reykjavík.

Article 3 The object of the company is investment in equity holdings, particularly holdings in other companies engaged in air carrier operations, tourist services and transport operations, buying and selling real estate, credit operations and other related operations.

Chapter II Share Capital of the Company

Article 4 The share capital of the Company is ISK 1,000,000,000 – one billion Icelandic krónur. Each share in the Company corresponds to one Icelandic króna or multiples thereof.

The Board of Directors of the Company is authorised to issue bonds in the amount of ISK 2,000,000,000, which shall carry six-month REIBOR interest with a 3.5% premium for a term of five years; the number of bonds issued shall be at the discretion of the Board, with interest payment dates every six months with the exception that the first interest period shall extend for 15 months, with the option of conversion into shares in the Company at the price of 29.7. The Board of Directors of the Company are authorised to issue new shares in accordance with the aforesaid authorisation of bondholders and issue new shares to owners of the convertible bonds who exercise their conversion right in accordance with the following rules. The shareholders waive their pre-emptive right in the authorised share offering. The authorisation is permitted for 5 years from 23 November 2006.

2 In the event that the Board of Directors exercises the authority granted in Paragraph 2 of this Article 4, the phrasing of the conversion option of the convertible bonds shall be as follows:

(a) The owners of the bonds (“Owners”) are entitled to convert the principal of the debt into equity in Icelandair Group (“Issuer”). The conversion option accrues pro rata over the lifetime of the bond, so that an Owner earns the option of converting 20% of the principal of the debt into shares for each passed year of the lifetime of the bond. Thus, the owner will acquire a 20% conversion option on the date (“Option Date”) when one year has passed from the issue of the bond, an additional 20% on the date when two years have passed from the issue of the bond etc.

The Owner shall have a conversion option at the price of 29.7 (“Conversion Price”), as adjusted pursuant to subsection (b) below. The number of the shares to which an Owner is entitled shall be determined in accordance with the formula below:

H = HST / BG where:

H represents the number of shares in the debtor to which an Owner is entitled;

HST represents the principal of the debt under the bond; and

BG represents the Conversion Price, taking into account any adjustments pursuant to subsection (b).

(b) The Conversion Price shall be adjusted as provided below:

(i) If dividends are paid to shareholders during the term of the bond, the Conversion Price shall be reduced in accordance with the following formula:

ABG = BG – (A / H ) where:

ABG represents the adjusted Conversion Price based on the dividend payments;

BG represents the original Conversion Price, as adjusted, if applicable, in accordance with subsection (b) at the time of payment of the dividend;

A represents the total amount of the dividend paid; and

3 H represents the number of outstanding shares in the Issuer at the time of payment of the dividend.

If a dividend is paid in a medium other than cash, the total amount of the dividend shall be based on the value of the dividend on the day that it is disbursed.

(ii) If the share capital of the debtor is increased through the issue of bonus shares, cf. Chapter V of the Companies Act No. 2/1995, or reduced for the purpose of balancing losses, cf. subsection (1) of paragraph 2 of Article 51 of the Companies Act No. 2/1995, the Conversion Price shall be adjusted in direct proportion to the resulting change in the number of shares in the Issuer.

(iii) In the event that changes are made in the nominal value of each share in the Issuer, the Conversion Price shall be adjusted in direct proportion to the change in the nominal price of the shares.

(c) In the event that the Issuer is dissolved or merged with or taken over by another company so that the operation of the Issuer is continued in another company, Owners shall be notified in writing of such plans. An Owner shall have 14 days from the receipt of such notice to decide whether the debt pursuant to this bond is immediately converted into shares or not. In such an event, the debtor shall be entitled to convert the entire principal of the debt into shares, regardless of the 20% pro rata rule of subsection (a) above. If an Owner decides to convert the debt into shares, the Issuer shall ensure that the debt is converted into shares in the Issuer in such a way that the rights of the Owner in the takeover company or new company are the same as those of other shareholders in the Issuer.

(d) An increase in the share capital of the Issuer pursuant to Chapter V of the Companies Act No. 2/1995, where payment is made for the new shares, shall not have any effect on the conversion option of an Owner, provided that the payment for the shares is not less than 85% of the market price of the Issuer at the time of determining the price of the new shares. If the price of the new shares is lower than the price specified above, the Owner shall be notified of the proposed increase and granted 14 days to convert the debt into shares in order to be able to participate in the increase.

(e) Any other events relating to the Issuer, including the following, shall not affect the conversion option of an Owner:

(i) A reduction in the share capital of the Issuer by a payment to shareholders pursuant to subsection (1) of paragraph 2 of article 51 of the Companies Act No. 2/1995;

(ii) The issue of new convertible bonds pursuant to Chapter VI of the Companies Act No. 2/1995;

4

(iii) The issue of subscription rights pursuant to Chapter V of the Companies Act No. 2/1995;

(iv) The merger of the Issuer with another company/other companies pursuant to Chapter XIV of the Companies Act No. 2/1995, where the Issuer continues to operate under its current State Registration Number.

(f). An Owner shall exercise his conversion option by sending a notice to such effect to the Issuer during the two-week period preceding an Option Date. An owner may only exercise the entire part of the conversion option earned, and not a part of it. A notice by an Owner shall be regarded as a binding subscription to the shares in question. The Issuer is under obligation to increase his share capital by a number corresponding to the number of shares to which an Owner has an option pursuant to subsection (a) above and deliver the shares to the Owner within 14 days of the Option Date.

(g) When a claim pursuant to this Bond has been converted into a share in the Issuer pursuant to the above, the part of the debt which has been converted shall be regarded as paid in full. A provision for this conversion option has been made in the Articles of Association of the Debtor in accordance with Chapter VI of the Companies Act No 2/1995.

Article 5

The share capital of the Company may be increased, either by subscription to new shares or the issue of bonus shares, by a resolution of a shareholders’ meeting, both requiring the same force of vote as amendments to these Articles of Association. Shareholders have pre-emptive rights to new shares in proportion to their holdings in the Company and within the time limits specified in the decision to increase the Company share capital. In the event that any shareholder does not exercise his or her pre-emptive rights in full, other shareholders shall be entitled to increased their subscription rights. A shareholders’ meeting may, by a 2/3 majority vote, decide to waive pre-emptive rights on increases in share capital, provided that there is no discrimination.

In the event that a shareholder has not paid in the required share capital by the due date, he or she shall pay penalty interest on the amount due from that date to the date of payment, in addition to costs incurred for the collection of the payment. Other means of dealing with defaults may also be used, as provided for by law at any time.

Only a shareholders’ meeting can decide on a reduction in share capital.

All shares carry equal rights.

5

Article 6 Shares in the Company are issued electronically pursuant to the provisions of the Act on the Electronic Registration of Title to Securities.

The Board of Directors shall maintain a register of shares in a lawful form. Registry of title in a securities depository constitutes full proof of title to shares in the Company and adequate basis for entry in the register of shares.

The register of shares shall be preserved in the office of the Company, where all shareholders shall have access to it and permission to inspect its contents.

Article 7 Shares in the Company may be pledged or sold without restriction except as otherwise provided by law.

The sale of shares to foreign nationals is subject to the provisions of Icelandic statutory law, as current at any time.

Transfers of title to shares, whether by sale, gift, inheritance, the settlement of an estate or attachment, shall be promptly notified to the Company’s office and the Company’s register of shares shall then be amended accordingly.

Parties who have acquired shares in the Company cannot exercise their rights as shareholders until their names have been entered in the register of shares, or if they have given due notice and submitted proof of title.

For the Company, the register of shares shall be regarded as full proof of title to any shares in the Company, and dividends at any time, as well as all notices, shall be sent to the party registered at any time as the owner of the shares in question in the Company’s register of shares. The Company is not liable for the loss of any payments or notices resulting from neglect by shareholders to notify changes in title or address.

Article 8 No privileges are attached to shares in the Company.

Shareholders shall not be required to suffer redemption of their shares except as provided by law.

Article 9

6 The Company shall not grant loans against its own shares in the Company except as permitted by statutory law. The Company may acquire its own shares to the extent permitted by statutory law. Voting rights of shares owned by the Company in itself may not be exercised.

The Company shall not grant loans to shareholders, Board members, the Managing Director or senior officers of the Company, nor provide them with guarantees. The provisions of this Article do not, however, apply to normal business loans or purchases by the Company’s employees, or an associated company, of shares, or the purchase of shares for their benefit, as permitted by law.

Article 10 Shareholders are under obligation, without specific undertaking, to observe the Articles of Association of the Company in their current form or as lawfully amended at any time. Shareholders can not be obligated, neither by the Articles of the Company nor by amendments thereto, to increase their shareholding.

Shareholders are not liable for the commitments of the Company beyond their share in the Company unless they assume such further commitments under a separate legal instrument. This provision cannot be amended by any resolution of a shareholders’ meeting.

Chapter III Shareholders' Meetings

Article 11 The supreme authority in the affairs of the Company is entrusted to lawful shareholders’ meetings, within the limits set by these Articles of Association and statutory law.

Shareholders exercise their powers of decision at shareholders’ meetings.

All shareholders may attend and speak at shareholders’ meetings and exercise their right to vote.

A shareholder may appoint a proxy to attend meetings on his/her behalf. The proxy shall submit a written and dated letter of proxy.

A shareholder may attend a meeting accompanied by an advisor. The advisor shall not be entitled to speak, submit motions or vote at shareholders’ meetings.

7 The auditor of the Company and the Managing Director shall have full rights to speak and submit motions at shareholders’ meetings even if they are not shareholders

The Board of Directors may invite experts to attend individual meetings, if their opinion or assistance is required.

Article 12 Shareholders’ meetings shall be called at the discretion of the Board of Directors, at the request of the Company auditor , or if shareholders controlling 1/10 of the shares of the Company request a meeting by a written notice. The request shall include a statement to the Board of Directors explaining the reason for the request, and the Board of Directors shall notify shareholders of the business on the agenda in the notice of the meeting.

When a lawful request for a meeting has been submitted, the Board of Directors shall call a meeting no later than fourteen days from the time that the request was received. If the Board of Directors has not called a meeting within that time, shareholders may require a meeting to be called pursuant to the provisions of the Companies Act.

Article 13 Shareholders’ meetings, including the Annual General Meeting, shall be called by a notice to each shareholder by registered mail, telegram or by other verifiable means or, at the discretion of the Board of Directors, by a notice in the newspapers, with at least one week's notice. A shareholders' meeting is valid, regardless of attendance, if the meeting has been properly convened. Attendance shall be determined based on the number of ballots delivered.

The notice of a shareholders’ meeting shall specify the business to be addressed at the meeting. If the agenda includes motions to amend the Articles of the Company, the substance of the motion shall be included in the notice of the meeting. Seven days before a shareholders’ meeting, at the latest, an agenda, final submissions and, in the case of annual general meetings, the annual accounts, report of the Board of Directors and the auditor’s report shall be laid open for inspection by shareholders at the Company office.

Each shareholder shall be entitled to have a specific item of business included on the agenda of a shareholders’ meeting, provided that such shareholder submits a written request to this effect to the Board of Directors of the Company with sufficient advance notice for the item to be included on the agenda in accordance with these Articles.

8 Items of business which are not included on the agenda may not be accepted for final decision at a shareholders’ meeting except with the consent of all the shareholders in the Company, but a resolution may be passed to provide guidance to the Board of Directors of the Company. Lawfully submitted motions for amendments may be put to a vote at the meeting itself, even if they have not been laid open for inspection by shareholders. An Annual General Meeting is always permitted to conclude matters which it is required to address pursuant to statutory law or the Company Articles.

Article 14 The Annual General Meeting shall be held before the end of the month of May each year.

The agenda of the Annual General Meeting shall include the following items of business:

1. The Board of Directors of the Company shall report on the Company's position and its activities in the preceding year of operation 2. Audited annual accounts shall be submitted for approval 3. Decisions shall be taken concerning the disposal of the profit or loss of the Company during the fiscal year 4. Motions to amend the Articles of the Company shall be addressed, if submitted; 5. A decision shall be made on the remuneration of the Board of Directors 6. A Board of Directors shall be elected 7. Company auditors shall be elected 8. Discussions and voting on other items of business lawfully submitted at the meeting.

Article 15 The Chairman of the Board of the Company, or an elected chairman of the meeting, shall preside over shareholders’ meetings and the election of a secretary. At the outset of the meeting the chairman of the meeting shall verify whether the meeting was properly called and declare whether such is the case. The chairman of the meeting presides over discussions and voting.

Article 16 Each share of one króna shall carry one vote.

All ordinary business at shareholders’ meetings shall be decided by majority vote, except as otherwise provided in these Articles of Association or by law. In the

9 event of an equality of votes at elections to posts in the Company, the election shall be decided by casting lots.

Article 17 A brief account of proceedings at shareholders’ meetings shall be entered in a book of minutes, together with all resolutions of the meeting and results of voting. These minutes shall constitute conclusive proof of proceedings at shareholders’ meetings.

Chapter IV The Board of Directors of the Company etc.

Article 18 The Board of Directors of the Company shall be composed of seven members and two alternate members elected at the Annual General Meeting for a term of one year. The eligibility of members of the Board is subject to statutory law. Elections to the Board shall always be by ballot if the number of nominations exceeds the number of Members to be elected.

Prospective candidates to the Board of Directors shall submit a written notice to such effect to the Board of Directors no later than five days before the start of the Annual General Meeting, or extraordinary shareholder’s meeting where elections to the Board of Directors are included on the agenda. Only those who have submitted a notice pursuant to the above are eligible as candidates at an Annual General Meeting.

At the Annual General Meeting elections to the Board of Directors shall be restricted to ballots with the names of candidates who announced their candidature within the set deadline.

Article 19 The Board of Directors holds the supreme authority in the affairs of the Company between shareholders’ meetings and is responsible for ensuring that its organisation and operation are at all times in correct and proper order.

The Board of Directors shall appoint a Managing Director for the Company and decide the terms of his or her employment. The Board of Directors of the Company and the Managing Director are responsible for the management of the Company.

10 The Board of Directors shall ensure adequate supervision of the accounts of the Company and the disposal of its assets.

The Board of Directors shall establish working procedures in compliance with the provisions of the Companies Act.

Only the Board of Directors may assign powers of procuration.

The signatures of the majority of the Board shall bind the Company.

Article 20 The Board of Directors of the Company shall elect a Chairman of the Board and Vice-Chairman from among its members, and allocate tasks among themselves in other respects as required.

The Chairman shall call Board meetings and ensure that all the members of the Board are notified of such meetings. Meetings of the Board shall be held at the discretion of the Chairman. The Chairman shall also call a meeting of the Board if requested by one member of the Board or the Managing Director. Meetings of the Board of Directors are valid if attended by a majority of the members of the Board. However, no important decision shall be taken unless all members of the Board have had an opportunity to discuss the matter, if possible. The outcome of issues shall be decided by force of vote. In the event of an equality of votes the issue shall be regarded as rejected.

The Managing Director shall attend Board meetings even if he or she is not a member of the Board, and shall have the right to participate in discussions and submit proposals, unless otherwise decided by the Board in individual cases.

A book of minutes shall be kept of proceedings at meetings of the Board of Directors, signed by the participants in the meeting. A member of the Board of Directors or Managing Director who disagrees with a Board decision is entitled to have his or her dissenting opinion recorded in the minutes.

Article 21 The Managing Director of the Company and the Board of Directors are jointly responsible for the management of the Company.

The Managing Director has charge of the day-to-day operation of the Company, and in this respect he or she shall observe the policy and instructions of the Board of Directors. Day-to-day operations do not include measures which are unusual or extraordinary. Such measures may only be taken by the Managing Director pursuant to special authorisation from the Board of Directors of the Company unless it is impossible to wait for the decisions of the Board of

11 Directors without seriously disadvantaging the operation of the Company. In such an event, the Managing Director shall consult with the Chairman of the Board, if possible, after which the Board of Directors shall immediately be notified of the measures.

The Managing Director shall ensure that the accounts and finances of the Company conform to the law and accepted practices and that the disposal of the property of the Company is secure.

The Managing Director shall provide the Members of the Board of Directors and Company auditors with any information pertaining to the operation of the Company which they may request, as required by law.

Chapter V Accounts, Auditing etc.

Article 22 At the Annual General Meeting of the Company a chartered auditor or auditing firm shall be elected for the Company for a term of one year to review the accounts of the Company and submit the conclusions of the review to the Annual General Meeting. The auditor shall have access to all books and documents of the Company for such purpose. Auditors shall not be elected from among the members of the Board or employees of the Company. The qualifications and eligibility of auditors at elections are in other respects governed by law.

The operating year and financial year of the Company shall be the calendar year. The Board of Directors shall have prepared the annual accounts of the Company and submitted them to the Company’s auditors no later than one month before the Annual General Meeting.

Part VI Amendment of the Articles, Dissolution of the Company etc.

Article 23 These Articles of Association may only be amended at a lawful Annual General Meeting or extraordinary shareholders’ meeting, provided that the notice of the meeting clearly indicates that such an amendment is proposed and outlines the main substance of the amendment. A decision is valid only if it has the support of at least 2/3 of the cast votes and the support of shareholders controlling at least 2/3 of the share capital represented at the meeting, provided always that no other

12 force of vote is required by these Articles or statutory law, cf. Article 93 of the Companies Act.

Article 24 The dissolution of the Company, its division or merger with other companies is subject to the provisions of statutory law concerning limited liability companies.

Article 25 Matters on which these Articles provide no guidance shall be governed by the provisions of the Companies Act and such provisions of other current statutory law as may be applicable.

So approved at a shareholders’ meeting on 24 October 2006. So amended at a shareholders’ meeting on 31 October 2006. So amended at a shareholders’ meeting on 15 November 2006. So amended at a shareholders’ meeting on 23 November 2006

On the Board of Directors of Icelandair Group Holding hf.

Finnur Ingólfsson

13 28.2 MERGER PLAN FOR ICELANDAIR GROUP HOLDING HF. AND ICELANDAIR GROUP HF. AND KPMG REPORT ON THE MERGER OF ICELANDAIR GROUP HOLDING HF. AND ICELANDAIR GROUPHF.

Icelandair Group Holding hf. Icelandair Group hf.

Documents concerning the merger of the companies 1 November, 2006 Table of Contents

Page Merger Plan ...... 3 Report of the boards of directors of the companies... 5 Assessors’ report ...... 6

Merger Plan

The boards of directors of Icelandair Group Holding hf., State Reg. No. 591006-2150, Reykjavík Airport, 101 Reykjavík, and Icelandair Group hf., State Reg. No. 631205-1780, Reykjavík Airport, 101 Reykjavík, have today approved the following plan for a merger of the companies.

Article 1

The boards of directors of the companies are in agreement on merging the companies under the State Registration Number of Icelandair Group hf., State Reg. No. 631205-1780. As regards the merger, reference is made to Chapter XIV of the Companies Act No. 2/1995

The merger shall take effect as of 1 November 2006, and the merged company will assume all the operations, assets, rights and obligations of the taken-over company as of that date.

The merger is based on the annual financial statement of Icelandair Group hf. for the year 2005 and its interim financial report for 1 January 2006 to 31 October 2006, and, in addition, on the interim financial report of Icelandair Group Holding hf. from its date of establishment to 31 October 2006. As of the date of the merger, Icelandair Group hf. will take over all the operations, assets, rights and obligations of Icelandair Group Holding hf. and from that time the rights and obligations of the taken-over company shall be regarded as ended. This merger plan is based on the projected merged balance sheet of the companies as at 31 October 2006, i.e. the three-quarter financial report for Icelandair Group hf. for 2006 and an estimate for October report for both companies, but a final merged balance sheet will be presented before shareholders’ meetings of the merging companies make their final decision concerning the merger.

Article 2

The only assets of Icelandair Group Holding hf. are shares in Icelandair Group hf. On the day of the merger, Icelandair Group Holding hf. owned shares in the nominal value of ISK 1,000,000,000 in Icelandair Group, i.e. 100% of the shares.

On the merger of Icelandair Group Holding hf. and Icelandair Group hf. the former company will be liquidated and its shareholders will receive shares in Icelandair Group hf. in the nominal value of ISK 1,000,000,000 as payment for their shares in Icelandair Group holding.

Article 3

Any dividends which may be paid out in 2007 for the operating year of 2006 will accrue to the shareholders owning the shares in the merged company on the day of its Annual General Meeting.

Article 4

Members of the boards of directors, managers and assessors under Article 122 of Act No. 2/1995, the supervisors of the companies, shareholders or groups of shareholders, shall not enjoy any rights in the merged company.

Article 5

Creditors holding special rights in the taken-over company will retain such rights notwithstanding the merger and will, on the merger, obtain the same rights as regards the merged company. Other creditors will not enjoy special rights in the merged company.

Article 6

In confirmation of this merger plan it is signed by the boards of directors of Icelandair Group Holding hf. and Icelandair Group hf., the implementation of the merger being entrusted to the boards of both companies.

Reykjavík, 15 November 2006

Board of Directors of Icelandair Group Holding hf. Board of Directors of Icelandair Group hf.

Report of the Boards of Directors of Icelandair Group hf. and Icelandair Group hf. in respect of the Merger of the Companies Pursuant to Article 121 of Act No. 2/1995.

A joint plan has been prepared by the boards of directors of Icelandair Group Holding hf. and Icelandair Group hf. concerning the merger of the companies. An assessors’ report has also been prepared for the merger. The companies will be merged under the name of Icelandair Group hf., State Reg. No. 631205-1780. On the merger, the shareholders of Icelandair Group Holding hf. will receive shares in the nominal value of ISK 1,000,000,000 in the take-over company in exchange for their shares in Icelandair Group Holding in the same nominal value.

The merger is effective as of 1 November 2006. The annual financial statement of Icelandair Group hf. for the year 2005, its interim financial report for 1 January 2006 to 31 October 2006, and the interim financial report of Icelandair Group Holding hf. from its date of establishment to 31 October 2006 have been made available. The only assets of Icelandair Group Holding hf. are shares in Icelandair Group hf. On the day of the merger, Icelandair Group Holding hf. owned shares in the nominal value of ISK 1,000,000,000 in Icelandair Group, i.e. 100% of the shares.

On the merger of Icelandair Group Holding hf. and Icelandair Group hf. the former company will be liquidated and its shareholders will receive shares in Icelandair Group hf. in the nominal value of ISK 1,000,000,000 as payment for their shares in Icelandair Group holding hf. No complications arose as regards the determination of the payment for the shares, as Icelandair Group Holding hf. is the sole owner of all the shares in Icelandair Group hf. and the nominal value of the shares in both companies is the same.

The merger is in fact a step toward the listing of the shares of Icelandair Group hf. in the Iceland Stock Exchange following the acquisition by Icelandair Group Holding hf. of all its shares and the previous listing of that company in the Iceland Stock Exchange hf. The party initiating the take-over will be liquidated and its ownership transferred directly to its shareholders.

Reykjavík, 15 November 2006

Board of Directors of Icelandair Group Holding hf. Board of Directors of Icelandair Group hf.

Icelandair Group Holding hf. Icelandair Group hf. Reykjavík Airport Reykjavík Airport 101 Reykjavík 101 Reykjavík State Reg. No. 591006-2150 State Reg. No. 631205-1780

Reykjavík, 15 November 2006

Re: Report on the merger of Icelandair Group Holding hf. and Icelandair Group hf.

We have reviewed the merger plan of the above companies dated 15 November 2006, and in the context of our review we submit the following comments.

According to the merger plan, the directors of the companies have decided to propose a merger of the companies. The annual financial statement of Icelandair Group hf. for the year 2005, its interim financial report for 1 January 2006 to 31 October 2006, and the interim financial report of Icelandair Group Holding hf. from its date of establishment to 31 October 2006 have been made available.

The only assets of Icelandair Group Holding hf. are shares in Icelandair Group hf. On the day of the merger, Icelandair Group Holding hf. owned shares in the nominal value of ISK 1,000,000,000 in Icelandair Group hf., i.e. 100% of the shares.

On the merger of Icelandair Group Holding hf. and Icelandair Group hf. the former company will be liquidated and its shareholders will receive shares in Icelandair Group hf. in the nominal value of ISK 1,000,000,000 as payment for their shares in Icelandair Group Holding hf. There were no complications relating to the determination of compensation for the shares.

It must be concluded that the compensation for the shares in Icelandair Group Holding hf. is fair and reasoned.

There is no indication that the merger of the companies will significantly prejudice the possibilities for creditors to enforce their claims against each of the merged companies.

Respectfully,

KPMG Endurskoðun hf.

28.3 FINANCIAL REPORTS FOR ICELANDAIR EHF. 28.3.1 AUDITED 2003 – 2005 ANNUAL REPORTS 28.3.2 INTERIM INCOME STATEMENT, BALANCE SHEET AND CASH FLOW STATEMENT FOR THE NINE MONTH PERIOD ENDING 30 SEPTEMBER 2005 28.3.3 AUDITED INTERIM INCOME STATEMENT, BALANCE SHEET AND CASH FLOW STATEMENT FOR THE NINE MONTH PERIOD ENDING 30 SEPTEMBER 2006

Icelandair ehf. Consolidated Financial Statements r2003

Icelandair ehf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 461202-3490 Contents

Endorsement and Signatures by the Board of Directors and the CEO ...... 36 Balance Sheet ......

Auditors' Report ...... 48 Statement of Cash Flows ......

Income Statement ...... 59 Notes ......

______Financial Statements of Icelandair ehf. 2003 2 Endorsement and Signatures by the Board of Directors and the CEO

Icelandair ehf. was established in December 2002 and started operations on 1 January 2003. The purpose of the Company is aircraft operation and other related operations, real estate operation and other activities normal for the Company. The Company's consolidated financial statements comprise of the Company and four subsidiaries. They have been prepared in accordance with the Financial Statements Act and the Regulation on the Presentation and Contents of Financial Statements and Consolidated Financial Statements.

According to the Income Statement, profit for the year 2003 amounted to ISK 502 million. Operating revenue amounted to ISK 25,700 million in 2003. According to the Balance Sheet, equity at the end of the year 2003 amounted to ISK 3,276 million, including share capital in the amount of ISK 3,000 million which is wholly owned by Flugleiðir hf.

The Board of Directors proposes a 7.5% dividend payment in 2004, arising from operations in the year 2003 or amounting to ISK 225 million. Reference is made to the notes in the financial statements regarding allocation of profits and other changes in equity.

The Board of Directors and the CEO of Icelandair ehf. hereby confirm the Company's financial statements by means of their signatures.

Reykjavik, 24 February 2004.

The Board of Directors:

Hörður Sigurgestsson Grétar Br. Kristjánsson Ingimundur Sigurpálsson Inga Jóna Þórðardóttir Pálmi Haraldsson

CEO:

Sigurður Helgason

______Financial Statements of Icelandair ehf. 2003 3 Auditors' Report

Board of Directors and Shareholder of Icelandair ehf.

We have audited the accompanying consolidated balance sheet of Icelandair ehf. (the "Company") as of December 31, 2003 and the related consolidated statement of income and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Company as of December 31, 2003 and of the results of its operations and its cash flows for the year then ended in accordance with the law and generally accepted accounting principles in Iceland.

Reykjavik, 24 February 2004.

Guðni S. Gústafsson Stefán Hilmarsson

KPMG Endurskoðun hf.

______Financial Statements of Icelandair ehf. 2003 4 Income Statement for the year 2003

Note 2003

Operating income:

Transport revenue: Passengers ...... 17,300,050 Cargo and mail ...... 860,693 Charter flight revenue and aircraft lease ...... 4,990,942 Other operating revenue ...... 17 2,548,473 5 25,700,158

Operating expenses:

Salaries, salary-related expenses and other personnel expenses ...... 18 6,401,275 Aircraft fuel ...... 3,442,035 Aircraft and aircrew lease ...... 3,347,805 Aircraft servicing, handling and communication expenses ...... 3,922,598 Aircraft maintenance expenses ...... 2,527,892 Other operating expenses ...... 19 5,259,105 Depreciation ...... 22 124,691 25,025,401

Operating profit before financial income and financial expenses ...... 674,757

Financial income and (financial expenses):

Interest income ...... 158,514 Interest expense ...... ( 23,877) Net foreign exchange loss ...... 4,15( 137,696) Calculated inflation adjustment ...... 2,25 ( 58,763) ( 61,822)

Profit before tax ...... 612,935 Income tax expense ...... 13,26( 111,082)

Profit for the year ...... 16 501853

______Financial Statements of Icelandair ehf. 2003 5 In ISK thousand Balance Sheet

Assets

Note 2003 2002 Fixed assets:

Intangible assets: Long-term cost ...... 6,20 69,910 0

Operating assets: Engines and other aircraft equipment ...... 21 378,859 0 Other operating assets ...... 21 270,482 0 7 649,341 0 Engine hours ...... 8 646,514 0 1,295,855 0

Investments: Investment in associated company ...... 9 7,342 0 Bonds ...... 19,066 0 Insurance deposits and other restricted deposits ...... 289,842 0 316,250 0

Fixed assets 1,682,015 0

Current assets:

Inventories ...... 10 158,335 0

Receivables: 11 Accounts receivable ...... 1,668,711 0 Notes receivable and short-term bonds ...... 56,575 0 Amounts due from Flugleiðir hf.'s group entities ...... 698,312 0 Other receivables ...... 436,287 5,000

Prepaid expenses ...... 8 557,947 0 Cash and cash equivalents ...... 12 4,243,612 0 Current assets 7,819,779 5,000

Total assets 9,501,794 5,000

______Financial Statements of Icelandair ehf. 2003 6 In ISK thousand 31 December 2003

Equity and liabilities

Note 2003 2002

Equity:

Share capital ...... 24 3,000,000 5,000 Statutory reserve ...... 50,185 0 Foreign exchange hedging reserve ...... 15 ( 304,866) 0 Retained earnings ...... 530,660 0 Equity 25 3,275,979 5,000

Obligations:

Deferred income tax liability ...... 13,26,27 139,958 0

Current liabilities:

Accounts payable ...... 2,103,841 0 Income tax payable ...... 28 17,966 0 Other payables ...... 2,390,116 0 Prepaid income ...... 5 1,573,934 0 6,085,857 0

Total liabilities 6,225,815 0

Total equity and liabilities 9,501,794 5,000

______Financial Statements of Icelandair ehf. 2003 7 In ISK thousand Statement of Cash Flows for the year 2003

Note 2003

Cash flows from operating activities:

Profit for the year ...... 16 501,853 Adjustments for: Depreciation ...... 22 124,691 Charged engine hours ...... 700,516 Gain on the sale of assets ...... ( 2,536) Indexation and foreign exchange loss on assets and liabilities ...... 126,468 Calculated inflation adjustment ...... 2,25 58,763 Income tax ...... 13,26 111,082 Working capital from operations 1,620,837

Changes in operating assets and liabilities: Inventories ...... ( 158,335) Receivables ...... ( 2,854,885) Prepaid expenses ...... ( 557,947) Current liabilities ...... 4,511,923 Prepaid income ...... 1,573,934 Changes in operating assets and liabilities 2,514,690

Net cash from operating activities 4,135,527

Cash flows from investing activities:

Capitalised long-term costs and engine hours ...... ( 1,603,010) Acquisition of operating assets: Engines and other aircraft equipment ...... 7( 402,726) Other operating assets ...... 7( 336,977) Proceeds from the sale of assets ...... 4,167 Investments and long-term receivables ...... ( 248,503 ) Net cash used in investing activities( 2,587,049 )

Cash flows from financing activities:

Proceeds from the issue of share capital ...... 25 3,000,000 Forward exchange rate hedges ...... 15 ( 304,866) Net cash from financing activities 2,695,134

Increase in cash and cash equivalents ...... 4,243,612

Cash and cash equivalents at 1 January ...... 0

Cash and cash equivalents at 31 December ...... 12 4,243,612

______Financial Statements of Icelandair ehf. 2003 8 In ISK thousand Notes to Financial Statements

Summary of Accounting Policies

Basis of preparation 1. The financial statements of Icelandair ehf. contain the consolidated financial statements of the Group; where all major intragroup transactions are eliminated. The financial statements are prepared in accordance with the Financial Statements Act and the Regulation and Presentation of Financial Statements and Consolidated Financial Statements. The Financial Statements is based on the general price-level accounting.

Icelandair ehf. is subsidiary of Flugleiðir hf. and has legal residence at Reykjavíkurflugvöllur. The financial statements of the Company for the year ended 31 December 2003 are a part of the consolidated financial statements of the Parent Company wherein information regarding financial performance and financial position of the Company can be found.

2. The Financial Statements are prepared in Icelandic kronas rounded to the nearest thousand. The effect of general price- level changes on the operations and the financial position are calculated and included in the financial statements based on the official consumer price index increase of 2.7%.

Operating assets are revaluated by restating their historical value and depreciation to year-end 2003. Depreciation is entered as an expense in the income statement at the average price level during the year. The effects of general price-level changes on monetary assets and liabilities are calculated and entered as expense amounting to ISK 59 millions during the year. As a result of these price-level adjustments, amounts in the balance sheet are presented at year-end price level and the operating results at the average price level during the year. Restatement of assets and the calculated inflation adjustment are entered in the restatement account in the balance sheet, as shown in note 25.

Foreign currency 3. Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement.

Derivatives 4. The Company has entered into derivative agreements with its parent company, Flugleiðir hf., for the purpose of limiting its exposure to foreign exchange risk and the risk arising from fluctuations in fuel prices.

Currency swap contracts and options are stated in the financial statements at an estimated fair value as at December 31, 2003. Contracts with a positive fair value are stated in the balance sheet as current assets and contracts with a negative fair value are shown as current liabilities. Changes in the fair value of these contracts are recognized in the income statement when the contracts are settled, as shown in note 15 concerning changes in accounting policies.

To limit the risk of fluctuation in aircraft fuel prices, the Company has entered into both swap, and option contracts. The value of fuel derivatives is recognised in the financial statements in the same period that the fuel is used.

______Financial Statements of Icelandair ehf. 2003 9 In ISK thousand Notes, contd.:

Revenue recognition 5. Passenger tickets and cargo sales are not recognized as revenue until transportation has been provided. Sold and unused documents amounting to ISK 1,528 million at December 31, 2003 are shown in the balance sheet as prepaid income. Sold documents not used within nine months from the month of sale are recognized as revenue.

Intangible assets 6. Included in other intangible assets in the balance sheet are acquired software systems. The cost of the acquired software systems is amortized over three years.

Operating assets 7. Operating assets are stated at revalued cost, less accumulated depreciation. Depreciation is calculated on a straight-line basis according to the estimated useful life of the asset until a 10% residual value is reached.

8. Engine overhauls are capitalised at cost, in USD, as engine hours in the balance sheet. The total figure capitalised amounts to ISK 1,087 million. The amount is expensed according to flown hours. The amount capitalised, is split between operating assets and prepaid expenses. The foreign exchange effect arising from USD exchange rate differences recognised as foreign exchange gain or loss in the income statement.

Associated companies and other companies 9. There is one associated company in the Group. The Company's share in the results and financial position of the associate are not recognised in the financial statements as they are immaterial. The investment is recognised at cost and is revalued according to changes in the consumer price index.

Inventories 10. Inventories are stated at the last purchase price.

Accounts receivable 11. A provision has been made for doubtful receivables to account for general risks associated with holding these kind of assets. The provision does however not represent a final write-off. On one hand there is a provision for specific receivables deemed to have a specific risk attached to them, on the other hand there is a provision for general risk. The provision has been deducted from the appropriate items in the balance sheet.

Cash and cash equivalents 12. Cash and cash equivalents consist of short-term securities, cash and bank deposits. Short-term securities include short- term notes from financial institutions, government and municipal securities which are listed on the Iceland Stock Exchange, and shares in mutual funds.

Deferred income-tax liability 13. The Company's deferred income-tax liability is calculated and recognised in the financial statements. The calculation is based on differences in balance sheet items in the tax return on the one hand and in the financial statement on the other. These differences arise from the fact that the tax return is based on other premises than the financial statements, arising mainly from the fact that some expenses are recognised earlier in the tax return, mostly depreciation, than in the financial statements.

______Financial Statements of Icelandair ehf. 2003 10 In ISK thousand Notes, contd.:

Inflationary-adjusted accounting 14. In 2001 the Icelandic Parliament approved changes to the Financial Statements Act, whereby inflationary accounting will be abolished as of the year 2002. However, the change will be phased in and inflation adjustments to the operation and financial position may still be calculated and recorded for the years 2002 and 2003. The Board of Directors of the Company has agreed to continue recognising the effects of inflation in the consolidated financial statements so they are adjusted for the effects of general price-level changes. If inflationary accounting had not been used the Company's profit would have been ISK 60 million higher and the Company's equity would have been ISK 20 million lower at the year-end.

Changes in accounting policies 15. A change has been made to the accounting methods regarding the treatment of forward hedging instruments. Previously, changes in the market value of such agreements were stated in the income statement as they incurred but now the change is recognised in the income statement after the agreements are settled. Unsettled change in market value of agreements is on the other hand recognised in a special equity account, foreign exchange hedging reserve. The effects of the changes are that the profit of the year after taxes is approx. ISK 250 million higher than it would have been according to the previous method.

Quarterly statements

16. Summary of the Company's operating results by quarters:

Q1 Q2 Q3 Q4 Total

Operating income ...... 4,727,780 6,692,521 8,972,869 5,306,988 25,700,158 Operating expenses without depreciation ...... ( 5,684,725) ( 6,438,867) ( 6,919,688) ( 5,857,430) ( 24,900,710) EBITDA ...... ( 956,945) 253,654 2,053,181 ( 550,442) 799,448 Depreciation ...... ( 30,309) ( 33,939) ( 30,612) ( 29,831) ( 124,691) Operating profit (loss) (EBIT) ...... ( 987,254) 219,715 2,022,569 ( 580,273) 674,757 Net financing costs ...... ( 194,504) ( 40,226) 27,696 145,212 ( 61,822) Income tax ...... 216,287 ( 39,416) ( 358,337) 70,384 ( 111,082) Profit (loss) ...... ( 965,471) 140,073 1,691,928 ( 364,677) 501,853

Operating income

17. Other operating revenue is specified as follows:

Sale of goods at airports ...... 666,775 Commissions ...... 294,594 Revenue from tourism services ...... 502,754 Other operating revenue ...... 1,084,350 2,548,473

______Financial Statements of Icelandair ehf. 2003 11 In ISK thousand Notes, contd.:

Operating expenses

18. Salaries, salary-related expenses and other personnel expenses are specified as follows:

Salaries ...... 4,116,145 Salary-related expenses ...... 822,993 Other personnel expenses ...... 1,462,137 6,401,275

Average number of eployees for the year was 1,017. The salaries of the Board of Directors, the CEO and four executive officers amounted to a total of ISK 71 million during the year 2003.

Other operating expenses

19. Other operating expenses are specified as follows: 2003

Operating cost of real estate and fixtures ...... 306,573 Communication expenses ...... 654,903 Advertising expenses ...... 595,059 Booking fees, credit cards fees and commission expenses ...... 1,309,014 Cost of goods sold at airports ...... 373,363 Passenger services ...... 936,234 Insurance expenses and claims incurred ...... 318,396 Professional services ...... 397,562 Office cost ...... 142,745 Lost trade receivables and change in provision ...... 24,805 Net worth tax ...... 665 Other operating expenses ...... 199,786 5,259,105

Intangible assets

20. Long-term costs are specified as follows:

Balance at 1.1.2003 ...... 31,595 Capitalised during the year ...... 62,764 Revaluation during the year ...... 985 Amortised during the year ...... ( 18,904) Balance 31.12.2003 ...... 76,440 Long-term costs, current portion ...... ( 6,530) Balance at 31.12.2004 ...... 69,910

Amortisation rate ...... 33%

______Financial Statements of Icelandair ehf. 2003 12 In ISK thousand Notes, contd.:

Operating assets

21. Operating assets are specified as follows:

Engines and Other other aircraft operating equipments assets Total

Acquisitions and additions during the year ...... 402,726 336,977 739,703 Revaluation during the year ...... 10,384 6,669 17,053 Depreciation during the year ...... ( 34,251) ( 71,536) ( 105,787) Disposed of during the year ...... 0 ( 1,628) ( 1,628) Book value at 31.12.2003 ...... 378,859 270,482 649,341

Cost at 31.12.2003 ...... 739,166 753,876 1,493,042 Accumulated depreciation 31.12.2003 ...... ( 360,307) ( 483,394) ( 843,701) Book value 31.12.2003 ...... 378,859 270,482 649,341

Depreciation ratios ...... 12-20% 4-20%

22. The depreciation charge in the income statement is specified as follows:

Amortisation of intangible assets, see note 20 ...... 18,904 Depreciation of operating assets, see note 21 ...... 105,787 Depreciation and amortisation recognised in the income statement ...... 124,691

Investments

23. The subsidiaries, which are all included in the Consolidated Financial Statements, are as follows:

Amadeus Ísland hf...... 95% Ferðasmiðurinn hf...... 93% Iceland Tours Ltd., UK ...... 100% Íslandsferðir ehf...... 100%

Equity

24. Share capital according to the Company’s Articles of Association amounts to ISK 3.000 million. Each share of one ISK in the Parent Company carries one vote.

______Financial Statements of Icelandair ehf. 2003 13 In ISK thousand Notes, contd.:

25. Changes in equity are specified as follows:

Foreign Share Statutory Revaluation exchange Retained capital reserve reserve hedging earnings Total reserve

Equity 1.1.2003 ...... 5,000 0 0 0 0 5,000 Increase in equity ...... 2,995,000 0 0 0 0 2,995,000 Asset revaluation ...... 0 0 20,229 0 0 20,229 Currency derivatives ...... 0 0 0 ( 304,866) 0 ( 304,866) Calculated expenses due to price adjustments ...... 0 0 58,763 0 0 58,763 Profit for the year ...... 0 0 0 0 501,853 501,853 Statutory reserve ...... 0 50,185 0 0 ( 50,185) 0 Revaluation res. transf...... 0 ( 78,992) 0 78,992 0 Equity 31.12.2003 ...... 3,000,000 50,185 0 ( 304,866) 451,668 3,275,979

Deferred income tax liability

26. Deferred income tax liability is specified as follows:

Acquisitions 1.1.2003 ...... 45,000 Calculated indexation ...... 1,177 Charged income tax expense ...... 111,082 Income tax by the year of 2004 for the operating year 2003 ...... ( 17,301) Deferred income tax liability 31.12.2003 ...... 139,958

27. Deferred income tax liability is recognised in the income statement as follows:

Operating assets ...... 60,346 Shares in other companies ...... 6,102 Current assets ...... 18,634 Derivatives ...... 54,876 Deferred income tax liability 31.12.2003 ...... 139,958

______Financial Statements of Icelandair ehf. 2003 14 In ISK thousand Notes, contd.:

Taxes

28. Taxes have been calculated and recognised in the financial statements. The Company meets the federal tax laws condition concerning the joint taxation of the parent company and its subsidiaries. Consequently taxes arising from operations in the year 2003, will be jointly taxed in 2004 with its Parent Company.

Ratios

29. The Group's primary ratios:

Working capital from operations ...... 1,620,837

Current ratio ...... 1.28 Current ratio - excluding prepaid income ...... 1.73 Equity ratio ...... 0.34 Equity to issued capital ...... 1.09

______Financial Statements of Icelandair ehf. 2003 15 In ISK thousand Icelandair ehf. Consolidated Financial Statements r2004

Icelandair ehf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 461202-3490 Contents

Endorsement and Signatures by the Board of Directors and the CEO ...... 36 Balance Sheet ......

Auditors' Report ...... 48 Statement of Cash Flows ......

Income Statement ...... 59 Notes ......

______Financial Statements of Icelandair ehf. 2004 2 Endorsement and Signatures by the Board of Directors and the CEO

The year of 2004 was Icelandair ehf.'s second operating year. The purpose of the Company is aircraft operation and other related operations, real estate operation and other activities normal for the Company. The Company's consolidated financial statements comprise of the Company's, and three subsidiaries, financial statements. They are prepared in accordance with the Financial Statements Act and the Regulation on the Presentation and Contents of Financial Statements and Consolidated Financial Statements. The same accounting principles apply as for the previous year with the exception that the Company has ceased the use of inflation accounting, as allowed in an amendment to the Financial Statements Act, passed in The Icelandic Parlament, at the end of the year 2001 abolishing inflation accounting in Iceland.

According to the income statement the operating revenues of the Group amounted to ISK 29,057 million in 2004. Profit from the Group's operations for the year 2004 amounted to ISK 32 million. According to the Balance Sheet the Group´s equity amounted to ISK 2,975 million at the end of 2004, including ISK 3,000 million in share capital which is wholly owned by Flugleiðir hf.

The Board of Directors proposes no dividend payment in 2005, arising from operations in the year 2004, reference is made to the notes in the financial statements regarding information on other changes in equity.

The Board of Directors and the CEO of Icelandair ehf. hereby confirm the Company's financial statements by means of their signatures.

Reykjavík, 18 February 2005.

The Board of Directors:

Hannes Smárason Einar Sigurðsson Pétur J. Eiríksson

CEO:

Sigurður Helgason

______Financial Statements of Icelandair ehf. 2004 3 Auditors' Report

Board of Directors and Shareholder of Icelandair ehf.

We have audited the accompanying consolidated balance sheet of Icelandair ehf. (the "Company") as of December 31, 2004 and the related consolidated statement of income and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Company as of December 31, 2004 and of the results of its operations and its cash flows for the year then ended in accordance with the law and generally accepted accounting principles in Iceland.

Reykjavík, 18 February 2005.

Guðni S. Gústafsson Jón S. Helgason

KPMG Endurskoðun hf.

______Financial Statements of Icelandair ehf. 2004 4 Income Statement for the year 2004

Note 2004 2003

Operating income:

Transport revenue: Passengers ...... 6 18,342 17,300 Cargo and mail ...... 6 849 861 Charter flight revenue and aircraft lease ...... 6,968 4,991 Other operating revenue ...... 20 2,898 2,548 29,057 25,700

Operating expenses:

Salaries, salary-related expenses and other personnel expenses ...... 21 7,500 6,401 Aircraft fuel ...... 5,352 3,442 Aircraft and air crew lease ...... 3,108 3,348 Aircraft servicing, handling and communication expenses ...... 4,555 3,922 Aircraft maintenance expenses ...... 3,047 2,528 Other operating expenses ...... 22 5,061 5,259 Depreciation ...... 25 150 125 28,773 25,025

Operating profit before financial income and financial expenses ...... 284 675

Financial income and (financial expenses):

Interest income ...... 198 159 Interest expense ...... ( 15) ( 24) Net foreign exchange loss ...... 4,5( 421) ( 138) Calculated inflation adjustment ...... 1,18 0 ( 59) ( 238) ( 62)

Profit before tax ...... 46 613 Income tax expense ...... 30,32( 14) ( 111)

Profit for the year ...... 19 32 502

______Financial Statements of Icelandair ehf. 2004 5 In ISK million Balance Sheet

Assets

Note 2004 2003 Fixed assets:

Intangible assets: Long-term cost ...... 8,23 103 70

Operating assets: Engines and other aircraft equipments ...... 24 367 379 Other operating assets ...... 24 254 270 9 621 649 Engine hours ...... 10 400 647 1,021 1,296

Investments: Investment in associated companies ...... 12 4 7 Bonds ...... 29 19 Insurance deposits and other restricted deposits ...... 279 290 312 316

Fixed assets 1,435 1,682

Current assets:

Inventories ...... 13 172 158

Receivables: 14,27 Accounts receivable ...... 1,535 1,669 Notes receivable and short-term bonds ...... 45 57 Amounts due from Flugleiðir hf.'s group entities ...... 1,813 698 Other receivables ...... 415 436

Prepaid expenses ...... 10 550 558 Cash and cash equivalents ...... 15 3,264 4,244 Current assets 7,795 7,820

Total assets 9,230 9,502

______Financial Statements of Icelandair ehf. 2004 6 In ISK million December 31, 2004

Equity and liabilities

Note 2004 2003

Equity:

Share capital ...... 28 3,000 3,000 Statutory reserve ...... 82 50 Foreign exchange hedging reserve ...... ( 112) ( 305) Translation reserve ...... ( 1) 0 Retained earnings ...... 6 531 Equity 29 2,975 3,276

Obligations:

Deferred income tax liability ...... 16,30,31 122 140

Current liabilities:

Accounts payable ...... 1,785 2,104 Income tax payable ...... 32 18 18 Other payables ...... 2,691 2,390 Prepaid income ...... 6 1,639 1,574 6,133 6,086

Total liabilities 6,255 6,226

Total equity and liabilities 9,230 9,502

______Financial Statements of Icelandair ehf. 2004 7 In ISK million Statement of Cash Flows for the year 2004

Note 2004 2003

Cash flows from operating activities:

Profit for the year ...... 19 32 502 Adjustments for: Depreciation ...... 25 150 125 Charged engine hours ...... 966 701 Gain on the sale of assets ...... ( 1) ( 3) Indexation and foreign exchange gain (loss) on assets and liabilities ...... 96 126 Calculated inflation adjustment ...... 18 0 59 Income tax ...... 30( 18) 111 Working capital from operations 1,225 1,621

Changes in operating assets and liabilities: Inventories ...... ( 14) ( 158) Receivables ...... 265 ( 3,160) Prepaid expenses ...... 1 ( 558) Current liabilities ...... 107 4,512 Prepaid income ...... 107 1,574 Changes in operating assets and liabilities 466 2,210

Net cash from operating activities 1,691 3,830

Cash flows from investing activities:

Capitalised costs and engine hours ...... ( 801) ( 1,603) Acquisition of operating assets: Engines and other aircraft equipment ...... 24( 24) ( 403) Other operating assets ...... 24( 66) ( 337) Proceeds from the sale of assets ...... 1 4 Investments and long-term receivables ...... ( 1,256 ) ( 248 ) Net cash used in investing activities( 2,146 ) ( 2,587 )

Cash flows from financing activities:

Proceeds from the issue of share capital ...... 0 3,000 Dividends paid ...... 29 ( 525) 0 Net cash from (used in) financing activities( 525 ) 3,000

Changes in cash and cash equivalents ...... ( 980 ) 4244

Cash and cash equivalents at 1 January ...... 4,244 0

Cash and cash equivalents at 31 December ...... 15 3,264 4,244

______Financial Statements of Icelandair ehf. 2004 8 In ISK million Notes to Financial Statements

Summary of Accounting Policies

Basis of preparation 1. The financial statements of Icelandair ehf. contain the consolidated financial statements of the Group; where all major intragroup transactions are eliminated. The financial statements are prepared in accordance with the Financial Statements Act and the Regulation and Presentation of Financial Statements and Consolidated Financial Statements. The financial statements are based on historial cost accounting. They are in all main respects prepared according to the same accounting policies as in the previous year apart for those items listed in note 18 concerning changes in accounting policies. The consolidated financial statements of the Group are prepared in Icelandic kronas rounded to the nearest million.

2. Icelandair ehf. is subsidiary of Flugleiðir hf. and has legal residence at Reykjavíkurflugvöllur. The financial statements of the Company for the year ended 31 December 2004 are a part of the consolidated financial statements of the Parent Company wherein information regarding financial performance and financial position of the Company can be found.

3. Subsidiaries are companies in which the Company holds a controlling interest, directly or indirectly. A controlling interest exists when the Company has significant influence over the financial and operational polices of a subsidiary. The Financial Statements of a subsidiary are included in the Group’s consolidated financial statements from the acquisition of the controlling interest until the interest is no longer held.

Foreign currency 4. Transactions in foreign currencies are translated to ISK at the foreign exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to ISK at the foreign exchange ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Acquisitions of operating assets in foreign currencies are recognised at foreign exchange ruling at the date-of- purchase. Operating expenses and operating income are treated in the same manner.

Derivatives 5. Currency swap contracts and options are shown in the financial statements at an estimated fair value as at December 31, 2004. Contracts with a positive fair value are shown in the balance sheet as current assets and contracts with a negative fair value are shown as current liabilities. Changes in the fair value of these contracts are recognized in the income statement when the contracts are settled. Unrealised changes in the fair value of these contracts are, on the other hand, recognised directly in equity as a specific item, in the foreign exchange hedging reserve.

The value of interest rate swap agreements at December 31, 2004 is not recognised in the balance sheet, but included in the calculation of the weighted average interest rate on the Company's long-term debt.

To limit the risk of fluctuation in aircraft fuel prices, the Company has entered into both swap, and option contracts. The value of fuel derivatives is recognised in the financial statements in the same period in which the use of the fuel to which it relates takes place.

Revenue recognition 6. Passenger tickets and cargo sales are not recognized as revenue until transportation has been provided. Sold and unused documents amounting to ISK 1.639 million at December 31, 2004 are shown in the balance sheet as prepaid income. Sold documents not used within nine months from the month of sale are recognized as revenue. ______Financial Statements of Icelandair ehf. 2004 9 In ISK million Notes, contd.:

7. Revenue from mail and cargo transportation is recognized in the income statement after transportation has been provided. Revenue from aircraft lease is recognized in the income statement when the relevant flight has been completed.

Intangible assets 8. Included in other intangible assets in the balance sheet are training costs of crew members and a acquired software systems. The cost of the training of crew members and acquired software systems is amortized over three years.

Operating assets 9. The net book value of property and equipment is based on historical cost less depreciation. Depreciation is calculated on a straight-line basis according to the estimated service life of the asset until a 10% residual value is reached.

10. Engine overhauls are capitalised at cost, in USD, as engine hours in the balance sheet. The total figure capitalised amounts to ISK 789 million. The amount is expensed according to flown hours. The amount capitalised, is split between operating assets and prepaid expenses. The foreign exchange effect arising from changes in the USD is recognised as foreign exchange gain or loss in the income statement.

Subsidiaries 11. Investments in subsidiaries are capitalized at a value that corresponds to the Company's share in their equity, considering the difference between the purchase price and the Company's share in their stockholders' equity at the acquisition date. The Financial Statements of foreign subsidiaries are converted to ISK using the same accounting methods and principles as are valid in Iceland. Translation difference arising from the translation to ISK is posted to a separate component of equity; Translation reserve.

Associated companies and other companies 12. There is one associated companies in the Group, Viking K.K. in Japan. The Company's share in the results and financial position of the associate are not recognised in the financial statements as they are immaterial. The investment is recognised as cost.

Inventories 13. Inventories are valued at the latest purchase price.

Accounts receivable 14. A provision has been made for doubtful receivables to account for general risks associated with holding these kind of assets. The provision does however not represent a final write-off. On one hand there is a provision for specific receivables deemed to have a specific risk attached to them, on the other hand there is a provision for general risk. The provision has been deducted from the appropriate items in the balance sheet.

Cash and cash equivalents 15. Cash and cash equivalents consist of short-term securities, cash and bank deposits. Short-term securities include short- term notes from financial institutions, government and municipal securities which are listed on the Iceland Stock Exchange, and shares in mutual funds.

______Financial Statements of Icelandair ehf. 2004 10 In ISK million Notes, contd.:

Deferred income-tax liability 16. The Company's deferred income-tax liability is calculated and recognised in the financial statements. The calculation is based on differences in balance sheet items in the tax return on the one hand and in the financial statement on the other. These differences arise from the fact that the tax return is based on other premises than the financial statements, arising mainly from the fact that some expenses are recognised earlier in the tax return, mostly depreciation, than in the financial statements.

International Financial Reporting Standards 17. According to the rules on the presentation of Financial Statements of companies registered on the Iceland Stock Exchange, the Company will adopt the International Financial Reporting Standards from the beginning of 2005. The Company has already begun preparing for this change. The possible effect of the change on the Company's equity has not been estimated.

Change in accounting policies 18. The Company has, according to an Act passed by the Icelandic Parliament, at the end of the year 2001 ceased using inflationary-adjusted accounting. The effect of price level changes are no longer recognised in the Company's Income Statement. The Company's assets previously revalued according to the consumer price index, are now stated at cost. Depreciaton and amortization are now calculated based on historical cost instead of revalued historical cost and inflation adjustment is no longer calculated nor recognised in the income statement. As a result of these changes operating results are no longer at the average price for the period and assets are not valued at the December 31, 2004 price level.

In accordance with International Accounting Standards regarding changes from inflationary-adjusted accounting to unadjusted accounting, comparative amounts in the Financial Statements have not been changed.

Quarterly statements

19. Summary of the Company's operating results by quarters:

Q1 Q2 Q3 Q4 Total

Operating income ...... 5,000 7,828 10,033 6,196 29,057 Operating expenses without depreciation ...... ( 6,238) ( 7,474) ( 8,035) ( 6,876) ( 28,623) Operating profit without depreciation (EBITDA) ( 1,238) 354 1,998 ( 680) 434 Depreciation ...... ( 29) ( 30) ( 42) ( 49) ( 150) Operating profit (loss) (EBIT) ...... ( 1,267) 324 1,956 ( 729) 284 Net financing costs ...... 116 16 ( 7) ( 363) ( 238) Income tax ...... 204 ( 61) ( 362) 205 ( 14) Profit (loss) ...... ( 947) 279 1,587 ( 887) 32

______Financial Statements of Icelandair ehf. 2004 11 In ISK million Notes, contd.:

Operating income

20. Other operating revenue is specified as follows: 2004 2003 Sale of goods at airports ...... 703 667 Commissions ...... 286 295 Revenue from tourism services ...... 138 503 Other operating revenue ...... 1,771 1,084 2,898 2,548

Operating expenses

21. Salaries, salary-related expenses and other personnel expenses are specified as follows: 2004 2003

Salaries ...... 4,600 4,116 Salary-related expenses ...... 1,048 823 Other personnel expenses ...... 1,852 1,462 7,500 6,401

Average number of eployees for the year was 959. The salaries of the Board of Directors, the CEO and four executive officers amounted to a total of ISK 83 million during the year 2004.

Other operating expenses

22. Other operating expenses are specified as follows:

Operating cost of real estate and fixtures ...... 268 307 Communication expenses ...... 688 655 Advertising expenses ...... 601 595 Booking fees, credit cards fees and commission expenses ...... 1,254 1,309 Cost of goods sold at airports ...... 391 373 Passenger services ...... 980 936 Insurance expenses and claims incurred ...... 256 318 Professional services ...... 346 398 Office cost ...... 153 143 Lost trade receivables and change in provision ...... 13 25 Net worth tax ...... 0 1 Other operating expenses ...... 111 200 5,061 5,259

______Financial Statements of Icelandair ehf. 2004 12 In ISK million Notes, contd.:

Intangible assets

23. Long-term costs are specified as follows:

Balance at 1.1.2004, non-current portion ...... 70 Balance at 1.1.2004, current portion ...... 6 Long-term costs 1.1.2004 ...... 76 Capitalised during the year ...... 173 Sold during the year ...... ( 32) Amortised during the year ...... ( 52) Balance at 31.12.2004 ...... 166 Long-term costs, current portion ...... ( 63) Long-term costs, non-current portion ...... 103

Amortisation rate ...... 33%

Operating assets

24. Operating assets and their depreciation, recognised on a straight-line basis, are specified as follows:

Engines and Other other aircraft operating equipments assets Total

Book value at 1.1.2004 ...... 379 270 649 Additions during the year ...... 24 66 90 Depreciation during the year ...... ( 37) ( 62) ( 98) Disposed of during the year ...... 0 ( 21) ( 21) Book value at 31.12.2004 ...... 367 254 621

Cost at 31.12.2004 ...... 764 801 1,565 Accumulated depreciation 31.12.2004 ...... ( 397) ( 546) ( 943) Book value 31.12.2004 ...... 367 254 621

Depreciation ratios ...... 12-20% 4-20%

25. The depreciation charge in the income statement is specified as follows:

Amortisation of intangible assets, see note 23 ...... 52 Depreciation of operating assets, see note 24 ...... 98 Depreciation and amortisation recognised in the income statement ...... 150

______Financial Statements of Icelandair ehf. 2004 13 In ISK million Notes, contd.:

Investments

26. The subsidiaries, which are all included in the Consolidated Financial Statements, are as follows:

Amadeus Ísland hf...... 95% Ferðasmiðurinn hf...... 93% Iceland Tours Ltd., UK ...... 100%

In the beginning of the year 2004 Flugleiðir hf. took over Icelandair ehf. shares in Íslandsferðir ehf., before Íslandsferðir ehf. financial statements were part of Icelandair ehf. Consolidated Financial Statements.

Receivables

27. Allowance for doubtful accounts receivable is deducted from receivables in the balance sheet. It is specified as follows:

Allowance for doubtful accounts January 1 ...... 43 Bad debts during the period ...... ( 10) Increase in provision, during the year ...... 14 Allowance for doubtful accounts December 31 ...... 47

Equity

28. Share capital according to the Company’s Articles of Association amounts to ISK 3,000 million. Each share of one ISK in the Parent Company carries one vote.

29. Changes in equity are specified as follows:

Foreign Share Statutory exchange Translation Retained capital reserve hedging reserve earnings Total reserve

Equity 1.1.2004 ...... 3,000 50 ( 305) 0 531 3,276 Currency derivatives ..... 0 0 193 0 0 193 Translation reserve ...... 0 0 0 ( 1) 0 ( 1) Dividend paid ...... 0 0 0 0 ( 525) ( 525) Profit for the year ...... 0 0 0 0 32 32 Statutory reserve ...... 0 32 0 0 ( 32) 0 Equity 31.12.2004 ...... 3,000 82 ( 112) ( 1) 6 2,975

______Financial Statements of Icelandair ehf. 2004 14 In ISK million Notes, contd.:

Deferred income tax liability

30. Deferred income tax liability is specified as follows:

Balance 1.1.2004 ...... 140 Transferred to Group companies ...... ( 8) Derecognised because of sale of subsidiary ...... ( 6) Income tax expense ...... 14 Income tax by the year of 2005 for the operating year 2004 ...... ( 18) Deferred income tax liability 31.12.2004 ...... 122

31. Deferred income tax liability is recognised in the income statement as follows:

Operating assets ...... 72 Current assets ...... 29 Derivatives ...... 20 Deferred income tax liability 31.12.2004 ...... 122

Taxes

32. Taxes have been calculated and recognised in the financial statements. The Company meets the federal tax laws condition concerning the joint taxation of the parent company and its subsidiaries. Consequently taxes arising from operations in the year 2004, will be jointly taxed in 2005 with its Parent Company.

Ratios

33. The Group's primary ratios: 2004 2003

Working capital from operations ...... 1225 1,621 Current ratio ...... 1,27 1,28 Current ratio - excluding prepaid income ...... 1,73 1,73 Equity ratio ...... 0,32 0,34 Equity to issued capital ...... 0,99 1,09

______Financial Statements of Icelandair ehf. 2004 15 In ISK million Icelandair ehf. Consolidated Financial Statements Year Ended 31 December 2005

Icelandair ehf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 461202-3490 Contents

Endorsement and Signatures by the Board of Directors and the CEO ...... 36 Balance Sheet ......

Auditors' Report ...... 47 Statement of Cash Flows ......

Income Statement ...... 58 Notes ......

______Financial Statements of Icelandair ehf. 2005 2 Endorsement and Signatures by the Board of Directors and the CEO

Icelandair ehf.'s financial statements are for the first time prepared according to International Financial Reporting Standards. The Company's financial statements for the previous years have been prepared in accordance with the Financial Statements Act and accounting principles in Iceland. The total effect of IFRS adoption on the Company's financial statements is that equity at the beginning of the year 2005 increases by ISK 145 million, from ISK 2,975 million to ISK 3,120 million. The effect of IFRS adoption is further explained in the notes to the financial statements.

According to the income statement operating income amounted to a total of ISK 31,463 million during the year and net profit for the year amounted to ISK 449 million. According to the balance sheet, equity at the end of the year amounted to ISK 3,642 million, including share capital in the amount of ISK 3,000 million which is wholly owned by FL GROUP hf.

The Board of Directors proposes no dividend payment in 2006, arising from operations in the year 2005, reference is made to the notes in the financial statements regarding information on other changes in equity.

The Board of Directors and the CEO of Icelandair ehf. hereby confirm the Company's financial statements by means of their signatures.

Reykjavík, March 23, 2006.

The Board of Directors:

Hannes Smárason Jón Sigurðsson

CEO:

Jón Karl Ólafsson

______Financial Statements of Icelandair ehf. 2005 3 Auditors' Report

Board of Directors and Shareholder of Icelandair ehf.

We have audited the accompanying consolidated balance sheet of Icelandair ehf. (the "Company") as of December 31, 2005 and the related consolidated statement of income and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Company as of December 31, 2005 and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU.

Reykjavík, March 23, 2006.

Jón S. Helgason Sæmundur Valdimarsson

KPMG Endurskoðun hf.

______Financial Statements of Icelandair ehf. 2005 4 Income Statement for the year 2005

Note 2005 2004

Operating income:

Transport revenue ...... 2 23,818 20,409 Aircraft and air crew lease ...... 6,161 6,968 Other operating revenue ...... 3 1,484 1,680 31,463 29,057

Operating expenses:

Salaries and other personnel expenses ...... 4 8,451 7,572 Aircraft fuel ...... 6,740 5,352 Aircraft and air crew lease ...... 3,228 3,108 Aircraft servicing, handling and communication ...... 3,786 4,555 Aircraft maintenance expenses ...... 2,827 2,333 Other operating expenses ...... 5 5,451 5,061 Depreciation ...... 6 684 691 31,167 28,672

Operating profit before financial income and financial expenses ...... 296 385

Net financial income (expenses) ...... 7 261 ( 258)

Profit before income tax ...... 557 127

Income tax expense ...... 8,9( 108) ( 28)

Profit for the year ...... 1 449 99

Earnings per share:

Basic earnings per share (ISK) ...... 10 0.15 0.03

______Financial Statements of Icelandair ehf. 2005 5 In ISK millions Balance Sheet as at 31 December 2005

Note 2005 2004 Assets: Operating assets ...... 11 1,621 1,598 Intangible assets ...... 12 121 110 Investments in associates ...... 2 4 Long-term receivables ...... 245 296 Total non-current assets 1,989 2,008

Inventories ...... 156 172 Trade and other receivables ...... 13 2,060 2,082 Receivables due from FL GROUP hf.'s group entities ...... 915 1,813 Cash and cash equivalents ...... 6,542 3,264 Total current assets 9,673 7,331

Total assets 11,662 9,339

Equity: Share capital ...... 14 3,000 3,000 Reserves ...... 87 ( 31 ) Retained earnings ...... 555 151 Total equity 15 3,642 3,120

Liabilities: Deferred income tax liability ...... 16 89 153 Total non-current liabilities 89 153

Trade and other payables ...... 18 5,838 4,428 Deferred income ...... 2,093 1,638 Total current liabilities 7,931 6,066

Total liabilities 8,020 6,219

Total equity and liabilities 11,662 9,339

______Financial Statements of Icelandair ehf. 2005 6 In ISK millions Statement of Cash Flows for the year 2005

Note 2005 2004

Cash flows from operating activities:

Profit for the year ...... 1 449 99 Difference between operating profit and cash from operations: Depreciation ...... 6 684 691 Other operating items ...... 19 62 173 Working capital from operations 1,195 963

Net change in operating assets and liabilities ...... 20 1,586 501

Net cash from operating activities 2,781 1,464

Cash flows from investing activities:

Acquisition of operating assets ...... 12( 594 ) ( 563 ) Acquisition of intangible assets ...... 13( 90 ) ( 101 ) Proceeds from the sale of assets ...... 4 1 Investments ...... 51 36 Net cash used in investing activities( 629 ) ( 627 )

Cash flows from financing activities:

Dividends paid ...... 0 ( 525 ) Interest-bearing loan due to parent company ...... 1,126 ( 1,292 ) Net cash from (used in) financing activities 1,126 ( 1,817 )

Increase (decrease) in cash and cash equivalents ...... 3,278 ( 980 )

Cash and cash equivalents at 1 January ...... 3,264 4,244

Cash and cash equivalents at 31 December ...... 6,542 3,264

______Financial Statements of Icelandair ehf. 2005 7 In ISK millions Notes

Significant accounting policies

Icelandair ehf. is a subsidiary of FL GROUP hf. and has legal residence at Reykjavíkurflugvöllur in Reykjavík. The financial statements of the Company for the year ended 31 December 2005 are a part of the consolidated financial statements of the Parent Company wherein information regarding the financial performance and financial position of the Group can be found. a. Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and its interpretations adopted by the International Accounting Standards Board (IASB), as confirmed by the EU. These are the Company's first financial statements prepared according to IFRS and IFRS 1, First-time Adoption of IFRS, has been applied.

An explanation of how the transition to IFRSs has affected the reported financial position and financial performance of the Company is provided in note 23. In the note, the changes in equity's comparative figures and the Company's results as they were disclosed according to Icelandic GAAP for the year 2004 and as they are according to IFRS, are explained. b. Basis of preparation The financial statements are presented in Icelandic kronas, rounded to the nearest million. They are prepared on the historical cost basis except that derivative financial instruments are stated at their fair value.

The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The financial statements have been prepared in accordance with valid International Financial Reporting Standards (IFRSs) or those who are allowed for preparation of first consolidated financial statements according to IFRS.

The preparation of financial statements in conformity with IFRS has led to changes in accounting policies from the previous year, the financial statements were prepared according to Icelandic GAAP for the year 2004. The accounting policies set out below have been applied consistently to all periods presented in these financial statements and in preparing an opening IFRS balance sheet at 1 January 2004 for the purposes of the transition to IFRSs.

c. Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

______Financial Statements of Icelandair ehf. 2005 8 In ISK millions Notes, contd.:

(ii) Associates Associates are those entities in which the Company has significant influence, but not control, over the financial and operating policies. The consolidated financial statements include the Group's share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases. When the Group's share of losses exceeds its interest in an associate, the Group's carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of an associate.

(iii) Transactions eliminated on consolidation Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group's interest in the entity and are deducted from the carrying value of associates. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. d. Foreign currency Foreign currency transactions Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Icelandic kronas at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Acquisition of operating assets in foreign currencies is translated at the foreign exchange rate ruling at the date of the transaction. Operating expenses and sales in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. e. Derivative financial instruments The Company uses derivative financial instruments to hedge its exposure to foreign exchange rate risk and fuel price risk arising from operational and financing activities. Derivative financial instruments are stated at fair value and the underlying assets are not recognised in the balance sheet.

Where derivatives qualify for hedge accounting of cash flow hedges, any gain or loss is recognised as a separate component of equity. The gain or loss on other derivative financial instruments is recognised in the income statement. f. Hedging (i) Hedge of monetary assets and liabilities Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecasted transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. When the forecasted transaction affects profits or loss the associated cumulative gain or loss is removed from equity and recognised in the income statement. The ineffective part of any gain or loss is recognised immediately in the income statement.

(ii) Hedging of fuel price risk Forward contracts and options entered into with the purpose of limiting exposure to fluctuation of aircraft fuel prices are recognised in the financial statements when the related fuel is used.

______Financial Statements of Icelandair ehf. 2005 9 In ISK millions Notes, contd.:

g. Operating assets (i) Aircraft engines and aircraft equipment Aircraft engines and aircraft equipment are stated at cost less accumulated depreciation and impairment losses. When an engine is overhauled the cost of the overhaul is capitalised and the remainder of the cost of the previous overhaul that has not already been depreciated, if there is any, is expensed in full.

Included in engine hours, an asset in the balance sheet, is the overhaul of aircraft engines stated at the historical cost basis. The investment amounts to a total of ISK 818 million and is expensed in accordance with flown hours.

(ii) Other operating assets Other operating assets are stated at cost less accumulated depreciation and impairment losses.

(iii) Subsequent costs The Company recognises in the carrying amount of an item of operating assets the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Company and the cost of the item can be measured reliably. All other costs are recognised in the income statement as an expense as incurred.

(iv) Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives and is specified as follows: Useful life Aircraft engines and aircraft equipment ...... 3-25 years Engine hours ...... Flying hrs. Other operating assets ...... 3-25 years The residual value is estimated annually, if not immaterial. h. Intangible assets (i) Intangible assets Intangible assets that are acquired by the Company are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to the income statement on a straight line basis over the estimated useful life of the relevant asset. Estimated useful life is specified as follows: Software ...... 3 years

(ii) Subsequent expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.

i. Investments (i) Long-term receivables Long-term receivables consist of pre-payments, insurance deposits, deposits and debt securities classified as held to maturity. Long-term receivables are stated on an effective interest basis.

______Financial Statements of Icelandair ehf. 2005 10 In ISK millions Notes, contd.:

j. Inventories Goods for resale and supplies are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Aircraft equipment is capitalised at the foreign exchange rate ruling at the date of acquisition. k. Trade and other receivables Trade and other receivables are stated at their cost less impairment losses.

Current maturities of bonds receivable are recognised among current assets in the balance sheet. l. Cash and cash equivalents Cash and cash equivalents consist of cash balances and liquid bank deposits. m. Impairment The carrying amounts of the Company's assets, other than inventories (see accounting policy j) are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated.

An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement.

(i) Calculation of recoverable amount The recoverable amount of long-term receivables is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate. Receivables with a short duration are not discounted.

The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

(ii) Reversals of impairment An impairment loss in respect of receivables is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised.

In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.

An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

______Financial Statements of Icelandair ehf. 2005 11 In ISK millions Notes, contd.:

n. Share capital (i) Dividends Dividends are recognised as a decrease in equity in the period in which they are declared. o. Interest-bearing loans and borrowings Interest-bearing loans and borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing loans and borrowings are stated on an effective interest basis. p. Employee benefits (i) Obligations arising from employees Obligations arising from retirement agreements with former management personnel are recognised among trade and other payables in the balance sheet and its present value is calculated using a 2% interest rate. q. Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. r. Trade and other payables Trade and other payables are stated at cost. s. Revenue (i) Transport revenue Passenger ticket sales are recognised as revenue after the transportation has been provided and sold unused tickets are recognised among liabilities in the balance sheet as deferred income. Sold tickets not used within nine months from the month of sale are recognised as revenue. Revenue from mail and cargo transportation is recognised in the income statement after transportation has been provided.

(ii) Aircraft and air crew lease Revenue from aircraft and air crew leases is recognised in the income statement at the end of charter flight.

(iii) Other operating revenue Revenue from other services rendered is recognised in the income statement after the service has been provided.

______Financial Statements of Icelandair ehf. 2005 12 In ISK millions Notes, contd.:

t. Expenses (i) Operating lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease.

(ii) Financial income and financial expenses Financial income and financial expenses comprise interest payable, indexation and other expenses arising from borrowings calculated using the effective interest rate method, interest receivable on assets and foreign exchange differences, and gains and losses on hedging instruments that are recognised in the income statement.

Interest income is recognised in the income statement as it accrues, using the effective interest method. Dividend income is recognised in the income statement on the date the entity’s right to receive payments is established.

u. Income tax Income tax on the profit or loss for the year comprise current and deferred tax.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax provides for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.

______Financial Statements of Icelandair ehf. 2005 13 In ISK millions Notes, contd.:

Quarterly statements

1. Summary of the Company's operating results by quarters:

Year 2005 Q1 Q2 Q3 Q4 Total

Operating income ...... 5,226 8,167 10,931 7,139 31,463 Operating expenses without depreciation .... 6,361 7,730 8,885 7,507 30,483 Operating profit without depreciation .... ( 1,135) 437 2,046 ( 368) 980 Depreciation ...... ( 144) ( 188) ( 195) ( 157) ( 684) Operating profit (EBIT) ...... ( 1,279) 249 1,851 ( 525) 296 Net financial (expenses) income ...... ( 55) 276 ( 217) 257 261 Operating profit before tax ( 1,334) 525 1,634 ( 268) 557 Income tax expense ...... 237 ( 96) ( 296) 47 ( 108)

Profit (loss) ...... ( 1,097) 429 1,338 ( 221) 449

Year 2004

Operating income ...... 5,000 7,828 10,033 6,196 29,057 Operating expenses without depreciation .... 6,078 7,280 7,909 6,714 27,981 Operating profit without depreciation ...... ( 1,078) 548 2,124 ( 518) 1,076 Depreciation ...... ( 155) ( 178) ( 193) ( 165) ( 691) Operating profit (EBIT) ...... ( 1,233) 370 1,931 ( 683) 385 Net financial income (expenses) ...... 116 17 ( 9) ( 382) ( 258) Operating profit before tax ( 1,117) 387 1,922 ( 1,065) 127 Income tax expense ...... 198 ( 69) ( 357) 200 ( 28)

Profit (loss) ...... ( 919) 318 1,565 ( 865) 99

Transport revenue

2. Transport revenue is specified as follows: 2005 2004 Passengers ...... 20,611 18,342 Other passenger-related revenue ...... 2,397 1,218 Cargo and mail ...... 810 849 Total transport revenue ...... 23,818 20,409

______Financial Statements of Icelandair ehf. 2005 14 In ISK millions Notes, contd.:

Other operating revenue

3. Other operating revenue is specified as follows: 2005 2004 Sale at airports ...... 684 703 Commissions ...... 286 286 Revenue from tourism ...... 119 138 Other operating revenue ...... 395 553 Total other operating revenue ...... 1,484 1,680

Salaries and other personnel expenses

4. Salaries and other personnel expenses are specified as follows: 2005 2004

Salaries ...... 5,209 4,600 Salary-related expenses ...... 1,319 1,048 Other personnel expenses ...... 1,923 1,924 Total salaries and other personnel expenses ...... 8,451 7,572

Average number of employees (full year equivalents) ...... 1,018 959

The salaries of the Board of Directors, the CEO and three executive officers amounted to a total of ISK 192 million during the year 2005, whereof benefits arising from realised call options amounted to ISK 122 million.

Other operating expenses

5. Other operating expenses are specified as follows: 2005 2004

Operating cost of real estate and fixtures ...... 263 268 Communication expenses ...... 741 688 Advertising expenses ...... 713 601 Booking fee and commission expenses ...... 1,259 1,254 Cost of goods sold at airports ...... 323 391 Passenger services ...... 1,234 980 Insurance expenses and claims incurred ...... 227 256 Professional services ...... 410 346 Administrative cost ...... 133 153 Lost trade receivables and change in provision ...... 25 13 Other operating expenses ...... 123 111 Total other operating expenses ...... 5,451 5,061

______Financial Statements of Icelandair ehf. 2005 15 In ISK millions Notes, contd.:

6. The depreciation charge in the income statement is specified as follows: 2005 2004

Depreciation of operating assets, see note 11 ...... 605 655 Amortisation of intangible assets, see note 12 ...... 79 36 Depreciation and amortisation recognised in the income statement ...... 684 691

Financial income and financial expenses

7. Financial income and financial expenses are specified as follows: 2005 2004

Interest income ...... 374 198 Interest expenses ...... ( 25) ( 15) Net foreign exchange loss ...... ( 88) ( 441) Net financing income (expenses) ...... 261 ( 258)

Income tax expense

8. Income tax recognised in the income statement is specified as follows: 2005 2004

Income tax payable for the year ...... 172 32 Change in the deferred income-tax liability ...... ( 64) ( 4) Total income tax recognised in the income statement ...... 108 28

9. Reconciliation of effective tax rate: 2005 2004

Profit before tax ...... 557 127 Income tax according to current tax rate ...... 18.0% 100 18.0% 23 Non-deductible expenses ...... 1.4% 8 3.9% 5 Effective tax rate ...... 19.5% 108 19.5% 28

______Financial Statements of Icelandair ehf. 2005 16 In ISK millions Notes, contd.:

Earnings per share

10. Basic earnings per share is calculated by dividing the net profit by the weighted average outstanding number of shares during the year. 2005 2004

Profit for the year ...... 449 99

Weighted average outstanding number of shares during the year ...... 3,000 3,000

Earnings per share of ISK 1 ...... 0.15 0.03

Operating assets

11. Operating assets and depreciation are specified as follows: Engines Other and aircraft operating Cost equipment Engine hours assets Total

Balance at 1.1.2004 ...... 740 1,088 731 2,559 Changes due to IFRS ...... 0 118 0 118 Balance at 1.1.2004, restated (IFRSs) ...... 740 1,206 731 2,677 Exchange rate difference ...... 0 ( 144) 0 ( 144) Additions during the year ...... 24 473 66 563 Sold and disposed during the year ...... 0 0 ( 5) ( 5) Balance at 31.12.2004 ...... 764 1,535 792 3,091 Exchange rate difference ...... 0 37 0 37 Additions during the year ...... 227 278 89 594 Sold during the year ...... ( 16) 0 ( 216) ( 232) Balance at 31.12.2005 ...... 975 1,850 665 3,490

Depreciation

Balance at 1.1.2004 ...... 360 0 483 843 Depreciation for the year ...... 37 557 61 655 Sold and disposed during the year ...... 0 0 ( 5) ( 5) Balance at 31.12.2004 ...... 397 557 539 1,493 Depreciation for the year ...... 62 475 68 605 Sold and disposed during the year ...... ( 16) 0 ( 213) ( 229) Balance at 31.12.2005 ...... 443 1,032 394 1,869

Carrying amounts

1.1.2004 ...... 380 1,206 248 1,834 31.12.2004 ...... 367 978 253 1,598 31.12.2005 ...... 532 818 271 1,621

Depreciation ratios ...... 4-35% Flying hrs. 4-33%

______Financial Statements of Icelandair ehf. 2005 17 In ISK millions Notes, contd.:

Intangible assets

12. Intangible assets and amortisation are specified as follows:

Cost Software

Balance at 1.1.2004 ...... 45 Additions during the year ...... 101 Balance at 31.12.2004 ...... 146 Additions during the year ...... 90 Balance at 31.12.2005 ...... 236

Amortisation

Amortisation for the year ...... 36 Balance at 31.12.2004 ...... 36 Amortisation for the year ...... 79 Balance at 31.12.2005 ...... 115

Carrying amounts

1.1.2004 ...... 45 31.12.2004 ...... 110 31.12.2005 ...... 121

Trade and other receivables

13. Trade and other receivables are specified as follows: 2005 2004

Trade receivables ...... 1,802 1,627 Prepaid expenses ...... 121 88 Other receivables ...... 197 414 Bad debt provision ...... ( 60) ( 47) Total trade and other receivables ...... 2,060 2,082

Bad debt provision has been calculated because of receivables that may be lost. The bad debt provision is based on the judgement of the Company's management and historical experience.

______Financial Statements of Icelandair ehf. 2005 18 In ISK millions Notes, contd.:

Equity

14. The Company's share capital amounts to ISK 3,000 million as decided in its Articles of Association. One vote is attached to each ISK one share.

15. Summary of equity: Forward Statutory hedging Translation Retained Total Share capital reserve reserve reserve earnings equity Equity 1.1 2004 ...... 3,000 50 ( 305) 0 531 3,276 IFRS adoption ...... 97 97 Equity 1.1.2004, restated ...... 3,000 50 ( 305) 628 3,373 Exchange rate hedges ...... 193 193 Translation differences ...... ( 1) ( 1) Dividends paid ...... ( 525) ( 525) Profit for the year ...... 99 99 Transf. to statutory reserve .... 32 ( 32) 0 Equity 31.12.2004 ...... 3,000 82 ( 112) ( 1) 170 3,139 IFRS adoption ...... ( 19) ( 19) Restated equity 1.1.2005 ...... 3,000 82 ( 112) ( 1) 151 3,120

Equity 31.12.2004 ...... 3,000 82 ( 112) ( 1) 6 2,975 IFRS adoption ...... 145 145 Equity 1.1.2005, (IFRS) ...... 3,000 82 ( 112) ( 1) 151 3,120 Translation differences ...... ( 1) ( 1) Exchange rate hedges ...... 74 74 Profit for the year ...... 449 449 Transf. to statutory reserve .... 45 ( 45) 0 Equity 31.12.2005 ...... 3,000 127 ( 38) ( 2) 555 3,642

Minority interest is less than ISK 1 million and is thus not specified.

Deferred income tax liability

16. The Company's deferred income tax liability is specified as follows: 2005 2004

Deferred income tax liability 1.1 ...... 153 140 IFRS adoption ...... 0 31 Transferred to Group companies ...... 0 ( 8) Derecognised because of sale of subsidiary ...... 0 ( 6) Income tax expense ...... 108 28 Income tax payable for the year ...... ( 172) ( 32) Deferred income tax liability 31.12...... 89 153

The deferred income tax liability is attributable to the following items: Operating assets ...... 85 108 Current assets ...... 425 Forward exchange rate agreements ...... 020 Deferred income tax liability 31.12...... 89 153

______Financial Statements of Icelandair ehf. 2005 19 In ISK millions Notes, contd.:

Risk management

17. Risk arising from oil prices and foreign currencies are related to the regular operations of the Company. Derivative financial instruments are used to hedge exposure to foreign exchange rate risk and fuel price risk

Foreign currency risk The Company's goal is to hedge 50-90% of exposure to currency risk in its cash flows. The Company places emphasis on hedging foreign currency risk. Before the currency risk is hedged the aim is to obtain inner balance in the relevant company's operations. Therefore, only the difference in outflows and inflows of foreign currencies are hedged. The largest differences are in net inflows of European currencies and net outflows in USD. The risk exposure is hedged with forward contracts and options 12 months into the future. The Company only deals with recognised banks as it aims to minimise its counterparty risk. At the end of the year 2005 approximately 80% of currency risk in cash flows was hedged.

Oil price risk Substantial risks arise from fluctuations in jet fuel. Fuel prices have increased significantly in the last few years. The policy of the Company is to hedge 40-80% of fuel price risks.

Counterparty risk The Company is committed to only trade derivatives with trusted parties. The counterparty risk that arises from trading derivatives, used in risk management, is therefore minimised.

Trade and other payables

18. Trade and other payables are specified as follows: 2005 2004

Trade payables ...... 2,171 1,719 Other payables ...... 3,667 2,709 Total trade and other payables ...... 5,838 4,428

Cash flow statement

19. Other operating items in the cash flow statement are specified as follows:

Proceeds from sale of operating assets ...... ( 2) ( 1) Exchange rate difference and indexation of liabilities and assets ...... ( 44) 146 Income tax expense ...... 108 28 Total other operating items ...... 62 173

20. Net change in operating assets and liabilities in the cash flow statement is specified as follows:

Trade payables ...... 1,410 236 Other items ...... 176 265 Net change in operating assets and liabilities ...... 1,586 501

______Financial Statements of Icelandair ehf. 2005 20 In ISK millions Notes, contd.:

Related parties

Identity of related parties 21. The Company has a related party relationship with its parent company, sister companies, associates, directors and executive officers.

Transactions with related parties Receivables and liabilities with related companies are specified as follows at year-end: Receivables due from FL GROUP hf.'s group entities ...... 978 Loans due to FL GROUP hf.'s group entities ...... 229 Interest-bearing receivables due from Group companies ...... 435 Interest-bearing loans due to parent company ...... 269

Transactions with related companies during the year are specified as follows: Service sold to FL GROUP hf.'s group entities ...... 6,878 Service purchased from FL GROUP hf.'s group entities ...... 4,677 Service purchased from associates ...... 225

Group entities

22. The Company holds three subsidiaries which all are included in the consolidated financial statements. The three subsidiaries are: Share

Amadeus Ísland hf ...... 95% Ferðasmiðurinn hf...... 93% Iceland Tours Ltd., UK ...... 100%

Changes due to adoption of International Financial Reporting Standards

23. As stated in notes regarding significant accounting policies, these are the Company's first year consolidated financial statements prepared in accordance with IFRSs.

The accounting policies set out in notes regarding significant accounting policies have been applied in preparing the financial statements for the year ended 31 December 2005, the comparative information presented in these financial statements for the year ended 31 December 2004 and in the preparation of an opening IFRS balance sheet at 1 January 2004, the date of transition.

In preparing its opening IFRS balance sheet, the Company has adjusted amounts reported previously in financial statements prepared in accordance with its old basis of accounting (previous GAAP). An explanation of how the transition from previous GAAP to IFRSs has affected the Company's financial position and financial performance is set out in the following tables and the notes that accompany the tables. No significant adjustments due to IFRS adoption were made to the cash flow statement previously published according to previous GAAP.

______Financial Statements of Icelandair ehf. 2005 21 In ISK millions Notes, contd.:

23. Contd.:

Equity 1 January 2005:

Equity according to previous GAAP 31 December 2004 ...... 2,975 Equity according to IFRS 1 January 2005 ...... 3,120 Net change from previous GAAP to IFRSs ...... 145

1.1.2004 1.1.2005 Total Changes in measurements: Intangible assets ...... IAS 38( 45) ( 45) Engine overhaul liability derecognised ...... IAS 16, 37 97 46 143 Lease engine overhaul liability derecognised ...... IAS 16, 38 66 66 Present value of pre-payments ...... ( 19) ( 19) Net change from previous GAAP to IFRSs ...... 97 48 145

Changes in equity are stated after the deduction of income tax.

Changes in presentation: Intangible assets transferred from current assets ...... IAS 38 73 Engine hours transferred from current assets ...... IFRS 3 388 Prepaid expenses transferred from intangible assets ...... IFRS 5 11

Changes in measurements Some expenses that have been capitalised as intangible assets are not in compliance with IAS 38 on intangible assets, e.g. pilot training. This causes a decrease in the Company's equity by ISK 45 million, with regards to income tax effects. The comparative figures in the income statement have been adjusted accordingly.

The Company has in previous years expensed estimated costs of future overhauls of engines owned by the Company. According to IAS 37 a liability arising from future expenses such as this cannot be recognised. As a result, the Company's equity increases by ISK 209 million, with regards to income tax effects. The comparative amounts in the income statement have been adjusted accordingly.

Prepayments recognised among long-term receivables have now been stated according to effective interest rates and therefore equity decreases by ISK 19 million, with regards to income tax effects.

Changes in presentation At the implementation of IFRS, assets that fulfill the definition of intangible assets according to IAS 38 and were previously included among current assets and long-term receivables have been transferred to intangible assets.

Next year's engine hours, previously recognised among current assets, have now been transferred to operating assets.

______Financial Statements of Icelandair ehf. 2005 22 In ISK millions Notes, contd.:

23. Contd.:

Balance Sheet 1 January 2005: Icelandic GAAP Changes in Changes in 31.12.2004 presentation measurement IFRSs Assets:

Operating assets ...... 1,021 388 189 1,598 Intangible assets ...... 103 63 ( 56) 110 Investments in associates ...... 4 4 Long-term receivables ...... 308 11 ( 23) 296 Total non-current assets 1,436 462 110 2,008

Inventories ...... 172 172 Trade and other receivables ...... 2,544 ( 462) 2,082 Receivables due from FL GROUP hf.'s group entities ..... 1,813 1,813 Cash and cash equivalents ...... 3,264 3,264 Total current assets 7,793 ( 462) 0 7,331

Total assets 9,229 0 110 9,339

Equity:

Share capital ...... 3,000 3,000 Reserves ...... ( 31) ( 31) Retained earnings ...... 6 145 151 Total equity 2,975 0 145 3,120

Liabilities:

Deferred income tax liability ...... 122 31 153 Total non-current liabilities 122 0 31 153

Trade and other payables ...... 4,494 ( 66) 4,428 Deferred income ...... 1,638 1,638 Total current liabilities 6,132 0 ( 66) 6,066

Total liabilities 6,254 0 ( 35) 6,219

Total equity and liabilities 9,229 0 110 9,339

Balance sheet changes are stated without the effect of income tax, changes in equity are stated after the deduction of income tax.

In Icelandair ehf.'s financial statements according to IFRS emphasis is on specifying application of significant accounting policies, as well as specifying the effect of the adoption of International Financial Reporting Standards on the Group's financial position.

______Financial Statements of Icelandair ehf. 2005 23 In ISK millions Notes, contd.:

23. Contd.:

Income statement for the year 2004

Icelandic Changes in Changes in GAAP presentation measurement IFRSs Operating income:

Transport revenue ...... 20,409 20,409 Aircraft and air crew lease ...... 6,968 6,968 Other operating revenue ...... 1,680 1,680 29,057 0 0 29,057

Operating expenses:

Salaries and other personnel expenses ...... 7,500 72 7,572 Aircraft fuel ...... 5,352 5,352 Aircraft and air crew lease ...... 3,108 3,108 Aircraft servicing, handling and communication ...... 4,555 4,555 Aircraft maintenance expenses ...... 3,047 ( 557) ( 157) 2,333 Other operating expenses ...... 5,061 5,061 Depreciation ...... 150 557( 16) 691 28,773 0 ( 101) 28,672

Operating profit before net financial expenses ...... 284 0 101 385

Net financial expenses ...... ( 238) ( 20) ( 258)

Profit before tax ...... 46 0 81 127

Income tax expense ...... ( 14) 0 ( 14) ( 28)

Profit for the year ...... 32 0 67 99

Earnings per share:

Basic earnings per share (ISK) ...... 0.01 0.03

Net profit of the Company increases by ISK 67 million in the comparative figures in the financial statements for the year 2004 due to the adoption of the standards.

Aircraft maintenance expenses decrease by ISK 157 million and exchange rate loss increases by ISK 20 million because estimated costs of future overhauls of engines are no longer expensed.

Salaries and other personnel expenses increase by ISK 72 million and depreciation decreases by ISK 16 million because of derecognising of previously capitalised expenses, see discussion above of changes in the value of assets.

Changes in income tax for the period result from the changes discussed here above.

______Financial Statements of Icelandair ehf. 2005 24 In ISK millions Notes, contd.:

Ratios

24. The Group's primary ratios are specified as follows 2005 2004

Working capital from operations ...... 1,195 963

Working capital ratio ...... 1.22 1.20 Working capital ratio without deferred income ...... 1.66 1.63 Equity ratio ...... 0.31 0.33 Total equity to issued capital ...... 0.82 0.96

______Financial Statements of Icelandair ehf. 2005 25 In ISK millions Icelandair ehf.

Interim Financial Statements 1 January - 30 September 2005

Icelandair ehf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 461202-3490 Income Statement for the Nine Months Ended 30 September 2005

2005 1.1.-30.9. Operating income:

Transport revenue: Passengers ...... 16.462 Other passenger related revenue ...... 1.747 Cargo and mail ...... 596 Aircraft and aircrew lease ...... 4.450 Other operating revenue ...... 1.069 24.324

Operating expenses:

Salaries and other personnel expenses ...... 6.252 Aircraft fuel ...... 5.050 Aircraft lease ...... 2.411 Aircraft servicing, handling and communication ...... 2.999 Aircraft maintenance expenses ...... 2.128 Other operating expenses ...... 4.135 Depreciation ...... 528 23.503

Operating profit before financial income ...... 821

Financial income ...... 4

Profit before income tax ...... 825

Income tax expense ...... ( 155)

Profit for the period ...... 670

Interim Financial Statements of Icelandair ehf. 30 September 2005 In ISK million ______2 ______Balance Sheet as at 30 September 2005

30.9.2005 31.12.2004 Fixed assets: Operating assets ...... 1.430 1.598 Intangible assets ...... 140 110 Investments in associates ...... 4 Long-term receivables ...... 264 296 Total fixed assets 1.834 2.008 Current assets: Inventories ...... 172 172 Trade and other receivables ...... 3.376 2.082 Intra company receivables ...... 1.177 1.813 Cash and cash equivalents ...... 6.454 3.264 Total current assets 11.179 7.331

Total assets 13.013 9.339

Equity: Share capital ...... 3.000 3.000 Reserves ...... 587 ( 31 ) Retained earnings ...... 821 151 Total equity 4.408 3.120

Long-term liabilities: Deferred income tax liability ...... 307 153 Total long-term liabilities 307 153 Current liabilities: Trade and other payables ...... 5.515 4.428 Prepaid income ...... 2.783 1.638 Total current liabilities 8.298 6.066

Total liabilities 8.605 6.219

Total equity and liabilities 13.013 9.339

Interim Financial Statements of Icelandair ehf. 30 September 2005 In ISK million ______3 ______Statement of Cash Flows for the Nine Months Ended 30 September 2005

2005 1.1.-30.9. Cash flows from operating activities:

Profit for the period ...... 670 Difference between operating profit and cash from operations: Depreciation ...... 528 Other operating items ...... 160 Working capital from operations 1.358

Net change in operating assets and liabilities ...... 2.144 Net cash from operating activities 3.502

Cash flows from investing activities:

Acquisition of operating assets ...... ( 198 ) Acquisition of intangible assets ...... ( 141 ) Proceeds from the sale of assets ...... 3 Investments ...... 24 Net cash used in investing activities( 312 )

Changes in cash and cash equivalents ...... 3.190

Cash and cash equivalents at 1 January ...... 3.264

Cash and cash equivalents at 30 September ...... 6.454

Interim Financial Statements of Icelandair ehf. 30 September 2005 In ISK million ______4 ______Icelandair ehf.

Interim Financial Statements 1 January - 30 September 2006

Icelandair ehf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 461202-3490 Income Statement for the Nine Months Ended 30 September 2006

2006 1.1.-30.9. Operating income:

Transport revenue ...... 22,408 Aircraft and aircrew lease ...... 5,682 Other operating revenue ...... 1,437 29,527

Operating expenses:

Salaries and other personnel expenses ...... 6,901 Aircraft fuel ...... 6,899 Aircraft and aircrew lease ...... 1,907 Aircraft servicing, handling and communication ...... 3,490 Aircraft maintenance expenses ...... 2,579 Other operating expenses ...... 4,630 Depreciation ...... 949 27,355

Operating profit before financial income and financial expenses ...... 2,172

Financial income ...... 1,089 Financial expenses ...... ( 584) 505

Profit before income tax ...... 2,677

Income tax expense ...... ( 488)

Profit for the period ...... 2,189

Interim Financial Statements of Icelandair ehf. 30 September 2006 In ISK million ______2 ______Balance Sheet as at 30 September 2006

30.9.2006 31.12.2005 Assets: Operating assets ...... 15,215 1,622 Intangible assets ...... 186 121 Investments in associates ...... 4 2 Long-term receivables ...... 524 244 Non-current assets 15,929 1,989

Inventories ...... 221 156 Trade and other receivables ...... 3,464 2,060 Intra company receivables ...... 1,020 915 Interest-bearing intra company receivables ...... 6,662 0 Cash and cash equivalents ...... 1,713 6,542 Current assets 13,080 9,673

Total assets 29,009 11,662

Equity: Share capital ...... 3,000 3,000 Reserves ...... 189 87 Retained earnings ...... 2,744 555 Total equity 5,933 3,642

Liabilities: Deferred income tax liability ...... 577 89 Credit institutions ...... 10,254 0 Non-current liabilities 10,831 89

Credit institutions ...... 1,207 0 Trade and other payables ...... 7,124 5,838 Intra company loans ...... 465 0 Prepaid income ...... 3,449 2,093 Current liabilities 12,245 7,931

Total liabilities 23,076 8,020

Total equity and liabilities 29,009 11,662

Interim Financial Statements of Icelandair ehf. 30 September 2006 In ISK million ______3 ______Statement of Cash Flows for the Nine Months Ended 30 September 2006

2006 1.1.-30.9. Cash flows from operating activities:

Profit for the period ...... 2,189 Difference between operating profit and cash from operations: Depreciation ...... 949 Other operating items ...... 319 Working capital from operations 3,457

Net change in operating assets and liabilities ...... 1,625 Net cash from operating activities 5,082

Cash flows from investing activities:

Acquisition of operating assets ...... ( 14,682 ) Acquisition of intangible assets ...... ( 134 ) Investments ...... ( 250 ) Intra company interest bearing receivables ...... ( 6,160 ) Net cash used in investing activities( 21,226 )

Cash flows from financing activities:

Proceeds from non-current borrowings ...... 12,273 Repayment of borrowings ...... ( 879) Interest bearing loan due to parent company ...... ( 79 ) Net cash from financing activities 11,315

Decrease in cash and cash equivalents ...... ( 4,829 )

Cash and cash equivalents at 1 January ...... 6,542

Cash and cash equivalents at 30 September ...... 1,713

Interim Financial Statements of Icelandair ehf. 30 September 2006 In ISK million ______4 ______28.4 FINANCIAL REPORTS FOR FLUGLEIÐIR FRAKT EHF. (ICELANDAIR CARGO) 28.4.1 AUDITED 2003 – 2005 ANNUAL REPORTS 28.4.2 INTERIM INCOME STATEMENT, BALANCE SHEET AND CASH FLOW STATEMENT FOR THE NINE MONTH PERIOD ENDING 30 SEPTEMBER 2005 28.4.3 AUDITED INTERIM INCOME STATEMENT, BALANCE SHEET AND CASH FLOW STATEMENT FOR THE NINE MONTH PERIOD ENDING 30 SEPTEMBER 2006

Flugleiðir - Frakt ehf. Financial Statements 2003

Flugleiðir - Frakt ehf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 471299-2359 Contents

Endorsement and Signatures by the Board of Directors and the Managing Director ...... 3 Balance Sheet ...... 6

Auditors' Report ...... 4 Statement of Cash Flows ...... 8

Income Statement ...... 5 Notes ...... 9

Flugleiðir - Frakt ehf. Financial Statements 2003 ______2 ______Endorsement and Signatures by the Board of Directors and the Managing Director

The financial statements of Flugleiðir - Frakt ehf. for the year 2003 have been prepared in accordance with the Icelandic Financial Statements Act and Regulation on the Presentation and Contents of Financial Statements. The financial statements are based on the same accounting policies as the previous year.

According to the income statement net profit for the year amounted to ISK 218 million. Operating revenue amounted to ISK 3,916 million for the year. According to the balance sheet, equity at end of the year amounted to ISK 115 million, including share capital in the amount of ISK 100 million, which is wholly owned by Flugleiðir hf.

The Board of Directors proposes a dividend payment of 10% to shareholders in the year 2004 arising from operations in 2003, amounting to ISK 10 million. Reference is made to the notes in the financial statements regarding the allocation of profits and other changes in equity.

The Board of Directors and the Managing Director of Flugleiðir - Frakt ehf. hereby confirm the Company's financial statements for the year 2003 with their signatures.

Reykjavík, 19 February 2004.

The Board of Directors:

Sigurður Helgason

Haukur Alfreðsson Halldór Vilhjálmsson

Managing Director:

Pétur J. Eiríksson

Flugleiðir - Frakt ehf. Financial Statements 2003 ______3 ______Auditor's report

Board of Directors and Shareholder of Flugleiðir - Frakt ehf.

We have audited the accompanying balance sheet of Flugleiðir - Frakt ehf. as of December 31, 2003 and the related statement of income and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements give a true and fair view of the financial position of Flugleiðir - Frakt ehf. as at December 31, 2003, and the results of its operations and its cash flows for the year then ended, in accordance with the law and generally accepted accounting principles in Iceland.

Reykjavík, 19 February 2004.

Guðni S. Gústafsson Stefán Hilmarsson

KPMG Endurskoðun hf.

Flugleiðir - Frakt ehf. Financial Statements 2003 ______4 ______Income Statement for the year 2003

Note 2003 2002 Operating income:

Cargo and mail ...... 2,697,465 3,335,477 Aircraft lease ...... 436,369 421,203 Aircraft handling and servicing ...... 759,415 566,394 Other operating revenue ...... 22,625 26,885 4 3,915,874 4,349,959

Operating expenses:

Aviation service expenses: Lease of lower hold capacity ...... 939,961 1,371,909 Aircraft lease ...... 437,258 564,854 Aircraft fuel ...... 332,843 386,687 Aircraft handling and communication ...... 300,408 264,662 Aircraft maintenance expenses ...... 375,827 474,318 Aircrew lease ...... 361,603 335,690 Other aviation service expenses ...... 14,314 20,302 2,762,214 3,418,422

Warehouse charges ...... 392,224 370,913 Transportation cost ...... 105,109 99,123

Salaries and other personnel expenses ...... 13 218,756 229,742 Sales and marketing cost ...... 14 73,513 93,676 General and administrative cost ...... 15 171,398 179,137 Depreciation ...... 18 11,555 4,696 3,734,769 4,395,709

Operating profit before financial income and financial expenses ...... 181,105 ( 45,750)

Financial income and (financial expenses):

Interest income ...... 7,072 7,350 Interest expenses ...... ( 9,940) ( 7,325) Net foreign exchange gain (loss) ...... 2,3 40,196 ( 44,648) Calculated inflation adjustment ...... 1,22 744 1,187 38,072 ( 43,436)

Effect of subsidiary ...... 7 341 0

Profit (loss) before income tax ...... 219,518 ( 89,186) Income tax ...... 23 ( 1,490 ) 0

Profit (loss) for the year ...... 12 218,028 ( 89,186)

Flugleiðir - Frakt ehf. Financial Statements 2003 In ISK thousand ______5 ______Balance sheet

Assets

Note 2003 2002 Fixed assets:

Intangible assets: Long-term cost ...... 5,16 20,271 0

Operating assets: Fixtures and computer equipment ...... 2,582 3,149 Fork lifts and carts ...... 4,045 3,882 Other operating assets ...... 9,407 9,334 6,17 16,034 16,365

Investments and long term receivables Share in subsidiary ...... 7 5,001 4,604 Deposits ...... 188 177 5,189 4,781

Fixed assets 41,494 21,146

Current assets:

Receivables: 8,20 Trade receivables ...... 627,012 678,366 Other receivables ...... 25,883 18,951

Prepaid expenses ...... 14,643 36,407 Cash and cash equivalents ...... 9 168,287 120,447 Current assets 835,825 854,171

Total assets 877,319 875,317

Flugleiðir - Frakt ehf. Financial Statements 2003 In ISK thousand ______6 ______31 December 2003

Equity and liabilities

Note 2003 2002 Equity:

Share capital ...... 21 100,000 100,000 Retained earnings (accumulated deficit) ...... 14,879 ( 203,396) Total equity 22 114,879 ( 103,396)

Obligations:

Deferred income tax liability ...... 10,23 1,490 0

Long-term liabilities:

Loan due to Parent Company ...... 24 0 69,824

Current liabilities:

Loans from credit institutions ...... 0 240,677 Trade payables ...... 154,570 139,805 Loans due to Group entities ...... 409,859 351,689 Current maturities of long-term liabilities ...... 24 56,851 78,029 Other current liabilities ...... 139,670 98,689 760,950 908,889

Total liabilities 762,440 978,713

Total equity and liabilities 877,319 875,317

Off-balance sheet items ...... 19

Flugleiðir - Frakt ehf. Financial Statements 2003 In ISK thousand ______7 ______Statement of Cash Flows for the year 2003

Note 2003 2002 Cash flows from operating activities:

Profit (loss) for the year ...... 12 218,028 ( 89,186) Adjustments for: Depreciation ...... 18 11,555 4,696 Effect of subsidiary ...... 7 ( 341) 0 Deferred income tax liability, change ...... 23 1,490 0 Foreign exchange gain on long-term debt ...... 2 ( 12,040) 0 Calculated inflation adjustment ...... 22 ( 744) ( 1,187) Working capital from (to) operations 217,948 ( 85,677)

Changes in operating assets and liabilities: Current receivables ...... 44,422 43,860 Prepaid expenses ...... 34,460 ( 34,990) Current payables ...... 113,916 10,169 Net change in operating assets and liabilities 192,798 19,039

Net cash from (to) operating activities 410,746 ( 66,638)

Cash flows from investing activities:

Capitalised long-term cost ...... 16 ( 37,511) 0 Investment in operating assets: 17 Fixtures and computer equipment ...... ( 527) 0 Fork lifts and carts ...... ( 1,650) 0 Other operating assets ...... ( 3,568) ( 7,559) Long-receivables and investments ...... 11 2,471 Net cash used in investing activities( 43,245) ( 5,088)

Cash flows from financing activities:

Long-term borrowings ...... 0 147,853 Repayment of long-term loans ...... ( 78,984) 0 Short-term loans ...... ( 240,677) ( 17,088) Net cash (used in) from financing activities( 319,661) 130,765

Increase in cash and cash equivalents ...... 47,840 59,039

Cash and cash equivalents at 1 January ...... 9 120,447 61,408

Cash and cash equivalents at 31 December ...... 9 168,287 120,447

Flugleiðir - Frakt ehf. Financial Statements 2003 In ISK thousand ______8 ______Notes

Significant accounting policies

Basis of preparation 1. The financial statements of Flugleiðir - frakt ehf. have been prepared in accordance with the Icelandic Financial Statements Act and Regulation on the Presentation and Contents of Financial Statements and Consolidated Financial Statements. They are prepared on regulations on inflationary accounting. Flugleiðir - frakt ehf. is a subsidiary of Flugleiðir hf. and has legal residence at Reykjavíkurflugvöllur in Reykjavík. The financial statements of the Company for the year ended 31 December 2003 are a part of the consolidated financial statements of the Parent Company wherein information regarding the financial performance and financial position of the Group can be found. The financial statements are presented in Icelandic kronas and rounded to the nearest thousand. The effects of general price-level changes are calculated and recorded in the financial statements according to a 2.7% increase in the Official Consumer Price Index within the year.

Operating assets are revalued by adjusting their original purchase price or historical cost and their accumulated depreciation, according to the Official Consumer Price Index at year-end. Depreciation is expensed in the income statement at the average price level for the year. The effects of inflation on monetary assets and liabilities are calculated and recorded as calculated inflation adjustment, amounting to ISK 744 thousand in the financial statements. As a result of these adjustments, amounts in the balance sheet are stated at year-end price-level while amounts in the income statement are stated at the average price-level for the year. The revaluation of fixed assets and the calculated inflation adjustment on monetary assets and liabilities have been posted to the revaluation reserve account in the balance sheet, as shown in note 22.

Foreign currency 2. Transactions in foreign currencies are translated at the foreign exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement.

Hedging of monetary assets and liabilities, income and expenses 3. Most of the Company's operating income and a part of aviation service expenses are in foreign currencies. The Company did not hedge against cash flows in foreign currencies during the year.

Revenue recognition 4. Revenue from cargo and mail is recognised after the transportation has been provided. Revenue from aircraft leases is recognised in the income statement at the end of charter flight. Revenue from services is recognised in the income statement after the services have been rendered.

Intangible assets 5. Intangible assets consist of investment in software for various computer systems. Software is amortised over three years starting on August 1, 2003.

Flugleiðir - Frakt ehf. Financial Statements 2003 In ISK thousand ______9 ______Notes, contd.:

Fixed assets 6. Fixed assets are capitalised at their inflation adjusted historical cost, less accumulated depreciation. Depreciation is recorded at a fixed rate over the useful life of the asset, until a 10% residual value is met.

Investments 7. The Company's share in the subsidiary Icelandic Logistics SA, located in Belgium, is capitalised at a value which represents the share of the Company in its equity. Flugleiðir - Frakt ehf. holds 70% of the company's shares. The Company is not obliged to make consolidated financial statements as the subsidiary does not significantly influence the Company's operations.

Receivables 8. Accounts receivable are reduced by a provision for doubtful accounts. This provision is not a final write down, but a reserve to meet possible future losses. Receivables unlikely to be collectible are reduced and there is also a reduction to meet general risk of receivables not being collectible. The reduction is deducted from the appropriate account in the balance sheet.

Cash and cash equivalents 9. Cash and cash equivalents consist of cash at hand and bank deposits

Deferred income tax liability 10. The Company's deferred income tax liability is calculated and recognised in the financial statements. It is based on the differences of balance sheet items due to different treatment of those items according to tax law and accounting standards. These differences arise because income tax is based on different presumptions than the Company's financial statements. These are mainly timing differences because expenses, mainly depreciation, are usually recognised earlier in the income tax return than in the financial statements.

Inflationary accounting 11. In 2001 the Icelandic Parliament approved changes to the Financial Statements Act, whereby inflationary accounting will be abolished as of the year 2002. However, the change will be phased in and inflation adjustments to the operation and financial position may still be calculated and recorded for the years 2002 and 2003. The Board of Directors of the Company have agreed to continue recording the effects of inflation in the financial statements so they are adjusted for the effects of general price-level changes. If inflationary accounting had not been used the Group's profit would have been ISK 0.5 million lower and equity ISK 1 million lower at year-end.

Flugleiðir - Frakt ehf. Financial Statements 2003 In ISK thousand ______10 ______Notes, Contd.:

Quarterly statements

12. Summary of the Company's operating results by quarters: Q1 Q2 Q3 Q4 Total Operating income ...... 906,984 958,699 954,054 1,096,137 3,915,874 Operating expenses without depreciation ..... ( 908,945) ( 903,423) ( 894,758) ( 1,016,088) ( 3,723,214) EBIDTA ...... ( 1,961) 55,276 59,296 80,049 192,660 Depreciation ...... ( 1,508) ( 1,581) ( 2,192) ( 6,274) ( 11,555) Operating profit (loss) ...... ( 3,469) 53,695 57,104 73,775 181,105 Financial Income and financial expenses ..... ( 3,463) 8,407 732 32,737 38,413 Income tax expense ...... 0 0 0 ( 1,490) ( 1,490) Profit (loss) ...... ( 6,932) 62,102 57,836 105,022 218,028

Operating expenses

13. Salaries, salary-related expenses and other personnel cost are specified as follows: 2003 2002

Salaries ...... 157,972 171,270 Salary-related expenses ...... 34,043 30,073 Other personnel cost ...... 26,741 28,399 218,756 229,742

The Company's average number of employees during the year was 48. The salaries of the Board of Directors and the CEO amounted to ISK 12.5 million in the year 2003.

14. Sales and marketing cost are specified as follows: 2003 2002

Advertising expenses ...... 13,843 11,209 Commissions ...... 49,076 71,319 Credit card fees ...... 10,594 11,148 73,513 93,676

15. General and administrative costs are specified as follows:

Operating expenses of real estate and fixtures ...... 18,785 31,937 Communication cost ...... 69,984 64,352 Professional services ...... 54,257 50,401 General expenses ...... 6,587 8,727 Insurance expenses and claims incurred ...... 13,255 8,870 Lost accounts receivable and change in provision ...... 1,719 10,786 Property tax ...... 9 0 Other expenses ...... 6,802 4,064 171,398 179,137

Flugleiðir - Frakt ehf. Financial Statements 2003 In ISK thousand ______11 ______Notes, contd.:

Intangible assets

16. Long-term cost is specified as follows:

Additions during the year ...... 37,511 Revaluation during the year ...... 507 Amortised during the year ...... ( 5,051) Balance at 31.12.2003 ...... 32,967 Current maturities, recognised as a current asset ...... ( 12,696) Long-term cost among fixed assets ...... 20,271

Amortisation ratio ...... 33%

Operating assets

17. Operating assets, revaluation and depreciation, calculated as a fixed annual percentage, are specified as follows: Fixtures and Fork lifts computers and carts Other Total

Total value 1.1.2003 ...... 5,599 7,121 11,445 24,165 Previously depreciated ...... ( 2,450) ( 3,239) ( 2,111) ( 7,800) Balance at 1.1.2003 ...... 3,149 3,882 9,334 16,365 Revaluation during the year ...... 74 106 248 428 Additions during the year ...... 527 1,650 3,568 5,745 Depreciation for the year ...... ( 1,168) ( 1,593) ( 3,743) ( 6,504) Balance at 31.12.2003 ...... 2,582 4,045 9,407 16,034

Total value 31.12.2003 ...... 6,283 8,988 15,370 30,641 Total depreciation 31.12.2003 ...... ( 3,701) ( 4,943) ( 5,963) ( 14,607) Balance at 31.12.2003 ...... 2,582 4,045 9,407 16,034

Depreciation ratios ...... 20% 20% 20-33%

18. Depreciation and amortisation according to the income statement are specified as follows:

Depreciation of operating assets, according to note 17 ...... 6,504 Amortisation of intangible assets, according to note 16 ...... 5,051 Total depreciation and amortisation ...... 11,555

Operating leases 19. The Company has entered into operating lease agreements with other Group companies concerning leases and maintenance of aircrafts amounting to ISK 754 million. The Company also has operating leases with companies outside the Group for lower hold capacity amounting to ISK 148 million at year end 2003. Off balance sheet commitments at year-end 2003 amount to ISK 902 million. The Company has also entered into leases of real estate, vehicles and computer equipment amounting to ISK 31 million at year-end 2003.

Flugleiðir - Frakt ehf. Financial Statements 2003 In ISK thousand ______12 ______Notes, contd.:

Receivables

20. Provision for bad debt is specified as follows 2003 2002

Provision at the beginning of the year ...... 28,550 27,550 Receivables lost during the year ...... ( 4,969) ( 9,786) Provision for bad debt during the year ...... 1,719 10,786 Provision at the end of the year ...... 25,300 28,550

Equity

21. The Company's share capital amounts to ISK 100 million according to its Articles of Association. One vote is attached to each ISK one share.

22. Summary of equity: Share Revaluation Retained capital reserve earnings Total

Equity 1.1.2003 ...... 100,000 0 ( 203,396) ( 103,396) Revaluation of assets ...... 991 991 Calculated income arising from inflation adjustment ...... ( 744) ( 744) Profit for the year ...... 218,028 218,028 Transfer of revaluation reserve ...... ( 247) 247 0 Equity 31.12.2003 ...... 100,000 0 14,879 114,879

Deferred income liability

23. The Company's deferred income tax liability is attributable to the following items:

Operating assets ...... 6,567 Current assets ...... 1,551 Carry forward loss ...... ( 6,628) Deferred income tax liability 31.12.2003 ...... 1,490

Long-term liabilities

24. The Company's long-term liability is due to its Parent Company, Flugleiðir hf. The loan is in USD and carries a fixed interest rate of 2%. The remaining balance will mature in 2004.

Flugleiðir - Frakt ehf. Financial Statements 2003 In ISK thousand ______13 ______Notes, contd.:

Ratios

25. The Company's primary ratios are specified as follows: 2003 2002 Income statement Accounts receivable turnover (days) ...... 49 47 Aviation service expense in proportion to operating income ...... 71% 79% Salaries and other personnel expenses in proportion to operating income ...... 6% 5% Profit in proportion to operating income ...... 6% ( 2%)

Balance sheet: Current ratio - current assets/current liabilities ...... 1.10 0.94 Equity ratio - equity/total assets ...... 0.13 ( 0.12) Intrinsic value of share capital - equity/share capital ...... 1.15 ( 1.03)

Flugleiðir - Frakt ehf. Financial Statements 2003 In ISK thousand ______14 ______Flugleiðir - Frakt ehf. Financial Statements 2004

Flugleiðir - Frakt ehf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 471299-2359 Contents

Endorsement and Signatures by the Board of Directors and the Managing Director ...... 3 Balance Sheet ...... 6

Auditors' Report ...... 4 Statement of Cash Flows ...... 7

Income Statement ...... 5 Notes ...... 8

Flugleiðir - Frakt ehf. Financial Statements 2004 ______2 ______Endorsement and Signatures by the Board of Directors and the Managing Director

Flugleiðir - Frakt ehf.'s financial statements for the year 2004 have been prepared in accordance with the Icelandic Financial Statements Act and Regulation on the Presentation and Contents of Financial Statements and Consolidated Financial Statements. They have in all main respects been prepared using the same accounting policies as for the previous year, except that inflationary adjusted accounting has been ceased in accordance with changes to the Icelandic Financial Statements Act approved by the Icelandic Parliament at year-end 2001.

According to the income statement net profit for the year amounted to ISK 246 million. Operating revenue amounted to ISK 4,772 million for the year. According to the balance sheet, equity at end of the year amounted to ISK 352 million, including share capital in the amount of ISK 100 million, which is wholly owned by Flugleiðir hf.

The Board of Directors proposes a dividend payment of 226% to shareholders in the year 2005 arising from operations in 2004, amounting to ISK 226 million. Reference is made to the notes in the financial statements regarding the allocation of profits and other changes in equity.

The Board of Directors and the Managing Director of Flugleiðir - Frakt ehf. hereby confirm the Company's financial statements for the year 2004 with their signatures.

Reykjavík, 14 February 2005.

The Board of Directors:

Sigurður Helgason

Guðmundur Pálsson Andri Áss Grétarsson

Managing Director:

Pétur J. Eiríksson

Flugleiðir - Frakt ehf. Financial Statements 2004 ______3 ______Auditor's report

Board of Directors and Shareholder of Flugleiðir - Frakt ehf.

We have audited the accompanying balance sheet of Flugleiðir - Frakt ehf. as of December 31, 2004 and the related statement of income and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements give a true and fair view of the financial position of Flugleiðir - Frakt ehf. as at December 31, 2004, and the results of its operations and its cash flows for the year then ended, in accordance with the law and generally accepted accounting principles in Iceland.

Reykjavík, 14 February 2005.

Guðni S. Gústafsson Jón S. Helgason

KPMG Endurskoðun hf.

Flugleiðir - Frakt ehf. Financial Statements 2004 ______4 ______Income Statement for the year 2004

Note 2004 2003 Operating income:

Cargo and mail ...... 3,207,194 2,697,465 Aircraft lease ...... 441,901 436,369 Aircraft handling and servicing ...... 1,095,945 759,415 Other operating revenue ...... 26,810 22,625 4 4,771,850 3,915,874

Operating expenses:

Aviation service expenses: Lease of lower hold capacity ...... 888,275 939,961 Aircraft lease ...... 690,115 437,258 Aircraft fuel ...... 597,227 332,843 Aircraft handling and communication ...... 368,104 300,408 Aircraft maintenance expenses ...... 498,784 375,827 Aircrew lease ...... 367,860 361,603 Other aviation service expenses ...... 11,592 14,314 3,421,957 2,762,214

Warehouse charges ...... 431,000 392,224 Transportation cost ...... 123,324 105,109

Salaries and other personnel expenses ...... 14 239,865 218,756 Sales and marketing cost ...... 15 79,931 73,513 General and administrative expenses ...... 16 152,569 171,057 Depreciation ...... 19 20,661 11,555 4,469,307 3,734,428

Operating profit before financial income and financial expenses ...... 302,543 181,446

Financial income and (financial expenses):

Interest income ...... 11,956 7,072 Interest expenses ...... ( 4,563) ( 9,940) Net foreign exchange (loss) gain ...... 2,3( 8,402) 40,196 Calculated inflation adjustment ...... 1,12 0 744 ( 1,009) 38,072

Profit before income tax ...... 301,534 219,518 Income tax ...... 24( 55,053) ( 1,490)

Profit for the year ...... 13 246,481 218,028

Flugleiðir - Frakt ehf. Financial Statements 2004 In ISK thousand ______5 ______Balance Sheet

Assets

Note 2004 2003 Fixed assets:

Intangible assets: Long-term cost ...... 5,17 10,019 20,271

Operating assets: Fixtures and computer equipment ...... 2,547 2,582 Fork lifts and carts ...... 2,240 4,045 Other operating assets ...... 7,221 9,407 6,18 12,008 16,034

Long term receivables: Deposits ...... 10,679 188 10,679 188

Fixed assets 32,706 36,493

Current assets:

Receivables: 8,21 Trade receivables ...... 602,803 632,013 Other receivables ...... 59,754 25,883

Prepaid expenses ...... 16,173 14,643 Cash and cash equivalents ...... 9 246,891 168,287 Current assets 925,621 840,826

Total assets 958,327 877,319

Flugleiðir - Frakt ehf. Financial Statements 2004 In ISK thousand ______6 ______31 December 2004

Equity and liabilities

Note 2004 2003 Equity:

Share capital ...... 22 100,000 100,000 Statutory reserve ...... 24,648 0 Translation reserve ...... 780 0 Retained earnings ...... 226,712 14,879 23 352,140 114,879

Obligations:

Deferred income tax liability ...... 10,25 7,838 1,490

Current liabilities:

Trade payables ...... 222,592 154,570 Loans due to to group entities ...... 157,451 409,859 Taxes payable ...... 56,974 0 Current maturities of long-term liabilities ...... 0 56,851 Other current liabilities ...... 161,332 139,670 598,349 760,950

Total obligations and liabilities 606,187 762,440

Total equity and liabilities 958,327 877,319

Off balance sheet items ...... 20

Flugleiðir - Frakt ehf. Financial Statements 2004 In ISK thousand ______7 ______Statement of Cash Flows for the year 2004

Note 2004 2003 Cash flows from operating activities:

Profit for the year ...... 13 246,481 218,028 Adjustments for: Depreciation ...... 19 20,661 11,555 Proceeds from sale of assets ...... ( 264) 0 Deferred income tax liability, change ...... 24 6,348 1,490 Foreign exchange gain on long-term debt ...... 2 ( 1,269) ( 12,040) Calculated inflation adjustment ...... 12 0 ( 744) Other items ...... 7 0 ( 341) Working capital from operations 271,957 217,948

Changes in operating assets and liabilities Current receivables ...... ( 3,881) 44,422 Prepaid expenses ...... ( 158) 34,460 Current payables ...... ( 105,750) 113,916 Net change in operating assets and liabilities( 109,789) 192,798

Net cash from operating activities 162,168 410,746

Cash flows from investing activities:

Capitalised long-term cost ...... 17 ( 4,544) ( 37,511) Investment in operating assets: 18 Fixtures and computer equipment ...... ( 1,121) ( 527) Fork lifts and carts ...... 0 ( 1,650) Other operating assets ...... ( 2,226) ( 3,568) Proceeds from the sales of assets ...... 400 0 Deposits ...... ( 10,491) 11 Net cash used in investing activities( 17,982) ( 43,245)

Cash flows from financing activities:

Dividends paid ...... ( 10,000) 0 Repayment of long-term liabilities ...... ( 55,582) ( 78,984) Short-term loans ...... 0 ( 240,677) Net cash used in financing activities( 65,582) ( 319,661)

Increase in cash and cash equivalents ...... 78,604 47,840

Cash and cash equivalents at 1 January ...... 9 168,287 120,447

Cash and cash equivalents at 31 December ...... 9 246,891 168,287

Flugleiðir - Frakt ehf. Financial Statements 2004 In ISK thousand ______8 ______Notes

Significant accounting policies

Basis of preparation 1. The financial statements of Flugleiðir - Frakt ehf. are prepared in accordance with the Icelandic Financial Statements Act and Regulation on the Presentation and Contents of Financial Statements and Consolidated Financial Statements. They are prepared on the historical cost basis and are, in all main respects, based on the same accounting policies as for the previous year apart from those items listed in note 12 concerning changes in accounting policies. The financial statements are in Icelandic kronas and rounded to the nearest thousand. Flugleiðir - frakt ehf. is a subsidiary of Flugleiðir hf. and has legal residence at Reykjavíkurflugvöllur in Reykjavík. The financial statements of the Company for the year ended 31 December 2004 are a part of the consolidated financial statements of the Parent Company wherein information regarding the financial performance and financial position of the Group can be found.

Foreign currency 2. Transactions in foreign currencies are translated at the foreign exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement.

Hedging of monetary assets and liabilities, income and expenses 3. Most of the Company's operating income and a part of aviation service expenses are in foreign currencies. The Company did not hedge against cash flows in foreign currencies during the year.

Revenue recognition 4. Revenue from cargo and mail is recognised after the transportation has been provided. Revenue from aircraft leases is recognised in the income statement at the end of charter flight. Revenue from services is recognised in the income statement after the services have been rendered.

Intangible assets 5. Intangible assets consist of investment in software for various computer systems. Software is amortised over three years.

Operating assets 6. Fixed assets are capitalised at cost less accumulated depreciation. Depreciation is calculated as a fixed annual percentage based on the expected useful life of the assets until a 10% residual value has been met.

Flugleiðir - Frakt ehf. Financial Statements 2004 In ISK thousand ______9 ______Notes, contd.:

Subsidiary 7. The Company's share in the subsidiary Icelandic Logistics SA, located in Belgium, is capitalised at a value which represents the share of the Company in its equity taking notice to the difference between the original purchase price and the Company's share in its equity at the purchase date. Flugleiðir - Frakt ehf. holds 70% of the company's shares.

Receivables 8. Accounts receivable are reduced by a provision for doubtful accounts. This provision is not a final write down, but a reserve to meet possible future losses. Receivables unlikely to be collectible are reduced and there is also a reduction to meet general risk of receivables not being collectible. The reduction is deducted from the appropriate account in the balance sheet.

Cash and cash equivalents 9. Cash and cash equivalents consists of cash and bank deposits.

Deferred income tax liability 10. The Company's deferred income tax liability is calculated and recognised in the financial statements. It is based on the differences of balance sheet items due to different treatment of those items according to tax law and accounting standards. These differences arise because income tax is based on different presumptions than the Company's financial statements. These are mainly timing differences because expenses, mainly depreciation are usually recognised earlier in the income tax return than in the financial statements.

International accounting standards 11. The company will according to rules set by the Icelandic Stock Exchange change its accounting policies and prepare its financial statements according to International Financial Reporting Standards on consolidated financial statements in the year 2005 and onwards. The Company has already started preparation for these changes. The effect of these changes on the Company's equity is not clear.

Changes in accounting policies 12. At the end of 2001 Alþingi, the Icelandic Parliament, approved changes to the Financial Statements Act abolishing inflationary accounting as of the year 2002. The effects of general price level changes are not recognised in the Company's income statement. The Company's assets, previously revalued based on the Consumer Price Index, are now entered at their cost value in the Company's financial statements. Depreciation is calculated based on historical cost instead of the revalued historical cost. The effect on the income statement is that net profit is no longer stated at the average consumer price index for the year and the aforementioned assets are no longer adjusted according to the year-end consumer price index. In accordance with International Accounting Standards regarding changes from inflationary to non-inflationary accounting principles the comparative amounts in the financial statements have not been adjusted.

Flugleiðir - Frakt ehf. Financial Statements 2004 In ISK thousand ______10 ______Notes, contd.:

Quarterly statements

13. Summary of the Company's operating results by quarters: Q1 Q2 Q3 Q4 Total Operating income ...... 1,141,222 1,249,358 1,115,343 1,265,927 4,771,850 Operating expenses without depreciation ..... ( 1,084,715) ( 1,152,228) ( 1,041,274) ( 1,170,429) ( 4,448,646) Operating profit without depreciation (EBITDA) ...... 56,507 97,130 74,069 95,498 323,204 Depreciation ...... ( 5,084) ( 5,059) ( 5,047) ( 5,471) ( 20,661) Operating profit (EBIT) ...... 51,423 92,071 69,022 90,027 302,543 Net financial income (expense) ...... 6,418 ( 2,291) 14,197 ( 19,333) ( 1,009) Income tax expense ...... ( 10,430) ( 16,220) ( 15,050) ( 13,353) ( 55,053) Profit ...... 47,411 73,560 68,169 57,341 246,481

Operating expenses

14. Salaries, salary-related expenses and other personnel expenses are specified as follows: 2004 2003

Salaries ...... 178,470 157,972 Salary-related expenses ...... 29,313 34,043 Other personnel cost ...... 32,082 26,741 239,865 218,756

The Company's average number of employees during the year was 50. The salaries of the Board of Directors and the CEO amounted to ISK 14 million in the year 2004.

15. Sales and marketing costs are specified as follows: 2004 2003

Advertising expenses ...... 18,342 13,843 Commissions ...... 49,937 49,076 Credit card fees ...... 11,652 10,594 79,931 73,513

16. General and administrative costs are specified as follows:

Operating expenses of real estate and fixtures ...... 16,976 18,785 Communication cost ...... 60,135 69,984 Professional services ...... 55,322 54,257 General expenses ...... 5,047 6,587 Insurance expenses and claims incurred ...... 9,057 13,255 Lost accounts receivables and change in provision ...... 1,346 1,719 Property tax ...... 1,640 9 Other expenses ...... 3,046 6,461 152,569 171,057

Flugleiðir - Frakt ehf. Financial Statements 2004 In ISK thousand ______11 ______Notes, contd.:

Intangible assets

17. Long-term cost is specified as follows:

Balance at 1.1.2004 ...... 32,967 Additions during the year ...... 4,544 Amortised during the year ...... ( 13,424) Balance 31.12.2004 ...... 24,087 Current maturities, recognised as a current asset ...... ( 14,068) Long-term cost among fixed assets ...... 10,019

Amortisation ratio ...... 33%

Operating assets

18. Operating assets are specified as follows: Fixtures and Fork lifts computers and carts Other Total

Total value 1.1.2004 ...... 6,283 8,988 15,370 30,641 Previously depreciated ...... ( 3,701) ( 4,943) ( 5,963) ( 14,607) Balance at 1.1.2004 ...... 2,582 4,045 9,407 16,034 Additions during the year ...... 1,121 0 2,226 3,347 Disposed of during the year ...... 0 ( 136) 0 ( 136) Depreciation for the year ...... ( 1,156) ( 1,669) ( 4,412) ( 7,237) Balance at 31.12.2004 ...... 2,547 2,240 7,221 12,008

Total value 31.12.2004 ...... 7,404 8,245 17,596 33,245 Total depreciation 31.12.2004 ...... ( 4,857) ( 6,005) ( 10,375) ( 21,237) Balance at 31.12.2004 ...... 2,547 2,240 7,221 12,008

Depreciation ratios ...... 20% 20% 20-33%

19. Depreciation and amortisation according to the income statement are specified as follows:

Depreciation of operating assets, according to note 18 ...... 7,237 Amortisation of intangible assets, according to note 17 ...... 13,424 Total depreciation and amortisation ...... 20,661

Operating leases 20. The Company has entered into operating lease agreements with other Group companies concerning leases and maintenance of aircrafts amounting to ISK 905 million. The Company has also made agreements with other companies within the Group for the lease of facilities and performance of maintenance work amounting to ISK 58 million. The Company also has operating leases with companies outside the Group for vehicles and computers amounting to ISK 24 million at year-end 2004. Therefore off balance sheet commitments at year-end 2004 amount to ISK 987 million.

Flugleiðir - Frakt ehf. Financial Statements 2004 In ISK thousand ______12 ______Notes, contd.:

Receivables

21. Provision for bad debt is specified as follows 2004 2003

Provision at the beginning of the year ...... 25,300 28,550 Receivables lost during the year ...... 0 ( 4,969) Provision for bad debt during the year ...... ( 8,700) 1,719 Provision at the end of the year ...... 16,600 25,300

Equity

22. The Company's share capital amounts to ISK 100 million according to its Articles of Association. One vote is attached to each ISK one share.

23. Summary of equity: Share Statutory Translation Other Total capital reserve reserve equity equity

Equity 1.1.2004 ...... 100,000 0 0 14,879 114,879 Dividends paid ...... ( 10,000) ( 10,000) Translation differences ...... 780 780 Profit for the year ...... 246,481 246,481 Transfer to statutory reserve ...... 24,648 ( 24,648) ( 24,648) Equity 31.12.2004 ...... 100,000 24,648 780 226,712 327,492

Deferred income tax liability

24. The Company's deferred income tax liability is specified as follows:

Deferred income tax liability 1.1.2004 ...... 1,490 Loss carry forward, used by other Group entities ...... 6,629 Income tax expense ...... 55,053 Income tax payable for the year 2004, due in 2005 ...... ( 55,334) Deferred income tax liability 31.12.2004 ...... 7,838

25. The deferred income tax liability is attributable to the following items:

Operating assets ...... 4,662 Current assets ...... 3,176 Deferred income tax liability 31.12.2004 ...... 7,838

Flugleiðir - Frakt ehf. Financial Statements 2004 In ISK thousand ______13 ______Notes, contd.:

Tax issues

26. Taxes payable arising from operations during the year have been recognised in the financial statements. The Company fulfills conditions concerning the joint taxation of parent company and subsidiaries. The Company is therefore jointly taxed with its Parent Company in 2005 arising from operations in 2004.

Ratios

27. The Company's primary ratios are specified as follows: 2004 2003 Income Statement: Accounts receivable turnover (days) ...... 38 49 Aviation service expenses in proportion to operating income ...... 72% 71% Salaries and other personnel expenses in proportion to operating income ...... 5% 6% Profit in proportion to operating income ...... 5% 6%

Balance sheet: Current ratio - current assets/current liabilities ...... 1.55 1.10 Equity ratio - equity/total assets ...... 0.37 0.13 Intrinsic value of share capital - equity/share capital ...... 3.52 1.15

Five year summary

28. The Company's five year summary is specified as follows: 2004 2003 2002 2001 2000 Income statement Operating income ...... 4,771,850 3,915,874 4,349,959 4,936,827 3,164,739 Operating expenses without depreciation ..... ( 4,448,646) ( 3,722,873) ( 4,391,013) ( 4,979,297) ( 3,323,706) Profit (loss) before depreciation ...... 323,204 193,001 ( 41,054) ( 42,470) ( 158,967) Depreciation ...... ( 20,661) ( 11,555) ( 4,696) ( 2,520) ( 990) Operating results before financial income and financial expenses ...... 302,543 181,446 ( 45,750) ( 44,990) ( 159,957) Financial income and financial expenses ..... ( 1,009) 38,072 ( 43,436) 57,046 35,363 Income tax ...... ( 55,053) ( 1,490) 0 0 0 Profit (loss) for the year ...... 246,481 218,028 ( 89,186) 12,056 ( 124,594)

Balance sheet Fixed assets ...... 32,706 36,493 21,146 13,214 10,942 Current assets ...... 925,621 840,826 854,171 811,254 672,834 Total assets 958,327 877,319 875,317 824,468 683,776 Equity ...... 352,140 114,879 ( 103,396) ( 13,310) ( 23,810) Obligations ...... 7,838 1,490 0 0 0 Long-term liabilities ...... 0 0 69,824 0 0 Current liabilities ...... 598,349 760,950 908,889 837,778 707,586 Total equity and liabilities 958,327 877,319 875,317 824,468 683,776

Flugleiðir - Frakt ehf. Financial Statements 2004 In ISK thousand ______14 ______Flugleiðir - Frakt ehf. Consolidated Financial Statements 2005

Flugleiðir - Frakt ehf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 471299-2359 Contents

Endorsement and Signatures by the Board of Directors and the CEO ...... 3 Balance Sheet ...... 6

Auditors' Report ...... 4 Statement of Cash Flows ...... 7

Income Statement ...... 5 Notes ...... 8

Financial Statements of Flugleiðir - Frakt ehf. 2005 ______2 ______Endorsement and Signatures by the Board of Directors and the CEO

Flugleiðir - Frakt ehf.'s financial statements are for the first time prepared according to International Financial Reporting Standards. The Company's financial statements for the previous years have been prepared in accordance with the Financial Statements Act and accounting principles in Iceland. The main effect of IFRS adoption is on the presentation of the financial statements as well as additional notes to the Financial Statements. The adoption of IFRS did not have any effect on equity at the beginning of the year 2006.

According to the income statement net profit amounted to ISK 7 million. According to the balance sheet, equity at the end of the year amounted to ISK 133 million, including share capital of ISK 100 million, which wholly owned by FL GROUP hf.

The Board of Directors proposes no dividend payment in 2006, arising from operations in the year 2005, reference is made to the notes in the financial statements regarding information on other changes in equity.

The Board of Directors and the CEO of Flugleiðir Frakt ehf. hereby confirm the Company's financial statements by means of their signatures.

Reykjavík, 6 March, 2006.

The Board of Directors:

Jón Karl Ólafsson

CEO:

Pétur J. Eiríksson

Financial Statements of Flugleiðir - Frakt ehf. 2005 ______3 ______Auditors' Report

Board of Directors and Shareholder of Flugleiðir - Frakt ehf.

We have audited the accompanying consolidated balance sheet of Flugleiðir - Frakt ehf. (the "Company") as of December 31, 2005 and the related consolidated statement of income and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Company as of December 31, 2005 and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU.

Reykjavík, 6 March, 2006.

Jón S. Helgason

Sæmundur Valdimarsson

KPMG Endurskoðun hf.

Financial Statements of Flugleiðir - Frakt ehf. 2005 ______4 ______Income Statement for the year 2005

Note 2005 2004 Operating income:

Cargo and mail ...... 3,053,233 3,207,194 Aircraft lease ...... 281,565 441,901 Aircraft handling and servicing ...... 1,212,903 1,095,945 Other revenue ...... 33,711 26,810 4,581,412 4,771,850

Operating expenses:

Aviation service expenses ...... 2 3,501,896 3,421,957 Warehouse charges ...... 413,700 431,000 Transportation expenses ...... 92,052 123,324 Salaries and other personnel expenses ...... 3 293,864 239,865 Sales and marketing cost ...... 4 64,114 79,931 General and administrative expenses ...... 5 183,810 152,569 4,549,436 4,448,646

Operating profit before depreciation ...... 31,976 323,204

Depreciation ...... 11 ( 25,747) ( 20,661)

Operating profit ...... 6,229 302,543

Net financial income (expenses) ...... 6 3,036 ( 1,009)

Profit before income tax ...... 9,265 301,534

Income tax expense ...... 7,8( 2,588) ( 55,053)

Profit for the year ...... 1 6,677 246,481

Earnings per share:

Basic earnings per share (ISK) ...... 9 0.07 2.46

Financial Statements of Flugleiðir - Frakt ehf. 2005 In ISK thousand ______5 ______Balance Sheet as at 31 December 2005

Note 2005 2004 Assets: Operating assets ...... 10 26,250 12,008 Intangible assets ...... 14 12,838 24,087 Insurance deposits ...... 0 10,679 Total non-current assets 39,088 46,774

Trade and other receivables ...... 15 799,311 664,662 Cash and cash equivalents ...... 176,055 246,891 Total current assets 975,366 911,553

Total assets 1,014,454 958,327

Equity: Share capital ...... 16 100,000 100,000 Statutory reserve ...... 25,000 24,648 Translation reserve ...... 444 780 Retained earnings ...... 7,037 226,712 Total equity attributable to equity holders of the parent 132,481 352,140 Minority interest ...... 348 2,126 Total equity 17 132,829 354,266

Liabilities:

Deferred income tax liability ...... 18.19 6,859 7,838 Total non-current liabilities 6,859 7,838

Loans from credit institutions ...... 11,466 0 Trade and other payables ...... 20 306,946 438,772 Loans due to FL GROUP hf's group entities ...... 22 556,354 157,451 Total current liabilities 874,766 596,223

Total liabilities 881,625 604,061

Total equity and liabilities 1,014,454 958,327

Financial Statements of Flugleiðir - Frakt ehf. 2005 In ISK thousand ______6 ______Statement of Cash Flows for the year 2005

Note 2005 2004 Cash flows from operating activities:

Profit for the year ...... 17 6,677 246,481 Adjustments for: Depreciation ...... 11 25,747 20,661 Other operating items ...... 21 ( 1,018) 4,815 Working capital from operations 31,406 271,957

Changes in operating assets and liabilities: Receivables ...... ( 121,382) ( 4,039) Current liabilities ...... 108,236 ( 105,750) Net change in operating assets and liabilities( 13,146) ( 109,789)

Net cash from operating activities 18,260 162,168

Cash flows from investing activities:

Acquisition of operating assets ...... 10 ( 25,372) ( 3,347) Acquisition of intangible assets ...... 14 ( 3,368) ( 4,544) Proceeds from the sale of assets ...... 0 400 Long-term receivables, change ...... 10,679 ( 10,491) Net cash used in investing activities( 18,061) ( 17,982)

Cash flows from financing activities:

Dividends paid ...... 17 ( 226,000) ( 10,000) Repayment of borrowings ...... 0 ( 55,582) Current liabilities, changes ...... 11,466 0 Interest-bearing loan due to Parent Company ...... 143,499 0 Net cash used in financing activities( 71,035) ( 65,582)

(Decrease) increase in cash and cash equivalents ...... ( 70,836) 78,604

Cash and cash equivalents at 1 January ...... 246,891 168,287

Cash and cash equivalents at 31 December ...... 176,055 246,891

Financial Statements of Flugleiðir - Frakt ehf. 2005 In ISK thousand ______7 ______Notes

Significant accounting policies

Flugleiðir - Frakt ehf. is a subsidiary of FL GROUP hf. and has legal residence at Reykjavíkurflugvöllur in Reykjavík. The financial statements of the Company for the year ended 31 December 2005 are a part of the consolidated financial statements of the Parent Company wherein information regarding the financial performance and financial position of the Group can be found. a. Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and its interpretations adopted by the International Accounting Standards Board (IASB), as confirmed by the EU. These are the Company's first financial statements prepared according to IFRS and IFRS 1, First-time Adoption of IFRS, has been applied.

An explanation of how the transition to IFRSs has affected the reported financial position and financial performance of the Company is provided in note 24. In the note, changes in the presentation of the asset-part of the balance sheet are explained. No changes were made to the Company's equity. b. Basis of preparation The financial statements are presented in Icelandic kronas, rounded to the nearest thousand. They are prepared on the historical cost basis.

The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The financial statements have been prepared in accordance with valid International Financial Reporting Standards (IFRSs) or those who are allowed for preparation of first financial statements according to IFRS.

The preparation of financial statements in conformity with IFRS has led to changes in accounting policies from the previous year, the financial statements were prepared according to Icelandic GAAP for the year 2004. The accounting policies set out below have been applied consistently to all periods presented in these financial statements and in preparing an opening IFRS balance sheet at 1 January 2004 for the purposes of the transition to IFRSs. c. Foreign currency

Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Icelandic kronas at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement.

Financial Statements of Flugleiðir - Frakt ehf. 2005 In ISK thousand ______8 ______Notes, contd.:

d. Hedging of monetary assets and liabilities, income and expenses Most of the Company's operating income and some part of aviation service expenses are in foreign currencies. The Company has not hedged its foreign currency cash flows during the year. e. Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. f. Operating assets (i) Operating assets Operating assets are stated at cost less accumulated depreciation and impairment losses.

(ii) Subsequent costs The Company recognises in the carrying amount of an item of operating assets the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Company and the cost of the item can be measured reliably. All other costs are recognised in the income statement as an expense as incurred.

(iii) Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives and is specified as follows:

Aircraft equipment ...... 3 years Fixtures and computer equipment ...... 5 years Fork lifts and carts ...... 3 - 5 years Other operating assets ...... 5 years The residual value is estimated annually, if not immaterial. g. Intangible assets (i) Intangible assets Intangible assets that are acquired by the Company are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to the income statement on a straight line basis over the estimated useful life of the relevant asset. Estimated useful life is specified as follows: Software ...... 3 years

(ii) Subsequent expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.

Financial Statements of Flugleiðir - Frakt ehf. 2005 In ISK thousand ______9 ______Notes, contd.:

h. Trade and other receivables Trade and other receivables are stated at their cost less impairment losses. i. Cash and cash equivalents Cash and cash equivalents consist of cash balances and liquid bank deposits. j. Impairment The carrying amounts of the Company's assets, are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated.

An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement.

(i) Calculation of recoverable amount The recoverable amount of assets is determined either by their sales price or usage value, whichever is higher. The usage value is determined by the assets present value of future cash flows. Present value is calculated using interest which reflect the assets market interest rate before tax and the risks that come with certain assets.

(ii) Reversals of impairment An impairment loss in respect of receivables is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised.

In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.

An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. k. Share capital (i) Dividends Dividends are recognised as a decrease in equity in the period in which they are declared. l. Interest-bearing loans and borrowings Interest-bearing loans and borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing loans and borrowings are stated on an effective interest basis.

Financial Statements of Flugleiðir - Frakt ehf. 2005 In ISK thousand ______10 ______Notes, cont.:

m. Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a n. Trade and other payables Trade and other payables are stated at cost. o. Revenue Revenue from Cargo and mail is recognised after the transportation has been provided. Revenue from arircrafts leases is recognised in the income statement at the end of charter flight. Revenue from services is recognised in the income statement after the services have been rendered. p. Expenses (i) Aviation service expenses Aviation service expenses consists of lease of lower hold capacity, aircraft leases, aircraft fuel, aircraft servicing, handling and communication, maintenance, aircrew lease and other expenses.

(ii) Operating lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease.

(iii) Financial income and financial expenses Financial income and financial expenses comprise interest payable, indexation and other expenses arising from borrowings calculated using the effective interest rate method, interest receivable on assets and foreign exchange differences that are recognised in the income statement.

Interest income is recognised in the income statement as it accrues, using the effective interest method.

q. Income tax Income tax on the profit or loss for the year comprise current and deferred tax.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax provides for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.

Financial Statements of Flugleiðir - Frakt ehf. 2005 In ISK thousand ______11 ______Notes, contd.:

Quarterly statements

1. Summary of the Company's operating results by quarters:

Year 2005 Q1 Q2 Q3 Q4 Total

Operating income ...... 1,073,204 1,073,311 1,117,617 1,317,280 4,581,412 Operating expenses without depreciation ...... (1,074,503) ( 1,045,254) ( 1,136,485) ( 1,293,194) ( 4,549,436) Operating profit without depreciation ...... ( 1,299) 28,057 ( 18,868) 24,086 31,976 Depreciation ...... ( 5,408) ( 5,430) ( 8,063) ( 6,846) ( 25,747) Operating profit (EBIT) ...... ( 6,707) 22,627 ( 26,931) 17,240 6,229 Net financial income (expenses) ...... 2,234 12,229 ( 16,532) 5,105 3,036 Operating profit before income tax ...... ( 4,473) 34,856 ( 43,463) 22,345 9,265 Income tax expense ...... ( 450) ( 8,921) 4,871 1,912 ( 2,588) Profit (loss) ...... ( 4,923) 25,935 ( 38,592) 24,257 6,677

Year 2004

Operating income ...... 1,141,222 1,249,358 1,115,343 1,265,927 4,771,850 Operating expenses without depreciation ...... (1,084,715) ( 1,152,228) ( 1,041,274) ( 1,170,429) ( 4,448,646) Operating profit without depreciation ...... 56,507 97,130 74,069 95,498 323,204 Depreciation ...... ( 5,084) ( 5,059) ( 5,047) ( 5,471) ( 20,661) Operating profit (EBIT) ...... 51,423 92,071 69,022 90,027 302,543 Net financial income (expenses) ...... 6,418 ( 2,291) 14,197 ( 19,333) ( 1,009) Operating profit before income tax ...... 57,841 89,780 83,219 70,694 301,534 Income tax expense ...... ( 10,430) ( 16,220) ( 15,050) ( 13,353) ( 55,053) Profit ...... 47,411 73,560 68,169 57,341 246,481

Aviation service expenses

2. Aviation service expenses are specified as follows: 2005 2004

Lease of lower hold capacity ...... 734,869 888,275 Aircraft leases ...... 618,506 690,115 Aircraft fuel ...... 866,384 597,227 Aircraft servicing, handling and communication ...... 400,818 368,104 Aircraft maintenance expenses ...... 390,248 498,784 Aircrew lease ...... 478,631 367,860 Other aviation service expenses ...... 12,440 11,592 Total aviation service expenses ...... 3,501,896 3,421,957

Financial Statements of Flugleiðir - Frakt ehf. 2005 In ISK thousand ______12 ______Notes, contd.:

Salaries and other personnel expenses

3. Salaries and other personnel expenses are specified as follows: 2005 2004

Salaries ...... 213,047 178,470 Pension funds contribution ...... 13,641 12,944 Other salary related expenses ...... 28,804 16,369 Total salaries and related expenses ...... 255,492 207,783 Personnel expenses ...... 38,372 32,082 Total salaries and other personnel expenses ...... 293,864 239,865

Average number of employees (full year equivalents) ...... 52 50

The salaries of the CEO amounted to ISK 74 million during the year 2005, whereof benefits arising from realised call options amounted to ISK 57 million. The salaries of the Board of Directors amounted to ISK 1 million during the year. The salaries of the CEO and the Board of Directors amounted to ISK 14 million during the year 2004.

Sales and marketing expenses

4. Sales and marketing expenses are specified as follows: 2005 2004

Advertising expenses ...... 13,864 18,342 Commissions ...... 40,067 49,937 Credit card fees ...... 10,183 11,652 Total sales and marketing expenses ...... 64,114 79,931

General and administrative expenses

5. General and administrative expenses are specified as follows:

Operating expenses of real estate and fixtures ...... 20,274 16,976 Communication expenses ...... 64,634 60,135 Professional services ...... 76,565 55,322 Administrative cost ...... 6,126 5,047 Insurance expenses and claims incurred ...... 8,062 9,057 Bad debts and change in provision ...... 7,670 1,346 Other expenses ...... 479 4,686 Total general and administrative expenses ...... 183,810 152,569

Financial Statements of Flugleiðir - Frakt ehf. 2005 In ISK thousand ______13 ______Notes, contd.:

Financial income and financial expenses

6. Financial income and financial expenses are specified as follows: 2005 2004

Interest income ...... 14,446 11,956 Interest expenses ...... ( 11,531) ( 4,563) Net foreign exchange gain (loss) ...... 121 ( 8,402) Net financial income (expenses) ...... 3,036 ( 1,009)

Income tax expense

7. Income tax recognised in the income statement is specified as follows: 2005 2004

Income tax payable for the year ...... 3,606 55,334 Change in the deferred income-tax liability ...... ( 1,018) ( 281) Total income tax recognised in the income statement ...... 2,588 55,053

8. Reconciliation of effective tax rate: 2005 2004

Profit before tax ...... 9,265 301,534

Income tax according to current tax rate ...... 18.0% 1,668 18.0% 54,276 Non-deductible expenses ...... 9.9% 920 0.3% 777 Effective tax rate ...... 27.9% 2,588 18.3% 55,053

Earnings per share

9. Basic earnings per share is calculated by dividing the net profit by the weighted average outstanding number of shares during the year. 2005 2004

Profit for the year ...... 6,677 246,481 Weighted average outstanding number of shares during the year ...... 100,000 100,000 Earnings per share of ISK 1 ...... 0.07 2.46

Financial Statements of Flugleiðir - Frakt ehf. 2005 In ISK thousand ______14 ______Notes, contd.:

Operating assets

10. Operating assets and depreciation are specified as follows:

Fixtures Aircraft and Fork lifts Cost equipment computers and carts Other Total

Balance at 1.1.2004 ...... 0 7,835 8,245 14,561 30,641 Additions during the year ...... 0 1,121 0 2,226 3,347 Balance at 31.12.2004 ...... 0 8,956 8,245 16,787 33,988 Additions during the year ...... 22,418 1,865 701 388 25,372 Balance at 31.12.2005 ...... 22,418 10,821 8,946 17,175 59,360 Depreciation Balance at 1.1.2004 ...... 0 840 4,335 8,825 14,000 Depreciation for the year ...... 0 1,156 1,669 4,412 7,237 Sold and disposed of during the year ...... 0 0 0 743 743 Balance at 31.12.2004 ...... 0 1,996 6,004 13,980 21,980 Depreciation for the year ...... 4,550 5,325 793 462 11,130 Balance at 31.12.2005 ...... 4,550 7,321 6,797 14,442 33,110

Carrying amounts 1.1.2004 ...... 0 6,995 3,910 5,736 16,641 31.12.2004 ...... 0 6,960 2,241 2,807 12,008 31.12.2005 ...... 17,868 3,500 2,149 2,733 26,250

Depreciation ratios ...... 33% 20% 20% 20-33%

11. Depreciation and amortisation according to the income statement are specified as follows 2005 2004

Depreciaton of operating assets ...... 11,130 7,237 Amortisation of intangible assets, according to note 14 ...... 14,617 ( 13,424) Total depreciation and amortisation ...... 25,747 ( 6,187)

Insurance and the valuation of assets 12. The insurance value of the Company's assets was ISK 17,9 million at the end of the year 2005.

Operating leases 13. The Company has entered into operating lease agreements with other Group companies concerning leases and maintenance of aircrafts amounting to ISK 2,072 million. The Company has also entered into agreements with other companies within the Group for the lease of facilities and performance of maintenance work amounting to ISK 56 million. The Company also has operating leases with companies outside the group for vehicles and computers amounting to ISK 29 million at year end 2005. Therefore off balance sheet commitments at year end 2005 amount to ISK 2,157 million.

Financial Statements of Flugleiðir - Frakt ehf. 2005 In ISK thousand ______15 ______Notes, contd.:

Intangible assets

14. Intangible assets and amortisation are specified as follows: Software

Cost Balance at 1.1.2004 ...... 38,088 Additions during the year ...... 4,544 Balance at 31.12.2004 ...... 42,632 Additions during the year ...... 3,368 Balance at 31.12.2005 ...... 46,000

Amortisation Balance at 1.1.2004 ...... 5,121 Amortisation for the year ...... 13,424 Balance at 31.12.2004 ...... 18,545 Amortisation for the year ...... 14,617 Balance at 31.12.2005 ...... 33,162

Carrying amounts 1.1.2004 ...... 32,967 31.12.2004 ...... 24,087 31.12.2005 ...... 12,838

Trade and other receivables

15. Trade and other receivables are specified as follows 2005 2004

Trade receivables ...... 796,898 665,814 Prepaid expenses ...... 1,230 2,105 Other receivables ...... 19,983 13,343 Bad debt provision ...... ( 18,800) ( 16,600) Total trade and other receivables ...... 799,311 664,662

Equity

16. The Company's share capital amounts to ISK 100 million according to its Articles of Association. One vote is attached to each ISK one share.

Financial Statements of Flugleiðir - Frakt ehf. 2005 In ISK thousand ______16 ______Notes, contd.:

17. Summary of equity: Share Statutory Translation Retained Total capital reserve reserve earnings equity Equity 1.1.2004 ...... 100,000 0 0 14,879 114,879 Dividends paid ...... ( 10,000) ( 10,000) Translation differences ...... 780 780 Profit for the year ...... 246,481 246,481 Transf. to statutory reserve ...... 24,648 ( 24,648) 0 Equity 31.12.2004 ...... 100,000 24,648 780 226,712 352,140 Dividends paid ...... ( 226,000) ( 226,000) Translation differences ...... ( 336) ( 336) Profit for the year ...... 6,677 6,677 Transf. to statutory reserve ...... 352 ( 352) 0 Equity 31.12.2005 ...... 100,000 25,000 444 7,037 132,481

Deferred income tax liability

18. The Company's deferred income tax liability is specified as follows: 2005 2004

Deferred income tax liability 1.1...... 7,838 1,490 Loss carry forward, paid from Parent Company ...... 0 6,629 Income tax expense ...... 2,588 55,053 Income tax payable for the year ...... ( 3,567) ( 55,334) Deferred income tax liability 31.12...... 6,859 7,838

19. The deferred income tax liability is attributable to the following items:

Operating assets ...... 3,258 4,662 Current assets ...... 3,601 3,176 Deferred income tax liability 31.12...... 6,859 7,838

Trade and other payables

20. Trade and other payables are specified as follows: 2005 2004

Trade payables ...... 175,504 222,592 Income tax payable for the year ...... 3,606 56,974 Other payables ...... 127,836 159,206 Total trade and other payables ...... 306,946 438,772

Financial Statements of Flugleiðir - Frakt ehf. 2005 In ISK thousand ______17 ______Notes, contd.:

Cash flow statement

21. Other operating items in the cash flow are specified as follows: 2005 2004

Proceeds from the sale of operating assets ...... 0 ( 264) Change in the deferred income tax liability ...... ( 1,018) 6,348 Exchange rate difference and indexation of non-current borrowings ...... 0 ( 1,269) Total other operating items ...... ( 1,018) 4,815

Related parties

Identity of related parties 22. The Company has a related party relationship with its parent company, sister companies, directors and executive officers.

Transactions with related parties Receivables and liabilities with related companies are specified as follows at year-end: Loans due to FL GROUP hf.'s group entities ...... 412,855 Interest-bearing loan due to Parent Company ...... 143,499

Transactions with related companies during the year are specified as follows: Service sold to FL GROUP hf.'s group entities ...... 271,416 Service purchased from FL GROUP hf.'s group entities ...... 2,391,697

Investment in subsidiaries

23. The Company's share in the subsidiary Icelandic Logistics SA, located in Belgium, is capitalised at a value which represents the Company's share in equity taking notice to the difference between the purchase price and the Company's share in its equity at the purchase date. Flugleiðir - Frakt ehf. holds 70% of the company's share capital.

Changes due to adoption of International Financial Reporting Standards

24. As stated in notes regarding significant accounting policies, these are the Company's first year financial statements prepared in accordance with IFRSs.

The accounting policies set out in notes regarding significant accounting policies have been applied in preparing the financial statements for the year ended 31 December 2005, the comparative information presented in these financial statements for the year ended 31 December 2004 and in the preparation of an opening IFRS balance sheet at 1 January 2004 (the Group's date of transition).

Financial Statements of Flugleiðir - Frakt ehf. 2005 In ISK thousand ______18 ______Notes, contd.:

24. Contd.:

In preparing its opening IFRS balance sheet, the Company has adjusted amounts reported previously in financial statements prepared in accordance with its old basis of accounting (previous GAAP). An explanation of how the transition from previous GAAP to IFRSs has affected the Company's financial position and financial performance is set out in the following tables and the notes that accompany the tables.

Balance Sheet 1 January 2005: Icelandic GAAP Changes in 31.12.2004 presentation IFRS's Assets:

Operating assets ...... 12,008 12,008 Intangible assets ...... 10,019 14,068 24,087 Long-term receivables ...... 10,679 10,679 Total non-current assets 32,706 14,068 46,774

Trade and other receivables ...... 678,730 ( 14,068) 664,662 Cash and cash equivalents ...... 246,891 246,891 Total current assets 925,621 ( 14,068) 911,553

Total assets 958,327 0 958,327

Equity:

Share capital ...... 100,000 100,000 Statutory reserve ...... 24,648 24,648 Foreign currency differences ...... 780 780 Retained earnings ...... 226,712 226,712 Total equity attributable to equity holders of the parent 352,140 352,140 Minority interest ...... 2,126 2,126 Total equity 352,140 2,126 354,266

Liabilities:

Deferred income tax liability ...... 7,838 7,838 Total non-current liabilities 7,838 0 7,838

Trade and other payables ...... 440,898 ( 2,126) 438,772 Loans due to FL GROUP hf's group entities ...... 157,451 157,451 Total current liabilities 598,349 ( 2,126) 596,223

Total liabilities 606,187 ( 2,126) 604,061

Total equity and liabilities 958,327 0 958,327

Financial Statements of Flugleiðir - Frakt ehf. 2005 In ISK thousand ______19 ______Notes, contd.:

Ratios

25. The Company's primary ratios are specified as follows: 2005 2004 Income statement:

Accounts receivable turnover (days) ...... 46 38 Aviation service expenses in proportion to operating income ...... 77% 72% Salaries and other personnel expenses in proportion to operating income ...... 5% 5% Profit in proportion to operating income ...... 0.15% 5.17%

Balance sheet

Current ratio - current assets/current liabilities ...... 1,12 1,55 Equity ratio - equity/total assets ...... 0,13 0,37 Intrinsic value - equity/share capital at nominal value ...... 1,33 3,54

Four year summary

26. The Company's four year summary is specified as follows: 2005 2004 2003 2002

Income statement: Operating income ...... 4,581,412 4,771,850 3,915,874 4,349,959 Operating expenses without depreciation ...... ( 4,549,436 ) ( 4,448,646 ) ( 3,722,873 ) ( 4,391,013 ) Profit before depreciation ...... 31,976 323,204 193,001 ( 41,054 ) Depreciation ...... ( 25,747 ) ( 20,661 ) ( 11,555 ) ( 4,696 ) Operating profit (loss) ...... 6,229 302,543 181,446 ( 45,750 ) Net financial income (expense) ...... 3,036 ( 1,009 ) 38,072 ( 43,436 ) Income tax ...... ( 2,588 ) ( 55,053 ) ( 1,490 ) 0 Net profit (loss) ...... 6,677 246,481 218,028 ( 89,186 )

Balance sheet: Non current assets ...... 39,088 46,774 41,494 21,146 Current assets ...... 975,366 911,553 835,825 854,171 Total assets 1,014,454 958,327 877,319 875,317

Equity ...... 132,829 354,266 114,879 ( 103,396 ) Non - current liabilities ...... 6,859 7,838 1,490 69,824 Current liabilities ...... 874,766 596,223 760,950 908,889 Total equity and liabilities 1,014,454 958,327 877,319 875,317

Financial Statements of Flugleiðir - Frakt ehf. 2005 In ISK thousand ______20 ______Flugleiðir - Frakt ehf. Interim Financial Statements 1 January - 30 September 2005

Flugleiðir - Frakt ehf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 471299-2359 Income Statement for the Nine Months Ended 30 September 2005

2005 Operating income: 1.1.-30.9.

Cargo and mail ...... 2.202.861 Aircraft lease ...... 165.556 Aircraft handling and servicing ...... 876.016 Other operating revenue ...... 19.699 3.264.132

Operating expenses:

Aviation service expenses: Lease of aircrafts and lower hold capacity ...... 1.021.718 Aircraft fuel ...... 584.624 Aircraft handling and communication ...... 288.554 Aircraft maintenance expenses ...... 258.980 Aircrew lease ...... 301.844 Other aviation service expenses ...... 7.401 2.463.121

Warehouse charges ...... 316.180 Transportation expenses ...... 66.525

Salaries and other personnel expenses ...... 185.553 Sales and marketing expenses ...... 55.597 Administrative expenses ...... 131.464 Depreciation ...... 18.901 3.237.341

Operating profit before financial expenses ...... 26.791

Financial expenses ...... ( 2.069)

Profit before tax ...... 24.722

Income tax expense ...... ( 4.500)

Profit for the period ...... 20.222

Flugleiðir - Frakt ehf. Interim Financial Statements 30.9.2005 In ISK thousand ______2 ______Balance Sheet as at 30 September 2005

30.9.2005 31.12.2004 Assets:

Operating assets ...... 28.016 12.008 Intangible assets ...... 16.671 24.087 Insurance fees ...... 10.341 10.679 Total non-current assets 55.028 46.774

Trade and other receivables ...... 780.330 664.662 Cash and cash equivalents ...... 107.122 246.891 Total current assets 887.452 911.553

Total assets 942.480 958.327

Equity:

Share capital ...... 100.000 100.000 Statutory reserve ...... 24.648 24.648 Translation reserve ...... 405 780 Retained earnings ...... 20.933 226.712 Total equity attributable to equity holders of the parent 145.986 352.140 Minority interest ...... 0 2.126 Total equity 145.986 354.266

Liabilities:

Deferred income tax liability ...... 7.877 7.838 Total non-current liabilities 7.877 7.838

Trade and other payables ...... 350.443 438.772 Loans from credit institutions ...... 14.218 0 Intra company payables ...... 423.956 157.451 Total current liabilities 788.617 596.223

Total liabilities 796.494 604.061

Total equity and liabilities 942.480 958.327

Flugleiðir - Frakt ehf. Interim Financial Statements 30.9.2005 In ISK thousand ______3 ______Statement of Cash Flows for the Nine Months Ended 30 September 2005

2005 Cash flows from operating activities: 1.1.-30.9.

Profit for the period ...... 20.222 Adjustments for: Depreciation ...... 18.901 Other operating items ...... 3.070 Working capital from operations 42.193

Net change in operating assets and liabilities ...... 55.796 Net cash from operating activities 97.989

Cash flows from investing activities:

Acquisition of operating assets ...... ( 24.125) Acquisition of intangible assets ...... ( 3.368) Investments and long-term receivables ...... 1.517 Net cash used in investing activities( 25.976)

Cash flows from financing activities:

Current liabilities, change ...... 14.218 Dividends paid ...... ( 226.000) Net cash used in financing activities( 211.782)

Change in cash and cash equivalents ...... ( 139.769)

Cash and cash equivalents at 1 January ...... 246.891

Cash and cash equivalents at 30 September ...... 107.122

Flugleiðir - Frakt ehf. Interim Financial Statements 30.9.2005 In ISK thousand ______4 ______Flugleiðir - Frakt ehf. Interim Financial Statements 1 January - 30 September 2006

Flugleiðir - Frakt ehf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 471299-2359 Income Statement for the Nine Months Ended 30 September 2006

2006 Operating income: 1.1.-30.9.

Cargo and mail ...... 2,922,910 Aircraft lease ...... 710,015 Aircraft handling and servicing ...... 1,126,382 Other operating revenue ...... 40,261 4,799,568

Operating expenses:

Aviation service expenses: Lease of aircrafts and lower hold capacity ...... 1,164,293 Aircraft fuel ...... 933,218 Aircraft handling and communication ...... 411,645 Aircraft maintenance expenses ...... 581,204 Aircrew lease ...... 573,469 Other aviation service expenses ...... 19,295 3,683,124

Warehouse charges ...... 427,328 Transportation expenses ...... 92,670

Salaries and other personnel expenses ...... 239,661 Sales and marketing expenses ...... 52,376 Administrative expenses ...... 159,325 Depreciation ...... 13,850 4,668,334

Operating profit before financial income ...... 131,234

Financial income ...... 14,924

Profit before tax ...... 146,158

Income tax expense ...... ( 28,000)

Profit for the period ...... 118,158

Flugleiðir - Frakt ehf. Interim Financial Statements 30.9.2006 In ISK thousand ______2 ______Balance Sheet as at 30 September 2006

30.9.2006 31.12.2005 Assets:

Operating assets ...... 48,958 26,250 Intangible assets ...... 18,960 12,838 Total non-current assets 67,918 39,088

Trade and other receivables ...... 948,347 798,081 Prepaid expenses ...... 9,418 1,230 Cash and cash equivalents ...... 210,949 176,055 Total current assets 1,168,714 975,366

Total assets 1,236,632 1,014,454

Equity: Share capital ...... 100,000 100,000 Statutory reserve ...... 25,000 25,000 Translation reserve ...... 600 444 Retained earnings ...... 125,195 7,037 Total equity attributable to equity holders of the parent 250,795 132,481 Minority interest ...... ( 3,115) 348 Total equity 247,680 132,829

Liabilities: Deferred income tax liability ...... 6,859 6,859 Total non-current liabilities 6,859 6,859

Trade and other payables ...... 455,799 306,946 Loans from credit institutions ...... 91,151 11,466 Intra company payables ...... 435,143 556,354 Total current liabilities 982,093 874,766

Total liabilities 988,952 881,625

Total equity and liabilities 1,236,632 1,014,454

Flugleiðir - Frakt ehf. Interim Financial Statements 30.9.2006 In ISK thousand ______3 ______Statement of Cash Flows for the Nine Months Ended 30 September 2006

2006 1.1.-30.9. Cash flows from operating activities:

Profit for the period ...... 118,158 Adjustments for: Depreciation ...... 13,850 Working capital from operations 132,008

Net change in operating assets and liabilities ...... ( 133,962) Net cash used in operating activities( 1,954)

Cash flows from investing activities:

Acquisition of operating assets ...... ( 30,417) Acquisition of intangible assets ...... ( 9,874) Investments and long-term receivables ...... ( 2,546) Net cash used in investing activities( 42,837)

Cash flows from financing activities:

Current liabilities, change ...... 79,685 Net cash from financing activities 79,685

Change in cash and cash equivalents ...... 34,894

Cash and cash equivalents at 1 January ...... 176,055

Cash and cash equivalents at 30 September ...... 210,949

Flugleiðir - Frakt ehf. Interim Financial Statements 30.9.2006 In ISK thousand ______4 ______28.5 FINANCIAL REPORTS FOR LOFTLEIÐIR-ICELANDIC EHF. 28.5.1 AUDITED 2003 – 2005 ANNUAL REPORTS 28.5.2 INTERIM INCOME STATEMENT, BALANCE SHEET AND CASH FLOW STATEMENT FOR THE NINE MONTH PERIOD ENDING 30 SEPTEMBER 2005 28.5.3 AUDITED INTERIM INCOME STATEMENT, BALANCE SHEET AND CASH FLOW STATEMENT FOR THE NINE MONTH PERIOD ENDING 30 SEPTEMBER 2006

Loftleiðir Icelandic ehf. Financial Statements 2003

Loftleiðir - Icelandic ehf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 571201-4960 Contents

Endorsement and Signatures by the Board of Directors and the CEO ...... 36 Balance Sheet ......

Auditors' Report ...... 48 Statement of Cash Flows ......

Income Statement ...... 59 Notes ......

Financial Statements of Loftleiðir - Icelandic ehf. 2003 ______2 ______Endorsement and Signatures by the Board of Directors and the CEO

Loftleiðir - Icelandic ehf.'s Financial Statements for the year 2003 have been prepared in accordance with the Icelandic Financial Statements Act and the Regulation on the Presentation and Contents of Financial Statements and Consolidated Financial Statements. The Company's Financial Statement have in all main respects been prepared using the same accounting principles as for the previous year.

According to the Income Statement operating revenue amounted to ISK 3,915 million for the year 2003 and net loss for the year amounted to ISK 158 million. According to the Balance Sheet, equity at end of the year was negative by ISK 328 million, including share capital in the amount of ISK 4 million, which is wholly owned by Flugleiðir hf.

Reference is made to the notes in the Financial Statements regarding the appropriation of loss and other changes in equity.

The Board of Directors and the CEO of Loftleiðir - Icelandic ehf. hereby confirm the Company's Financial Statements for the year 2003 by means of their signatures.

Reykjavík, 23 February 2004.

The Board of Directors:

Pétur J. Eiríksson Grétar Br. Kristjánsson Guðmundur Pálsson

CEO:

Sigþór Einarsson

Financial Statements of Loftleiðir - Icelandic ehf. 2003 ______3 ______Auditors' Report

Board of Directors and Shareholder of Loftleiðir - Icelandic ehf.

We have audited the accompanying Balance Sheet of Loftleiðir - Icelandic ehf. as of December 31, 2003 and the related Statement of Income and Cash Flows for the year then ended. These Financial Statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial Statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Financial Statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall Financial Statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the Financial Statements give a true and fair view of the financial position of Loftleiðir - Icelandic ehf. as at December 31, 2003, and the results of its operations and its cash flows for the year then ended, in accordance with the law and generally accepted accounting principles in Iceland.

Without issuing a qualified audit opinion, we would like to draw attention to the following. The Company's net loss for the year 2003 amounted to ISK 158 million and equity was negative by ISK 328 million at the end of the year 2003. The Company's debts to Flugleiðir hf.'s Group entities amounted to ISK 495 million. A decision has to be made to increase the share capital of the Company so that a minimum equity position can be achieved according to the laws.

Reykjavík, 23 February 2004.

Guðni S. Gústafsson Stefán Hilmarsson

KPMG Endurskoðun hf.

Financial Statements of Loftleiðir - Icelandic ehf. 2003 ______4 ______Income Statement for the year 2003

Note 2003 2002

Operating income:

Charter revenue ...... 4 3,901,729 2,952,379 Other operating revenue ...... 13,745 6,708 3,915,474 2,959,087

Operating expenses:

Aviation service expenses: Aircraft lease ...... 641,418 575,268 Aircraft fuel ...... 447,057 373,300 Aircraft handling and communication ...... 838,089 674,211 Aircraft maintenance expenses ...... 704,798 380,585 Aircrew lease ...... 771,759 472,811 Aircrew expenses ...... 268,387 158,282 Other aviation service expenses ...... 93,589 85,678 3,765,097 2,720,135

Passenger services ...... 177,110 115,164 Salaries and other personnel expenses ...... 12 38,901 22,286 General and administrative expenses ...... 13 51,398 16,004 Lost accounts receivables ...... 19 127,200 234,500 Depreciation ...... 16 2,083 948 4,161,790 3,109,037

Operating profit before financial income and financial expenses ...... ( 246,316 ) ( 149,950 )

Financial income and (financial expenses):

Interest income ...... 2,778 10,700 Interest expenses ...... ( 5,110) ( 649 ) Net foreign exchange gain (loss) ...... 2 10,725 ( 27,961 ) Calculated inflation adjustment ...... 1.21 6,955 1,180 15,348 ( 16,730)

Loss before income tax ...... ( 230,967) ( 166,680 ) Income tax expense ...... 18,22 72,920 0

Loss for the year ...... 11( 158,047) ( 166,680)

Financial Statements of Loftleiðir - Icelandic ehf. 2003 In ISK thousand ______5 ______Balance Sheet

Assets

Note 2003 2002 Fixed assets:

Intangible assets: Long-term cost ...... 5.14 339 603

Operating assets: Aircraft equipment ...... 7,715 0 Vehicles ...... 4,210 5,362 Fixtures ...... 928 0 6.15 12,853 5,362

Long-term receivables: Deferred income tax asset ...... 7.18 72,920 0 Deposits ...... 152 203 73,072 203

Total fixed assets 86,264 6,168

Current assets:

Receivables: 8.19 Accounts receivable ...... 107,679 83,432 Other receivables ...... 7,339 3,225

Prepaid expenses ...... 2,646 4,998 Cash and cash equivalents ...... 9 220,493 170,826 Total current assets 338,157 262,481

Total assets 424,421 268,649

Financial Statements of Loftleiðir - Icelandic ehf. 2003 In ISK thousand ______6 ______31 December 2003

Equity and liabilities

Note 2003 2002

Equity: Share capital ...... 20 4,000 4,000 Accumulated deficit ...... ( 332,495 ) ( 167,780 ) Total equity 21( 328,495 ) ( 163,780 )

Liabilities: Trade payables ...... 31,708 3,822 Loans due to Flugleiðir hf.'s group entities ...... 495,423 339,361 Aircraft lease insurance deposits ...... 41,470 20,265 Prepaid income ...... 4 120,741 40,514 Other payables ...... 63,574 28,467 Total liabilities 752,916 432,429

Total equity and liabilities 424,421 268,649

Obligations ...... 17

Financial Statements of Loftleiðir - Icelandic ehf. 2003 In ISK thousand ______7 ______Statement of Cash Flows for the year 2003

Note 2003 2002 Cash flows from operating activities:

Loss for the year ...... 11( 158,047 ) ( 166,680 ) Difference between operating profit and cash from operations: Depreciation ...... 16 2,083 948 Deferred income tax asset, change ...... 18( 72,920 ) 0 Calculated inflation adjustment ...... 1.21( 6,955 ) ( 1,180 ) Working capital used in operations( 235,839 ) ( 166,912 )

Changes in operating assets and liabilities: Current receivables ...... ( 28,361 ) ( 86,657 ) Prepaid expenses ...... 2,336 ( 4,701 ) Current liabilities ...... 320,486 432,429 Changes in operating assets and liabilities 294,461 341,071

Net cash from operating activities 58,622 174,159

Cash flows from investing activities:

Capitalised long-term cost ...... 0 ( 900 ) Acquisition of operating assets: 15 Aircraft equipment ...... ( 7,917 ) 0 Vehicles ...... 0 ( 6,230 ) Fixtures ...... ( 1,089 ) 0 Long-term receivables ...... 51 ( 203 ) Net cash used in investing activities( 8,955 ) ( 7,333 )

Cash flows from financing activities:

Proceeds from issue of capital stock ...... 0 4,000

Changes in cash and cash equivalents ...... 49,667 170,826

Cash and cash equivalents at 1 January ...... 9 170,826 0

Cash and cash equivalents at 31 December ...... 9 220,493 170,826

Financial Statements of Loftleiðir - Icelandic ehf. 2003 In ISK thousand ______8 ______Notes

Significant accounting policies

Basis of preparation 1. Loftleiðir - Icelandic ehf.'s Financial Statements have been prepared in accordance with the Icelandic Financial Statements Act and the Regulation on the Presentation and Contents of Financial Statements and Consolidated Financial Statements. The Financial Statements are based on general price-level accounting.

Loftleiðir - Icelandic ehf. is a subsidiary of Flugleiðir hf. and has legal residence at Reykjavíkurflugvöllur. The Financial Statements of the Company for the year ended 31 December 2003 are a part of the consolidated financial statements of the Parent Company wherein information regarding financial performance and financial position of the Group can be found.

The Financial Statements are presented in Icelandic kronas, rounded to the nearest thousand. The effect of general price-level changes on the operations and the financial position are calculated and included in the Financial Statements based on the increase of the official consumer price index within the year, which increased by 2.7%.

Intangible and operating assets are revalued by restating their historical value and depreciation to year-end 2003. Depreciation is entered as an expense in the Income Statement at the average price level during the year. The effects of general price-level changes on monetary assets and liabilities are calculated and entered as income amounting to ISK 7 million during the year. As a result of these price-level adjustments, amounts in the Balance Sheet are presented at year-end price level and the operating results at the average price level during the year. Restatement of assets and the calculated inflation adjustment are posted to equity in the Balance Sheet, as shown in note 21.

Foreign currency 2. Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement.

Hedging of monetary assets and liabilities, income and expenses 3. The Company's charter revenue and a part of its aviation service expenses are in foreign currencies. The Company uses forward exchange rate agreements to balance cash flows in foreign currencies and these hedges are recognised at the estimated fair value at year end 2004. Derivatives with a positive face value are recognised as current assets while derivatives with a negative face value are recognised as current liabilities.

Revenue recognition 4. Charter revenue is recognised in the Income Statement at the end of charter flight. Revenue arising from leased aircrafts at the balance sheet date is recognised proportionally according the project's status at year end 2003.

Intangible assets 5. Included in long-term cost is investment in software used to maintain the Company's signature system for invoices. Software is amortised over three years, starting on 1 January 2003.

Financial Statements of Loftleiðir - Icelandic ehf. 2003 In ISK thousand ______9 ______Notes, contd.:

Operating assets 6. Operating assets are stated at cost less accumulated depreciation. Depreciation is calculated as a percentage based on the estimated useful life of operating assets, until a 10% residual value is met.

Deferred tax asset 7. The Company's deferred tax asset has been calculated and is recognised in the Financial Statements. The calculation represents the temporary difference in Balance Sheet items as presented in the tax return on the one hand and in the Financial Statements on the other. The reason for this difference is that the tax assessment is based on premises other than those used in the Financial Statements.

Receivables 8. The Company has made a provision for doubtful receivables. This provision does not represent a final write-off. On the one hand, a provision has been made for receivables deemed to be high-risk, and on the other hand, a general provision is made in order to meet the general default risk. The provision is deducted from the appropriate Balance Sheet items.

Cash and cash equivalents 9. Cash and cash equivalents consist of cash balances and demand deposits.

Inflationary-adjusted accounting 10. In 2001 the Icelandic Parliament approved changes to the Financial Statements Act, whereby inflationary accounting will be abolished as of the year 2002. However, the change will be phased in and inflation adjustments to the operation and financial position may still be calculated and recorded for the years 2002 and 2003. The Board of Directors of the Company has agreed to continue recording the effects of inflation in the Consolidated Financial Statements so they are adjusted for the effects of general price-level changes. If inflationary accounting had not been used the Group's loss would have been ISK 7 million higher but effects on the Company's equity would have been immaterial.

Quarterly Statements

11. Summary of the Company's operating results by quarters:

Q1 Q2 Q3 Q4 Total Operating income ...... 848,884 799,748 1,230,951 1,035,891 3,915,474 Operating income without depreciation .. ( 987,978) ( 885,919) ( 1,213,658) ( 1,072,151) ( 4,159,706) EBIDTA ...... ( 139,094) ( 86,171) 17,293 ( 36,260) ( 244,232) Depreciation ...... ( 419) ( 441) ( 523) ( 700) ( 2,083) Operating loss (profit) ...... ( 139,513) ( 86,612) 16,770 ( 36,960) ( 246,315) Financial income and financial expenses ( 13,875) 12,618 20,735 ( 4,130) 15,348 Income tax expense ...... 0 0 0 72,920 72,920 Loss (profit) ...... ( 153,388) ( 73,994) 37,505 31,830 ( 158,047)

Financial Statements of Loftleiðir - Icelandic ehf. 2003 In ISK thousand ______10 ______Notes, contd.:

Operating expenses

12. Salaries, salary-related expenses and other personnel expenses are specified as follows: 2003 2002

Salaries ...... 25,889 14,641 Salary-related expenses ...... 4,149 3,550 Other personnel expenses ...... 8,863 4,095 38,901 22,286

During the year the Company's average number of employees was 4. The salaries of the Board of Directors and the CEO amounted to ISK 10.5 million.

13. General and administrative expenses are specified as follows:

Operating cost of real estate and fixtures ...... 1,703 1,667 Communication expenses ...... 4,268 1,675 Professional services ...... 17,396 7,948 General expenses ...... 1,033 1,093 Sales and marketing cost ...... 1,503 1,031 Insurance expenses and claims incurred ...... 22,152 992 Other operating expenses ...... 3,343 1,598 51,398 16,004

Intangible assets

14. Long-term cost is specified as follows:

Book value at 1.1.2003 ...... 603 Revaluation for the year ...... 20 Amortisation for the year ...... ( 301) Book value at 31.12.2003 ...... 322 Next year's amortisation, change recognised among current assets ...... 17 Long-term cost among fixed assets ...... 339

Depreciation ratio ...... 33%

Financial Statements of Loftleiðir - Icelandic ehf. 2003 In ISK thousand ______11 ______Notes, contd.:

Operating assets

15. Operating assets and depreciation, calculated as a fixed annual percentage, are specified as follows:

Equipment Vehicles Fixtures Total

Balance at 1.1.2003 ...... 0 6,316 0 6,316 Previously depreciated ...... 0 ( 954) 0 ( 954) Book value at 1.1.2003 ...... 0 5,362 0 5,362 Revaluation during the year ...... 118 128 21 267 Additions during the year ...... 7,917 0 1,089 9,006 Depreciation for the year ...... ( 320) ( 1,280) ( 182) ( 1,782) Book value at 31.12.2003 ...... 7,715 4,210 928 12,853

Balance at 31.12.2003 ...... 8,039 6,488 1,113 15,640 Total depreciation 31.12.2003 ...... ( 324) ( 2,278) ( 185) ( 2,787) Book value 31.12.2003 ...... 7,715 4,210 928 12,853

Depreciation ratios ...... 20% 20% 20%

16. The depreciation charge in the Income Statement is specified as follows:

Depreciation of operating assets, see note 15 ...... 1,782 Amortisation of intangible assets, see note 14 ...... 301 Depreciation and amortisation recognised in the income statement ...... 2,083

Operating leases 17. The Company has entered into operating lease agreements for aircrafts, the longest until March 2006. The obligations arising from these contracts, not recognised in the Balance Sheet, amount to a total of ISK 478 million at the end of 2003.

Deferred income tax asset

18. Changes in the deferred tax asset are specified as follows:

Loss carry-forward ...... 77,744 Operating assets ...... ( 532) Current assets ...... ( 4,292) Deferred income tax asset 31.12.2003 ...... 72,920

Financial Statements of Loftleiðir - Icelandic ehf. 2003 In ISK thousand ______12 ______Notes, contd.:

Receivables

19. The bad debt provision is specified as follows: 2003 2002 Bad debt provision 1.1.2003 ...... 234,500 0 Bad debt expense for the year ...... ( 361,700) 0 Lost receivables and change in provision ...... 127,200 234,500 Bad debt provision 31.12.2003 ...... 0 234,500

Equity

20. The Company's share capital amounts to ISK 4 million as decided in its Articles of Association. One vote is attached to each ISK one share.

21. Summary of equity: Share Revaluation Retained Total capital reserve earnings equity Equity 1.1 2003 ...... 4,000 0 ( 167,780) ( 163,780) Revaluation of assets ...... 5,362 287 Calculated income from inflation adjustments ...... ( 6,955) ( 6,955) Net loss for the year ...... ( 158,047) ( 158,047) Revaluation reserve, transferred ...... 1,593 ( 1,593) 0 Equity 31.12.2003 ...... 4,000 0 ( 327,420) ( 328,495)

Taxes

22. Taxes payable arising from operations during the year have been recognised in the financial statements. The Company meets the federal tax laws provision concerning the joint taxation of parent companies and subsidiaries. The Company is therefore jointly taxed with its Parent Company in 2004 arising from operation in 2003.

Ratios

23. The Company's primary ratios are specified as follows: 2003 2002 Income statement: Aviation service expenses in proportion to operating income ...... 96.2% 91.9% Profit for the year in proportion to operating income ...... ( 4.0%) ( 5.6%) Loss per 1 USD share ...... ( 39.5) ( 41.7)

Balance sheet: Current ratio ...... 0.4 0.6 Intrinsic value of share capital ...... ( 82.1) ( 40.9)

Financial Statements of Loftleiðir - Icelandic ehf. 2003 In ISK thousand ______13 ______Loftleiðir Icelandic ehf. Financial Statements 2004 USD

Loftleiðir - Icelandic ehf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 571201-4960 Contents

Endorsement and Signatures by the Board of Directors and the CEO ...... 36 Balance Sheet ......

Auditors' Report ...... 48 Statement of Cash Flows ......

Income Statement ...... 59 Notes ......

Financial Statements of Loftleiðir - Icelandic ehf. 2004 in USD ______2 ______Endorsement and Signatures by the Board of Directors and the CEO

Loftleiðir - Icelandic ehf.'s Financial Statements for the year 2004 have been prepared in accordance with the Icelandic Financial Statements Act and the Regulation on the Presentation and Contents of Financial Statements and Consolidated Financial Statements. The Company's Financial Statement have in all main respects been prepared using the same accounting principles as for the previous year, except that inflationary adjusted accounting has been ceased in accordance with the Act approved by the Icelandic Parliament at year- end 2001. The Company has received permission to keep its records and prepare its Financial Statements in US dollars as of January 2004. Comparative amounts in the Financial Statements have not been changed in conformity, the changes are further explained in note 11.

According to the Income Statement net profit for the year amounted to USD 989 thousand. Operating revenue amounted to USD 77,182 thousand for the year. According to the Balance Sheet, equity at end of the year was negative by USD 3,605 thousand, including share capital in the amount of USD 56 thousand, which is wholly owned by Flugleiðir hf.

Conditions for a dividend payment are not in-place. Reference is made to the notes in the Financial Statements regarding the allocation of profits and other changes in equity.

The Board of Directors and the CEO of Loftleiðir - Icelandic ehf. hereby confirm the Company's Financial Statements for the year 2004 by means of their signatures.

Reykjavík, 15 February 2005.

The Board of Directors:

Steinn Logi Björnsson Andri Áss Grétarsson Guðmundur Pálsson

CEO:

Sigþór Einarsson

Financial Statements of Loftleiðir - Icelandic ehf. 2004 in USD ______3 ______Auditors' Report

Board of Directors and Shareholder of Loftleiðir - Icelandic ehf.

We have audited the accompanying Balance Sheet of Loftleiðir - Icelandic ehf. as of December 31, 2004 and the related Statement of Income and Cash Flows for the year then ended. These Financial Statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these Financial Statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the Financial Statements give a true and fair view of the financial position of Loftleiðir - Icelandic ehf. as at December 31, 2004, and the results of its operations and its cash flows for the year then ended, in accordance with the law and generally accepted accounting principles in Iceland.

Reykjavík, 15 February 2005.

Jón S. Helgason

KPMG Endurskoðun hf.

Financial Statements of Loftleiðir - Icelandic ehf. 2004 in USD ______4 ______Income Statement for the year 2004

Note 2004

Operating income:

Charter revenue ...... 4 76,919,447 Other operating revenue ...... 262,822 77,182,269

Operating expenses:

Aviation service expenses: Aircraft lease ...... 12,208,440 Aircraft fuel ...... 6,646,241 Aircraft handling and communication ...... 10,543,911 Aircraft maintenance expenses ...... 15,088,170 Aircrew lease ...... 18,279,821 Aircrew expenses ...... 5,649,474 Other aviation service expenses ...... 2,399,274 70,815,331

Passenger services ...... 1,889,364 Salaries and other personnel expenses ...... 13 796,512 General and administrative expenses ...... 14 1,250,830 Lost accounts receivables ...... 21 910,291 Depreciation ...... 17 68,135 75,730,463

Operating profit before financial income and financial expenses ...... 1,451,806

Financial income and (financial expenses):

Interest income ...... 146,311 Interest expenses ...... ( 55,788) Net foreign exchange loss ...... 2,3 ( 339,980) ( 249,457)

Profit before income tax ...... 1,202,349 Income tax expense ...... 19,24( 213,447)

Profit for the year ...... 12 988,902

Financial Statements of Loftleiðir - Icelandic ehf. 2004 Amounts are in USD ______5 ______Balance Sheet

Assets

Note 2004 2003 Fixed assets:

Intangible assets: Long-term cost ...... 5.15 0 4,741

Operating assets: Aircraft equipment ...... 160,885 107,901 Vehicles ...... 73,632 58,883 Fixtures ...... 9,859 12,972 6.16 244,376 179,756

Long-term receivables: Deposits ...... 0 2,126 0 2,126

Total fixed assets 244,376 186,623

Current assets:

Receivables: 7.21 Accounts receivable ...... 1,483,152 1,506,000 Other receivables ...... 139,948 102,650 Deferred income tax asset ...... 8,19,20 101,019 1,019,860

Prepaid expenses ...... 6,906 37,007 Cash and cash equivalents ...... 9 7,058,696 3,083,818 Total current assets 8,789,721 5,749,335

Total assets 9,034,097 5,935,958

Financial Statements of Loftleiðir - Icelandic ehf. 2004 Amounts are in USD ______6 ______31 December 2004

Equity and liabilities

Note 2004 2003

Equity:

Share capital ...... 22 55,944 55,944 Accumulated deficit ...... ( 3,661,378 ) ( 4,650,280 ) Total equity 23( 3,605,434 ) ( 4,594,336 )

Liabilities:

Trade payables ...... 462,098 443,469 Income tax payable ...... 19 340,031 0 Loans due to Flugleiðir hf.'s group entities ...... 6,815,956 6,928,993 Aircraft lease insurance deposits ...... 2,130,000 580,000 Prepaid income ...... 2,176,100 1,688,695 Other payables ...... 4 715,346 889,137 Total liabilities 12,639,531 10,530,294

Total equity and liabilities 9,034,097 5,935,958

Off-balance sheet obligations ...... 18

Financial Statements of Loftleiðir - Icelandic ehf. 2004 Amounts are in USD ______7 ______Statement of Cash Flows for the year 2004

Note 2004 Cash flows from operating activities:

Profit for the year ...... 12 988,902 Difference between operating profit and cash from operations: Depreciation ...... 16 68,135 Loss on the sale of assets ...... 7,656 Working capital from operations 1,064,693

Changes in operating assets and liabilities: Current receivables ...... 904,391 Prepaid expenses ...... 30,101 Current liabilities ...... 2,109,711 Changes in operating assets and liabilities 3,044,203

Net cash from operating activities 4,108,896

Cash flows from investing activities:

Acquisition of operating assets: 16 Aircraft equipment ...... ( 92,413 ) Vehicles ...... ( 84,473 ) Proceeds from the sale of assets ...... 40,742 Long-term receivables ...... 2,126 Net cash used in investing activities( 134,018 )

Changes in cash and cash equivalents ...... 3,974,878

Cash and cash equivalents at 1 January ...... 9 3,083,818

Cash and cash equivalents at 31 December ...... 9 7,058,696

Financial Statements of Loftleiðir - Icelandic ehf. 2004 Amounts are in USD ______8 ______Notes

Significant accounting policies

1. Basis of preparation Loftleiðir - Icelandic ehf.'s Financial Statements have been prepared in accordance with the Icelandic Financial Statements Act and the Regulation on the Presentation and Contents of Financial Statements and Consolidated Financial Statements. They are prepared on the historical cost basis and are presented in US dollars according to the same accounting policies as for the previous year except for changes as explained in note nr. 11.

Loftleiðir - Icelandic ehf. is a subsidiary of Flugleiðir hf. and has legal residence at Reykjavíkurflugvöllur. The Financial Statements of the Company for the year ended 31 December 2004 are a part of the consolidated financial statements of the Parent Company wherein information regarding financial performance and financial position of the Group can be found.

2. Foreign currency Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies, other than USD, at the balance sheet date are translated at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement.

3. Hedging of monetary assets and liabilities, income and expenses The Company's charter revenue and a part of its aviation service expenses are in foreign currencies. The Company uses forward exchange rate agreements to balance cash flows in currencies other than USD. These derivatives are recognised at the estimated fair value at year end 2004. Derivatives with a positive face value are recognised as current assets while derivatives with a negative face value are recognised as current liabilities.

The Company has entered into forward contracts and options with the purpose of limiting exposure to fluctuation of aircraft fuel prices, these contracts are recognised in the Financial Statements when the related fuel is used.

4. Revenue recognition Charter revenue is recognised in the Income Statement at the end of charter flight. Revenue arising from leased aircrafts at the balance sheet date is recognised proportionally according the project's status at year end 2004.

5. Intangible assets Included in long-term cost is investment in software used to maintain the Company's signature system for invoices. Software is amortised over three years.

6. Operating assets Operating assets are stated at cost less accumulated depreciation. Depreciation is calculated as a percentage based on the estimated useful life of operating assets, until a 10% residual value is met.

Financial Statements of Loftleiðir - Icelandic ehf. 2004 Amounts are in USD ______9 ______Notes, contd.:

7. Receivables The Company has made a provision for doubtful receivables. This provision does not represent a final write-off. On the one hand, a provision has been made for receivables deemed to be high-risk, and on the other hand, a general provision is made in order to meet the general default risk. The provision is deducted from the appropriate Balance Sheet items.

8. Deferred tax asset The Company's deferred tax asset has been calculated and is recognised in the Financial Statements. The calculation represents the temporary difference in Balance Sheet items as presented in the tax return on the one hand and in the Financial Statements on the other. The reason for this difference is that the tax assessment is based on premises other than those used in the Financial Statements.

9. Cash and cash equivalents Cash and cash equivalents consist of cash balances and demand deposits.

10. International accounting standards The company will according to rules set by the Icelandic Stock Exchange change its accounting policies and prepare its financial statements according to International Financial Reporting Standards on consolidated financial statements in the year 2005 and onwards. The Company has already started preparation for these changes. The effect of these changes on the Company's equity is not clear.

11. Change in accounting policies The Company has, according to an Act passed by the Icelandic Parliament, at the end of the year 2001 ceased using inflationary-adjusted accounting. The effect of price level changes are no longer recognised in the Company's Income Statement. The Company's assets, previously revalued based on the Consumer Price Index, are now entered at their cost value in the Company's financial statements. Depreciation are now calculated based on historical cost instead of revalued historical cost and inflation adjustment is no longer calculated nor recognised in the Income Statement. As a result of these changes net profit is no longer stated at the average consumer price index for the year and the assets are no longer adjusted according to the year-end consumer price index.

In accordance with International Accounting Standards regarding changes from inflationary-adjusted accounting to unadjusted accounting, comparative amounts in the Financial Statements have not been changed.

The Parent Company and one of its subsidiaries have received permission to keep their books and prepare their Financial Statements in US dollars as of January 2004. These Financial Statements are thus in US dollars.

Financial Statements of Loftleiðir - Icelandic ehf. 2004 Amounts are in USD ______10 ______Notes, contd.:

Quarterly statements

12. Summary of the Company's operating results by quarters:

Q1 Q2 Q3 Q4 Total

Operating income ...... 19,012,716 19,979,066 22,085,487 16,105,000 77,182,269 Operating expenses without depreciation ( 18,315,843) ( 19,377,956) ( 21,228,456) ( 16,740,073) ( 75,662,328) Operating profit without depreciation (EBITDA) ...... 696,873 601,110 857,031 ( 635,073) 1,519,941 Depreciation ...... ( 15,084) ( 17,769) ( 17,280) ( 18,002) ( 68,135) Operating profit (loss) (EBIT) ...... 681,789 583,341 839,751 ( 653,075) 1,451,806 Financial income and financial expenses . ( 69,855) ( 24,218) ( 61,067) ( 94,317) ( 249,457) Income tax expense ...... ( 110,150) ( 99,850) ( 140,000) 136,553 ( 213,447) Profit (loss) ...... 501,784 459,273 638,684 ( 610,839) 988,902

Operating expenses

13. Salaries, salary-related expenses and personnel expenses are specified as follows: 2004 Salaries ...... 554,520 Salary-related expenses ...... 86,951 Other personnel expenses ...... 155,041 796,512

During the year the Company's average number of employees was 5. The salaries of the Company's CEO and the Board of Directors amounted to ISK 12 million during the year 2004.

14. General and administrative expenses are specified as follows:

Operating cost of real estate and fixtures ...... 25,122 Communication expenses ...... 78,756 Professional services ...... 364,518 General expenses ...... 17,909 Sales and marketing cost ...... 23,983 Insurance expenses and claims incurred ...... 616,410 Other operating expenses ...... 124,132 1,250,830

Financial Statements of Loftleiðir - Icelandic ehf. 2004 Amounts are in USD ______11 ______Notes, contd.:

Intangible assets

15. Long-term cost is specified as follows:

Balance at 1.1.2004 ...... 4,741 Amortisation for the year ...... ( 4,267) Balance at 31.12.2004 ...... 474 Next year's amortisation, change recognised among current assets ...... ( 474) Long-term cost among fixed assets ...... 0

Depreciation ratio ...... 33%

Operating assets

16. Operating assets and depreciation, calculated as a fixed annual percentage, are specified as follows:

Equipment Vehicles Fixtures Total

Balance at 1.1.2004 ...... 112,434 90,745 15,564 218,743 Previously depreciated ...... ( 4,533) ( 31,862) ( 2,592) ( 38,987) Book value at 1.1.2004 ...... 107,901 58,883 12,972 179,756 Additions during the year ...... 92,413 84,473 0 176,886 Sold during the year ...... 0 ( 48,398) 0 ( 48,398) Depreciation for the year ...... ( 39,429) ( 21,326) ( 3,113) ( 63,868) Book value at 31.12.2004 ...... 160,885 73,632 9,859 244,376

Balance at 31.12.2004 ...... 204,847 84,472 15,564 304,883 Total depreciation 31.12.2004 ...... ( 43,962) ( 10,840) ( 5,705) ( 60,507) Book value 31.12.2004 ...... 160,885 73,632 9,859 244,376

Depreciation ratios ...... 20% 20% 20%

17. The depreciation charge in the Income Statement is specified as follows:

Depreciation of operating assets, see note 16 ...... 63,868 Amortisation of intangible assets, see note 15 ...... 4,267 Depreciation and amortisation recognised in the income statement ...... 68,135

18. Operating leases The Company has entered into operating lease agreements for aircrafts, the longest until April 2008. Obligations arising from these agreements, not recognised in the Balance Sheet, amount to USD 21,399 thousand at year-end 2004.

Financial Statements of Loftleiðir - Icelandic ehf. 2004 Amounts are in USD ______12 ______Notes, contd.:

Deferred tax asset

19. Changes in the deferred tax asset are specified as follows:

Deferred tax asset 1.1.2004 ...... 1,019,860 Loss carry-forward used by companies within the Group ...... ( 1,045,425) Income tax expense ...... ( 213,447) Income tax payable in 2005 arising from operations in 2004 ...... 340,031 Deferred tax asset 31.12.2004 ...... 101,019

20. The deferred tax asset is attributable to the following items:

Operating assets ...... ( 11,457) Current assets ...... 112,476 Deferred tax asset 31.12.2004 ...... 101,019

Receivables

21. The bad debt provision is specified as follows:

Bad debt provision 1.1.2004 ...... 0 Bad debt expense for the year ...... ( 173,291) Lost receivables and change in provision ...... 910,291 Bad debt provision 31.12.2004 ...... 737,000

Equity

22. The Company's share capital amounts to ISK 4 million as decided in its Articles of Association. One vote is attached to each ISK one share.

23. Summary of equity: Accumulated Total Share capital deficit equity

Equity 1.1.2004 ...... 55,944 ( 4,650,280) ( 4,594,336) Profit for the year ...... 988,902 988,902 Equity 31.12.2004 ...... 55,944 ( 3,661,378) ( 3,605,434)

Financial Statements of Loftleiðir - Icelandic ehf. 2004 Amounts are in USD ______13 ______Notes, contd.:

Taxes

24. Taxes payable arising from operations during the year have been recognised in the financial statements. The Company meets the federal tax laws provision concerning the joint taxation of parent companies and subsidiaries. The Company is therefore jointly taxed with its Parent Company in 2005 arising from operation in 2004.

Ratios

25. The Company's primary ratios are specified as follows: 2004 Income Statement:

Aviation service expenses in proportion to operating income ...... 91.8% Profit for the year in proportion to operating income ...... 1.3% Earnings per 1 USD share ...... 17.7%

31.12.2004 31.12.2003 Balance Sheet:

Current ratio ...... 0.7 5.0 Intrinsic value of share capital ...... ( 64.4) ( 82.1)

Financial Statements of Loftleiðir - Icelandic ehf. 2004 Amounts are in USD ______14 ______Loftleiðir Icelandic ehf. Financial Statements 2004 USD

Loftleiðir - Icelandic ehf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 571201-4960 Loftleiðir Icelandic ehf. Financial Statements 2005 USD

Loftleiðir - Icelandic ehf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 571201-4960 Contents

Endorsement and Signatures by the Board of Directors and the CEO ...... 36 Balance Sheet ......

Auditors' Report ...... 47 Statement of Cash Flows ......

Income Statement ...... 58 Notes ......

Financial Statements of Loftleiðir - Icelandic ehf. 2005 ______2 ______Endorsement and Signatures by the Board of Directors and the CEO

Loftleiðir - Icelandic ehf.'s financial statements are for the first time prepared according to International Financial Reporting Standards. The Company's financial statements for the previous years have been prepared in accordance with the Financial Statements Act and accounting principles in Iceland. The Company is allowed to keep its records and prepare its financial statements in United States dollars from the beginning of the year 2004.

According to the income statement net profit for the year amounted to USD 4,212 thousand. According to the balance sheet, equity at the end of the year 2005 amounted to USD 1,215 thousand, including share capital in the amount of USD 56 thousand which is wholly owned by FL GROUP hf.

The Board of Directors proposes no dividend payment in 2006, arising from operations in the year 2005, reference is made to the notes in the financial statements regarding information on deployment of net profit and other changes in equity.

The Board of Directors and the CEO of Loftleiðir - Icelandic ehf. hereby confirm the Company's financial statements for the year 2005, by means of their signatures.

Reykjavík, March 16, 2006.

The Board of Directors:

Jón Karl Ólafsson Andri Grétarsson

CEO:

Sigþór Einarsson

Financial Statements of Loftleiðir - Icelandic ehf. 2005 ______3 ______Auditors' Report

Board of Directors and Shareholder of Loftleiðir - Icelandic ehf.

We have audited the accompanying balance sheet of Loftleiðir - Icelandic ehf. (the "Company") as of December 31, 2005 and the related statement of income and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements give a true and fair view of the financial position of the Company as of December 31, 2005 and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU.

Reykjavík, March 16, 2006

Jón S. Helgason

KPMG Endurskoðun hf.

Financial Statements of Loftleiðir - Icelandic ehf. 2005 ______4 ______Income Statement for the year 2005

Note 2005 2004

Operating income:

Charter revenue ...... 88,467,397 76,919,447 Other operating revenue ...... 575,180 262,822 89,042,577 77,182,269

Operating expenses:

Aviation service expenses ...... 2 79,054,641 70,815,331 Passenger services ...... 1,407,421 1,889,364 Salaries and other personnel expenses ...... 3 1,833,351 796,512 Administrative expenses ...... 4 1,008,284 2,161,121 Depreciation ...... 5 70,712 68,135 83,374,409 75,730,463

Operating profit before financing costs ...... 5,668,168 1,451,806

Net financing costs ...... 6( 509,106) ( 249,457)

Profit before tax ...... 5,159,062 1,202,349

Income tax expense ...... 7( 946,745) ( 213,447)

Profit for the year ...... 17 4,212,317 988,902

Earnings per share:

Basic earnings per share ...... 1.05 0.25

Financial Statements of Loftleiðir - Icelandic ehf. 2005 Amounts in USD ______5 ______Balance Sheet as at 31 December 2005

Note 2005 2004 Assets: Operating assets ...... 9 217,434 244,376 Intangible assets ...... 12 1,293 4,396 Insurance deposits ...... 13 4,400 0 Deferred tax asset ...... 15 89,636 101,019 Total non-current assets 312,763 349,791

Trade receivables ...... 2,266,372 1,483,152 Interest-bearing receivable due from FL GROUP ...... 7,070,934 0 Other receivables ...... 653,494 142,458 Cash and cash equivalents ...... 8,236,049 7,058,696 Total current assets 18,226,849 8,684,306

Total assets 18,539,612 9,034,097

Equity: Share capital ...... 16 55,944 55,944 Statutory reserve ...... 13,986 0 Other reserves ...... 607,696 0 Retained earnings (accumulated deficit) ...... 536,953 ( 3,661,378) Total equity 17 1,214,579 ( 3,605,434 )

Liabilities: Trade payables ...... 1,748,206 462,098 Loans due to FL GROUP hf.'s group entities ...... 8,916,352 6,815,956 Aircraft lease insurance deposits ...... 2,120,039 2,130,000 Income tax payable ...... 15 924,047 340,031 Other payables ...... 1,057,672 715,346 Deferred income ...... 2,558,717 2,176,100 Total current liabilities 17,325,033 12,639,531

Total equity and liabilities 18,539,612 9,034,097

Financial Statements of Loftleiðir - Icelandic ehf. 2005 Amounts in USD ______6 ______Statement of Cash Flows for the year 2005

Note 2005 2004 Cash flows from operating activities:

Profit for the year ...... 16 4,212,317 988,902 Difference between operating profit and cash from operations:: Depreciation ...... 5 70,712 68,135 Loss on the sale of assets ...... 0 7,656 Income tax ...... 11,388 ( 126,584 ) Working capital from operations 4,294,417 938,109

Changes in operating assets and liabilities: Other receivables ...... ( 686,560 ) 1,061,071 Current liabilities ...... 4,685,500 2,109,711 Changes in operating assets and liabilities 3,998,940 3,170,782

Net cash from operating activities 8,293,357 4,108,891

Cash flows from investing activities:

Acquisition of operating assets ...... 9( 40,665 ) ( 176,886 ) Proceeds from the sale of assets ...... 0 40,742 Long-term receivables, change ...... ( 4,400 ) 2,126 Interest-bearing receivable due from FL GROUP, change ...... ( 7,070,934 ) 0 Net cash used in investing activities( 7,115,999 ) ( 134,018 )

Increase in cash and cash equivalents ...... 1,177,358 3,974,873

Cash and cash equivalents at 1 January ...... 7,058,691 3,083,818

Cash and cash equivalents at 31 December ...... 8,236,049 7,058,691

Other information:

Interest income received ...... 183,875 143,162 Interest expenses paid ...... ( 47,844 ) ( 55,788 )

Financial Statements of Loftleiðir - Icelandic ehf. 2005 Amounts in USD ______7 ______Notes

Significant accounting policies

Loftleiðir - Icelandic ehf. is a subsidiary of FL GROUP hf. and has legal residence at Reykjavíkurflugvöllur. The financial statements of the Company for the year ended 31 December 2005 are a part of the consolidated financial statements of the Parent Company wherein information regarding financial performance and financial position of the Group can be found. a. Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and its interpretations adopted by the International Accounting Standards Board (IASB), as confirmed by the EU. No changes have been made to specific items in the balance sheet due to implementation of the standards. The effects of the transition are mainly seen in a different presentation along with extended notes to the financial statements. The transition has no effect on the Company's equity at the beginning of the year 2005. b. Basis of preparation The financial statements are prepared on the historical cost basis and are presented in United States dollars (USD).

The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The financial statements have been prepared in accordance with valid International Financial Reporting Standards (IFRSs) or those Standards allowed to use in preparation of the first financial statements according to IFRS. c. Foreign currency Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies, other than USD, at the balance sheet date are translated at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. d. Derivative financial instruments The Company's charter revenue and a part of its aviation service expense are in foreign currencies. The Company uses forward exchange rate agreements to balance cash flows in other currencies than USD. These derivatives are recognised at the estimated market value at year end 2005. Derivatives with a positive face value are recognised as current assets while derivatives with a negative face value are recognised as current liabilities.

The Company has entered into forward and option contracts with the purpose of limiting exposure to fluctuation of aircraft fuel prices, these contracts are recognised in the financial statements when the related fuel is used.

e. Operating assets (ii) Operating assets Operating assets are stated at cost less accumulated depreciation and impairment losses.

Financial Statements of Loftleiðir - Icelandic ehf. 2005 Amounts in USD ______8 ______Notes, contd.:

(iii) Subsequent costs The Company recognises in the carrying amount of an item of operating assets the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Company and the cost of the item can be measured reliably. All other costs are recognised in the income statement as an expense as incurred.

(iv) Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives and is specified as follows: Useful life

Aircraft equipment ...... 3 - 5 years Vehicles ...... 5 years Fixtures ...... 5 years The residual value is estimated annually, if not immaterial. f. Intangible assets (i) Intangible assets that are acquired by the Company are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to the income statement on a straight line basis over the estimated useful life of the relevant asset. Estimated useful life is specified as follows:

Software ...... 3 years

(ii) Subsequent expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. g. Trade and other receivables Trade and other receivables are stated at cost less impairment losses. h. Cash and cash equivalents Cash and cash equivalents consist of cash balances and liquid bank deposits. i. Impairment The carrying amounts of the Company's assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated.

An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement.

(i) Calculation of recoverable amount The recoverable amount of assets other than receivables is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

Financial Statements of Loftleiðir - Icelandic ehf. 2005 Amounts in USD ______9 ______Notes, contd.:

(ii) Reversals of impairment An impairment loss in respect of receivables is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised.

In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.

An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. j. Interest-bearing loans and borrowings Interest-bearing loans and borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing loans and borrowings are stated on an effective interest basis. k. Provisions A provision is recognised in the balance sheet when the Company has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. l. Trade and other payables Trade and other payables are stated at cost. m. Operating income (i) Operating revenue Charter revenue is recognised in the income statement at the end of charter flight. Revenue arising from leased aircrafts at the balance sheet date is recognised proportionally according the project's status at year end. Revenue from services rendered is recognised in the income statement after the service has been provided.

n. Expenses (i) Operating lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease.

(ii) Net financing costs Net financing costs comprise interest payable on borrowings calculated using the effective interest rate method, interest receivable on funds invested, foreign exchange gains and losses, and gains and losses on hedging instruments that are recognised in the income statement.

Interest income is recognised in the income statement as it accrues, using the effective interest method. Dividend income is recognised in the income statement on the date the entity's right to receive payments is established.

Financial Statements of Loftleiðir - Icelandic ehf. 2005 Amounts in USD ______10 ______Notes, contd.:

o. Income tax Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. At the end of the year a deferred tax asset arising from accumulated carry-forward tax losses is higher than the deferred income tax liability from balance sheet items and thus a deferred tax asset is recognised in the balance sheet.

Financial Statements of Loftleiðir - Icelandic ehf. 2005 Amounts in USD ______11 ______Notes, contd.:

Quarterly statements

1. Summary of the Company's operating results by quarters:

Year 2005 Q1 Q2 Q3 Q4 Total

Operating income ...... 18,614,806 21,521,412 26,056,166 22,850,193 89,042,577 Operating expenses less depreciation and aircraft lease ...... ( 16,040,330) ( 16,119,752) ( 18,718,968) ( 17,846,217) ( 68,725,267) Operating profit less depreciation and aircraft lease (EBITDAR) ..... 2,574,476 5,401,660 7,337,198 5,003,976 20,317,310 Aircraft leases ...... ( 3,305,230) ( 3,672,410) ( 3,735,397) ( 3,865,393) ( 14,578,430) Operating profit without depreciation.... ( 730,754) 1,729,250 3,601,801 1,138,583 5,738,880 Depreciation ...... ( 16,311) ( 17,689) ( 18,841) ( 17,871) ( 70,712) Operating profit (EBIT) ...... ( 747,065) 1,711,561 3,582,960 1,120,712 5,668,168 Net financing costs ...... 52,875 ( 6,760) ( 469,676) ( 85,545) ( 509,106) Profit (loss) before income tax ...... ( 694,190) 1,704,801 3,113,284 1,035,167 5,159,062 Income tax expense ...... 125,000 ( 307,000) ( 588,086) ( 176,659) ( 946,745)

Profit (loss) ...... ( 569,190) 1,397,801 2,525,198 858,508 4,212,317

Year 2004 Q1 Q2 Q3 Q4 Total

Operating income ...... 19,012,716 19,979,066 22,085,487 16,105,000 77,182,269 Operating expenses less depreciation and aircraft lease ...... ( 15,230,385) ( 16,486,421) ( 17,621,385) ( 14,115,697) ( 63,453,888) Operating profit less depreciation and aircraft lease (EBITDAR) ..... 3,782,331 3,492,645 4,464,102 1,989,303 13,728,381 Aircraft leases ...... ( 3,085,458) ( 2,891,535) ( 3,607,071) ( 2,624,376) ( 12,208,440) Operating profit without depreciation.. 696,873 601,110 857,031 ( 635,073) 1,519,941 Depreciation ...... ( 15,084) ( 17,769) ( 17,280) ( 18,002) ( 68,135) Operating profit (EBIT) ...... 681,789 583,341 839,751 ( 653,075) 1,451,806 Net financing costs ...... ( 69,855) ( 24,218) ( 61,067) ( 94,317) ( 249,457) Profit (loss) before income tax ...... 611,934 559,123 778,684 ( 747,392) 1,202,349 Income tax ...... ( 110,150) ( 99,850) ( 140,000) 136,553 ( 213,447)

Profit (loss) ...... 501,784 459,273 638,684 ( 610,839) 988,902

Aviation service expenses

2. Aviation service expenses: 2005 2004

Aircraft leases ...... 14,578,430 12,208,440 Aircraft fuel ...... 4,912,329 6,646,241 Aircraft handling and communication ...... 5,693,279 10,543,911 Aircraft maintenance ...... 23,141,823 15,088,170 Aircraft crew leases ...... 23,444,042 18,279,821 Other crew expenses ...... 5,739,601 5,649,474 Other aviation expenses ...... 1,545,137 2,399,274 Total aviation service expenses ...... 79,054,641 70,815,331

Financial Statements of Loftleiðir - Icelandic ehf. 2005 Amounts in USD ______12 ______Notes, contd.:

Salaries and other personnel expenses

3. Salaries and other personnel expenses are specified as follows: 2005 2004 Salaries ...... 1,380,555 554,520 Pension fund ...... 83,856 42,411 Salary-related expenses ...... 106,262 44,540 Total salaries and salary-related expense ...... 1,570,673 641,471 Other personnel expenses ...... 262,678 155,041 Total salaries and other personnel expenses ...... 1,833,351 796,512

Average number of employees for the year ...... 8 5

The salaries of the Company's CEO amounted to ISK 72 million during the year, whereof benefits arising from realised call options amounted to ISK 57 million. The salaries of the Board of Directors amounted to ISK 1 million during the year 2005. The salaries of the Board of Directors and the CEO amounted to ISK 12 million in 2004.

Other operating expenses

4. Administrative expenses are specified as follows:

Operating cost of real estate and fixtures ...... 76,133 25,122 Communication expenses ...... 125,787 78,756 Professional services ...... 375,810 364,518 Administrative cost ...... 40,165 17,909 Selling and marketing expenses ...... 37,760 23,983 Insurance expenses and claims incurred ...... 166,104 616,410 Lost trade receivables ...... 84,881 910,291 Other operating expenses ...... 101,644 124,132 Total administrative expenses ...... 1,008,284 2,161,121

Depreciation

5. The depreciation charge in the income statement is specified as follows:

Depreciation of operating assets, see note 9 ...... 67,609 63,868 Amortisation of intangible assets, see note 12 ...... 3,103 4,267 Depreciation and amortisation recognised in the income statement ...... 70,712 68,135

Net financing costs

6. Net financing costs are specified as follows:

Interest income ...... 257,122 146,311 Interest expenses ...... ( 47,844) ( 55,788) Net foreign exchange loss ...... ( 718,384) ( 339,980) Net financing costs ...... ( 509,106) ( 249,457)

Financial Statements of Loftleiðir - Icelandic ehf. 2005 Amounts in USD ______13 ______Notes, contd.:

Income tax expense

7. Income tax recognised in the income statement is specified as follows: 2005 2004

Income tax payable for the year ...... 924,047 340,031 Change in the deferred tax asset ...... 11,383 ( 126,584) Exchange rate difference ...... 11,315 ( 3,588) Total income tax recognised in the income statement ...... 946,745 213,447

8. Reconciliation of effective tax rate: 2005 2004

Profit before tax ...... 5,159,062 1,202,349

Income tax according to current tax rate ...... 18.00% 928,631 18.00% 216,423 Non-deductible expenses ...... 0.13% 6,799 0.05% 612 Exchange rate difference ...... 0.22% 11,315 -0.30%( 3,588) Effective tax rate ...... 18.35% 946,745 17.75% 213,447

Operating assets

9. Operating assets and depreciation are specified as follows:

Cost Equipment Vehicles Fixtures Total

Balance at 1.1.2004 ...... 112,434 90,745 15,564 218,743 Additions during the year ...... 92,413 84,473 0 176,886 Sold and disposed during the year ...... 0 ( 90,746) 0 ( 90,746) Balance at 1.1.2005 ...... 204,847 84,472 15,564 304,883 Additions during the year ...... 18,266 22,400 0 40,666 Balance at 31.12.2005 ...... 223,113 106,872 15,564 345,549

Depreciation and impairment losses Balance at 1.1.2004 ...... 4,533 31,862 2,592 38,987 Depreciation ...... 39,429 21,326 3,113 63,868 Sold and disposed during the year ...... 0 ( 42,349) 0 ( 42,349) Balance at 1.1.2005 ...... 43,962 10,839 5,705 60,506 Depreciation ...... 44,988 19,508 3,113 67,609 Balance at 31.12.2005 ...... 88,950 30,347 8,818 128,115

Carrying amounts 1.1.2004 ...... 107,901 58,883 12,972 179,756 31.12.2004 ...... 160,885 73,633 9,859 244,376 31.12.2005 ...... 134,163 76,525 6,746 217,434

Depreciation ratios ...... 20-33% 20% 20%

Financial Statements of Loftleiðir - Icelandic ehf. 2005 Amounts in USD ______14 ______Notes, contd.:

10. Insurance value The insurance value of the Company's aircrafts amounted to USD 210 thousand at year-end 2005.

11. Operating lease agreements The Company has in place operating lease agreements for aircrafts, the longest until April 2008. Liabilities arising from these agreements not recognised in the balance sheet amount to USD 18,715 thousand at year end 2005. The total amount expensed in the income statement because of these agreements is USD 14,578 thousand in the year 2005

Intangible assets

12. Intangible assets and amortisation are specified as follows: Software

Balance at 1.1.2004 ...... 8,663 Additions during the year 2004 ...... ( 4,267) Balance at 1.1.2005 ...... 4,396 Additions during the year 2005 ...... ( 3,103) Balance at 31.12.2005 ...... 1,293

Insurance deposits

13. Among insurance deposits in the balance sheet are payments arising from real estate leases. Insurance deposits amount to USD 4,400 at year-end 2005.

Trade and other receivables

14. Bad debt provision has been calculated because of receivables that may be lost. The bad debt provision is based on the judgement of the Company's management and historical experience. The bad debt provision is specified as follows:

2005 2004

Bad debt provision at the beginning of the year ...... 737,000 0 Bad debt expense for the year ...... ( 84,881) ( 173,291) Lost receivables and change in provision ...... 84,881 910,291 Bad debt provision at the end of the year ...... 737,000 737,000

Financial Statements of Loftleiðir - Icelandic ehf. 2005 Amounts in USD ______15 ______Notes, contd.:

Deferred tax asset

15. The Company's deferred tax asset is specified as follows: 2005 2004

Deferred tax asset 1 January 2005 ...... 101,019 1,019,860 Loss carry-forward used by companies within the Group ...... 0 ( 1,041,837) Income tax expensed ...... ( 946,745) ( 213,447) Income tax payable ...... 924,047 340,031 Exchange rate difference ...... 11,315 ( 3,588) Deferred tax asset 31 December 2005 ...... 89,636 101,019

The Company's deferred tax asset is attributable to the following items:

Non-current assets ...... ( 10,524) ( 11,457) Trade receivables ...... 100,160 112,476 Deferred tax asset 31 December 2005 ...... 89,636 101,019

Equity

16. The Company's share capital amounts to ISK 4 million as decided in its Articles of Association. One vote is attached to each ISK one share.

17. Summary of equity: Statutory Other Retained Total Share capital reserve reserves earnings equity

Equity 1.1 2004 ...... 55,944 ( 4,650,280) ( 4,594,336) Profit for the year ...... 988,902 988,902 Equity 31.12.2004 ...... 55,944 0 0 ( 3,661,378) ( 3,605,434) Hedging reserves ...... 607,696 607,696 Profit for the year ...... 4,212,317 4,212,317 Transferred to statutory reserve ...... 13,986 ( 13,986) 0 Equity 31.12.2005 ...... 55,944 13,986 607,696 536,953 1,214,579

Related parties

18. Identity of related parties The Company has a related party relationship with its Parent Company, sister companies, directors and executive officers.

Transactions with related parties Receivables and liabilities with related companies are specified as follows at year-end: Current receivables due from Group companies ...... 378,763 Interest-bearing receivable due from FL GROUP hf...... 7,070,934 Loans due to Group companies ...... ( 9,295,115)

Financial Statements of Loftleiðir - Icelandic ehf. 2005 Amounts in USD ______16 ______Notes contd.:

18. Contd.:

Transactions with related parties during the year are specified as follows: Service sold to companies within the Group ...... 13,278,722 Service purchased from companies within the Group ...... 62,133,793

Ratios

19. The Company's primary ratios are specified as follows: 2005 2004 Income statement: Aviation service expenses in proportion to operating income ...... 88.8% 91.8% Profit for the year in proportion to operating income ...... 4.7% 1.3% Earnings per 1 USD share ...... 75.3 17.7

Balance sheet: Current ratio ...... 1.1 0.7 Total equity to issued capital ...... 21.7 ( 64.4)

Financial Statements of Loftleiðir - Icelandic ehf. 2005 Amounts in USD ______17 ______Loftleiðir Icelandic ehf.

Interim Financial Statements 1 January - 30 September 2005

Loftleiðir - Icelandic ehf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 571201-4960 Income Statement for the Nine Months Ended 30 September 2005

2005 1.1.-30.9. Operating income:

Charter revenue ...... 65.795.988 Other operating revenue ...... 396.396 66.192.384

Operating expenses:

Aviation service expenses: Aircraft lease ...... 10.713.036 Aircraft fuel ...... 3.375.258 Aircraft handling and communication ...... 4.406.833 Aircraft maintenance expenses ...... 17.077.993 Aircrew lease ...... 17.800.966 Aircrew expenses ...... 4.455.506 Other aviation service expenses ...... 1.263.756 59.093.348

Passenger services ...... 934.567 Salaries and other personnel expenses ...... 836.922 Administrative expenses ...... 727.251 Depreciation ...... 52.841 61.644.929

4.547.455 Operating profit before net financing costs ...... Net financing costs ...... ( 423.561)

Profit before tax ...... 4.123.894 Income tax expense ...... ( 770.086)

Profit for the period ...... 3.353.808

Interim Financial Statements of Loftleiðir - Icelandic ehf. 30.9.2005 Amounts are in USD ______2 ______Balance Sheet as at 30 September 2005

30.9.2005 31.12.2004 Fixed assets:

Operating assets ...... 235.305 244.376 Intangible assets ...... 1.293 4.396 Deffered tax assets ...... 116.288 101.019 Total fixed assets 352.886 349.791

Current assets:

Trade and other receivables ...... 1.615.162 1.625.610 Cash and cash equivalents ...... 13.816.281 7.058.696 Total current assets 15.431.443 8.684.306

Total assets 15.784.329 9.034.097

Equity:

Share capital ...... 55.944 55.944 Accumulated deficit ...... ( 307.570) ( 3.661.378) Total equity ( 251.626) ( 3.605.434)

Liabilities:

Trade and other payables ...... 4.964.672 1.517.475 Intra company payables ...... 5.625.807 6.815.956 Aircraft lease insurance deposits ...... 2.328.611 2.130.000 Deferred income ...... 3.116.865 2.176.100 Total liabilities 16.035.955 12.639.531

Total equity and liabilities 15.784.329 9.034.097

Interim Financial Statements of Loftleiðir - Icelandic ehf. 30.9.2005 Amounts are in USD ______3 ______Statement of Cash Flows for the Nine Months Ended 30 September 2005

2005 Cash flows from operating activities: 1.1.-30.9.

Profit for the period ...... 3.353.808 Difference between operating profit and cash from operations: Depreciation ...... 52.841 Other operating items ...... 1.730.066 Working capital used in operations 5.136.715

Net change in operating assets and liabilities ...... 1.661.536 Net cash provided by operating activities 6.798.251

Cash flows from investing activities:

Aquisition of operating assets ...... ( 40.666 ) Net cash used in investing activities( 40.666 )

Increase in cash and cash equivalents ...... 6.757.585

Cash and cash equivalents at 1 January ...... 7.058.696

Cash and cash equivalents at 31 December ...... 13.816.281

Interim Financial Statements of Loftleiðir - Icelandic ehf. 30.9.2005 Amounts are in USD ______4 ______Loftleiðir Icelandic ehf.

Interim Financial Statements 1 January - 30 September 2006

Loftleiðir - Icelandic ehf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 571201-4960 Income Statement for the nine Months Ended 30 September 2006

2006 1.1.-30.9. Operating income:

Charter revenue ...... 70,368,012 Gain on sale of assets ...... 5,841,317 Other operating revenue ...... 419,296 76,628,625

Operating expenses:

Aviation service expenses ...... 66,311,657 Passenger services ...... 898,893 Salaries and other personnel expenses ...... 2,185,629 Administrative expenses ...... 1,019,718 Insurance expenses and claims incurred ...... 2,011,176 Depreciation ...... 212,383 72,639,456

Operating profit before net financial income ...... 3,989,169

Net financial income ...... 774,758

Profit before tax ...... 4,763,927

Income tax expense ...... ( 580,000)

Profit for the period ...... 4,183,927

______Loftleiðir Icelandic ehf. Interim Financial Statements 30.9.2006 2 Amounts are in USD Balance Sheet as at 30 September 2006

30.9.2006 31.12.2005 Assets:

Operating assets ...... 541,306 217,434 Intangible assets ...... 12,646,780 1,293 Long-term receivables ...... 3,562,400 4,400 Deferred tax asset ...... 80,575 89,636 Total non-current assets 16,831,061 312,763

Inventories ...... 232,843 0 Trade and other receivables ...... 11,019,757 2,919,866 Interest bearing intra company receivables ...... 1,408,725 7,070,934 Cash and cash equivalents ...... 8,482,718 8,236,049 Total current assets 21,144,043 18,226,849

Total assets 37,975,104 18,539,612

Equity:

Share capital ...... 55,944 55,944 Statutory reserve ...... 13,986 13,986 Other reserves ...... ( 123,612 ) 607,696 Retained earnings ...... 4,601,253 536,953 Total equity 4,547,571 1,214,579

Liabilities:

Trade and other payables ...... 14,351,421 3,729,925 Loans from credit institutions ...... 1,099,474 0 Intra company payables ...... 9,934,590 8,916,352 Aircraft lease insurance deposits ...... 2,504,601 2,120,039 Prepaid income ...... 5,537,447 2,558,717 Total current liabilities 33,427,533 17,325,033

Total equity and liabilities 37,975,104 18,539,612

______Loftleiðir Icelandic ehf. Interim Financial Statements 30.9.2006 3 Amounts are in USD Statement of Cash Flows for the Nine Months Ended 30 September 2006

2006 Cash flows from operating activities: 1.1.-30.9.

Profit for the period ...... 4,183,927 Difference between operating profit and cash from operations: Depreciation ...... 212,383 Gain on the sale of assets ...... ( 5,841,317 ) Working capital used in operations( 1,445,007 )

Net change in operating assets and liabilities ...... 1,887,008 Net cash provided by operating activities 442,001

Cash flows from investing activities:

Acquisition of operating assets ...... ( 20,997,562 ) Acquisition of intangible assets ...... ( 5,286,000 ) Proceeds from the sale of assets ...... 26,568,866 Cash and cash equivalents acquired from subsidiary ...... 1,655,774 Intra company receivables, change ...... ( 1,400,350 ) Net cash from investing activities 540,728

Cash flows from financing activities:

Short-term borrowings, changes ...... 429,055 Net cash from financing activities 429,055

Increase in cash and cash equivalents ...... 1,411,784

Cash and cash equivalents at 1 January ...... 7,070,934

Cash and cash equivalents at 30 September ...... 8,482,718

______Loftleiðir Icelandic ehf. Interim Financial Statements 30.9.2006 4 Amounts are in USD 28.6 FINANCIAL REPORTS FOR AIR ICELAND 28.6.1 AUDITED 2003 – 2005 ANNUAL REPORTS 28.6.2 INTERIM INCOME STATEMENT, BALANCE SHEET AND CASH FLOW STATEMENT FOR THE NINE MONTH PERIOD ENDING 30 SEPTEMBER 2005 28.6.3 AUDITED INTERIM INCOME STATEMENT, BALANCE SHEET AND CASH FLOW STATEMENT FOR THE NINE MONTH PERIOD ENDING 30 SEPTEMBER 2006

Flugfélag Íslands hf. Financial Statements 2003

Flugfélag Íslands hf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 530575-0209 Contents

Endorsement and Signatures of the Board of Directors and the CEO ...... 36Balance Sheet ......

Auditors' Report ...... 48Statement of Cash Flows ......

Income Statement ...... 59Notes ......

Financial Statements of Flugfélag Íslands hf. 2003 ______2 ______Endorsement and Signatures by the Board of Directors and the CEO

The financial statements of Flugfélag Íslands hf. for the year 2003 have been prepared in accordance with the Icelandic Financial Statements Act and Regulation on the Presentation and Contents of Financial Statements. The financial statements have been prepared using the same accounting policies as the previous year.

According to the income statement net profit for the year amounted to ISK 385 million. Operating income amounted to ISK 2,925 million during the year. According to balance sheet, equity at year end 2003 amounted to ISK 866 million, including share capital in the amount of ISK 420 million which is wholly owned by Flugleiðir hf.

The Board of Directors proposes a dividend payment of 91% or amounting to ISK 350 million be paid to the shareholder in the year 2004 as a result of operations in 2003. Reference is made to the financial statements regarding the allocation of profit and other changes in equity during the year.

The Board of Directors and the CEO of Flugfélag Íslands ehf. hereby confirm the Company's financial statements for the year 2003 by means of their signatures:

Reykjavík, 20 February 2004.

The Board of Directors:

Sigurður Helgason

Pálmi Haraldsson Guðmundur Pálsson

CEO:

Jón Karl Ólafsson

Financial Statements of Flugfélag Íslands hf. 2003 ______3 ______Auditors' Report

Board of Directors and Shareholder of Flugfélag Íslands hf.

We have audited the accompanying Balance Sheet of Flugfélag Íslands hf. as of December 31, 2003 and the related statement of income and cash flows for the year then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements give a true and fair view of the financial position of Flugfélag Íslands hf. as at December 31, 2003, and the results of its operations and its cash flows for the year then ended, in accordance with the law and generally accepted accounting principles in Iceland.

Reykjavík, 20 February 2004.

Guðni S. Gústafsson Hafdís Böðvarsdóttir

KPMG Endurskoðun hf.

Financial Statements of Flugfélag Íslands hf. 2003 ______4 ______Income Statement for the year 2003

Note 2003 2002 Operating income: Note Transport revenue: Passengers ...... 1,972,434 1,754,321 Cargo and mail ...... 105,220 88,140 Charter revenue and aircraft lease ...... 408,426 406,615 Other revenue ...... 438,495 416,532 4 2,924,575 2,665,608

Operating expenses:

Salaries and other personnel expenses ...... 14 1,166,168 1,014,990 Aircraft fuel ...... 179,705 166,149 Aircraft and aircrew lease ...... 291,935 437,831 Aircraft servicing, handling and communication ...... 97,314 90,500 Aircraft maintenance expenses ...... 219,747 224,514 Other operating expenses ...... 15 572,582 524,268 Depreciation ...... 18 132,288 78,392 2,659,739 2,536,644

Operating profit before financial income and financial expenses ...... 264,836 128,964

Net financial income (expenses):

Interest income ...... 3,870 12,435 Interest expenses ...... ( 17,089) ( 12,409) Net foreign exchange (loss) gain ...... 2( 20,232) 70,441 Calculated inflation adjustment ...... 1,24 ( 4,171) 1,457 ( 37,622) 71,924

Profit before income tax ...... 227,214 200,888 Income tax ...... 20 157,829 0

Profit for the year ...... 13 385,043 200,888

Financial Statements of Flugfélag Íslands hf. 2003 In ISK thousand ______5 ______Balance Sheet

Assets

Note 2003 2002 Fixed assets:

Intangible assets: Long-term cost ...... 5,16 19,043 62,632

Operating assets: Buildings ...... 45,790 82,696 Aircrafts, spare parts and equipment ...... 407,015 216,073 Other operating assets ...... 62,043 82,586 17 514,848 381,355 Engine hours ...... 7 42,129 20,763 556,977 402,118

Investments and long-term receivables: Deferred income tax asset ...... 8,20 157,829 0 Investment in other companies ...... 3,992 2,492 Bonds ...... 0 2,883 Deposits ...... 17,742 20,103 179,563 25,478

Total fixed assets 755,583 490,228

Current assets:

Inventories ...... 21 131,415 161,889

Current receivables: 9,22 Trade receivables ...... 342,758 348,934 Other receivables ...... 18,597 17,652

Prepaid expenses ...... 99,058 38,856 Cash and cash equivalents ...... 10 205,006 137,890

Total current assets 796,834 705,221

Total assets 1,552,417 1,195,449

Financial Statements of Flugfélag Íslands hf. 2003 In ISK thousand ______5 ______31 December 2003

Equity and liabilities

Note 2003 2002 Equity:

Share capital ...... 23 420,000 420,000 Statutory reserve ...... 61,500 42,000 Retained earnings ...... 384,217 16,498 24 865,717 478,498

Obligations:

Obligations arising from engine hours ...... 0 194,589

Long-term borrowings:

Loans due to credit institutions ...... 0 5,502 Loans due to Parent Company ...... 224,708 110,241 25 224,708 115,743

Current liabilities:

Trade payables ...... 161,999 156,905 Loans due to Flugleiðir hf.'s group entities ...... 8,947 38,943 Taxes payable ...... 1,671 667 Next year maturities of long-term liabilities ...... 26 66,413 22,347 Prepaid income ...... 4 47,921 35,279 Other current liabilities ...... 175,041 152,478 461,992 406,619

Total liabilities and obligations 686,700 716,951

Total equity and liabilities 1,552,417 1,195,449

Off balance sheet items ...... 19

Financial Statements of Flugfélag Íslands hf. 2003 In ISK thousand ______6 ______Statement of Cash Flows for the year 2003

Note 2003 2002 Cash flows from operating activities: Note Profit for the year ...... 13 385,043 200,888 Adjustments for: Depreciation ...... 18 132,288 78,392 Gain on sale of assets ...... ( 1,707) ( 1,969) Expensed engine hours ...... 7 67,536 82,079 Calculated inflation adjustment ...... 1,24 4,171 ( 1,457) Income tax ...... ( 157,829) 0 Indexation and foreign exchange differences ...... 2,116 ( 52,923) Other operating items ...... 1,917 1,000 Working capital from operations 433,535 306,010

Changes in operating assets and liabilities: Inventories ...... 30,474 10,365 Current receivables and prepaid expenses ...... 5,344 52,615 Current payables and prepaid income ...... ( 183,282) ( 25,220) Net change in operating assets and liabilities( 147,464) 37,760

Net cash from operating activities 286,071 343,770

Cash flows from investing activities:

Capitalised long-term cost ...... 16 ( 29,363) ( 75,583) Investment in operating assets: 17 Aircrafts, spare parts and equipment ...... ( 175,663) ( 39,564) Other operating assets ...... ( 6,728) ( 36,984) Change in engine hours ...... ( 143,618) ( 65,023) Proceeds from the sale of assets ...... 2,200 3,000 Investments ...... ( 1,500) 0 Long-term receivables ...... 5,244 ( 6,887) Net cash used in investing activities( 349,428) ( 221,041)

Cash flows from financing activities:

Dividends paid ...... 24 ( 16,000) 0 Proceeds from new long-term borrowings ...... 456,042 5,799 Repayment of borrowings ...... ( 309,569) ( 21,660) Short-term borrowings ...... 0 ( 568) Net cash from (used in) financing activities 130,473 ( 16,429)

Change in cash and cash equivalents ...... 67,116 106,300

Cash and cash equivalents at 1 January ...... 10 137,890 31,590

Cash and cash equivalents at 31 December ...... 10 205,006 137,890

Financial Statements of Flugfélag Íslands hf. 2003 In ISK thousand ______5 ______Notes

Significant accounting policies

Basis of preparation 1. The financial statements are prepared in accordance with the Icelandic Financial Statements Act and Regulation on the Presentation and Contents of Financial Statements and Consolidated Financial Statements. They are prepared on regulations on inflationary accounting. Flugfélag Íslands hf. is að subsidiary of Flugleiðir hf. and has legal residence at Reykjavíkurflugvöllur in Reykjavík. The financial statement of the Company for the year ended 31 December 2003 are a part of the consolidated financial statements of the Parent Company wherein information regarding the financial performance and financial position of the Group can be found. The financial statements are in Icelandic kronas rounded to the nearest thousand. The effects of general price-level changes are calculated and recorded in the consolidated financial statements according to a 2.7% increase in the Official Consumer Price Index within the year.

Operating assets are revalued by adjusting their original historical cost and their accumulated depreciation, according to the Official Consumer Price Index at year-end. Depreciation is expensed in the income statement at the average price level for the year. The effects of inflation on monetary assets and liabilities are calculated and recorded as calculated inflation adjustment, amounting to ISK 4,2 million in the financial statements. As a result of these adjustments, amounts in the balance sheet are stated at year-end price-level but amounts in the income statement are stated at the average price-level for the year. The revaluation of fixed assets and the calculated inflation adjustment on monetary assets and liabilites have been entered in the revaluation reserve account in the balance sheet, as shown in note 24.

Foreign currency 2. Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Icelandic kronas at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement.

Hedging of monetary assets and liabilities, revenues and expenses 3. A part of the Company's operating income and a part of aviation service expenses are in foreign currencies. The company has used derivatives to hedge cash flows in foreign currencies during the fiscal year. The gain or loss arising from these cash flow hedges are recognised in the income statement.

Revenue recognition 4. Cargo and passenger ticket sales are recognised as revenue after the transportation has been provided and sold unused tickets are recognised among liabilities in the balance sheet as prepaid income. This amounted to ISK 48 million at the end of 2003.

Intangible assets 5. Included in long-term cost is the cost of training newly recruited pilots and investment in software. Long term cost is amortised over three years.

Financial Statements of Flugfélag Íslands hf. 2003 In ISK thousand ______5 ______Notes, contd.:

Operating assets 6. Operating assets are capitalised at their inflation adjusted historical cost, less accumulated depreciation. Depreciation is recorded at a fixed rate over the useful life of the asset, until a 10% residual value is met.

Engine hours 7. Included in engine hours, an asset in the balance sheet, is the overhaul of aircraft engines reconised according to flown hours. Engine hours are stated at the historical cost basis in US dollars and capitalised at the foreign exhange rate ruling at year-end. Revaluation is recognised as foreign exchange difference in the income statement.

Deferred tax asset 8. The Company's deferred tax asset has been calculated and is recognised in the financial statements. The calculation represents the temporary difference in balance sheet items as presented in the tax return on the one hand and in the financial statements on the other. The reason for this difference is that the tax assessment is based on premises other than those used in the financial statements. At year end calculated deffered tax asset arising from carry-forward loss exceeded the deffered income tax liability from balance sheet items and thus a deffered tax asset is capitalised.

Receivables 9. Trade receivable are reduced by a provision for doubtful accounts. This provision is not a final write down, but a reserve to meet possible future losses. Receivables unlikely to be collectible are reduced and there is also a reduction to meet general risk of receivables not being collectible. The reduction is deducted from the appropriate account in the balance sheet.

Cash and cash equivalents 10. Cash and cash equivalents consist of cash balances and demand deposits.

Value adjustment accounting 11. In 2001 the Icelandic Parliament approved changes to the Financial Statements Act, whereby inflationary accounting will be abolished as of the year 2002. However, the change will be phased in and inflation adjustments to the operation and financial posistion may still be calculated and recorded for the years 2002 and 2003. The Board of Directors of the Company has agreed to continue recording the effects of inflation in the Consolidated Financial Statements so they are adjusted for the effects of general price-level changes. If inflationary accounting had not been used the Company's profit would have been ISK 6 million higher and equity ISK 22 million lower at year-end.

Changes in depreciation policies 12. Depreciation policies for operating assets and intangible assets have incurred a change so that the useful life of those asset groups is depreciated during the same useful life of comparable assets of the Parent Company. Yearly depreciation would have been approx. ISK 36 million lower according to the previous method. Changes have been made to the grouping of intangible assets and operating assets in the income statement in accordance with the presentation of the Parent Company.

Financial Statements of Flugfélag Íslands hf. 2003 In ISK thousand ______6 ______Notes, contd.:

Quarterly Statements

13. Summary of the Company's operating results by quarters:

Q1 Q2 Q3 Q4 Total Operating income ...... 516,278 709,245 1,005,694 693,358 2,924,575 Operating expenses without depreciation .... ( 551,128) ( 606,986) ( 705,968) ( 663,369) ( 2,527,451) EBIDTA ...... ( 34,850) 102,259 299,726 29,989 397,124 Depreciation ...... ( 27,862) ( 30,043) ( 31,995) ( 42,388) ( 132,288) Operating profit (loss) ...... ( 62,712) 72,216 267,731 ( 12,399) 264,836 Net financial income (expenses) ...... 4,634 ( 11,183) ( 13,875) ( 17,198) ( 37,622) Income tax ...... 0 0 ( 1,400) 159,229 157,829 Profit (loss) ...... ( 58,078) 61,033 252,456 129,632 385,043

Operating expenses

14. Salaries, salary-related expenses and other personnel expenses are specified as follows: 2003 2002

Salaries ...... 808,504 711,247 Salary-related expenses ...... 166,246 138,031 Other personnel expenses ...... 191,418 165,712 1,166,168 1,014,990

The Company's average number of employees during the year was 214. The salaries of the Board of Directors and the CEO salaries amounted to ISK 13.8 million in the year 2003.

15. Other operating expenses are specified as follows: 2003 2002

Operating cost of real estate and fixtures ...... 113,759 105,080 Communication expenses ...... 57,506 24,564 Advertising expenses ...... 73,096 64,884 Booking fees, commissions and credit card fees ...... 92,624 78,003 Cost of goods sold ...... 75,278 49,825 Passenger services ...... 27,845 19,460 Administrative cost ...... 18,729 19,868 Professional services ...... 34,060 62,375 Insurance expenses and claims incurred ...... 47,950 69,227 Bad debts and change in provision ...... 19,788 13,059 Property tax ...... 1,671 667 Other expenses ...... 10,276 17,256 572,582 524,268

Financial Statements of Flugfélag Íslands hf. 2003 In ISK thousand ______7 ______Notes, contd.:

Intangible assets

16. Long-term cost is specified as follows:

Balance at 1.1.2003 ...... 99,945 Transferred between depreciation categories according to note 12 ...... ( 28,298) Revaluation during the year ...... 1,641 Additions during the year ...... 29,363 Amortised during the year ...... ( 45,139) Book value 31.12.2003 ...... 57,512 Next year's ammortisation, stated among current assets ...... ( 38,469) Long-term cost among fixed assets ...... 19,043

Depreciation ratio ...... 33%

Operating assets

17. Operating assets are specified as follows: Engines, spare Other parts and operating Buildings equipment assets Total Total value 1.1.2003 ...... 99,335 258,598 210,939 568,872 Previously depreciated ...... ( 16,639) ( 42,525) ( 128,353) ( 187,517) Balance at 1.1.2003 ...... 82,696 216,073 82,586 381,355 Transferred between depreciation categories according to note 12 ...... ( 36,509) 68,653 ( 3,846) 28,298 Revaluation during the year ...... 1,236 9,244 1,884 12,364 Additions during the year ...... 0 175,663 6,728 182,391 Sold during the year ...... 0 ( 1,883) ( 528) ( 2,411) Depreciation for the year ...... ( 1,633) ( 60,735) ( 24,781) ( 87,149) Balance at 31.12.2003 ...... 45,790 407,015 62,043 514,848

Total value at 31.12.2003 ...... 55,200 528,900 188,098 772,198 Total depreciation 31.12.2003 ...... ( 9,410) ( 121,885) ( 126,055) ( 257,350) Balance at 31.12.2003 ...... 45,790 407,015 62,043 514,848

Depreciation ratios ...... 3% 8-20% 15-20%

18. Depreciation and amortisation according to the income statement are specified as follows:

Depreciation of operating assets, see note 17 ...... 87,149 Amortisation of intangible assets, see note 16 ...... 45,139 Total depreciation and ammortisation ...... 132,288

Financial Statements of Flugfélag Íslands hf. 2003 In ISK thousand ______8 ______Notes, contd.:

Operating leases 19. The Company has entered into operating lease agreements regarding the lease of three Fokker 50 aircrafts from its Parent Company. In addition the Company has entered into lease agreements with other parties regarding the lease of one Metro aircraft and one Fokker 50 aircraft. The longest of these agreements expires in 2006. The deligation arising from these contracts amounts to a total of ISK 449 million. The Company also leases buildings and vehicles, the longest of which expires in 2006. The obligation arising from those leases amounts to ISK 146 million. At the end of the year the total obligation arising from the aforementioned lease agreements amounts to ISK 595 million.

Deferred income tax asset

20. The deferred income tax asset is attributable to the following items:

Carry-forward losses ...... 160,203 Operating assets ...... ( 681) Current assets ...... ( 1,693) Deferred income tax liability 31.12.2003 ...... 157,829

Inventories

21. Inventories at year-end are specified as follows: 2003 2002

Aircraft spare parts ...... 114,243 146,222 Fuel inventories ...... 695 741 Other inventories ...... 16,477 14,926 131,415 161,889

Receivables

22. Provision for bad debt is specified as follows: 2003 2002

Provision at the beginning of the year ...... 32,000 28,000 Receivables lost during the year ...... ( 33,188) ( 9,059) Provision for bad debts during the year ...... 19,788 13,059 Provision at the end of the year ...... 18,600 32,000

Equity

23. The Company's share capital amounts to ISK 420 million as decided in its Articles of Association. One vote is attached to each ISK one share.

Financial Statements of Flugfélag Íslands hf. 2003 In ISK thousand ______9 ______Notes, contd.:

24. Summary of equity:

Share Statutory Revaluation Retained Total capital reserve reserve earnings equity

Equity 1.1 2003 ...... 420,000 42,000 0 16,498 478,498 Revaluation of assets ...... 14,005 14,005 Dividends paid...... ( 16,000) ( 16,000) Calculated cost due to price changes ...... 4,171 4,171 Profit for the year...... 385,043 385,043 Transf. to statutory reserve ...... 19,500 ( 19,500) 0 Transf. of revaluation reserve ...... ( 18,176) 18,176 0 Equity 31.12.2003 ...... 420,000 61,500 0 384,217 865,717

Long-term liabilities

25. The Company's long-term liabilities at year-end, all due to the Parent Company, are specified as follows: Interest Remaining rates Balance Loans in ISK, indexed ...... 7.3% 53,678 Loans in USD ...... 3.6% 31,096 Loans in CHF ...... 2.8% 36,015 Loans in JPY ...... 2.4% 23,251 Loans in EUR ...... 4.5% 147,081 Total long-term liabilities, including current maturities ...... 291,121 Current maturities of long-term liabilities ...... ( 66,413) Long-term liabilities in the balance sheet ...... 224,708

26. Repayment of long-term liabilities are specified as follows:

Repayments in 2004 ...... 66,413 Repayments in 2005 ...... 66,413 Repayments in 2006 ...... 39,574 Repayments in 2007 ...... 39,574 Repayments in 2008 ...... 39,574 Repayments in 2009 ...... 39,573 291,121

Taxes

27. Taxes for the year have been recognised in the financial statements. The Company complies to the Law on joint taxation of Parent Company and subsidiaries and will therefore be taxed in year 2004 for the operating year 2003, together with its Parent Company

Financial Statements of Flugfélag Íslands hf. 2003 In ISK thousand ______10 ______Notes, contd.:

Ratios

28. The Company's primary ratios are specified as follows: 2003 2002 Income statement: Accounts receivables turnover ratio (days) ...... 35 41 Aviation service expense in proportion to operating income ...... 27% 34% Salaries and other personnel expenses in proportion to operating income ...... 40% 38% Profit in proportion to operating income ...... 13% 8% Profit per share ...... 0.92 0.48 Return on equity ...... 83% 74%

Balance sheet: Current ratio - current assets/current liabilities ...... 1.72 1.73 Equity ratio - equity/total assets ...... 0.56 0.40 Intrinsic value of shares - equity/share capital at nominal value ...... 2.06 1.14

29. Five year summary: 2003 2002 2001 2000 1999 Income statement: Operating income ...... 2,924,575 2,665,608 2,876,580 2,516,930 1,793,236 Operating expenses without depreciation .... ( 2,527,451) ( 2,457,252) ( 2,915,343) ( 2,797,124) ( 1,947,597) Profit (loss) without depreciation ...... 397,124 208,356 ( 38,763) ( 280,194) ( 154,361) Depreciation ...... ( 132,288) ( 78,392) ( 67,212) ( 41,466) ( 33,407) Operating profit (loss) (EBIT) ...... 264,836 129,964 ( 105,975) ( 321,660) ( 187,768) Net financial (expenses) income ...... ( 37,622) 70,924 ( 68,777) ( 60,259) ( 9,747) Income tax expense ...... 157,829 0 0 0 0 Profit (loss) for the year ...... 385,043 200,888 ( 174,752) ( 381,919) ( 197,515)

Balance sheet: Non-current assets ...... 755,583 490,228 470,249 497,057 474,854 Current assets ...... 796,834 705,221 620,586 547,492 321,842 Total assets 1,552,417 1,195,449 1,090,835 1,044,549 796,696

Equity ...... 865,717 478,498 270,789 46,069 51,906 Obligations ...... 0 194,589 255,070 0 0 Long-term liabilities ...... 224,708 115,743 139,575 453,143 323,044 Current liabilities ...... 461,992 406,619 425,401 545,337 421,746 Total equity and liabilities 1,552,417 1,195,449 1,090,835 1,044,549 796,696

Financial Statements of Flugfélag Íslands hf. 2003 In ISK thousand ______11 ______Flugfélag Íslands hf. Financial Statements 2004

Flugfélag Íslands hf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 530575-0209 Contents

Endorsement and Signatures of the Board of Directors and the CEO ...... 36Balance Sheet ......

Auditors' Report ...... 48Statement of Cash Flows ......

Income Statement ...... 59Notes ......

Financial Statements of Flugfélag Íslands hf. 2004 ______2 ______Endorsement and Signatures by the Board of Directors and the CEO

The financial statements of Flugfélag Íslands hf. for the year 2004 have been prepared in accordance with the Icelandic Financial Statements Act and Regulation on the Presentation and Contents of Financial Statements and Consolidated Financial Statements. The financial statements are based on the same accounting policies as for the previous year except that inflationary adjusted accounting has been ceased in accordance with changes to the Icelandic Financial Statements Act in 2001.

According to the income statement net profit for the year amounted to ISK 301 million. Operating income amounted to ISK 3,341 million during the year. According to the balance sheet, equity at the end of the year amounted to ISK 852 million, including share capital in the amount of ISK 420 million which is wholly owned by Flugleiðir hf.

The Board of Directors proposes a dividend payment of 84,5% or amounting to ISK 354,9 million be paid to the shareholder in the year 2005 as a result of operations in 2004. Reference is made to the notes to the financial statements regarding the allocation of profits and other changes in equity.

The Board of Directors and the CEO of Flugfélag Íslands ehf. hereby confirm the Company's financial statements by means of their signatures:

Reykjavík, 11 February 2005.

The Board of Directors:

Sigurður Helgason

Jens Bjarnason Sveinbjörn Indriðason

CEO:

Jón Karl Ólafsson

Financial Statements of Flugfélag Íslands hf. 2004 ______3 ______Auditors' Report

Board of Directors and Shareholder of Flugfélag Íslands hf.

We have audited the accompanying balance sheet of Flugfélag Íslands hf. as of December 31, 2004 and the related statement of income and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements give a true and fair view of the financial position of the Company as at December 31, 2004, and the results of its operations and its cash flows for the year then ended, in accordance with the law and generally accepted accounting principles in Iceland.

Reykjavík, 11 February 2005.

Jón S. Helgason

KPMG Endurskoðun hf.

Financial Statements of Flugfélag Íslands hf. 2004 ______4 ______Income Statement for the year 2004

Note 2004 2003 Operating income:

Transport revenue: Passengers ...... 2,258,853 1,972,434 Cargo ...... 96,598 105,220 Charter revenue and aircraft lease ...... 519,918 408,426 Other revenue ...... 465,262 438,495 4 3,340,631 2,924,575

Operating expenses:

Salaries and other personnel expenses ...... 13 1,393,082 1,166,168 Aircraft fuel ...... 229,899 179,705 Aircraft and aircrew lease ...... 233,057 291,935 Aircraft servicing, handling and communication ...... 98,325 97,314 Aircraft maintenance expenses ...... 260,269 219,747 Other operating expenses ...... 14 560,127 572,582 Depreciation ...... 17 156,244 132,288 2,931,003 2,659,739

Operating profit before financial income and financial expenses ...... 409,628 264,836

Financial income and financial expenses:

Interest income ...... 5,615 3,870 Interest expenses ...... ( 18,616) ( 17,089) Net foreign exchange loss ...... 2( 28,817) ( 20,232) Calculated inflation adjustment ...... 11 0 ( 4,171) ( 41,818) ( 37,622)

Profit before income tax ...... 367,810 227,214 Income tax ...... 8,19( 67,021) 157,829

Profit for the year ...... 12 300,789 385,043

Financial Statements of Flugfélag Íslands hf. 2004 In ISK thousand ______5 ______Balance Sheet

Assets

Note 2004 2003 Fixed assets:

Intangible assets: Long-term cost ...... 5,15 8,219 19,043

Operating assets: Buildings ...... 44,134 45,790 Aircrafts, spare parts and equipment ...... 651,125 407,015 Other operating assets ...... 59,216 62,043 16 754,475 514,848 Engine hours ...... 7 106,931 42,129 861,406 556,977

Investments and long-term receivables: Deferred income tax asset ...... 0 157,829 Investment in other companies ...... 5,992 3,992 Bonds ...... 1,786 0 Deposits ...... 7,610 17,742 15,388 179,563

Total fixed assets 885,013 755,583

Current assets:

Inventories ...... 19 93,564 131,415

Current receivables: 9,20 Trade receivables ...... 333,854 342,758 Other receivables ...... 37,911 18,597

Prepaid expenses ...... 98,076 99,058 Cash and cash equivalents ...... 10 384,246 205,006

Total current assets 947,651 796,834

Total assets 1,832,664 1,552,417

Financial Statements of Flugfélag Íslands hf. 2004 In ISK thousand ______6 ______31 December 2004

Equity and liabilities

Note 2004 2003 Equity:

Share capital ...... 21 420,000 420,000 Statutory reserve ...... 76,539 61,500 Retained earnings ...... 354,967 384,217 22 851,506 865,717

Obligations:

Deferred income tax liability ...... 10.23 13,098 0

Long-term liabilities:

Loans due to Parent Company ...... 304,306 224,708 24 304,306 224,708

Current liabilities:

Trade payables ...... 161,595 161,999 Loans due to Flugleiðir hf.'s group entities ...... 26,596 8,947 Taxes payable ...... 62,490 1,671 Current maturities of long-term liabilities ...... 25 103,965 66,413 Prepaid income ...... 4 50,536 47,921 Other current liabilities ...... 258,572 175,041 663,754 461,992

Total liabilities and obligations 981,158 686,700

Total equity and liabilities 1,832,664 1,552,417

Off-balance sheet items ...... 18

Financial Statements of Flugfélag Íslands hf. 2004 In ISK thousand ______7 ______Statement of Cash Flows for the year 2004

Note 2004 2003 Cash flows from operating activities:

Profit for the year ...... 12 300,789 385,043 Adjustments for: Depreciation ...... 17 156,244 132,288 Gain on sale of assets ...... ( 1,027) ( 1,707) Expensed engine hours ...... 7 60,985 67,536 Calculated inflation adjustment ...... 11 0 4,171 Income tax ...... 67,021 ( 157,829) Indexation and foreign exchange losses ...... 8,256 4,033 Working capital from operations 592,268 433,535

Changes in operating assets and liabilities: Inventories ...... 37,851 30,474 Current receivables and prepaid expenses ...... 133,859 5,344 Current payables and prepaid income ...... 121,691 ( 183,282) Net change in operating assets and liabilities 293,401 ( 147,464)

Net cash from operating activities 885,669 286,071

Cash flows from investing activities:

Capitalised long-term cost ...... 15 ( 179,284) ( 29,363) Investment in operating assets: 16 Aircrafts, spare parts and equipment ...... ( 329,185) ( 175,663) Other operating assets ...... ( 23,279) ( 6,728) Change in engine hours ...... 0 ( 143,618) Proceeds from the sale of assets ...... 1,050 2,200 Investments ...... ( 2,000) ( 1,500) Long-term receivables ...... 6,970 5,244 Net cash used in investing activities( 525,728) ( 349,428)

Cash flows from financing activities:

Dividends paid ...... 23 ( 315,000) ( 16,000) Proceeds from new long-term borrowings ...... 200,000 456,042 Repayment of borrowings ...... ( 65,700) ( 309,569) Net cash (used in) from financing activities( 180,700) 130,473

Change in cash and cash equivalents ...... 179,241 67,116

Cash and cash equivalents at 1 January ...... 10 205,006 137,890

Cash and cash equivalents at 31 December ...... 10 384,247 205,006

Financial Statements of Flugfélag Íslands hf. 2004 In ISK thousand ______8 ______Notes

Significant accounting policies

Basis of preparation 1. The financial statements of Flugfélag Íslands hf. have been prepared in accordance with the Icelandic Financial Statements Act and Regulation on the presentation and contents of financial statements and consolidated financial statements. They are prepared on the historical cost basis and according to the same accounting policies as for the previous year except for changes as explained in note nr. 11. The financial statements are in Icelandic kronas and rounded to the nearest thousand. Flugfélag Íslands hf. is a subsidiary of Flugleiðir hf. and has legal residence at Reykjavíkurflugvöllur in Reykjavik. The financial statements of the Company for the year ended 31 December 2004 are a part of the consolidated financial statements of the Parent Company wherein information regarding the financial performance and financial position of the Group can be found.

Foreign currency 2. Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Icelandic kronas at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement.

Hedging of monetary assets and liabilities, revenues and expenses 3. A portion of the Company's operating income and a part of aviation service expenses are in foreign currencies. The Company has used derivatives to hedge cash flows in foreign currencies during the fiscal year. The gain or loss arising from these cash flow hedges are recognised in the income statement.

Revenue recognition 4. Cargo and passenger ticket sales are recognised as revenue after the transportation has been provided and sold unused tickets are recognised among liabilities in the balance sheet as prepaid income. Prepaid income amounted to ISK 51 million at the end of 2004.

Intangible assets 5. Included in long-term cost is the cost of training newly recruited pilots and investment in software. These items are amortised over three years.

Operating assets 6. Operating assets are capitalised at their inflation adjusted historical cost, less accumulated depreciation. Depreciation is recorded at a fixed rate over the useful life of the asset, until a 10% residual value is met.

Engine hours 7. Included in engine hours, an asset in the balance sheet, is the overhaul of aircraft engines reconised according to flown hours. Engine hours are stated at the historical cost basis in US dollars and capitalised at the foreign exhange rate ruling at year-end. Revaluation is recognised as foreign exchange difference in the income statement.

Financial Statements of Flugfélag Íslands hf. 2004 In ISK thousand ______9 ______Notes, contd.:

Receivables 8. Trade receivables are reduced by a provision for doubtful accounts. This provision is not a final write down, but a reserve to meet possible future losses. Receivables unlikely to be collectible are reduced and there is also a reduction to meet general risk of receivables not being collectible. The reduction is deducted from the appropriate account in the balance sheet.

Cash and cash equivalents 9. Cash and cash equivalents consist of cash balances and demand deposits.

Deferred income tax liability 10. The Company's deferred income tax liability is calculated and recognised in the financial statements. It is based on the differences of balance sheet items due to different treatment of those items according to tax law and accounting standards. These differences arise because income tax is based on different presumptions than the Company's financial statements. These are mainly timing differences because expenses, mainly depreciation, are usually recognised earlier in the income tax return than in the financial statements.

Changes in accounting policies 11. At the end of 2001 Alþingi, the Icelandic Parliament, approved changes to the Financial Statements Act abolishing inflationary accounting as of the year 2002. The Company's Board of Directors has decided to abolish inflationary accounting according to these changes in the laws. The effects of general price level changes are not recognised in the Company's income statement. The Company's assets, previously revalued based on the Consumer Price Index, are now entered at their cost value in the Company's financial statements. Depreciation is calculated based on historical cost instead of the revalued historical cost. The effect on the income statement is that net profit is no longer stated at the average consumer price index for the year and the aforementioned assets are no longer adjusted according to the year-end consumer price index. In accordance with International Accounting Standards regarding changes from inflationary to non-inflationary accounting principles, the comparative amounts in the financial statements have not been adjusted.

Quarterly Statements

12. Summary of the Company's operating results by quarters:

Q1 Q2 Q3 Q4 Total Operating income ...... 604,203 839,022 1,155,332 742,074 3,340,631 Operating expenses without depreciation .... ( 588,059) ( 699,956) ( 786,800) ( 699,944) ( 2,774,759) EBIDTA ...... 16,144 139,066 368,532 42,130 565,872 Depreciation ...... ( 35,280) ( 36,449) ( 40,758) ( 43,757) ( 156,244) Operating profit (loss) ...... ( 19,136) 102,617 327,774 ( 1,627) 409,628 Net financial income (expense) ...... ( 2,557) ( 809) ( 9,734) ( 28,718) ( 41,818) Income tax ...... 3,900 ( 18,400) ( 57,500) 4,979 ( 67,021) Profit (loss) ...... ( 17,793) 83,408 260,540 ( 25,366) 300,789

Financial Statements of Flugfélag Íslands hf. 2004 In ISK thousand ______10 ______Notes, contd.:

Operating expenses

13. Salaries, salary-related expense and other personnel expenses are specified as follows: 2004 2003

Salaries ...... 943,727 808,504 Salary-related expenses ...... 226,486 166,246 Other personnel expenses ...... 222,869 191,418 1,393,082 1,166,168

The Company´s average number of employees during the year was 219. The salaries of the Board of Directors and the CEO amounted ISK 16 million in the year 2004.

14. Other operating expenses are specified as follows: 2004 2003

Operating cost of real estate and fixtures ...... 107,552 113,759 Communication expenses ...... 66,745 57,506 Advertising expenses ...... 80,905 73,096 Booking fees, commissions, and credit card fees ...... 91,809 92,624 Cost of goods sold ...... 44,717 75,278 Passenger services ...... 44,141 27,845 Administrative cost ...... 18,182 18,729 Professional services ...... 35,711 34,060 Insurance expenses and claims incurred ...... 37,138 47,950 Bad debts and change in provision ...... 54 19,788 Property tax ...... 2,636 1,671 Other operating expenses ...... 30,537 10,276 560,127 572,582

Intangible assets

15. Long-term cost is specified as follows:

Balance at 1.1.2004 ...... 57,512 Additions during the year ...... 15,755 Amortised during the year ...... ( 43,429) Balance at 31.12.2004 ...... 29,838 Next year's amortisation, recognised among current assets ...... ( 21,619) Long-term cost among fixed assets ...... 8,219

Depreciation ratio ...... 33%

Financial Statements of Flugfélag Íslands hf. 2004 In ISK thousand ______11 ______Notes, contd.:

Operating assets

16. Operating assets are specified as follows: Engines, spare Other parts and operating Buildings equipment assets Total Total value 1.1.2004 ...... 55,200 528,900 188,098 772,198 Previously depreciated ...... ( 9,410) ( 121,885) ( 126,055) ( 257,350) Balance at 1.1.2004 ...... 45,790 407,015 62,043 514,848 Additions during the year ...... 0 329,185 23,279 352,464 Sold during the year ...... 0 0 ( 22) ( 22) Depreciation for the year ...... ( 1,656) ( 85,075) ( 26,084) ( 112,815) Balance at 31.12.2004 ...... 44,134 651,125 59,216 754,475

Total value 31.12.2004 ...... 55,200 853,915 191,895 1,101,010 Total depreciation 31.12.2004 ...... ( 11,066) ( 202,790) ( 132,679) ( 346,535) Balance at 31.12.2004 ...... 44,134 651,125 59,216 754,475

Depreciation ratios ...... 3% 8-20% 15-20%

17. Depreciation and amortisation according to the income statement are specified as follows:

Depreciation of operating assets, see note 16 ...... 112,815 Amortisation of intangible assets, see note 15 ...... 43,429 Total depreciation and amortisation ...... 156,244

Operating leases 18. The Company has entered into operating lease agreements regarding the lease of three Fokker 50 aircrafts from its Parent Company. In addition the Company has entered into lease agreements with other parties regarding the lease of one Metro aircraft. The longest of these agreements expires in 2008. The obligation arising from these contracts amounts to a total of ISK 447 million. The Company also leases buildings and vehicles, the longest of which expires in 2008. The obligation arising from those leases amounts to ISK 291 million. At the end of the year the total obligation arising from the aforementioned lease agreements amounts to ISK 738 million.

Inventories

19. Inventories are specified as follows: 2004 2003

Aircraft spare parts ...... 82,780 114,243 Fuel inventories ...... 0 695 Other inventories ...... 10,784 16,477 93,564 131,415

Financial Statements of Flugfélag Íslands hf. 2004 In ISK thousand ______12 ______Notes, contd.:

Receivables

20. Provision for bad debt is specified as follows

Provision at the beginning of the year ...... 18,600 32,000 Receivables lost during the year ...... ( 4,654)( 33,188) Provision for bad debts during the year ...... 54 19,788 Provision at the end of the year ...... 14,000 18,600

Equity

21. The Company's share capital amounts to ISK 420 million as decided in its Articles of Association. One vote is attached to each ISK one share.

22. Summary of equity: Share Statutory Retained Total capital reserve earnings equity

Equity 1.1 2004 ...... 420,000 61,500 384,217 865,717 Dividends paid ...... ( 315,000) ( 315,000) Profit for the year ...... 300,789 300,789 Transf. to statutory reserve ...... 15,039 ( 15,039) 0 Equity 31.12.2004 ...... 420,000 76,539 354,967 851,506

Deferred income tax liability

23. The deferred income tax liability is attributable to the following items:

Operating assets ...... 11,976 Current assets ...... 1,122 Deferred income tax liability 31.12.2004 ...... 13,098

Financial Statements of Flugfélag Íslands hf. 2004 In ISK thousand ______13 ______Notes, contd.:

Long-term liabilities

24. The Company's long-term borrowings, all due to the Parent Company Flugleiðir hf, are specified as follows: Interest Remaining rates Balance Loans in ISK, indexed ...... 7.3% 27,889 Loans in USD ...... 4.8% 61,393 Loans in CHF ...... 3.0% 67,974 Loans in JPY ...... 2.1% 37,277 Loans in EUR ...... 4.4% 213,738 Total long-term borrowings including next years maturities ...... 408,271 Current maturities of long-term liabilities ...... ( 103,965) Long-term liabilities in balance sheet ...... 304,306

25. Repayment of long-term liabilities is specified as follows:

Repayments in 2005 ...... 103,965 Repayments in 2006 ...... 76,076 Repayments in 2007 ...... 76,076 Repayments in 2008 ...... 76,077 Repayments in 2009 ...... 76,077 408,271

Taxes

26. Taxes have been calculated and recognised in the financial statements. The Company meets the Tax Law's provision concerning the joint taxation of parent companies and subsidiaries. Consequently, taxes arising from operations in the year 2004 will be jointly taxed in 2005 with its Parent Company.

Ratios

27. The Company's primary ratios are specified as follows: 2004 2003 Income statement:

Accounts receivable turnover (days) ...... 36 35 Aviation service expense in proportion to operating income ...... 25% 27% Salaries and other personnel expenses in proportion to operating income ...... 42% 40% Profit in proportion to operating income ...... 9% 13% Profit per share ...... 0.72 0.92 Return on equity ...... 55% 83%

Balance sheet:

Current ratio - current assets/current liabilities ...... 1.43 1.72 Equity ratio - equity/total assets ...... 0.46 0.56 Intrinsic value of share capital - equity/share capital at nominal value ...... 2.03 2.06

Financial Statements of Flugfélag Íslands hf. 2004 In ISK thousand ______14 ______Notes, contd.:

28. Five year summary: 2004 2003 2002 2001 2000 Income statement: Operating income ...... 3,340,631 2,924,575 2,665,608 2,876,580 2,516,930 Operating expenses without depreciation .... ( 2,774,759) ( 2,527,451) ( 2,457,252) ( 2,915,343) ( 2,797,124) Profit (loss) without depreciation ...... 565,872 397,124 208,356 ( 38,763) ( 280,194) Depreciation ...... ( 156,244) ( 132,288) ( 78,392) ( 67,212) ( 41,466) Operating profit (loss) (EBIT) ...... 409,628 264,836 129,964 ( 105,975) ( 321,660) Net financial income (expenses) ...... ( 41,818) ( 37,622) 70,924 ( 68,777) ( 60,259) Income tax expense ...... ( 67,021) 157,829 0 0 0 Profit (loss) for the year ...... 300,789 385,043 200,888 ( 174,752) ( 381,919)

Balance sheet: Non-current assets ...... 885,013 755,583 490,228 470,249 497,057 Current assets ...... 947,651 796,834 705,221 620,586 547,492 Total assets 1,832,664 1,552,417 1,195,449 1,090,835 1,044,549

Equity ...... 851,506 865,717 478,498 270,789 46,069 Obligations ...... 13,098 0 194,589 255,070 0 Long-term liabilities ...... 304,306 224,708 115,743 139,575 453,143 Current liabilities ...... 663,754 461,992 406,619 425,401 545,337 Total equity and liabilities 1,832,664 1,552,417 1,195,449 1,090,835 1,044,549

Financial Statements of Flugfélag Íslands hf. 2004 In ISK thousand ______15 ______Flugfélag Íslands ehf. Financial Statements 2005

Flugfélag Íslands ehf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 530575-0209 Contents

Endorsement and Signatures of the Board of Directors and the CEO ...... 36 Balance Sheet ......

Auditors' Report ...... 47 Statement of Cash Flows ......

Income Statement ...... 58 Notes ......

______Financial Statements of Flugfélag Íslands ehf. 2005 2 Endorsement and Signatures by the Board of Directors and the CEO

Flugfélag Íslands ehf.'s financial statements are for the first time prepared according to International Financial Reporting Standards. The Company's financial statements for the previous years have been prepared in accordance with the Financial Statements Act and accounting principles in Iceland. The total effect of IFRS adoption on the Company's financial statements is that equity at the beginning of the year 2005 decreases by ISK 16 million, from ISK 851 million to ISK 835 million. The effect of IFRS adoption is further explained in the notes to the financial statements.

According to the income statement net profit for the year amounted to ISK 201 million. According to the balance sheet, equity at the end of the period amounted to ISK 681 million, including share capital in the amount of ISK 420 million.

The Board of Directors proposes no dividend payment in 2006, arising from operations in the year 2005, reference is made to the notes in the financial statements regarding information on other changes in equity.

The Board of Directors and the CEO of Flugfélag Íslands ehf. hereby confirm the Company's financial statements by means of their signatures:

Reykjavík, 3 March 2006

The Board of Directors:

Þorsteinn Örn Guðmundsson

Andri Áss Grétarsson

CEO:

Árni Gunnarsson

______Financial Statements of Flugfélag Íslands ehf. 2005 3 Auditors' Report

Board of Directors and Shareholder of Flugfélag Íslands ehf.

We have audited the accompanying balance sheet of Flugfélag Íslands ehf. (the "Company") as of December 31, 2005 and the related statement of income and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements give a true and fair view of the financial position of the Company as of December 31, 2005 and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU.

Reykjavík, 3 March 2006 Jón S. Helgason

KPMG Endurskoðun hf.

______Financial Statements of Flugfélag Íslands ehf. 2005 4 Income Statement for the year 2005

Note 2005 2004 Operating income:

Transport revenue: Passengers ...... 2,591,372 2,258,853 Cargo and mail ...... 103,087 96,598 Charter flight revenue and aircraft lease ...... 498,246 519,918 Other operating revenue ...... 2 358,266 465,262 3,550,971 3,340,631

Operating expenses:

Salaries and other personnel expenses ...... 3 1,572,740 1,401,882 Aircraft fuel ...... 310,530 229,899 Aircraft lease ...... 281,472 233,057 Aircraft servicing, handling and communication ...... 98,079 98,325 Aircraft maintenance expenses ...... 213,924 199,284 Other operating expenses ...... 4 590,902 560,127 Depreciation ...... 9 181,789 192,606 3,249,436 2,915,180

Operating profit...... 301,535 425,451

Net financial expenses ...... 5( 54,749) ( 41,818)

Profit before income tax ...... 246,786 383,633

Income tax expense ...... 6( 45,665) ( 69,869)

Profit for the year ...... 18 201,121 313,764

Earnings per share: Basic earnings per share (ISK) ...... 0.48 0.75

______Financial Statements of Flugfélag Íslands ehf. 2005 5 In ISK thousand Balance Sheet as at 31 December 2005

Note 2005 2004 Assets: Operating assets ...... 8 565,052 922,874 Intangible assets ...... 13 2,822 9,802 Investments in companies ...... 14 6,442 5,992 Long-term receivables ...... 0 7,610 Total non-current assets 574,316 946,278

Inventories ...... 15 95,010 93,564 Trade receivables ...... 16 394,921 333,854 Other receivables ...... 69,367 54,686 Assets classified as held for sale ...... 52,340 0 Cash and cash equivalents ...... 32,180 384,246 Total current assets 643,818 866,350

Total assets 1,218,134 1,812,628

Equity: Share capital ...... 17 420,000 420,000 Statutory reserve ...... 86,595 76,539 Retained earnings ...... 174,702 338,537 Total equity 18 681,297 835,076

Liabilities: Interest-bearing loans and borrowings ...... 0 304,306 Deferred income tax liability ...... 19 21,482 9,492 Total non-current liabilities 21,482 313,798

Trade payables ...... 170,714 161,595 Loans due to FL GROUP hf.'s group entities ...... 5,100 26,596 Taxes payable ...... 31,309 62,490 Current portion of interest-bearing loans and borrowings ...... 0 103,965 Other payables ...... 244,194 258,572 Prepaid income ...... 64,038 50,536 Total current liabilities 515,355 663,754

Total liabilities 536,837 977,552

Total equity and liabilities 1,218,134 1,812,628

______Financial Statements of Flugfélag Íslands ehf. 2005 5 In ISK thousand Statement of Cash Flows for the year 2005

Note 2005 2004 Cash flows from operating activities:

Profit for the year ...... 18 201,121 313,764 Adjustments for: Depreciation ...... 9 181,789 192,606 Gain on the sale of operating assets ...... ( 60) ( 1,027) Write-down of investment in shares ...... 1,050 0 Indexation and foreign exchange ...... 526 8,256 Deferred income tax liability, increase ...... 6 11,990 10,015 Working capital from operations 396,416 523,614

Net change in operating assets and liabilities ...... Inventories ...... 5,419 37,851 Current receivables ...... ( 75,748) 133,859 Current liabilities ...... ( 44,434) 181,545 Net change in operating assets and liabilities( 114,763) 353,255

Net cash from operating activities 281,653 876,869

Cash flows from investing activities:

Acquisition of operating assets ...... 8( 248,865) ( 515,994) Proceeds from the sale of assets ...... 373,500 1,050 Acquisition of intangible assets ...... 0 ( 6,955) Investments in shares ...... ( 1,500) 0 Long-term receivables, change ...... 7,247 4,970 Net cash from (used in) investing activities 130,382 ( 516,929)

Cash flows from financing activities:

Dividends paid ...... 18( 354,900) ( 315,000) Proceeds from new non-current borrowings ...... 0 200,000 Repayment of borrowings ...... ( 409,201) ( 65,700) Net cash used in financing activities( 764,101) ( 180,700)

(Decrease) increase in cash and cash equivalents ...... ( 352,066) 179,240

Cash and cash equivalents at 1 January ...... 384,246 205,006

Cash and cash equivalents at 31 December ...... 32,180 384,246

Further information Interest income received ...... 7,163 4,897 Interest expenses paid ...... 10,991 19,419

______Financial Statements of Flugfélag Íslands ehf. 2005 5 In ISK thousand Notes

Significant accounting policies

Flugfélag Íslands ehf. is a subsidiary of FL GROUP hf. and has legal residence at Reykjavíkurflugvöllur in Reykjavík. The financial statements of the Company for the year ended 31 December 2005 are a part of the consolidated financial statements of the Parent Company wherein information regarding the financial performance and financial position of the Group can be found.

a. Statement of compliance

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and its interpretations adopted by the International Accounting Standards Board (IASB), as confirmed by the EU. These are the Company's first financial statements prepared according to IFRS and IFRS 1, First-time Adoption of IFRS, has been applied.

An explanation of how the transition to IFRSs has affected the reported financial position and financial performance of the Company is provided in note 22. In the note, the changes in equity's comparative figures and the Company's results as they were disclosed according to Icelandic GAAP for the year 2004 and as they are according to IFRS, are explained. b. Basis of preparation The financial statements are presented in Icelandic kronas, rounded to the nearest thousand. They are prepared on the historical cost basis.

The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The financial statements have been prepared in accordance with valid International Financial Reporting Standards (IFRSs) or those who are allowed for preparation of first financial statements according to IFRS.

The preparation of financial statements in conformity with IFRS has led to changes in accounting policies from the previous year, the financial statements were prepared according to Icelandic GAAP for the year 2004. The accounting policies set out below have been applied consistently to all periods presented in these financial statements and in preparing an opening IFRS balance sheet at 1 January 2004 for the purposes of the transition to IFRSs. c. Foreign currency Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Icelandic kronas at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. d. Hedging of monetary assets and liabilities, revenues and expenses A portion of the Company's revenues and expenses are in foreign currencies. The company has used derivatives to hedge cash flows in foreign currencies during the fiscal year. The gain or loss arising from these cash flow hedges are recognised in the income statement.

______Financial Statements of Flugfélag Íslands ehf. 2005 5 In ISK thousand Notes, contd.:

e. Operating assets (i) Aircraft engines and aircraft equipment Aircraft engines and aircraft equipment are stated at cost less accumulated depreciation and impairment losses. When aircrafts are acquired the purchase price is divided between the aircraft itself and engine hours. Aircrafts are depreciated over the estimated useful live of the relevant aircraft until a residual value is met. Engine hours are depreciated according to flown hours. When an engine is overhauled the cost of the overhaul is capitalised and written-off according to the estimated useful life of the relevant aircraft engine.

(ii) Buildings and other operating assets Buildings and other operating assets are stated at cost less accumulated depreciation and impairment losses.

(iii) Subsequent costs The Company recognises in the carrying amount of an item of operating assets the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Company and the cost of the item can be measured reliably. All other costs are recognised in the income statement as an expense as incurred. (iv) Depreciation Depreciation is charged to the income statement on a straight-line basis, with regards to the residual value, over the estimated useful lives and is specified as follows:

Aircraft engines and aircraft equipment ...... 5-10 years Engine hours ...... Flying hrs. Buildings ...... 33 years Other operating assets ...... 5-10 years

The residual value is estimated annually, if not immaterial. f. Intangible assets (i) Software Intangible assets that are acquired by the Company are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to the income statement on a straight line basis over the estimated useful life of the relevant asset. Estimated useful life is specified as follows:

Software ...... 3 years

(ii) Subsequent expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.

g. Investments Long-term receivables consist of pre-payments, insurance deposits, deposits and debt securities classified as held to maturity. Long-term receivables are stated on an effective interest basis.

______Financial Statements of Flugfélag Íslands ehf. 2005 6 In ISK thousand Notes, contd.:

h. Inventories Goods for resale and supplies are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Aircraft equipment is capitalised at the foreign exchange rate ruling at the date of acquisition.

The cost of inventories is measured using the first-in-first-out (FIFO) formula. The cost of inventory is comprised of cost of purchasing, cost of transport to its current location, and costs incurred to establish its current condition.

i. Trade and other receivables Trade and other receivables are stated at their cost less impairment losses. Current maturities of bonds receivable are recognised among current assets in the balance sheet. j. Assets classified as held for sale Assets classified as held for sale are stated at the lower of cost or fair value k. Cash and cash equivalents Cash and cash equivalents consist of cash balances and demand deposits. l. Impairment The carrying amounts of the Company's assets, other than inventories (see accounting policy j) are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement.

(i) Calculation of recoverable amount The recoverable amount of long-term receivables is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate. The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

(ii) Reversals of impairment An impairment loss in respect of receivables is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised.

In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.

An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. m. Interest-bearing loans and borrowings Interest-bearing loans and borrowings are recognised initially at fair value less attributable transaction costs. ______Subsequent to initial recognition,_ interest-bearing loans and borrowings are stated on an effective______interest basis. Financial Statements of Flugfélag Íslands ehf. 2005 7 In ISK thousand Notes, contd.:

n. Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. o. Trade and other payables Trade and other payables are stated at cost. p. Revenue (i) Transport revenue Passenger ticket sales are recognised as revenue after the transportation has been provided and sold unused tickets are recognised among liabilities in the balance sheet as deferred income. Sold tickets not used within three months from the month of sale are recognised as revenue. Revenue from mail and cargo transportation is recognised in the income statement after transportation has been provided. Revenue from charter flights is recognised in the income statement at the end of charter flight. Revenue from other services rendered is recognised in the income statement after the service has been provided. q. Expenses (i) Operating lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. (ii) Financial income and financial expenses Financial income and financial expenses comprise interest payable, indexation and other expenses arising from borrowings calculated using the effective interest rate method, interest receivable on assets and foreign exchange differences, and gains and losses on hedging instruments that are recognised in the income statement.

Interest income is recognised in the income statement as it accrues, using the effective interest method. Dividend income is recognised in the income statement on the date the entity’s right to receive payments is established.

r. Income tax Income tax on the profit or loss for the year comprise current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax provides for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

______Financial Statements of Flugfélag Íslands ehf. 2005 8 In ISK thousand Notes, contd.:

Quarterly statements

1. Summary of the Company's operating results by quarters: Year 2005 Q1 Q2 Q3 Q4 Total

Operating income ...... 659,533 904,568 1,148,769 838,101 3,550,971 Operating expenses without aircraft leases and depreciation ...... ( 639,376) ( 745,628) ( 728,072) ( 673,099) ( 2,786,175) Operating profit without depr. and aircraft leases (EBITDAR) 20,157 158,940 420,697 165,002 764,796 Aircraft leases ...... ( 57,977) ( 66,990) ( 90,442) ( 66,063) ( 281,472) Op. pr. before depr. (EBITDA) ...... ( 37,820) 91,950 330,255 98,939 483,324 Depreciation ...... ( 39,038) ( 43,325) ( 54,498) ( 44,928) ( 181,789) Operating profit (EBIT) ...... ( 76,858) 48,625 275,757 54,011 301,535 Net financial (expenses) income ...... ( 8,848) 2,163 ( 26,464) ( 21,600) ( 54,749) Profit (loss) before income tax ...... ( 85,706) 50,788 249,293 32,411 246,786 Income tax expense ...... 15,500 ( 9,200) ( 44,900) ( 7,065) ( 45,665)

Profit (loss) ...... ( 70,206) 41,588 204,393 25,346 201,121 Year 2004 Q1 Q2 Q3 Q4 Total Operating income ...... 604,203 839,022 1,155,332 742,074 3,340,631 Operating expenses without aircraft leases and depreciation ...... ( 529,225) ( 621,574) ( 689,764) ( 648,954) ( 2,489,517) Operating profit without depr. and aircraft leases (EBITDAR) 74,978 217,448 465,568 93,120 851,114 Aircraft leases ...... ( 54,867) ( 60,339) ( 75,675) ( 42,176) ( 233,057) Op. pr. before depr. (EBITDA) ...... 20,111 157,109 389,893 50,944 618,057 Depreciation ...... ( 41,501) ( 48,535) ( 55,809) ( 46,761) ( 192,606) Operating profit (EBIT) ...... ( 21,390) 108,574 334,084 4,183 425,451 Net financial (expenses) income ...... ( 2,557) ( 809) ( 9,734) ( 28,718) ( 41,818) Profit (loss) before income tax ...... ( 23,947) 107,765 324,350 ( 24,535) 383,633 Income tax expense ...... 4,412 ( 19,472) ( 58,636) 3,827 ( 69,869)

Profit (loss) ...... ( 19,535) 88,293 265,714 ( 20,708) 313,764

Other operating revenue

2. Other operating revenue is specified as follows: 2005 2004 Sales ...... 56,608 50,925 Commissions ...... 31,196 51,195 Service agreements ...... 141,153 132,831 Maintenance services sold ...... 39,197 77,731 Aircraft servicing ...... 77,326 52,468 Other operating revenue ...... 12,786 100,112 Total other operating revenue ...... 358,266 465,262

______Financial Statements of Flugfélag Íslands ehf. 2005 5 In ISK thousand Notes, contd.:

Salaries and other personnel expenses

3. Salaries and other personnel expenses are specified as follows:

Salaries ...... 1,096,332 943,727 Pension funds ...... 139,979 115,182 Other salary-related expenses ...... 78,734 111,304 Total salary and salary-related expenses ...... 1,315,045 1,170,213 Other personnel expenses ...... 257,695 231,669 Total salaries and other personnel expenses ...... 1,572,740 1,401,882

Average number of employees (full year equivalents) ...... 239 226

The salary of the CEO amounted to ISK 13 million during the year 2005 and the salary of the Board of Directors amounted to ISK 1 million. The total salaries of the Board of Directors and the CEO amounted to a total of ISK 16 million during the year 2004.

Other operating expenses

4. Other operating expenses are specified as follows:

Cost of goods sold ...... 40,759 44,717 Operating cost of real estate and equipment ...... 132,084 129,450 Communication expenses ...... 73,430 66,745 Advertising expenses ...... 80,461 80,905 Booking fees, credit card fees and commission expenses ...... 88,759 91,809 Professional services ...... 58,111 35,711 Administrative cost ...... 20,577 18,182 Passenger services ...... 47,750 44,141 Insurance expenses and claims incurred ...... 31,016 37,138 Other operating expenses ...... 17,955 11,329 Total other operating expenses ...... 590,902 560,127

Financial income and financial expenses

5. Financial income and financial expenses are specified as follows: 2005 2004 Interest income ...... 7,485 5,615 Interest expenses ...... ( 8,037) ( 18,616) Net foreign exchange loss ...... ( 54,197) ( 28,817) Net financing expenses ...... ( 54,749) ( 41,818)

______Financial Statements of Flugfélag Íslands ehf. 2005 6 In ISK thousand Notes, contd.:

Income tax expense

6. Income tax recognised in the income statement is specified as follows: 2005 2004 Income tax payable for the year ...... 33,675 59,853 Change in the deferred income-tax liability ...... 11,990 7,168 IFRS adoption ...... 0 2,848 Total income tax recognised in the income statement ...... 45,665 69,869

7. Reconciliation of effective tax rate: 2005 2004 Reconciliation of effective tax rate: ...... 246,786 383,633

Income tax according to current tax rate ...... 18.0% 44,422 18.0% 69,054 Non-deductible expenses ...... 0.5% 1,243 0.2% 815 Effective tax rate ...... 18.5% 45,665 18.2% 69,869

Operating assets

8. Operating assets and depreciation are specified as follows: Engines Other and aircraft Engine operating Cost Buildings equipment hours assets Total Balance at 1.1.2004 ...... 55,200 528,900 89,885 169,666 843,651 Exchange rate difference ...... 0 0 ( 24,029) 0 ( 24,029) Additions during the year ...... 0 329,185 163,529 23,280 515,994 Sold and disposed ...... 0 ( 1,448) 0 ( 1,051) ( 2,499) Balance at 31.12.2004 ...... 55,200 856,637 229,385 191,895 1,333,117 Exchange rate difference ...... 0 0 767 0 767 Additions during the year ...... 0 77,697 144,369 26,799 248,865 Sold and disposed ...... 0 ( 259,036) ( 132,051) 0 ( 391,087) Transferred to assets for sale ..... 0 ( 40,450) ( 27,582) 0 ( 68,032) Balance at 31.12.2005 ...... 55,200 634,848 214,888 218,694 1,123,630

Depreciation

Balance at 1.1.2004 ...... 9,410 121,886 - 107,623 238,919 Depreciation for the year ...... 1,656 85,075 60,985 26,084 173,800 Sold and disposed ...... 0 ( 1,448) 0 ( 1,028) ( 2,476) Balance at 31.12.2004 ...... 11,066 205,513 60,985 132,679 410,243 Depreciation for the year ...... 1,656 98,874 52,118 22,162 174,810 Sold and disposed ...... 0 ( 14,608) - 0 ( 14,608) Transferred to assets for sale ..... 0 ( 11,867) - 0 ( 11,867) Balance at 31.12.2005 ...... 12,722 277,912 113,103 154,841 558,578

______Financial Statements of Flugfélag Íslands ehf. 2005 7 In ISK thousand Notes, contd.:

Operating assets and depreciation are specified as follows, contd. Engines Other and aircraft Engine operating Carrying amounts Buildings equipment hours assets Total 1.1.2004 ...... 45,790 407,014 89,885 62,043 604,732 31.12.2004 ...... 44,134 651,124 168,400 59,216 922,874 31.12.2005 ...... 42,478 356,936 101,785 63,853 565,052

Depreciation ratios ...... 3% 10-20% Flying hrs.10-20%

9. Depreciation is specified as follows: 2005 2004 Depreciation of operating assets, see note 8 ...... 174,810 173,800 Amortisation of intangible assets, see note 13 ...... 6,979 18,806 Recognised in the income statement as depreciation ...... 181,789 192,606

During the year the Company sold operating assets in the amount of ISK 241 million. The gain on the sale was immaterial.

Insurance value and official assessment value

Real estate insurance value 10. Official assessment value, insurance value and carrying amounts are specified as follows: Official assessment Insurance Carrying value value amount Buildings, Reykjavík Airport ...... 85,570 114,880 26,822 Apartment, Akureyri ...... 11,900 13,900 9,753 Warehouse, Egilsstaðir ...... 8,126 21,050 5,903 Buildings total ...... 105,596 149,830 42,478

Official valuation of the Company's leased land for buildings at December 31, 2005 amounted to ISK 1,4 million, and is not included in the Balance Sheet

11. Insurance value of the Company's aircrafts at December 31, 2005 amounted to ISK 221 million, equipment to ISK 525 million and other operating assets to ISK 146 million.

12. Operating leases The Company has entered into operating lease agreements regarding the lease of six Fokker 50 aircrafts from its Parent Company. The longest of these agreements expires in 2011. The commitment arising from these contracts amounts to a total of ISK 444 million. The Company also leases buildings and vehicles, the longest of which expires also in 2011. The commitment arising from those leases amounts to ISK 223 million. At the end of the year the total commitment arising from the aforementioned lease agreements amounts to ISK 667 million.

______Financial Statements of Flugfélag Íslands ehf. 2005 8 In ISK thousand Notes, contd.:

Intangible assets

13. Intangible assets and amortisation are specified as follows: Pilot Cost training Software Total Balance at 1.1.2004 ...... 71,486 55,671 127,157 IFRS adoption ...... ( 71,486) 0 ( 71,486) Balance at 31.12.2004, restated ...... 0 55,671 55,671 Additions during the year ...... 0 6,955 6,955 Balance at 31.12.2004 ...... 0 62,626 62,626 Balance at 31.12.2005 ...... 0 62,626 62,626

Amortisation Balance at 1.1.2004 ...... 35,627 34,019 69,646 IFRS adoption ...... ( 35,627) 0 ( 35,627) Balance at 31.12.2004, restated ...... 0 34,019 34,019 Amortisation for the year ...... 0 18,806 18,806 Balance at 31.12.2004 ...... 0 52,825 52,825 Amortisation for the year ...... 0 6,979 6,979 Balance at 31.12.2005 ...... 0 59,804 59,804

Carrying amounts 1.1.2004 ...... 35,859 21,652 57,511 31.12.2004 ...... 0 9,802 9,802 31.12.2005 ...... 0 2,822 2,822

Investments in companies

14. Investment in companies is specified as follows: Carrying Share % amount Vesturferðir ehf...... 10.0% 1,950 Ásgarður ehf...... 1.9% 2,000 Mýflug ehf...... 3.0% 1,204 Kulusuk ...... 1.3% 1,232 Stáltak hf...... 56 Total investment in companies ...... 6,442

Inventories

15. Inventories are specified as follows: 2005 2004 Aircraft spare parts ...... 82,559 82,780 Other inventories ...... 12,451 10,784 Total inventories ...... 95,010 93,564

______Financial Statements of Flugfélag Íslands ehf. 2005 9 In ISK thousand Notes, contd.:

Trade and other receivables

16. Bad debt provision has been calculated because of receivables that may be lost. The bad debt provision is based on the judgement of the Company's management and historical experience. 2005 2004 Balance at the beginning of the year ...... 14,000 18,600 Written-off ...... ( 1,994) ( 4,654) Change in provision for bad debts ...... 3,894 54 Balance at the end of the year ...... 15,900 14,000

Equity

17. The Company's share capital amounts to ISK 420 million according to its Articles of Association. One vote is attached to each ISK one share.

18. Summary of equity: Statutory Retained Total Share capital reserve earnings equity Equity 1.1 2004 ...... 420,000 61,500 384,217 865,717 IFRS adoption...... ( 29,405) ( 29,405) Equity 1.1.2004, restated...... 420,000 61,500 354,812 836,312 Dividends paid...... ( 315,000) ( 315,000) Profit for the year...... 300,789 300,789 Transferred to statutory reserve ...... 15,039 ( 15,039) 0 Equity 31.12.2004 ...... 420,000 76,539 325,562 822,101 IFRS adoption...... 12,975 12,975 Restated equity 1.1.2005 (IFRS)...... 420,000 76,539 338,537 835,076

Equity 31.12.2004...... 420,000 76,539 354,967 851,506 IFRS adoption...... ( 16,430) ( 16,430) Equity 1.1.2005, (IFRS)...... 420,000 76,539 338,537 835,076 Dividends paid...... ( 354,900) ( 354,900) Profit for the year...... 201,121 201,121 Transferred to statutory reserve ...... 10,056 ( 10,056) 0 Equity 31.12.2005 ...... 420,000 86,595 174,702 681,297

______Financial Statements of Flugfélag Íslands ehf. 2005 10 In ISK thousand Notes, contd.:

Deferred income tax liability

19. The Company's deferred income tax liability is specified as follows:

2005 2004 Deferred income tax liability (asset) 1.1...... 9,492 ( 164,283) Paid from the Parent Company ...... 0 163,760 Income tax expense ...... 45,665 69,869 Income tax payable for the year ...... ( 33,675) ( 59,854) Deferred income tax liability 31.12...... 21,482 9,492

The deferred income tax liability is attributable to the following items: Operating assets ...... 19,158 8,370 Inventories ...... 855 0 Trade receivables ...... 1,469 1,122 Deferred income tax liability 31.12...... 21,482 9,492

Related parties

Identity of related parties The Company has a related party relationship with its parent company, sister companies, associates, directors 20. and executive officers.

Transactions with related parties Receivables and liabilities with related entities are specified as follows at year-end: Receivables from Group entities ...... 9,043 Loans due to Group entities ...... 14,143

Transactions with related entities during the year are specified as follows: Service sold to Group entities ...... 47,723 Aircraft lease payments to FL Group ...... 224,997 Building lease payments to FL Group ...... 42,192 Service purchased from Group entities ...... 120,906

Subsequent events

21. The Company has, in recent years, leased six Fokker 50 aircrafts from its Parent Company, the intention is to purchase these aircrafts at the beginning of 2006. The same applies to buildings leased from the Parent Company. The Company has also entered into an agreement regarding the acquisition of two DASH 8 aircrafts and accessories. These aircrafts are to be delivered in June 2006. The total investment amounts to ISK 1,885 million.

______Financial Statements of Flugfélag Íslands ehf. 2005 11 In ISK thousand Notes, contd.:

Changes due to adoption of International Financial Reporting Standards

22. As stated in notes regarding significant accounting policies, these are the Company's first year consolidated financial statements prepared in accordance with IFRSs.

The accounting policies set out in notes regarding significant accounting policies have been applied in preparing the financial statements for the year ended 31 December 2005, the comparative information presented in these financial statements for the year ended 31 December 2004 and in the preparation of an opening IFRS balance sheet at 1 January 2004, the date of transition.

In preparing its opening IFRS balance sheet, the Company has adjusted amounts reported previously in financial statements prepared in accordance with its old basis of accounting (previous GAAP). An explanation of how the transition from previous GAAP to IFRSs has affected the Company's financial position and financial performance is set out in the following tables and the notes that accompany the tables. No significant adjustments due to IFRS adoption were made to the cash flow statement previously published according to previous GAAP.

Equity 1 January 2005:

Equity according to previous GAAP 31 December 2004 ...... 851,506 Equity according to IFRS 1 January 2005 ...... 835,076 Net change from previous GAAP to IFRSs ...... ( 16,430)

1.1.2004 1.1.2005 Total Changes in measurements: Intangible assets ...... IAS 38( 16,430) ( 16,430) Net change from previous GAAP to IFRSs ...... ( 16,430) 0 ( 16,430)

Changes in equity are stated after the deduction of income tax.

Changes in presentation: Intangible assets transferred from current assets ...... IAS 38 21,619 Engine hours transferred from current assets ...... IFRS 3 61,468

Changes in measurements Some expenses that have been capitalised as intangible assets are not in compliance with IAS 38 on intangible assets, e.g. pilot training. This causes a decrease in the Company's equity by ISK 16 million, with regards to income tax effects. The comparative figures in the income statement have been adjusted accordingly.

Changes in presentation Next year's amortisation of intangible assets, i.e. pilot training, that are not in compliance with IAS 38 on capitalising intangible assets and previously recorded as current assets, have therefore been recorded as expenses.

Next year's engine hours, previously recognised among current assets, have now been transferred to operating assets.

______Financial Statements of Flugfélag Íslands ehf. 2005 12 In ISK thousand Notes, contd.:

22. Contd.: Balance Sheet 1 January 2005: Icelandic GAAP Changes in Changes in 31.12.2004 presentation measurement IFRSs Assets: Operating assets ...... 861,406 61,468 922,874 Intangible assets ...... 8,219 21,619 ( 20,036) 9,802 Investments in associates ...... 5,992 5,992 Long-term receivables ...... 7,610 7,610 Total non-current assets 883,227 83,087 ( 20,036) 946,278 Inventories ...... 93,564 93,564 Trade receivables ...... 333,854 333,854 Other receivables ...... 137,773 ( 83,087) 54,686 Cash and cash equivalents ...... 384,246 384,246 Total current assets 949,437 ( 83,087) 0 866,350 Total assets 1,832,664 0 ( 20,036) 1,812,628 Equity: Share capital ...... 420,000 420,000 Statutory reserve ...... 76,539 76,539 Retained earnings ...... 354,967 ( 16,430) 338,537 Total equity 851,506 0 ( 16,430) 835,076

Liabilities: Interest-bearing loans and borrowings ...... 304,306 304,306 Deferred income tax liability ...... 13,098 ( 3,606) 9,492 Total non-current liabilities 317,404 0 ( 3,606) 313,798 Trade payables ...... 161,595 161,595 Loans due to FL GROUP hf.'s group entities ...... 26,596 26,596 Taxes payable ...... 62,490 62,490 Curr. port. of interest-bearing loans and borr...... 103,965 103,965 Other payables ...... 258,572 258,572 Prepaid income ...... 50,536 50,536 Total current liabilities 663,754 0 0 663,754

Total liabilities 981,158 0 ( 3,606) 977,552

Total equity and liabilities 1,832,664 ( 20,036) 1,812,628

______Financial Statements of Flugfélag Íslands ehf. 2005 13 In ISK thousand Notes, contd.:

22. Frh.: Balance sheet changes are stated without the effect of income tax, changes in equity are stated after the deduction of income tax.

In Flugfélag Íslands ehf.'s financial statements according to IFRS emphasis is on specifying application of significant accounting policies, as well as specifying the effect of the adoption of International Financial Reporting Standards on the Group's financial position.

Income statement for the year 2004

Icelandic GAAP Changes IFRS Operating income:

Transport revenue: Passengers ...... 2,258,853 2,258,853 Cargo and mail ...... 96,598 96,598 Charter flight revenue and aircraft leases ...... 519,918 519,918 Other operating revenue ...... 465,262 465,262 3,340,631 0 3,340,631

Operating expenses:

Salaries and other personnel expenses ...... 1,393,082 8,800 1,401,882 Aircraft fuel ...... 229,899 229,899 Aircraft lease ...... 233,057 233,057 Aircraft servicing, handling and communication ...... 98,325 98,325 Aircraft maintenance expenses ...... 260,269 ( 60,985) 199,284 Other operating expenses ...... 560,127 560,127 Depreciation ...... 156,244 36,362 192,606 2,931,003 ( 15,823) 2,915,180

Operating profit before net financial expenses ...... 409,628 15,823 425,451

Net financial expenses ...... ( 41,818) 0 ( 41,818)

Profit before tax ...... 367,810 15,823 383,633

Income tax expense ...... ( 67,021) ( 2,848) ( 69,869)

Profit for the year ...... 300,789 12,975 313,764

Earnings per share: Basic earnings per share (ISK) ...... 0.72 0.75

Net profit of the Company increases by ISK 13 million in the comparative figures in the financial statements for the year 2004 due to the adoption of the standards.

The expensing of engine hours, previously recognised as maintenance expenses, is now recognised as depreciation. Depreciation decreases also because of the aforementioned expensing of pilot training.

Changes in income tax for the period result from the changes discussed here above.

______Financial Statements of Flugfélag Íslands ehf. 2005 14 In ISK thousand Notes, contd.:

Ratios

23. The Company's primary ratios are specified as follows 2005 2004 Income statement: Accounts receivables turnover ratio (days) ...... 37 36 Aircraft expenses/operating income ...... 25% 23% Salaries and other personnel expenses/operating income ...... 44% 42% Profit after tax/operating income ...... 6% 9% Return on equity ...... 42% 58% Balance sheet: Current ratio - current assets/current liabilities ...... 1.25 1.31 Equity ratio - equity/total assets ...... 0.56 0.46 Intrinsic value of shares - equity/share capital ...... 1.62 1.99

24. Five year summary: 2005 2004 2003* 2002* 2001* Income statement: Operating income ...... 3,550,971 3,340,631 2,924,575 2,665,608 2,876,580 Op. income without depr...... ( 3,067,647) ( 2,722,574) ( 2,527,451) ( 2,457,252) ( 2,915,343) Profit (loss) without depr...... 483,324 618,057 397,124 208,356 ( 38,763) Depreciation ...... ( 181,789) ( 192,606) ( 132,288) ( 78,392) ( 67,212) Operating profit (loss) ...... 301,535 425,451 264,836 129,964 ( 105,975) Net financial income (expense) ...... ( 54,749) ( 41,818) ( 37,622) 70,924 ( 68,777) Income tax expense ...... ( 45,665) ( 69,869) 157,829 0 0 Profit (loss) ...... 201,121 313,764 385,043 200,888 ( 174,752)

Balance sheet: Non-current assets ...... 574,316 946,278 755,583 490,228 470,249 Current assets ...... 643,818 866,350 796,834 705,221 620,586 Total assets 1,218,134 1,812,628 1,552,417 1,195,449 1,090,835

Equity ...... 681,297 835,076 865,717 478,498 270,789 Int.-bearing loans and borr...... 21,482 313,798 224,708 310,332 394,645 Current payables ...... 515,355 663,754 461,992 406,619 425,401 Total equity and liabilities 1,218,134 1,812,628 1,552,417 1,195,449 1,090,835

*The figures from the 2003, 2002 and 2001 financial statements have not been adjusted according to IFRS.

______Financial Statements of Flugfélag Íslands ehf. 2005 15 In ISK thousand Flugfélag Íslands ehf.

Interim Financial Statements 1 January - 30 September 2005

Flugfélag Íslands ehf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 530575 - 0209 Income Statement for the Nine Months Ended 30 September 2005

2005 1.1.-30.9. Operating income:

Transport revenue: Passengers ...... 1.885.085 Cargo and mail ...... 75.807 Charter revenue and aircraft lease ...... 414.652 Other operating revenue ...... 337.326 2.712.870

Operating expenses:

Salaries and other personnel expenses ...... 1.189.036 Aircraft fuel ...... 230.022 Aircraft lease ...... 215.409 Aircraft servicing, handling and communication ...... 75.386 Aircraft maintenance expenses ...... 165.418 Other operating expenses ...... 453.216 Depreciation ...... 136.860 2.465.347

Operating profit before financial expenses ...... 247.523

Financial expenses ...... ( 33.148)

Profit before income tax ...... 214.375

Income tax ...... ( 38.600)

Profit for the period ...... 175.775

Interim Financial Statements of Flugfélag Íslands ehf. 30.9.2005 In ISK thousand ______2 ______Balance Sheet as at 30 September 2005

30.9.2005 31.12.2004 Fixed assets: Operating assets ...... 586.611 922.874 Intangible assets ...... 4.106 9.802 Investment in associates ...... 4.792 5.992 Long-term receivables ...... 5.364 7.610 Total fixed assets 600.873 946.278 Current assets: Inventories ...... 94.625 93.564 Accounts receivable ...... 714.287 333.854 Other receivables ...... 41.989 54.686 Cash and cash equivalents ...... 147.817 384.246 Total current assets 998.718 866.350

Total assets 1.599.591 1.812.628

Equity: Share capital ...... 420.000 420.000 Statutory reserve ...... 76.539 76.539 Retained earnings ...... 159.413 338.537 Total equity 655.952 835.076

Long-term liabilities: Credit institutions ...... 0 304.306 Deferred income tax liability ...... 13.123 9.492 Total non-current liabilities 13.123 313.798 Current liabilities: Current maturitites of non-current liabilities ...... 157.059 103.965 Trade and other payables ...... 674.484 482.657 Intra company payables ...... 18.532 26.596 Prepaid income ...... 80.441 50.536 Total current liabilities 930.516 663.754

Total liabilities 943.639 977.552

Total equity and liabilities 1.599.591 1.812.628

Interim Financial Statements of Flugfélag Íslands ehf. 30.9.2005 In ISK thousand ______3 ______Statement of Cash Flows for the Nine Months Ended 30 September 2005

2005 1.1.-30.9. Cash flows from operating activities:

Profit for the period ...... 175.775 Difference between operating profit and cash from operations: Depreciation ...... 136.860 Gain on the sale of assets ...... ( 60 ) Other operating items ...... 5.060 Working capital from operations 317.635

Net change in operating assets and liabilities ...... ( 181.465 ) Net cash from operating activities 136.170

Cash flows from investing activities:

Acquisition of operating assets ...... ( 171.461 ) Proceeds from the sale of assets ...... 373.499 Long-term receivables ...... 3.586 Net cash from investing activities 205.624

Cash flows from financing activities:

Dividends paid ...... ( 354.900) Repayment of long-term debt ...... ( 380.382) Intra company debt, change ...... 157.059 Net cash used in financing activities( 578.223 )

Changes in cash and cash equivalents ...... ( 236.429 )

Cash and cash equivalents at 1 January ...... 384.246

Cash and cash equivalents at 30 September ...... 147.817

Interim Financial Statements of Flugfélag Íslands ehf. 30.9.2005 In ISK thousand ______4 ______Flugfélag Íslands ehf.

Interim Financial Statements 1 January - 30 September 2006

Flugfélag Íslands ehf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 530575 - 0209 Income Statement for the Nine Months Ended 30 September 2006

2006 1.1.-30.9. Operating income:

Transport revenue: Passengers ...... 2,354,698 Cargo and mail ...... 110,527 Charter revenue and aircraft lease ...... 413,185 Other operating revenue ...... 326,950 3,205,360

Operating expenses:

Salaries and other personnel expenses ...... 1,435,757 Aircraft fuel ...... 288,781 Aircraft lease ...... 91,337 Aircraft servicing, handling and communication ...... 99,943 Aircraft maintenance expenses ...... 150,702 Other operating expenses ...... 488,567 Depreciation ...... 182,988 2,738,075

Operating profit before financial expenses ...... 467,285

Financial expenses ...... ( 63,898)

Profit before income tax ...... 403,387

Income tax expense ...... ( 74,000)

Profit for the period ...... 329,387

Interim Financial Statements of Flugfélag Íslands ehf. 30.9.2006 In ISK thousand ______2 ______Balance Sheet as at 30 September 2006

30.9.2006 31.12.2005 Fixed assets: Operating assets ...... 2,278,606 565,052 Intangible assets ...... 1,456 2,822 Investments in associates ...... 6,442 6,442 Total fixed assets 2,286,504 574,316 Current assets: Inventories ...... 129,309 95,010 Trade and other receivables ...... 828,780 464,288 Assets for sale ...... 0 52,340 Cash and cash equivalents ...... 331,586 32,180 Total current assets 1,289,675 643,818

Total assets 3,576,179 1,218,134

Equity: Share capital ...... 420,000 420,000 Reserves ...... 76,539 86,595 Retained earnings ...... 514,146 174,702 Total equity 1,010,685 681,297

Long-term liabilities: Deferred income tax liability ...... 21,482 21,482 Loan due to Parent Company ...... 1,506,818 0 Total non-current liabilities 1,528,300 21,482 Current liabilities: Interest-bearing loans due to group entities ...... 246,533 0 Trade and other payables ...... 670,427 446,217 Loans due to group entities ...... 9,418 5,100 Prepaid income ...... 110,816 64,038 Total current liabilities 1,037,194 515,355

Total liabilities 2,565,494 536,837

Total equity and liabilities 3,576,179 1,218,134

Interim Financial Statements of Flugfélag Íslands ehf. 30.9.2006 In ISK thousand ______3 ______Statement of Cash Flows for the Nine Months Ended 30 September 2006

2006 1.1.-30.9. Cash flows from operating activities:

Profit for the period ...... 329,387 Difference between operating profit and cash from operations: Depreciation ...... 182,988 Other operating items ...... ( 21,652 ) Working capital from operations 490,723

Net change in operating assets and liabilities ...... ( 252,928 ) Net cash from operating activities 237,795

Cash flows from investing activities:

Acquisition of operating assets ...... ( 1,687,234 ) Acquisition of intangible assets ...... ( 1,016 ) Net cash used in investing activities( 1,688,250 )

Cash flows from financing activities:

New long-term borrowings ...... 1,503,328 Interest-bearing loans due to Parent Company, change ...... 246,533 Net cash from financing activities 1,749,861

Changes in cash and cash equivalents ...... 299,406

Cash and cash equivalents at 1 January ...... 32,180

Cash and cash equivalents at 30 September ...... 331,586

Interim Financial Statements of Flugfélag Íslands ehf. 30.9.2006 In ISK thousand ______4 ______28.7 FINANCIAL REPORTS FOR BLUEBIRD CARGO 28.7.1 AUDITED 2003 – 2005 ANNUAL REPORTS 28.7.2 INTERIM INCOME STATEMENT, BALANCE SHEET AND CASH FLOW STATEMENT FOR THE NINE MONTH PERIOD ENDING 30 SEPTEMBER 2005 28.7.3 AUDITED INTERIM INCOME STATEMENT, BALANCE SHEET AND CASH FLOW STATEMENT FOR THE NINE MONTH PERIOD ENDING 30 SEPTEMBER 2006

Financial Statements Bláfugl hf.

Bluebird Cargo

2003 TABLE OF CONTENTS

Sheet

Auditor´s Report...... 2

Signatures and Report of the Board of Directors and the Managing Director...... 3

Statement of Operations...... 4

Balance Sheet December 31, 2003...... 5 - 6

Statement of Cash Flows 2003...... 7

Notes to Financial Statements...... 8 - 11

Bluebird Cargo, Board of Directors:

Einar S. Ólafsson Elías S. Skúlason Jón Einarsson Úlfur Sigurmundsson Þórarinn Kjartansson

Managing Directors:

Þórarinn Kjartansson

Accountants:

Grant Thornton endurskoðun ehf. Theodór Sigurbergsson State Authorized Public Accountant

Bluebird Cargo - Financial Statements 2003 1 AUDITOR'S REPORT

To the Board of Directors and Shareholders of Bláfugl hf. (Bluebird Cargo).

We have audited the accompanying Balance Sheet of Bluebird Cargo as of December 31, 2003, and the related Statement of Operations and Statement of Cash Flows for the year then ended. These Financial Statements are the responsibility of the Board of Directors of Bluebird Cargo. Our responsibility is to express an opinion on these Financial Statements based on our audit.

We conducted our audit in accordance with generally accepted Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Financial Statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Financial Statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall Financial Statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the Financial Statements give a true and fair view of the financial position of Bluebird Cargo as of December 31, 2003, and the results of its Operations and its Cash Flows for the year then ended, in accordance with the law and generally accepted accounting principles in Iceland.

Reykjavík, March 19, 2004

Grant Thornton endurskoðun ehf.

Theodór Sigurbergsson State Authorized Public Accountant

Bluebird Cargo - Financial Statements 2003 2 ENDORSEMENT AND REPORT BY THE BOARD OF DIRECTORS

AND MANAGING DIRECTOR

The Financial Statement of Bláfugl hf. (Bluebird Cargo) are in all main respect prepared in accordance with the same accounting principles as for the pervious year with the main exception that the accounts are now presented in U.S. Dollars. The Tax Authorities of Iceland approved the request of Bláfugl to keep the company accounts and records in USD instead of ISK, and this change was implemented as of January 2003.

This years Statement of Operations shows Net earnings of USD 1.9 million. Stockholders Equity for the year ended 31, December 2003 is USD 6.5 million but at the beginning of the year it was USD 3.7 million.

The growth in activities at Bluebird Cargo continued in the year 2003. Two B737-300 freighter aircraft were added to the fleet in September, and put into service on contract basis for TNT, operating out of Liege in Belgium. The other two B737-300 freighter aircraft continued operating for UPS and Flugflutningar ehf. as before. At the end of the year, the aircraft fleet therefore stood at four B737-300F. Continued growth is expected in 2004.

The softness of the USD currency resulted in an increase in non-USD cost during the year. However, the majority of the operating cost of Bluebird Cargo is in USD. The Board of Directors is therefore pleased to present most gratifying results for the year 2003, particularly when considering the size and young age of the Company.

Bluebird's Cargo Shareholders at the year ended 31, December 2003 were 77 but they were 64 at the beginning of the year, and 2 Shareholder owned more than 10% share; Flugflutningar ehf. 16,95% share and Vallarvinir ehf. 16,08% share.

The Board of Directors and Managing Director of Bluebird Cargo hereby confirm The Financial Statements for the year ended 31, December 2003.

Keflavíkurflugvöllur, March 19, 2004

Board of Directors:

Einar S. Ólafsson

Elías S. Skúlason Jón Einarsson

Úlfur Sigurmundsson Þórarinn Kjartansson

Managing Directors: Þórarinn Kjartansson

Bluebird Cargo - Financial Statements 2003 3 STATEMENT OF INCOME FOR THE YEAR 2003

Notes 2003 2002 OPERATING REVENUE:

Sales income...... 4 19,550,673 12,349,467 Other income...... 70,234 83,516 19,620,907 12,432,983

OPERATING EXPENSES:

Salaries and related expenses...... 18 3,222,161 1,873,668 Spares, maintenance and repairs...... 1,582,050 1,096,604 Aircraft lease...... 717,287 0 Aircraft fuel...... 1,906,787 1,467,380 Other expenses...... 19 4,649,244 3,328,057 Depreciation...... 9 3,294,613 2,300,200 15,372,142 10,065,909

Operating profit before financial income and (expenses)...... 4,248,765 2,367,074

FINANCIAL INCOME AND (EXPENSES):

Interest income...... 17,781 15,886 Interest expense...... ( 2,187,179) ( 1,915,557) Currency exchange difference...... ( 111,851) 5,127,399 Calculated inflation adjustment...... 3 0 ( 5,211,817) ( 2,281,249) ( 1,984,089)

Operating profit before taxes...... 1,967,516 382,985

Taxes...... 16 ( 65,820) ( 93,350)

NET EARNINGS...... 1,901,696 289,635

Bluebird Cargo - Financial Statements 2003 4 All amounts are in USD BALANCE SHEET

ASSETS:

Notes 2003 2002

FIXED ASSETS:

Property and equipment: 9 Aircraft and engines...... 31,318,853 34,536,807 Rotable parts...... 307,747 300,714 Equipment and vehicle...... 71,627 73,928 31,698,227 34,911,449 Longterm assets: Advance payments and deposits...... 2,139,651 1,286,359 2,139,651 1,286,359

Fixed assets 33,837,878 36,197,808 CURRENT ASSETS:

Inventories: Expendable parts...... 11 16,125 4,361

Receivables: Accounts receivables...... 7 1,269,563 895,482 Other receivables...... 50,992 79,016 Prepayments...... 712,902 28,464

Cash and cash equivalents...... 8 1,243,351 163,310 Current assets 3,292,933 1,170,633

TOTAL ASSETS 37,130,811 37,368,441

Bluebird Cargo - Financial Statements 2003 5 All amounts are in USD DECEMBER 31 2003

STOCKHOLDERS' EQUITY AND LIABILITIES:

Notes 2003 2002

STOCKHOLDERS' EQUITY: 12

Capital stock...... 4,905,037 4,177,197 Additional paid in capital...... 367,563 120,353 Retained earnings...... 1,263,615 ( 638,081) Stockholders' equity 6,536,215 3,659,469

OBLIGATIONS:

Deferred income tax...... 13 65,820 0 Obligations 65,820 0

LONG-TERM DEBT: 14

Long-term debt...... 28,793,737 32,412,551 Current maturites...... ( 2,871,782) ( 3,618,814) 25,921,955 28,793,737

CURRENT LIABILITIES:

Accounts payable...... 1,377,335 915,175 Current maturities...... 15 2,871,782 3,618,814 Other current liabilities...... 357,704 275,541 Taxes for the year...... 16 0 105,705 4,606,821 4,915,235

Obligation and liabilities 30,594,596 33,708,972

Commitments 17

STOCKHOLDERS' EQUITY AND LIABILITIES 37,130,811 37,368,441

Bluebird Cargo - Financial Statements 2003 6 All amounts are in USD STATEMENT OF CASH FLOWS FOR THE YEAR 2003

Notes 2003 2002 CASH FLOWS FROM OPERATING ACTIVITIES:

Net earnings of the year...... 1,901,696 289,635 Items not affecting cash: Depreciation...... 9 3,294,613 2,300,200 Calculated inflation adjustment...... 3 0 5,211,817 Deferred income tax liability...... 65,820 0 Exchange rate difference...... 0 ( 5,375,672) Loss on sale of assets...... 0 2,025 Working capital provided by operating activities 5,262,129 2,428,005

Changes in current assets and liabilities: Current receivables, decrease (increase)...... ( 346,057) 213,878 Inventories, decrease (increase)...... ( 11,764) 1,053 Current liabilities, (decrease) increase...... 438,618 ( 491,611) 80,797 ( 276,680)

Net cash provided by operating activities 5,342,926 2,151,325

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of Aircraft and rotable parts...... ( 68,039) ( 15,750,573) Prepayments and deposits...... ( 1,537,730) ( 515,638) Purchase of Equipment...... ( 13,350) ( 16,697) Proceeds from sale of fixed assets...... 0 21,487 Cash used in investing activities ( 1,619,119) ( 16,261,421)

CASH FLOWS FROM FINANCING ACTIVITIES:

Installments of long-term liabilities...... ( 3,618,816) ( 2,026,257) New long-term liabilities...... 0 15,253,006 Paid in capital...... 975,050 911,790 Cash used by financing activities ( 2,643,766) 14,138,539

Increase in cash...... 1,080,041 28,443

Cash at beginning of year...... 163,310 134,867 Cash at year end...... 1,243,351 163,310

SUPPLEMENTAL INFORMATION:

Interest paid on long term debt...... 2,179,880 1,870,920 Income tax and property tax paid...... 114,370 0

Bluebird Cargo - Financial Statements 2003 7 All amounts are in USD NOTES TO THE FINANCIAL STATEMENTS

CHANGES IN ACCOUNTING POLICIES:

1. In accordance with law nr. 25/2002 about change in the Accounting Act and the Financial Statements Act, Bláfugl hf. (Bluebird Cargo) has received permission to keep its accounts in the currency of USD. The company's Financial Statements will therefore in the future be reported in the currency of USD. Previous years comparative figures have been changed in conformity. They were translated from Icelandic kronur into the currency of USD based on average exchange rate of year 2002 for the operating items but the year end rate for the balance sheet items.

ACCOUNTING POLICIES:

2. The Financial Statements of Bluebird Cargo are prepared in accordance with the Financial Statements Act and the Regulation on the Presentation and Contents of Financial Statements, and are in all main respects based on the same accounting principles as during the previous year except as described in this chapter.

3. In accordance with changes in the Financial Statements Act, calculated effect of general price-level changes are no longer stated in the Financial Statements. The revaluation account, under owners equity, is recorded to decrease retained earnings at the beginning of the year 2003. This change means that calculated effects of price level changes on monetary assets and liabilities, the so called general price-level adjustment, is no longer stated in the profit and loss account. Revaluation of fixed assets is also no longer recorded and depreciation of tangible fixed assets owned at the year end 2002 is calculated based on revalued historical cost as shown at the year end 2002.

4. Revenue are recognised in the Statement of Income in the period when transportation is provided.

5. Bluebird Cargo has concluded operating lease agreements for two aircraft. The annual lease installments are stated in the Financial Statement

6. Transactions in currencies other than USD are initially recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in such currencies are retranslated at the rates prevailing on the balance sheet date. Profits and losses arising from exchange rate changes are included in net profit loss for the period.

7. Accounts receivables are valued at cost plus incurred interest and exchange rate difference.

8. When preparing the Statement of Cash Flows, the Company considers cash on hand, bank deposits and all higly liquid debt instruments as cash.

Bluebird Cargo - Financial Statements 2003 8 All amounts are in USD NOTES TO THE FINANCIAL STATEMENTS

PROPERTY AND EQUIPMENT:

9. Property and equipment are recorded at historical cost revalued to year-end 2002, less calculated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful life of fixed assets, based on the revalued cost.

Property and equipment and depreciation are as follows:

Aircraft Rotable Equipment Total and engines parts and vehicle

Initial cost 1.1. 2003...... 38,510,190 372,686 97,959 38,980,835 Previously depreciated...... (3,973,382) (71,972) (24,030) (4,069,384) Net book value 1.1. 2003...... 34,536,808 300,714 73,929 34,911,451

Additions during the year...... 68,039 13,350 81,389 Depreciation...... (3,217,955) (61,006) (15,652) (3,294,613) Net book value 31.12. 2003...... 31,318,853 307,747 71,627 31,698,227

Annual depreciation ratio...... 8% 15% 15 - 20%

10. Insurance value of aircraft and flight equipment in operations is USD 69.4 million at the year end.

11. Spare parts, reported as current assets are valued at USD 16.1 thousand. Spare parts are valued at the lower of cost or market.

STOCKHOLDERS' EQUITY:

12. The capital stock amounts to USD 4.9 million. One vote is attach to each share of one ISK.

Summary of stockholders' equity:

Additional paid in Revaluation Retained Capital stock capital reserve earnings Total

Balance 1.1. 2003...... 4,177,197 120,353 (242,188) (395,893) 3,659,469 Revaluation reserve transf. to retained earnings...... 242,188 (242,188) 0 Corrected balance 1.1. 2003...... 4,177,197 120,353 0 (638,081) 3,659,469 Paid in capital...... 727,840 247,210 975,050 Net earnings...... 1,901,696 1,901,696 Stockholders' equity 31.12. 2003...... 4,905,037 367,563 0 1,263,615 6,536,215

Bluebird Cargo - Financial Statements 2003 9 All amounts are in USD NOTES TO THE FINANCIAL STATEMENTS

OBLIGATIONS:

13. Deferred income tax liability is USD 65.8 thousand at the year end. This item is based on differences between balance sheet items as presented in the tax returns and the financial statements. This difference results from the fact that tax assessments are based on different rules than those governing the financial statements.

Changes during the year in the income tax liability are specified as follows:

Income tax liability at the beginning of year ...... 0 Calculated income tax...... 65,820 Income tax liability at year end...... 65,820

The income tax liability divides as follows on individual items of the balance sheet:

Fixed tangible assets...... 424,618 Other items...... 10,567 Loss carry forward...... (369,365) 65,820

LONG-TERM DEBTS:

14. Long-term debts are recorded in terms of the year end 2003 price level. Long-term debt and their interest, classified by currency, are specified as follows:

Interest Balance

Loans in USD...... 6.95% 28,793,737

Current maturities...... (2,871,782)

Long-term debt as stated in the balance sheet...... 25,921,955

The above interest rates represent weighted average rate at Desember 31, 2003.

15. Annual maturities of long-term debt December 31, 2003 are as follows: Total

Year 2004...... 2,871,782 Year 2005...... 14,689,809 Year 2006...... 1,754,136 Year 2007...... 9,478,010 Long term debt total...... 28,793,737

Bluebird Cargo - Financial Statements 2003 10 All amounts are in USD NOTES TO THE FINANCIAL STATEMENTS

TAXES:

16. The Company will not pay any income tax due to loss carried forward which amounts to USD 2 million at the year end. The loss carried forward can be deducted from net income the following ten years after the loss was experienced. The loss carried forward can be deducted from net income at latest as follows:

From net income in year 2013...... 2,052,029 2,052,029

MORTGAGES AND COMMITMENTS:

17. Mortgages with remaining loan balances at December 31, 2003 are USD 28.8 million.

OTHER MATTERS:

18. Salaries and related expenses are specified as follows: 2003 2002

Salaries...... 2,241,135 1,374,209 Related expenses...... 409,885 243,872 2,651,020 1,618,081 Contractors...... 571,141 255,587 3,222,161 1,873,668

Average number of employees...... 28 24

Salaries paid to the Board of Directors and Managing Director of the Company amounted to USD 15.6 thousand in the year 2003.

19. Other operating expenses are specified as follows: 2003 2002

Aircraft servicing, handling, communication and insurance...... 3,558,176 2,540,902 Crews, training and other personnel expenses...... 477,421 330,115 Aircraft and crew lease expenses...... 122,228 100,703 Sale and administrative...... 491,419 356,337 4,649,244 3,328,057

Bluebird Cargo - Financial Statements 2003 11 All amounts are in USD Financial Statements Bláfugl hf.

Bluebird Cargo

2004 TABLE OF CONTENTS

Sheet

Auditor´s Report...... 2

Endorsement and Report by the Board of Directors and the Managing Director...... 3

Statement of Income...... 4

Balance Sheet December 31, 2004...... 5 - 6

Statement of Cash Flows 2004...... 7

Notes to the Financial Statements...... 8 - 11

Bluebird Cargo, Board of Directors:

Einar S. Ólafsson Elías S. Skúlason Jón Einarsson Úlfur Sigurmundsson Þórarinn Kjartansson

Managing Directors:

Þórarinn Kjartansson

Accountants:

Grant Thornton endurskoðun ehf. Theodór Sigurbergsson State Authorized Public Accountant

Bluebird Cargo - Financial Statements 2004 2 AUDITOR'S REPORT

To the Board of Directors and Shareholders of Bláfugl hf. (Bluebird Cargo).

We have audited the accompanying Balance Sheet of Bluebird Cargo as of December 31, 2004, and the related Statement of Income and Statement of Cash Flows for the year then ended. These Financial Statements are the responsibility of the Board of Directors of Bluebird Cargo. Our responsibility is to express an opinion on these Financial Statements based on our audit.

We conducted our audit in accordance with generally accepted Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Financial Statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Financial Statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall Financial Statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the Financial Statements give a true and fair view of the financial position of Bluebird Cargo as of December 31, 2004, and the results of its Income and its Cash Flows for the year then ended, in accordance with the law and generally accepted accounting principles in Iceland.

Reykjavík, May 6, 2005

Grant Thornton endurskoðun ehf.

Theodór Sigurbergsson State Authorized Public Accountant

Bluebird Cargo - Financial Statements 2004 3 ENDORSEMENT AND REPORT BY THE BOARD OF DIRECTORS

AND MANAGING DIRECTOR

The Financial Statement of Bláfugl hf. (Bluebird Cargo) are presented in US Dollar (USD) and are in all main respect prepared in accordance with the same accounting principles as for the pervious year.

This years Statement of Income shows Net earnings of USD 4.2 million, up from USD 1.9 million in the previous year. Stockholders Equity for the year ended 31, December 2004 is USD 11.5 million but at the beginning of the year it was USD 6.5 million. Sales income grew by 50% during the year, and was USD 30.2 million, compared to USD 19.6 million in 2003.

During the year 2004 Bluebird Cargo continued the growth and transition of the B737-300 freighter fleet. Two B737 300 freighter aircraft were added to the fleet, both leased from GECAS, and one older aircraft of the same type was returned. The total fleet stood at 5 B737-300 aircraft at the end of the year. All five aircraft were operating contracted flights in Europe at the end of the year. One older B737-300 was returned to the owner at the beginning of 2005 in exchange for the third leased aircraft from GECAS, thereby completing the fleet renewal for the time being.

Bluebird's Cargo Shareholders at the year ended 31, December 2004 were 89 but they were 77 at the beginning of the year, and 3 Shareholder owned more than 10% share; Flugflutningar ehf. 15,74% share, Vallarvinir ehf. 15,19% share and Ólafur Einarsson 10,93% share.

The Board of Directors and Managing Director of Bluebird Cargo hereby confirm The Financial Statements for the year ended 31, December 2004.

Keflavíkurflugvöllur, May 6, 2005

Board of Directors:

Einar S. Ólafsson

Elías S. Skúlason Jón Einarsson

Úlfur Sigurmundsson Þórarinn Kjartansson

Managing Directors:

Þórarinn Kjartansson

Bluebird Cargo - Financial Statements 2004 4 STATEMENT OF INCOME FOR THE YEAR 2004

Notes 2004 2003 OPERATING REVENUE:

Sales income...... 2 30,126,494 19,550,673 Other income...... 1,047,705 70,234 31,174,199 19,620,907

OPERATING EXPENSES:

Salaries and related expenses...... 18 4,848,754 3,222,161 Spares, maintenance and repairs...... 3,523,640 1,582,050 Aircraft lease...... 3 2,608,546 717,287 Aircraft fuel...... 3,031,740 1,906,787 Other expenses...... 19 6,752,076 4,649,244 Depreciation...... 7 3,355,299 3,294,613 24,120,055 15,372,142

Operating profit before financial income and (expenses)...... 7,054,144 4,248,765

FINANCIAL INCOME AND (EXPENSES):

Interest income...... 53,051 17,781 Interest expense...... ( 1,993,809) ( 2,187,179) Currency exchange difference...... ( 117,758) ( 111,851) ( 2,058,516) ( 2,281,249)

Operating profit before taxes...... 4,995,628 1,967,516

Taxes...... 12, 15 ( 787,306) ( 65,820)

NET EARNINGS...... 4,208,322 1,901,696

Bluebird Cargo - Financial Statements 2004 5 All amounts are in USD BALANCE SHEET

ASSETS:

Notes 2004 2003

FIXED ASSETS:

Property and equipment: 7 Aircraft and engines...... 28,464,244 31,318,853 Rotable parts...... 459,211 307,747 Equipment and vehicle...... 150,559 71,627 29,074,014 31,698,227 Longterm assets: Advance payments and deposits...... 9 3,489,156 2,139,651 3,489,156 2,139,651

Fixed assets 32,563,170 33,837,878 CURRENT ASSETS:

Inventories: Expendable parts...... 10 51,889 16,125

Receivables: Accounts receivables...... 5 2,165,589 1,269,563 Other receivables...... 887,503 50,992 Prepayments...... 649,292 712,902

Cash and cash equivalents...... 6 3,776,104 1,243,351 Current assets 7,530,377 3,292,933

TOTAL ASSETS 40,093,547 37,130,811

Bluebird Cargo - Financial Statements 2004 6 All amounts are in USD DECEMBER 31 2004

STOCKHOLDERS' EQUITY AND LIABILITIES:

Notes 2004 2003

STOCKHOLDERS' EQUITY: 11

Capital stock...... 5,261,855 4,905,037 Additional paid in capital...... 1,050,356 367,563 Statutory reserve...... 420,832 0 Retained earnings...... 4,805,415 1,263,615 Stockholders' equity 11,538,458 6,536,215

OBLIGATIONS:

Deferred income tax...... 12 831,244 65,820 Obligations 831,244 65,820

LONG-TERM DEBT: 13

Long-term debt...... 25,921,955 28,793,737 Current maturites...... ( 4,020,059) ( 2,871,782) 21,901,896 25,921,955

CURRENT LIABILITIES:

Accounts payable...... 1,272,618 1,377,335 Current maturities...... 14 4,020,059 2,871,782 Other current liabilities...... 507,390 357,704 Taxes for the year...... 15 21,882 0 5,821,949 4,606,821

Obligation and liabilities 28,555,089 30,594,596

Commitments 16, 17

STOCKHOLDERS' EQUITY AND LIABILITIES 40,093,547 37,130,811

Bluebird Cargo - Financial Statements 2004 7 All amounts are in USD STATEMENT OF CASH FLOWS FOR THE YEAR 2004

Notes 2004 2003 CASH FLOWS FROM OPERATING ACTIVITIES:

Net earnings of the year...... 4,208,322 1,901,696 Items not affecting cash: Depreciation...... 7 3,355,299 3,294,613 Deferred income tax liability...... 765,424 65,820 Gain on sale of assets...... ( 3,023) 0 Working capital provided by operating activities 8,326,022 5,262,129

Changes in current assets and liabilities: Current receivables, decrease (increase)...... ( 1,732,537) ( 346,057) Inventories, decrease (increase)...... ( 35,764) ( 11,764) Current liabilities, (decrease) increase...... 66,852 438,618 ( 1,701,449) 80,797

Net cash provided by operating activities 6,624,573 5,342,926

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of Aircraft and rotable parts...... ( 616,345) ( 68,039) Prepayments and deposits...... ( 1,285,895) ( 1,537,730) Purchase of Equipment...... ( 118,232) ( 13,350) Proceeds from sale of fixed assets...... 6,514 0 Cash used in investing activities ( 2,013,958) ( 1,619,119)

CASH FLOWS FROM FINANCING ACTIVITIES:

Instalments of long-term liabilities...... ( 2,871,783) ( 3,618,816) Dividend paid...... ( 245,690) 0 Paid in capital...... 1,039,611 975,050 Cash used by financing activities ( 2,077,862) ( 2,643,766)

Increase in cash...... 2,532,753 1,080,041

Cash at beginning of year...... 1,243,351 163,310 Cash at year end...... 3,776,104 1,243,351

SUPPLEMENTAL INFORMATION:

Interest paid on long term debt...... 1,984,520 2,179,880 Income tax and property tax paid...... 0 114,370

Bluebird Cargo - Financial Statements 2004 8 All amounts are in USD NOTES TO THE FINANCIAL STATEMENTS

ACCOUNTING POLICIES:

1. The Financial Statements of Bláfugl hf. (Bluebird Cargo) are prepared in accordance with the Financial Statements Act and the Regulation on the Presentation and Contents of Financial Statements. The Financial Statements are presented in US Dollar (USD). It is based on historical cost and are, in all main respects, based on the same accounting principles as during the previous year.

2. Revenue are recognised in the Statement of Income in the period when transportation is provided.

3. Bluebird Cargo has concluded operating lease agreements for three aircraft at year end 2004. The company also leases two vehicle under operating lease. Lease expenses included in the Financial Statements amountet to USD 2.6 million. Obligations with regard to these agreements amount to USD 24.4 million over the next five years. The annual lease instalments are stated in the Financial Statements.

4. Transactions in currencies other than USD are initially recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in such currencies are retranslated at the rates prevailing on the balance sheet date. Profits and losses arising from exchange rate changes are included in net profit loss for the period.

5. Accounts receivables are valued at cost plus incurred interest and exchange rate difference.

6. When preparing the Statement of Cash Flows, the Company considers cash on hand, bank deposits and all higly liquid debt instruments as cash.

PROPERTY AND EQUIPMENT:

7. Property and equipment are valued at cost less depreciation. Depreciation is calculated on a straight-line basis over the estimated useful life of fixed assets.

Property and equipment and depreciation are as follows:

Aircraft Rotable Equipment Total and engines parts and vehicle

Initial cost 1.1. 2004...... 38,510,190 440,725 111,309 39,062,224 Previously depreciated...... (7,191,337) (132,978) (39,682) (7,363,997) Net book value 1.1. 2004...... 31,318,853 307,747 71,627 31,698,227

Additions during the year...... 381,131 235,214 118,232 734,577 Sold during the year...... (3,491) (3,491) Depreciation...... (3,235,740) (83,750) (35,809) (3,355,299) Net book value 31.12. 2004...... 28,464,244 459,211 150,559 29,074,014

Annual depreciation ratio...... 8% 15% 15 - 20%

Bluebird Cargo - Financial Statements 2004 9 All amounts are in USD NOTES TO THE FINANCIAL STATEMENTS

8. Insurance value of aircraft and flight equipment in operations is USD 102.4 million at the year end.

LONG TERM ASSETS:

9. Advance payment an deposits corresponds to amounts paid for heavy maintenance of capitalised aircraft and deposits in relation to aircraft.

INVENTORIES:

10. Expendable parts, reported as current assets are valued at USD 51.9 thousand. Expendable parts are valued at the lower of cost or market.

STOCKHOLDERS' EQUITY:

11. The capital stock amounts to USD 5.3 million. One vote is attach to each share of one ISK.

Summary of stockholders' equity:

Additional paid in Statutory Retained Capital stock capital reserve earnings Total

Balance 1.1. 2004...... 4,905,037 367,563 1,263,615 6,536,215 Paid in capital...... 356,818 682,793 1,039,611 Dividend paid...... (245,690) (245,690) Transferred to statutory reserve...... 420,832 (420,832)0 Net earnings...... 4,208,322 4,208,322 Stockholders' equity 31.12. 2004...... 5,261,855 1,050,356 420,832 4,805,415 11,538,458

OBLIGATIONS:

12. Deferred income tax liability is USD 831.2 thousand at the year end. This item is based on differences between balance sheet items as presented in the tax returns and the financial statements. This difference results from the fact that tax assessments are based on different rules than those governing the financial statements.

Changes during the year in the income tax liability are specified as follows:

Income tax liability at the beginning of year ...... 65,820 Calculated income tax...... 778,621 Income tax payable in 2005...... (13,197) Income tax liability at year end...... 831,244

The income tax liability divides as follows on individual items of the balance sheet:

Fixed tangible assets...... 814,278 Other items...... 16,966 831,244

Bluebird Cargo - Financial Statements 2004 10 All amounts are in USD NOTES TO THE FINANCIAL STATEMENTS

LONG-TERM DEBTS:

13. Long-term debts are recorded in terms of the year end 2004 price level. Long-term debt and their interest, classified by currency, are specified as follows:

Interest Balance

Loans in USD...... 7.49% 25,921,955

Current maturities...... (4,020,059)

Long-term debt as stated in the balance sheet...... 21,901,896

The above interest rates represent weighted average rate at Desember 31, 2004.

14. Annual maturities of long-term debt December 31, 2004 are as follows: Total

Year 2005...... 4,020,059 Year 2006...... 3,365,840 Year 2007...... 11,201,393 Year 2008...... 1,848,108 Year 2009...... 1,977,744 Subsequent year...... 3,508,811 Long term debt total...... 25,921,955

TAXES:

15. All taxes for the year 2004 have been accounted for in the Financial Statements. The Company will pay income tax and net worth tax of USD 21.9 thousand million during the year 2005 for its operation in the year of 2004.

MORTGAGES AND COMMITMENTS:

16. Mortgages with remaining loan balances at December 31, 2004 are USD 25.9 million.

17. As per agreement between Bluebird Cargo and all of Bluebird's Cargo employees, the employees are entitled to a share of the company's profit. The resulting accumulated obligations at the end of the year 2004 amounted to USD 528.2 thousand. The amount is not stated in the Financial Statement.

Bluebird Cargo - Financial Statements 2004 11 All amounts are in USD NOTES TO THE FINANCIAL STATEMENTS

OTHER MATTERS:

18. Salaries and related expenses are specified as follows: 2004 2003

Salaries...... 3,015,662 2,241,135 Related expenses...... 539,422 409,885 3,555,084 2,651,020 Contractors...... 1,293,670 571,141 4,848,754 3,222,161

Average number of employees...... 30 24

Salaries paid to the Board of Directors and Managing Director of the Company amounted to USD 25.6 thousand in the year 2004.

19. Other operating expenses are specified as follows: 2004 2003

Aircraft servicing, handling, communication and insurance...... 4,815,447 3,558,176 Crews, training and other personnel expenses...... 1,131,880 477,421 Aircraft and crew lease expenses...... 12,460 122,228 Sale and administrative...... 792,289 491,419 6,752,076 4,649,244

Bluebird Cargo - Financial Statements 2004 12 All amounts are in USD Financial Statements Bláfugl ehf.

Bluebird Cargo

2005 Table of contents

Sheet

Auditor´s Report...... 2

Endorsement and Report by the Board of Directors and the Managing Director...... 3

Statement of Income...... 4

Balance Sheet December 31, 2005...... 5 - 6

Statement of Cash Flows 2005...... 7

Statement of changes in equity...... 8

Notes to the Financial Statements...... 9 - 19

Bluebird Cargo, Board of Directors:

Einar S. Ólafsson Hannes Smárason Jón Sigurðsson

Managing Directors:

Þórarinn Kjartansson

Accountants:

Grant Thornton endurskoðun ehf. Theodór Sigurbergsson State Authorized Public Accountant

Bluebird Cargo - Financial Statements 2005.xls 1 Auditor's Report

To the Board of Directors and Shareholders of Bláfugl ehf. (Bluebird Cargo).

We have audited the accompanying Balance Sheet of Bluebird Cargo as of December 31, 2005, and the related Statement of Income, Statement of Cash Flows and Statement of changes in equity for the year then ended. These Financial Statements are the responsibility of the Board of Directors of Bluebird Cargo. Our responsibility is to express an opinion on these Financial Statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Financial Statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and dixclosures in the Financial Statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall Financial Statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the Financial Statements give a true and fair view of the financial position of the Company as of December 31, 2005 and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU.

Reykjavík, February 15, 2006

Grant Thornton endurskoðun ehf.

Theodór Sigurbergsson State Authorized Public Accountant

Bluebird Cargo - Financial Statements 2005.xls 2 Endorsement and Report by the Board of Directors and Managing Director

The Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU. The Financial Statements for the previous years have been prepared in accordance with the Icelandic Generally Accepted Principles. The effect of the transition to IFRSs on equity 1.1. 2005 is a decrease of USD 0.9 million from USD 11.5 million to USD 10.6 million. The effect of the transition to IFRSs on earnings in the year 2004 is a decrease amounting to USD 3.5 million. The effect of the transition to IFRSs on the Financial Statements are further explained in notes to the Financial Statements.

This years Statement of Income shows Net earnings of USD 2 million. Stockholders Equity for the year ended 31, December 2005 is USD 12.6 million but at the beginning of the year it was USD 10.6 million. Sales income grew by 18% during the year, and was USD 35.6 million, compared to USD 30.1 million in 2004. Changes in Stockholder's Equity and appropriation of net profits are further explained in Financial Statements.

Bluebird's Cargo shareholders at the year ended 31, December 2005 were 2 but they were 89 at the beginning of the year, and 2 Shareholder owned more than 10% share; FL Group hf. 84,26% share and Flugflutningar ehf. 15,74% share.

The Board of Directors and Managing Director of Bluebird Cargo hereby confirm The Financial Statements for the year ended 31, December 2005.

Kópavogur, February 15, 2006

Board of Directors:

Einar S. Ólafsson Hannes Smárason Jón Sigurðsson

Managing Directors:

Þórarinn Kjartansson

Bluebird Cargo - Financial Statements 2005.xls 3 Statement of Income for the year 2005

2005 2004

Sales income...... 35.571.681 30.126.494 Other income...... 332.141 1.047.705 Salaries and related expenses...... ( 6.594.066) ( 5.234.452) Spares, maintenance and repairs...... ( 3.934.511) ( 3.523.640) Aircraft lease...... ( 6.343.734) ( 2.608.546) Aircraft fuel...... ( 4.204.956) ( 3.031.740) Other expenses...... ( 6.956.133) ( 6.752.076) Depreciation...... ( 3.536.676) ( 3.797.667) Operating profit before net financing income (expenses).... 4.333.746 6.226.078

Net financing expenses...... ( 1.824.490) ( 2.048.132)

Operating profit before taxes...... 2.509.256 4.177.946

Taxes...... ( 551.580) ( 665.488)

NET EARNINGS...... 1.957.676 3.512.458

Earnings per share...... 0,37 0,70

Bluebird Cargo - Financial Statements 2005 4 All amounts are in USD Balance Sheet

Assets

2005 2004

Fixed assets

Property and equipment...... 30.697.334 28.631.646 Longterm assets...... 2.718.284 3.411.190 33.415.618 32.042.836

Current assets

Inventories...... 105.365 51.889 Accounts receivables...... 2.058.744 2.165.589 Other receivables...... 702.989 1.536.795 Cash and cash equivalents...... 1.822.109 3.776.104 4.689.207 7.530.377

TOTAL ASSETS 38.104.825 39.573.213

Bluebird Cargo - Financial Statements 2005 5 All amounts are in USD December 31 2005

Stockholders' equity and liabilities

2005 2004

Stockholders' equity

Capital stock...... 5.261.855 5.261.855 Additional paid in capital...... 1.050.356 1.050.356 Statutory reserve...... 616.600 420.832 Retained earnings...... 5.633.660 3.871.752 12.562.471 10.604.795

Long term debt

Long term financial liabilities...... 18.497.278 21.901.896 Deferred income tax...... 1.208.808 657.228 19.706.086 22.559.124

Current liabilities

Accounts payable...... 1.559.395 1.272.618 Current maturities...... 3.407.835 4.020.059 Other current liabilities...... 869.038 1.116.617 5.836.268 6.409.294

25.542.354 28.968.418

STOCKHOLDERS' EQUITY AND LIABILITIES 38.104.825 39.573.213

Bluebird Cargo - Financial Statements 2005 6 All amounts are in USD Statement of Cash Flows for the year 2005

2005 2004 Cash flows from operating activities

Cash generated from operations...... 8.835.666 8.749.051 Interest paid...... ( 1.856.329) ( 2.060.868) Taxes paid...... ( 21.882) 0 Working capital provided by operating activities 6.957.455 6.688.183

Cash flows from investing activities

Purchase of Aircraft and rotable parts...... ( 5.588.758) ( 616.345) Prepayments and deposits...... 707.757 ( 1.349.505) Purchase of Equipment...... ( 13.607) ( 118.232) Proceeds from sale of fixed assets...... 0 6.514 Cash used in investing activities ( 4.894.608) ( 2.077.568)

Cash flows from financing activities

Instalments of long-term liabilities...... ( 4.016.842) ( 2.871.783) Dividend paid...... 0 ( 245.690) Paid in capital...... 0 1.039.611 Cash used by financing activities ( 4.016.842) ( 2.077.862)

Increase (decrease) in cash...... ( 1.953.995) 2.532.753

Cash at beginning of year...... 3.776.104 1.243.351 Cash at year end...... 1.822.109 3.776.104

Bluebird Cargo - Financial Statements 2005 7 All amounts are in USD Statement of changes in equity

Capital Additional Statutory Retained stock paid in capital reserve earnings Total

Balance 1.1.2004...... 4.905.037 367.563 1.263.615 6.536.215 IFRS adoption...... (237.799) (237.799) Balance 1.1.2004, restated...... 4.905.037 367.563 1.025.816 6.298.416 Paid in capital...... 356.818 682.793 1.039.611 Dividend paid...... (245.690) (245.690) Transfer to statutory reserve...... 420.832 (420.832) 0 Net earnings...... 3.512.458 3.512.458 Balance 31.12. 2004...... 5.261.855 1.050.356 420.832 3.871.752 10.604.795

Balance 31.12. 2005...... 5.261.855 1.050.356 420.832 4.805.415 11.538.458 IFRS adoption...... (933.663) (933.663) Balance 31.12.2005, restated...... 5.261.855 1.050.356 420.832 3.871.752 10.604.795 Transfer to statutory reserve...... 195.768 (195.768) 0 Net earnings...... 1.957.676 1.957.676 Balance 31.12. 2005...... 5.261.855 1.050.356 616.600 5.633.660 12.562.471

Bluebird Cargo - Financial Statements 2005 8 All amounts are in USD Notes

Operations

1. Bláfugl ehf. (Bluebird Cargo) legal residence is Hlíðarsmári 15, Kópavogi. The company is subsidiary of FL-Group hf. and is part of its Consolidated Financial Statements.

Significant accounting policies

Adoption of International Financial Reporting Standard

2. The Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and its interpretations adopted by the International Accounting Standards Board (IASB), as confirmed by the EU. This is the first Financial Statements prepared according to IFRS and IFRS 1, First-time Adoption of IFRS, has been applied.

An explanation of how the transition to IFRSs has affected the reported financial position and financial performance of the company is provided in note 34. In the note, the changes in equity's comparative figures and company's results as they were disclosed according to Icelandic GAAP for the year 2004 and as they are according to IFRS, are explained.

Basis of preparation

3. The Financial Statements are prepared under the historial cost convention.

The preparation of the Financial Statements in conformity with generally accepted accounting principles requires management to make estimates and assuptions that affect the reported amounts of assets and liabilities at the date of the Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The principal accounting policies adopted are set out below.

Foreign currencies

4. Transactions in currencies other than USD are initially recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in such currencies are retranslated at the rates prevailing on the balanche sheet date. Profits and losses arising on exchange are included in net profit or loss for the period.

Risk management

5. Bluebird's Cargo overall policy towards foreign exchange risk is to manage risk by applying natural hedging to as much extent as possible and that way keep risk within acceptable level.

Bluebird Cargo - Financial Statements 2005.xls 9 All amounts are in USD Revenue recognition

6. Revenue are recognised in Income Statement in the period when transportation is provided. Interest income is accrued on time basis, by reference to the principal outstanding and the interest rate applicable.

Leases

7. Leases are classified as operating leases. Lease payments are charged to the Income Statement on straight-line basis over the period of the lease.

Borrowing costs

8. All borrowing costs are expensed in the period they incur.

Taxation

9. The income tax currently payable is based on taxable profit for the period. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other periods and it further excludes items that are never taxable or deductible.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the Financial Statemets and the corresponding tax basis used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill (or negative goodwill) or from the initial recognition (other than in a business combination) of other assets and liabilities in transaction which affects neither the tax profit nor the accounting profit. Deffered tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the company intends to settle its current tax assets and liabilities on a net basis.

The carrying amount of deffered tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered.

Deffered tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. Deferred tax is charged or credited in the Income Statement, except when it relates to items credited or charged directly to equity in which case the deferred tax is also dealt with in equity Operating assets

10. Property and equipment are stated at cost less accumulated depreciation. When aircrafts are acquired the purchase price is divided between the aircraft itself and engine cycles. Aircrafts are depreciated over the estimated useful live of the relevant aircraft until a residual value is met. Engine cycles are depreciated according to engine cycles operated. When an engine is overhauled the cost of the overhaul is capitalised and the remainder of the cost of the previous overhaul that has not already been depreciated, if there is any, is expensed in full.

The cost of a property and equipment comprises its purchase price and any directly attributable cost of bringing the asset to working condition for its intended use.

The company recognises in the carrying amount of an item of operating assets the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the company and the cost of the item can be measured reliably. All other costs are recognised in the Income Statement as an expense as incurred.

Bluebird Cargo - Financial Statements 2005.xls 10 All amounts are in USD Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives and is specified as follows:

Useful life Residual value

Aircrafts and flight equipment...... 3 - 13 ár 10% Engine cycles...... Cycles operated Other property and equipment...... 5 - 7 ár 0 - 10%

The residual value is estimated annually.

Impairment

11. At each balance sheet date, the company reviews the carrying amounts of its tangible to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Recoverable amount is the greater of net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

Inventories

12. Expendable parts are reported as current assets. Expendable parts are valued at the lower of cost or market.

Accounts receivable

13. Accounts receivables are valued at nominal value. Accounts receivable in other currencies than USD, have been entered at the exchange rates prevailing at the balance sheet date.

Cash and cash equivalents

14. When preparing the Statement of Cash Flows, the Company considers cash on hand, bank deposits and all highly liquid debt instruments as cash.

Bluebird Cargo - Financial Statements 2005.xls 11 All amounts are in USD Long-term liabilities

15. Long-term liabilities are valued at nominal value less payments made and the remaining nominal balance is adjusted by exchange rate or index, if applicable. Interest expense is accrued on a periodical basis, based on the principal outstanding and at the interest rate applicable.

Provision

16. Provisions is recognised when the Company has a present obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

Salaries

17. Salaries, salary - related expenses, other personnel expenses and contractors paid by the company are specified as follows:

2005 2004

Salaries...... 4.109.522 2.978.734 Salary - related expenses...... 947.733 595.674 Other personnel expenses...... 558.076 366.374 Contractors...... 978.735 1.293.670 6.594.066 5.234.452

Average number of positions...... 40 30

18. Management salaries

Þórarinn Kjartansson, Managing Director and board member...... 455.001 Einar Ólafsson, Chairman of the board...... 38.180 Elías S. Skúlason, board member...... 19.090 Jón Einarsson, board member...... 19.090 Úlfur Sigmundsson, board member...... 19.090 550.451

Fees to Auditor's

19. Remuneration to the Company's Auditors' are specified as follows: 2005 2004

Audit of financial statements...... 18.658 17.689 Other servies...... 130.782 75.105 149.440 92.794

Bluebird Cargo - Financial Statements 2005.xls 12 All amounts are in USD Financial income / (expenses)

20. Financial income are specified as follows: 2005 2004

Interest income...... 173.241 63.435 Interest on bank loans...... ( 2.019.958) ( 1.982.167) Other interest expenses...... ( 24.064) ( 11.642) Exchange rate differences...... 46.291 ( 117.758) ( 1.824.490) ( 2.048.132) Earnings per share

21. The calculation of Earnings per share is based on the following data:

2005 2004

Net earnings...... 1.957.676 3.512.458

Total average numer of shares outstanding during the period...... 5.261.855 5.047.586

Earnings per share...... 0,37 0,70

Property and equipment

22. Property, equipment and depreciation are as follows:

Aircraft Rotable Equipments Total and engines parts and vehicle Cost Balance 1.1. 2005...... 38.510.377 675.939 223.724 39.410.040 Changes due to IFRS...... ( 287.211) ( 287.211) Balance 1.1. 2005, restated...... 38.223.166 675.939 223.724 39.122.829 Addition during the year...... 5.500.912 87.846 13.607 5.602.365 Sales and disposal during the year...... ( 299.625) ( 299.625) Balance 31.12. 2005...... 43.424.453 763.785 237.331 44.425.569

Accumulated depreciation Balance 1.1. 2005...... 10.046.133 216.728 73.165 10.336.026 Changes due to IFRS...... 163.800 ( 8.375) ( 267) 155.158 Balance 1.1. 2005, restated...... 10.209.933 208.353 72.898 10.491.184 Depreciation...... 3.401.999 95.122 39.555 3.536.676 Sales and disposal during the year...... ( 299.625) ( 299.625) Balance 31.12. 2005...... 13.312.307 303.475 112.453 13.728.235

Book value 31.12. 2005...... 30.112.146 460.310 124.878 30.697.334

Bluebird Cargo - Financial Statements 2005.xls 13 All amounts are in USD Insurances

23. Insurance value of aircraft and flight equipment: Insurance value Book value

Aircraft and flight equipment...... 42.900.000 30.572.456

Operating lease

24. 2005 2004 Lease payments under operating leases recognised in Income Statements for the year...... 6.382.245 2.623.424

At the balance sheet date, the company had outstanding commitments under operating leases, which fall due as follows:

31.12.2005 31.12.2004

In 2006 / 2005...... 5.057.343 5.044.167 In 2007 / 2006...... 5.053.435 5.031.727 In 2008 / 2007...... 5.030.967 5.027.483 In 2009 / 2008...... 4.337.598 5.008.167 In 2010 / 2009...... 0 4.261.313 19.479.343 24.372.857

Operating lease payments represent rentals payable by the Company for certain of its aircrafts and cars. Three rental agreements are in place for aircraft and four for vehicle. The leases expire in the years 2007 - 2009.

Long term assets

25. Advance payment and deposits corresponds to amounts paid for heavy maintenance of capitalised aircraft and deposits in relation to aircraft. Long - term receivables are recognised according to the effective interest rate method.

Inventories

26. 31.12.2005 31.12.2004

Expendable parts...... 105.365 51.889 105.365 51.889

Other financial assets

27. Accounts receivable: 31.12.2005 31.12.2004 Nominal value...... 2.058.744 2.165.589

The directors consider that the carrying amount of trade receivables approximates their fair value.

Bluebird Cargo - Financial Statements 2005.xls 14 All amounts are in USD Other receivables 31.12.2005 31.12.2004 Prepaid expenses...... 605.868 649.292 Other...... 97.121 887.503 702.989 1.536.795

The directors consider that the carrying amount of other receivables approximates their fair value.

Bank balances and cash:

Bank balances and cash comprise cash and short-term deposits. The carrying amount of these assets approximates their fair value.

Capital stock

28. Capital stock are specified as follows:

Shares Ratio Nominal value

Capital stock at year end...... 5.261.855 100,0% 5.261.855 5.261.855 100,0% 5.261.855

Long-term debts

29. Long-term debt and their interest, classified by currency, are specified as follows: 31.12.2005 31.12.2004

Loans in USD...... 21.905.113 25.921.955 Current maturities...... ( 3.407.835) ( 4.020.059) Long-term debt as stated in the balance sheet...... 18.497.278 21.901.896

Aggregated annual maturities are as follows:

31.12.2005 31.12.2004

In 2006 / 2005...... 3.407.835 4.020.059 In 2007 / 2006...... 11.253.640 3.365.840 In 2008 / 2007...... 1.897.525 11.201.393 In 2009 / 2008...... 2.036.673 1.848.108 In 2010 / 2009...... 3.309.440 1.977.744 Subsequent years...... 0 3.508.811 Long term debt total...... 21.905.113 25.921.955

Bluebird Cargo - Financial Statements 2005.xls 15 All amounts are in USD Deferred tax

30. Changes during the year in the income tax liability are specified as follows: 31.12.2005 31.12.2004

Income tax liability at the beginnig of year...... 657.228 65.820 IFRS adoption...... 0 ( 52.198) Calculated income tax...... 551.580 665.488 Income tax payable in 2006...... 0 ( 21.882) Income tax liability at year end...... 1.208.808 657.228

The income tax liability at the beginning of year:

Fixed tangible assets...... 1.315.490 744.963 Other items...... ( 35.997) ( 87.735) Loss carry forward...... ( 70.685) 0 1.208.808 657.228 Taxes

31. The Company will not pay any income tax due to loss carried forward which amounts to USD 393 thousand at the year end. The loss carried forward can be deducted from net income the following ten years after the loss was experienced. The loss carried forward can be deducted from net income at latest as follows:

From net income in year 2015...... 392.695

Mortgages and commitments

32. Mortgages with remaining loan balances at December 31, 2005 are USD 22 million.

Cash generated from operations

33. Cash generated from operations:

2005 2004

Net profit...... 4.333.746 6.226.078

Adjustment for: Depreciation...... 3.536.676 3.797.667 Gain on sale of asset...... 0 ( 3.023)

Changes in current assets and liabilities: Current receivables...... 940.651 ( 1.668.927) Inventories...... ( 53.476) ( 35.764) Current liabilities...... 78.069 433.020 Cash generated from operations...... 8.835.666 8.749.051

Bluebird Cargo - Financial Statements 2005.xls 16 All amounts are in USD Changes due to adoption of International Financial Reporting Standards

34. As stated in notes regarding significant accounting policies, these are the Company's first year Financial Statements prepared in accordance with IFRSs.

The accounting policies set out in notes regarding significant accounting policies have been applied in preparing the Financial Statements for the year, the comparative information presented in these Financial Statements for the year ended December 31, 2004 and in the preparation of an opening IFRS balance sheet at January 1, 2004 (the Company's date of transition).

In preparing its opening IFRS balance sheet, the Company has adjusted amounts reported previously in Financial Statements prepared in accordance with its old basis of accounting (previous GAAP). An explanation of how the transition from previous GAAP and IFRSs has affected the Company's Financial position and financial performance is set out in the following tables and the notes that accompany the tables. No significant adjustments due to IFRS adoption were made to the cash flow statement previously published according to previous GAAP.

Equity 1.1. 2005

Equity according to previous GAAP 31.12.2004...... 11.538.458 Equity according to IFRS 1.1.2005...... 10.604.796 Net change from previous GAAP to IFRSs...... ( 933.662)

1.1.2004 1.1.2005 Samtals Changes in measurements: Property and equipment...... 0 ( 373.053) ( 373.053) Longterm asset...... ( 72.447) 6.699 ( 65.748) Other current liabilities...... ( 165.351) ( 329.510) ( 494.861) Net change from previous GAAP to IFRSs...... ( 237.798) ( 695.864) ( 933.662)

Depreciation was calculated on straight-line basis over the estimated useful life of property and equipment, until residual value reached. By implementation of IFRS, property and equipment, except for aircraft engines, are depreciated on straight line basis over the estimated useful life, less residual value. Aircraft engines are depreciated according to engine cycles. This is reflected in negative effects on equity amounts to USD 373 thousand after taxes.

Long term receivables value is based on effective interest rates. Negative effects on equity amounts to USD 66 thousand after taxes.

Liabilities resulting from profit sharing agreement with employees is now credited at the respective year. Negative effects on equity amounts to USD 495 thousand after taxes.

Bluebird Cargo - Financial Statements 2005.xls 17 All amounts are in USD Balance Sheet 1 January 2005

Assets Icelandic GAAP Changes IFRSs 31.12.2004 Fixed assets Property and equipment...... 29.074.014 ( 442.368) 28.631.646 Longterm assets...... 3.489.156 ( 77.966) 3.411.190 32.563.170 ( 520.334) 32.042.836

Current assets Expendable parts...... 51.889 51.889 Accounts receivables...... 2.165.589 2.165.589 Other receivables...... 1.536.795 1.536.795 Cash and cash equivalents...... 3.776.104 3.776.104 7.530.377 7.530.377

Total assets 40.093.547 ( 520.334) 39.573.213 Stockholders' equity and liabilities

Stockholders' equity Capital stock...... 5.261.855 5.261.855 Additional paid in capital...... 1.050.356 1.050.356 Statutory reserve...... 420.832 420.832 Retained earnings...... 4.805.415 ( 933.662) 3.871.753 11.538.458 ( 933.662) 10.604.796

Long-term debt Long-term financial liabilities...... 21.901.896 21.901.896 Deffered income tax...... 831.244 ( 174.017) 657.227 22.733.140 ( 174.017) 22.559.123

Current liabilities Accounts payable...... 1.272.618 1.272.618 Current maturities...... 4.020.059 4.020.059 Other current liabilities...... 529.272 587.345 1.116.617 5.821.949 587.345 6.409.294

28.555.089 413.328 28.968.417

Stockholders' equity and liabilities 40.093.547 ( 520.334) 39.573.213

Bluebird Cargo - Financial Statements 2005.xls 18 All amounts are in USD Income Statement for the year 2004

Icelandic GAAP Changes IFRSs

Sales income...... 30.126.494 30.126.494 Other income...... 1.047.705 1.047.705 Salaries and related expenses...... ( 4.848.754) ( 385.698) ( 5.234.452) Spares, maintenance and repairs...... ( 3.523.640) ( 3.523.640) Aircraft lease...... ( 2.608.546) ( 2.608.546) Aircraft fuel...... ( 3.031.740) ( 3.031.740) Other expenses...... ( 6.752.076) ( 6.752.076) Depreciation...... ( 3.355.299) ( 442.368) ( 3.797.667) Operating profit before net financing income (expenses)... 7.054.144 ( 828.066) 6.226.078

Net financing expenses...... ( 2.058.516) 10.384 ( 2.048.132)

Operating profit before taxes...... 4.995.628 ( 817.682) 4.177.946

Taxes...... ( 787.306) 121.818 ( 665.488) ( 787.306) 121.818 ( 665.488)

Net earnings...... 4.208.322 ( 695.864) 3.512.458

Total salaries increased by USD 385 thousand, due to the fact that personnel's profit share is charged to the operation expenses.

Depreciation increases by USD 442 thousand resulting from different depreciation on engine.

The changes to income tax result from the above mentioned changes.

Bluebird Cargo - Financial Statements 2005.xls 19 All amounts are in USD Financial Statements Bláfugl hf.

Bluebird Cargo

1/1 - 30/9 2005 STATEMENT OF INCOME 1/1-30/9 2005

Notes 1/1-30/9 2005 2004 OPERATING REVENUE:

Sales income...... 26,894,986 30,126,494 Other income...... 279,566 1,047,705 27,174,552 31,174,199

OPERATING EXPENSES:

Salaries and related expenses...... 5,103,769 4,848,754 Spares, maintenance and repairs...... 3,172,860 3,523,640 Aircraft lease...... 4,663,982 2,608,546 Aircraft fuel...... 3,046,160 3,031,740 Other expenses...... 5,488,323 6,752,076 Depreciation...... 2,938,550 3,355,299 24,413,644 24,120,055

Operating profit before financial income and (expenses)...... 2,760,908 7,054,144

FINANCIAL INCOME AND (EXPENSES):

Interest income...... 54,661 53,051 Interest expense...... ( 1,510,337) ( 1,993,809) Currency exchange difference...... 37,818 ( 117,758) ( 1,417,858) ( 2,058,516)

Operating profit before taxes...... 1,343,050 4,995,628

Taxes...... ( 327,916) ( 787,306)

NET EARNINGS...... 1,015,134 4,208,322

Bluebird Cargo - Financial Statements 1/1 - 30/9 2005 All amounts are in USD BALANCE SHEET

ASSETS:

Notes 30/9 2005 2004

FIXED ASSETS:

Property and equipment: Aircraft and engines...... 30,219,382 28,464,244 Rotable parts...... 400,577 459,211 Equipment and vehicle...... 133,857 150,559 30,753,816 29,074,014 Longterm assets: Advance payments and deposits...... 3,048,082 3,489,156 3,048,082 3,489,156

Fixed assets 33,801,898 32,563,170 CURRENT ASSETS:

Inventories: Expendable parts...... 170,020 51,889

Receivables: Accounts receivables...... 2,825,850 2,165,589 Other receivables...... 164,267 887,503 Prepayments...... 1,934,568 649,292

Cash and cash equivalents...... 646,218 3,776,104 Current assets 5,740,923 7,530,377

TOTAL ASSETS 39,542,821 40,093,547

Bluebird Cargo - Financial Statements 1/1 - 30/9 2005 All amounts are in USD SEPTEMBER 30 2005

STOCKHOLDERS' EQUITY AND LIABILITIES:

Notes 30/9 2005 2004

STOCKHOLDERS' EQUITY:

Capital stock...... 5,261,855 5,261,855 Additional paid in capital...... 1,050,356 1,050,356 Statutory reserve...... 555,137 420,832 Retained earnings...... 5,686,244 4,805,415 Stockholders' equity 12,553,592 11,538,458

OBLIGATIONS:

Deferred income tax...... 1,159,160 831,244 Obligations 1,159,160 831,244

LONG-TERM DEBT:

Long-term debt...... 23,587,271 25,921,955 Current maturites...... ( 4,182,390) ( 4,020,059) 19,404,881 21,901,896

CURRENT LIABILITIES:

Accounts payable...... 1,598,157 1,272,618 Current maturities...... 4,182,390 4,020,059 Other current liabilities...... 644,641 507,390 Taxes for the year...... 0 21,882 6,425,188 5,821,949

Obligation and liabilities 26,989,229 28,555,089

STOCKHOLDERS' EQUITY AND LIABILITIES 39,542,821 40,093,547

Bluebird Cargo - Financial Statements 1/1 - 30/9 2005 All amounts are in USD STATEMENT OF CASH FLOWS 1/1 - 30/9 2005

Notes 1/1-30/9 2005 2004 CASH FLOWS FROM OPERATING ACTIVITIES:

Net earnings of the period...... 1,015,134 4,208,322 Items not affecting cash: Depreciation...... 2,938,550 3,355,299 Deferred income tax liability...... 0 765,424 Gain on sale of assets...... 327,916 ( 3,023) Working capital provided by operating activities 4,281,600 8,326,022

Changes in current assets and liabilities: Current receivables, decrease (increase)...... 62,975 ( 1,732,537) Inventories, decrease (increase)...... ( 118,131) ( 35,764) Current liabilities, (decrease) increase...... 440,907 66,852 385,751 ( 1,701,449)

Net cash provided by operating activities 4,667,351 6,624,573

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of Aircraft and rotable parts...... ( 4,604,745) ( 616,345) Prepayments and deposits...... ( 844,199) ( 1,285,895) Purchase of Equipment...... ( 13,607) ( 118,232) Proceeds from sale of fixed assets...... 0 6,514 Cash used in investing activities ( 5,462,551) ( 2,013,958)

CASH FLOWS FROM FINANCING ACTIVITIES:

Instalments of long-term liabilities...... ( 2,334,686) ( 2,871,783) Dividend paid...... 0 ( 245,690) Paid in capital...... 0 1,039,611 Cash used by financing activities ( 2,334,686) ( 2,077,862)

Increase in cash...... ( 3,129,886) 2,532,753

Cash at beginning of year...... 3,776,104 1,243,351 Cash at the end of period...... 646,218 3,776,104

SUPPLEMENTAL INFORMATION:

Interest paid on long term debt...... 1,490,084 1,984,520 Income tax and property tax paid...... 0 0

Bluebird Cargo - Financial Statements 1/1 - 30/9 2005 All amounts are in USD Bluebird Cargo

Interim Financial Statements 1 January - 30 September 2006

Bláfugl ehf. Hlíðasmára 15 201 Kópavogur

Reg. no. 460899-2229 Income Statement for the nine Months Ended 30 September 2006

2006 1.1.-30.9. Operating income:

Aircraft lease ...... 23,496,791 Sold cargo ...... 7,266,255 Other income ...... 209,089 30,972,135

Operating expenses:

Salaries and related expenses ...... 5,874,470 Spares, maintenance and repairs...... 3,145,738 Aircraft lease ...... 4,972,929 Aircraft fuel ...... 2,865,839 Purchased cargo and handling ...... 3,018,712 Other expenses ...... 3,324,415 Depreciation ...... 2,742,939 25,945,042

Operating profit before net financing expenses ...... 5,027,093

Net financing expenses ...... ( 1,109,792)

Profit before tax ...... 3,917,301

Income tax expense ...... ( 708,245)

Profit for the period ...... 3,209,056

______Bláfugl ehf. Interim Financial Statements 30.9.2006 2 Amounts are in USD Balance Sheet as at 30 September 2006

30.9.2006 31.12.2005 Assets:

Operating assets ...... 32,062,867 30,697,334 Long-term receivables ...... 2,892,208 2,718,284 Total non-current assets 34,955,075 33,415,618

Inventories ...... 147,319 105,365 Trade and other receivables ...... 3,205,119 2,761,733 Cash and cash equivalents ...... 3,117,189 1,822,109 Total current assets 6,469,627 4,689,207

Total assets 41,424,702 38,104,825

Equity:

Share capital ...... 5,261,855 5,261,855 Additional paid in capital ...... 1,050,356 1,050,356 Statutory reserve ...... 616,600 616,600 Retained earnings ...... 8,842,716 5,633,660 Total equity 15,771,527 12,562,471

Liabilities:

Long term financial liabilities ...... 7,698,274 18,497,278 Deffered income tax ...... 1,361,364 1,208,808 Total non-current liabilities 9,059,638 19,706,086

Trade and other payables ...... 4,918,868 2,428,433 Current maturities on non-current liabilities ...... 11,674,669 3,407,835 Total current liabilities 16,593,537 5,836,268

Total liabilities 25,653,175 25,542,354

Total equity and liabilities 41,424,702 38,104,825

______Bláfugl ehf. Interim Financial Statements 30.9.2006 3 Amounts are in USD Statement of Cash Flows for the Nine Months Ended 30 September 2006

2006 Cash flows from operating activities: 1.1.-30.9.

Profit for the period ...... 3,209,056 Difference between operating profit and cash from operations: Depreciation ...... 2,742,939 Other operating items ...... 708,245 Working capital used in operations 6,660,240

Net change in operating assets and liabilities ...... 1,437,782 Net cash provided by operating activities 8,098,022

Cash flows from investing activities:

Acquisition of operating assets ...... ( 4,108,472 ) Prepayments ...... ( 162,300 ) Net cash from investing activities( 4,270,772 )

Cash flows from financing activities:

Repayment of long-term borrowings ...... ( 2,532,170 ) Net cash from financing activities( 2,532,170 )

Increase in cash and cash equivalents ...... 1,295,080

Cash and cash equivalents at 1 January ...... 1,822,109

Cash and cash equivalents at 30 September ...... 3,117,189

______Blafugl ehf. Interim Financial Statements 30.9.2006 4 Amounts are in USD 28.8 ICELANDAIR GROUP’S INTERIM STATEMENTS FOR 2006 28.8.1 COMPILED INTERIM ACCOUNT FOR THE PERIOD ENDING 31 MARCH 2006 28.8.2 REVIEWED INTERIM ACCOUNT FOR THE PERIOD ENDING 30 JUNE 2006 28.8.3 AUDITED INTERIM ACCOUNT FOR THE PERIOD ENDING 30 SEPTEMBER 2006 Icelandair Group hf. Condensed Consolidated Interim Financial Statements 1 January - 31 March 2006

Icelandair Group hf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 631205-1780 Contents

Endorsement and Signatures of the Board of Directors and the CEO ...... 36 Balance Sheet ......

Auditors' Compilation Report ...... 47 Statement of Cash Flows ......

Income Statement ...... 58 Notes ......

Interim Financial Statements of Icelandair Group hf. 31 March 2006 ______2

Auditors' Compilation Report

Board of Directors of Icelandair Group hf.

We have compiled the interim consolidated balance sheet of Icelandair Group hf. and its subsidiaries as of 31 March 2006 and the related consolidated income statement and statement of cash flows for the three months then ended. These interim consolidated financial statements are presented in accordance with International Financial Reporting Standards. All information included in these interim consolidated financial statements is the representation of the management of Icelandair Group hf.

A compilation is limited to presenting in the form of financial statements information that is the representation of management. We have not audited or reviewed the accompanying interim consolidated financial statements and, accordingly, do not express an opinion or any other form of assurance on them.

Reykjavík, 23 May 2006.

Jón S. Helgason Sæmundur Valdimarsson

KPMG Endurskoðun hf.

Interim Financial Statements of Icelandair Group hf. 31 March 2006 ______4 Income Statement for the Three Months Ended 31 March 2006

Note 2006 1.1.-31.3. Operating income:

Transport revenue ...... 2 5,555 Aircraft and air crew lease ...... 2,217 Other operating revenue ...... 3 1,823 9,595

Operating expenses:

Salaries and other personnel expenses ...... 4 3,840 Aircraft fuel ...... 1,654 Aircraft and air crew lease ...... 875 Aircraft servicing, handling and communication ...... 608 Aircraft maintenance expenses ...... 695 Other operating expenses ...... 5 2,188 9,860

Operating loss before depreciation (EBITDA) ...... ( 265)

Depreciation ...... 6( 827)

Operating loss before net financial income (EBIT) ...... ( 1,092)

Net financial income ...... 7 406 Share of profit of associates ...... 9

Loss before tax ...... ( 677)

Income tax expense ...... 8 122

Loss for the period ...... ( 555)

Loss per share:

Basic and diluted loss per share (ISK) ...... 9( 0.19)

Amounts are in ISK million Interim Financial Statements of Icelandair Group hf. 31 March 2006 ______5 Balance Sheet as at 31 March 2006

Note 31.3.2006 1.1.2006

Assets: Operating assets ...... 10 22,527 20,595 Intangible assets ...... 11 14,247 14,549 Investments in associates ...... 623 319 Prepaid aircraft acquisitions ...... 12 19,336 16,886 Long-term receivables ...... 1,591 1,369 Total non-current assets 58,324 53,718

Inventories ...... 983 864 Trade and other receivables ...... 8,591 4,669 Cash and cash equivalents ...... 3,630 5,023 Total current assets 13,204 10,556

Total assets 71,528 64,274

Equity: Share capital ...... 13 3,000 3,000 Share premium ...... 16,350 16,350 Other reserves ...... 619 0 Accumulated deficit ...... ( 555) 0 Total equity 14 19,414 19,350

Liabilities: Credit institutions ...... 15 17,287 22,728 Deferred income tax liability ...... 262 262 Pension liability ...... 24 0 Total non-current liabilities 17,573 22,990

Credit institutions ...... 0 786 Trade and other payables ...... 16,338 8,486 Current maturities of non-current liabilities ...... 15 13,401 10,327 Prepaid income ...... 4,802 2,335 Total current liabilities 34,541 21,934

Total liabilities 52,114 44,924

Total equity and liabilities 71,528 64,274

Amounts are in ISK million Interim Financial Statements of Icelandair Group hf. 31 March 2006 ______6 Statement of Cash Flows for the Three Months Ended 31 March 2006

Note 2006 1.1.-31.3. Cash flows from operating activities:

Loss for the period ...... ( 555 ) Adjustments for: Depreciation ...... 6 827 Other operating items ...... 17( 692 ) Working capital to operations( 420 )

Net change in operating assets and liabilities ...... 18 1,399 Net cash from operating activities 979

Cash flows from investing activities:

Acquisition of operating assets ...... ( 1,851 ) Acquisition of intangible assets ...... ( 41 ) Acquisition of subsidiary, net of cash acquired ...... 5,023 Proceeds from the sale of assets ...... 1,746 Long-term receivables, change ...... ( 43 ) Current receivables, change ...... ( 1,462 ) Net cash used in investing activities 3,372

Cash flows from financing activities:

Repayment of borrowings ...... ( 786 ) Net cash used in financing activities( 786 )

Decrease in cash and cash equivalents ...... 3,565

Effect of exchange rate fluctuations on cash held ...... 65

Cash and cash equivalents at 1 January ...... 0

Cash and cash equivalents at 31 March ...... 3,630

Amounts are in ISK million Interim Financial Statements of Icelandair Group hf. 31 March 2006 ______7 Notes

Significant accounting policies

Icelandair Group hf.'s legal residence is at Reykjavíkurflugvöllur in Reykjavík, Iceland. The condensed consolidated interim financial statements of the Company for the three months ended 31 March 2006 comprise the Company and its subsidiaries, together referred to as the “Group”. Icelandair Group hf. is a subsidiary of FL GROUP hf. and the condensed consolidated interim financial statements of the Company are a part of the consolidated interim financial statements of the Parent Company wherein information regarding the financial performance and financial position of the Group can be found. The interim financial statements were authorised for issue by the directors on 23 May 2006. a. Statement of compliance These condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standard IAS 34, Interim Financial Reporting. They do not include all of the information required for a complete set of consolidated annual financial statements. b. Basis of preparation The condensed consolidated interim financial statements are prepared in Icelandic kronas, rounded to the nearest million. They are prepared on the historical cost basis except that securities and derivative financial instruments are stated at their fair value.

The preparation of consolidated interim financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. c. Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The interim financial statements of subsidiaries are included in the consolidated interim financial statements from the date that control commences until the date that control ceases.

(ii) Associates Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. The consolidated interim financial statements include the Group's share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases. When the Group's share of losses exceeds its interest in an associate, the Group's carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of an associate.

(iii) Transactions eliminated on consolidation Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated interim financial statements. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group's interest in the entity and are deducted from the carrying value of associates. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

Amounts are in ISK million Interim Financial Statements of Icelandair Group hf. 31 March 2006 ______8 Notes, contd.: d. Foreign currency Foreign currency transactions Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Icelandic kronas at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Acquisition of operating assets in foreign currencies is translated at the foreign exchange rate ruling at the date of the transaction. Operating expenses and sales in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction.

Financial statements in foreign currencies and of foreign operations Three domestic subsidiaries record their accounts in US dollars and prepare their financial statements in the same currency. One foreign subsidiary is a part of the consolidated interim financial statements. The assets and liabilities of these subsidiaries are translated to Icelandic kronas at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of these subsidiaries are translated to Icelandic kronas at the average exchange rate for the period. Foreign exchange differences arising on retranslation are recognised directly in a separate component of equity. e. Derivative financial instruments The Group uses derivative financial instruments to hedge its exposure to foreign exchange rate risk, interest rate risk and fuel price risk arising from operational and financing activities. Derivative financial instruments are stated at fair value and the underlying assets are not recognised in the balance sheet. f. Hedging (i) Cash flow hedges Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecasted transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. When the forecasted transaction affects profits or loss the associated cumulative gain or loss is removed from equity and recognised in the income statement. The ineffective part of any gain or loss is recognised immediately in the income statement.

(ii) Hedging of fuel price risk Forward contracts and options entered into with the purpose of limiting exposure to fluctuation of aircraft fuel prices are recognised in the financial statements when the related fuel is used. g. Operating assets (i) Aircrafts and flight equipment Aircrafts and flight equipment, e.g. aircraft engines and aircraft spare parts, are stated at cost less accumulated depreciation and impairment losses. When aircrafts are acquired the purchase price is divided between the aircraft itself and engine hours. Aircrafts are depreciated over the estimated useful life of the relevant aircraft until a residual value is met. Engine hours are depreciated according to flown hours. When an engine is overhauled the cost of the overhaul is capitalised and the remainder of the cost of the previous overhaul that has not already been depreciated, if there is any, is expensed in full.

(ii) Buildings and other operating assets Buildings and other operating assets are stated at cost less accumulated depreciation and impairment losses.

Amounts are in ISK million Interim Financial Statements of Icelandair Group hf. 31 March 2006 ______9 Notes, contd.:

(iii) Subsequent costs The Group recognises in the carrying amount of an item of operating assets the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Group and the cost of the item can be measured reliably. All other costs are recognised in the income statement as an expense as incurred.

(iv) Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each item of operating assets. The estimated useful lives are as follows: Useful life Aircrafts and flight equipment ...... 10-25 years Engine hours ...... Flying hrs. Buildings ...... 15-50 years Other property and equipment ...... 3-8 years The residual value is estimated annually, if not immaterial. h. Intangible assets (i) Goodwill and intangible assets with indefinite useful lives All business combinations are accounted for by applying the purchase method. Goodwill represents amounts arising on acquisition of subsidiaries. In respect of business acquisitions goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired.

Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment.

Negative goodwill arising on an acquisition is recognised directly in profit or loss.

Intangible assets with indefinite useful lives are stated at cost less accumulated impairment losses.

(ii) Other intangible assets Other intangible assets are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to the income statement on a straight line basis over the estimated useful life of the relevant asset. The estimated useful lives are specified as follows: Software ...... 3 years Customer relations ...... 7-10 years Aircraft lease contracts ...... 2-3 years Other intangible assets ...... 6-10 years

(iii) Subsequent expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. i. Long-term receivables Long-term receivables consist of subordinate loans, pre-payments, insurance deposits, deposits and debt securities classified as held to maturity. Long-term receivables are stated on an effective interest basis.

Amounts are in ISK million Interim Financial Statements of Icelandair Group hf. 31 March 2006 ______10 Notes, contd.: j. Inventories Goods for resale and supplies are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Aircraft equipment is capitalised at the foreign exchange rate ruling at the date of acquisition. k. Trade and other receivables Trade and other receivables are stated at cost less impairment losses.

Current maturities of bonds receivable are recognised among current assets in the balance sheet. l. Cash and cash equivalents Cash and cash equivalents consist of cash balances and liquid bank deposits. m. Impairment The carrying amounts of the Group's assets, other than inventories are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated. An impairment test is performed at least annually for intangible assets believed to have an indefinite useful life.

An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement.

An impairment test was performed on goodwill at the beginning of the year 2006.

(i) Calculation of recoverable amount The recoverable amount of long-term receivables is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate. Receivables with a short duration are not discounted.

The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

(ii) Reversals of impairment An impairment loss in respect of receivables is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised.

Goodwill impairment is not reversed.

In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.

An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

n. Share capital Dividends Dividends are recognised as a decrease in equity in the period in which they are declared.

Amounts are in ISK million Interim Financial Statements of Icelandair Group hf. 31 March 2006 ______11 Notes, contd.: o. Interest-bearing loans and borrowings Interest-bearing loans and borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing loans and borrowings are stated on an effective interest basis. p. Employee benefits Pension liability The Company has entered into pension plan agreements with some of its former employees. The obligation is recognised in the balance sheet. The increase or decrease of the obligation is recognised in the income statement. The obligation is estimated according to average life expectancy and its present value calculated using 2% interest rates. Obligations arising from retirement agreements with former management personnel are recognised among trade and other payables in the balance sheet. q. Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. r. Trade and other payables Trade and other payables are stated at cost. s. Prepaid income Sold unused flight documents and other prepayments are presented as prepaid income in the balance sheet. t. Operating income (i) Transport revenue Passenger ticket sales are not recognised as revenue until transportation has been provided. Sold documents not used within nine months from the month of sale are recognised as revenue. Revenue from mail and cargo transportation is recognised in the income statement after transportation has been provided.

(ii) Aircraft and air crew lease Revenue from aircraft and air crew lease is recognised in the income statement at the end of charter flight.

(iii) Other operating revenue Revenue from other services rendered is recognised in the income statement after the service has been provided. Gain on sale of operating assets is recognised in the income statement after the risks and rewards of ownership have been transferred to the buyer. u. Expenses (i) Operating lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease.

(ii) Financial income and financial expenses Financial income and financial expenses comprise interest payable, indexation and other expenses arising from borrowings calculated using the effective interest rate method, interest receivable on assets and foreign exchange differences, and gains and losses on hedging instruments that are recognised in the income statement. Amounts are in ISK million Interim Financial Statements of Icelandair Group hf. 31 March 2006 ______12 Notes, contd.:

v. Income tax Income tax on the profit or loss for the period comprise current and deferred tax.

Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

Amounts are in ISK million Interim Financial Statements of Icelandair Group hf. 31 March 2006 ______13 Notes, contd.:

Investments in subsidiaries

1. At the beginning of the year 2006 the Company took over operations of the fourteen subsidiaries listed in note 19. The companies were all owned by the Parent Company, FL GROUP hf., except for IG Investments ehf. which took over the assets of FL GROUP hf., other than investments in subsidiaries, and liabilities relating to aviation services. The acquisitions, accounted for according to the purchase method, had the following effect on the Group’s balance sheet:

Cash and cash equivalents ...... 5,023 Trade and other receivables ...... 5,533 Operating assets ...... 39,424 Deferred income tax ...... ( 263 ) Credit institutions ...... ( 32,720 ) Trade, payables and other liabilities ...... ( 10,821 ) Net assets ...... 6,176 Identified intangible assets ...... 4,404 10,580 Goodwill on acquisition ...... 9,891 Consideration paid ...... 20,471 Consideration satisfied by share issue ...... ( 18,850 ) Net borrowings ...... ( 1,621) Consideration satisfied in cash ...... 0

Included in the consideration paid are acquisition related expenses, for example expert advisors fees and other fees.

Operating income 2006 1.1.-31.3. 2. Transport revenue is specified as follows:

Passengers ...... 4,515 Cargo and mail ...... 1,040 Total transport revenue ...... 5,555

3. Other operating revenue is specified as follows:

Sale at airports and hotels ...... 387 Revenue from tourism ...... 272 Revenue from maintenance and aircraft handling ...... 454 Other operating revenue ...... 278 Gain on sale of operating assets ...... 432 Total other operating revenue ...... 1,823

Amounts are in ISK million Interim Financial Statements of Icelandair Group hf. 31 March 2006 ______14 Notes, contd.:

Operating expenses 2006 4. Salaries and other personnel expenses are specified as follows: 1.1.-31.3.

Salaries ...... 2,430 Salary-related expenses ...... 716 Other personnel expenses ...... 694 Total salaries and other personnel expenses ...... 3,840

5. Other operating expenses are specified as follows:

Operating cost of real estates and fixtures ...... 332 Communication expenses ...... 291 Advertising expenses ...... 379 Booking fee and commission expenses ...... 350 Cost of goods sold ...... 129 Customer services ...... 243 Insurance expenses and claims incurred ...... 82 Professional services ...... 27 Administrative cost ...... 76 Lost trade receivables and change in provision ...... 15 Other operating expenses ...... 264 Total other operating expenses ...... 2,188

6. The depreciation charge in the income statement is specified as follows:

Depreciation of operating assets, see note 10 ...... 485 Amortisation of intangible assets, see note 11 ...... 342 Depreciation and amortisation recognised in the income statement ...... 827

Net financial income

7. Net financial income is specified as follows:

Interest income ...... 463 Interest expenses ...... ( 653) Net foreign exchange gain ...... 596 Net financial income ...... 406 Income tax expense

8. Income tax recognised in the income statement is specified as follows:

Income tax payable for the period ...... 70 Change in the deferred income-tax liability ...... 52 Total income tax recognised in the income statement ...... 122

Amounts are in ISK million Interim Financial Statements of Icelandair Group hf. 31 March 2006 ______15 Notes, contd.:

Loss per share

9. Basic loss per share is calculated by dividing the net loss by the weighted average outstanding number of shares during the period.

Loss for the period ...... ( 555) Weighted average outstanding number of shares ...... 3,000 Basic and diluted loss per share of ISK 1 ...... ( 0.19) Assets

10. Operating assets and depreciation are specified as follows: Book value Depreciation Aircrafts and aircraft equipment ...... 17,697 287 Buildings ...... 2,116 26 Engine hours ...... 1,223 91 Other operating assets ...... 1,491 81 Total operating assets and depreciation ...... 22,527 485 11. Intangible assets and amortisation are specified as follows: Book value Amortisation Goodwill ...... 9,953 0 Trademarks and slots ...... 2,866 0 Customer relations and aircraft leases ...... 1,225 313 Long-term cost ...... 203 29 Total intangible assets and amortisation ...... 14,247 342

12. Among prepaid aircraft acquisitions in the balance sheet is a contract in the amount of ISK 14,490 million for the purchase of 10 Boeing 737-800 aircrafts which will be delivered to the Company in the year 2006. The first aircraft was delivered in March 2006. In May 2005 the Company entered into a contract regarding the purchase of additional five Boeing 737-800 aircrafts which will be delivered in the year 2007. The intention is to lease all of the aforementioned aircrafts. In February 2005 and April 2006 the Company entered into an agreement with Boeing regarding the purchase of four Boeing 787 Dreamliner aircrafts to be delivered in the year 2010. The intention is to use these aircrafts on scheduled routes of Icelandair ehf. The Company has also entered into an agreement to buy two Dash aircrafts which will be delivered in June 2006 and will be used on scheduled routes of Air Iceland ehf.

Amounts are in ISK million Interim Financial Statements of Icelandair Group hf. 31 March 2006 ______16 Notes, contd.:

12. contd.:

Prepaid aircraft acquisitions are specified as follows:

Prepayments of 14 Boeing 737 ...... 19,032 Prepayments of 4 Boeing 787 ...... 154 Prepayments of 2 Dash ...... 150 Total prepaid aircraft acquisitions ...... 19,336

Equity

13. The Company's share capital amounts to ISK 3,000 million as decided in its Articles of Association. One vote is attached to each ISK one share. Forward 14. Summary of equity: Share Share hedging Translation Accumulated Total capital premium reserve reserve deficit equity

Equity 31.12.2005 ...... 500 500 Issue of share capital ...... 2,500 16,350 18,850 Equity 1.1.2006 ...... 3,000 16,350 0 0 0 19,350 Forward hedges ...... 470 470 Loss for the period ...... ( 555) ( 555) Translation differences ...... 149 149 Equity 31.3.2006 ...... 3,000 16,350 470 149 ( 555) 19,414

Interest-bearing loans and borrowings

15. Interest-bearing loans and borrowings are specified as follows: 31.3.2006

Borrowings for prepaid aircraft acquisitions ...... 16,019 Other interest-bearing loans and borrowings ...... 14,669 30,688 Current portion of borrowings for prepaid aircraft acquisitions ...... ( 12,547) Current portion of other interest-bearing loans and borrowings ...... ( 854) Total non-current interest-bearing loans and borrowings ...... 17,287

Risk management

16. The source of risks, arising from interest rates and foreign currencies, lies mostly in the aviation and tourism segment of the Group. Companies held by Icelandair Group hf. operate on international markets and therefore the Company is subject to risks of fluctuation in currency, interest rates and oil prices. The Company has adopted a policy to decrease those risks with the use of derivatives. The risk management for companies held by Icelandair Group hf. was, at the end of March 2006 controlled by the risk management department of Icelandair ehf.

Amounts are in ISK million Interim Financial Statements of Icelandair Group hf. 31 March 2006 ______16 Notes, contd.:

16. contd.:

Foreign currency risk The Company's goal is to hedge 50-90% of exposure to currency risk in its cash flows. The primary source of currency risk is in Icelandair ehf. and therefore the Company places emphasis on hedging those risks. The Company places emphasis on hedging foreign currency risk. Before the currency risk is hedged the aim is to obtain inner balance in the relevant company's operations. Therefore, only the difference in outflows and inflows of foreign currencies are hedged. The largest differences are in net inflows of European currencies and net outflows in USD. The risk exposure is hedged with forward contracts and options 12 months into the future. The Company only deals with recognised banks as it aims to minimise its counterparty risk. At the end of the period approximately 80% of currency risk in cash flows was hedged.

Interest rate risk The Company's primary exposure to interest rate risk arises from aircraft financing. The Company funded prepayments of 15 Boeing 737-800 by borrowing. The interest rate risk arising from funding the aircraft acquisitions has been hedged until 2010. The Company has hedged approximately 80% of that specific interest rate risk.

Oil price risk Companies owned by the Group are exposed to substantial risks arising from fluctuations in jet fuel. The largest user of jet fuel in the Group is Icelandair ehf. Fuel prices have increased significantly in the last few years. The policy of the Company is to hedge 40-80% of fuel price risks.

Counterparty risk The Group is committed to only trade derivatives with trusted parties. The counterparty risk that arises from trading derivatives, used in risk management, is therefore minimised.

Cash flow statement 2006 1.1.-31.3. 17. Other operating items in the cash flow statement are specified as follows:

Gain on sale of operating assets ...... ( 432) Pension liability change ...... ( 24) Exchange rate difference and indexation of liabilities and assets ...... ( 105) Share of profit of associates ...... ( 9) Income tax expense ...... ( 122) Total other operating items in the cash flow statement ...... ( 692)

18. Net change in operating assets and liabilities in the cash flow statement is specified as follows:

Trade receivables ...... ( 4,242) Trade payables ...... 3,531 Prepaid income ...... 2,223 Other items ...... ( 113) Net change in operating assets and liabilities in the cash flow statement ...... 1,399

Amounts are in ISK million Interim Financial Statements of Icelandair Group hf. 31 March 2006 ______17 Notes, contd.:

Group entities

19. The Company holds fourteen subsidiaries which all are included in the consolidated interim financial statements. They are: Share

Air Iceland ehf...... 100% Blue Cargo ehf...... 100% Bluebird Cargo ehf...... 100% IceCap Gurnesey ...... 100% Iceland Travel ehf...... 100% Icelandair ehf...... 100% Icelandair Cargo ehf...... 100% Icelandair Ground Services ehf. (IGS) ...... 100% Icelandair Hotels ehf...... 100% Icelandair Shared Services ehf. (Fjárvakur) ...... 100% Icelandair Tecnical Services ehf. (ITS) ...... 100% IceLease ehf...... 100% IG Investments ehf...... 100% Loftleidir - Icelandic ehf. (Charter) ...... 100%

Ratios

20. The Group's primary ratios are specified as follows:

Working capital to operations ...... ( 420)

Working capital ratio ...... 0.38 Equity ratio ...... 0.27 Intrinsic value of share capital ...... 6.47

Amounts are in ISK million Interim Financial Statements of Icelandair Group hf. 31 March 2006 ______18 Icelandair Group hf. Condensed Consolidated Interim Financial Statements 1 January - 30 June 2006

Icelandair Group hf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 631205-1780 Contents

Endorsement and Signatures of the Board of Directors and the CEO ...... 37Statement of Changes in Equity ......

Auditors' Review Report ...... 48 Statement of Cash Flows ......

Income Statement ...... 59Notes ......

Balance Sheet ...... 6

Interim Financial Statements of Icelandair Group hf. 30 June 2006 ______2 ______Endorsement and Signatures of the Board of Directors and the CEO

The Company was founded in December 2005 and started its operations on 1 January 2006. The condensed consolidated interim financial statements of Icelandair Group hf. for the period from 1 January to 30 June 2006 have been prepared in accordance with International Financial Reporting Standard (IFRS) for Interim Financial Statements (IAS 34). The interim financial statements comprise the consolidated interim financial statements of Icelandair Group hf. and its subsidiaries, which were fourteen at the end of June 2006.

At the beginning of the year 2006 Icelandair Group hf.'s Parent Company, FL GROUP hf., announced its intention to float Icelandair Group hf. on the Icelandic Stock Exchange.

According to the income statement net profit for the period amounted to ISK 1,279 million. According to the balance sheet, equity at the end of the period amounted to ISK 22,114 million, including share capital in the amount of ISK 3,000 million.

The Board of Directors and the CEO of Icelandair Group hf. hereby confirm the Company's consolidated interim financial statements for the period from 1 January to 30 June 2006 by means of their signatures.

Reykjavík, 11 August 2006.

The Board of Directors:

Hannes Smárason Jón Sigurðsson Þorsteinn Örn Guðmundsson

CEO:

Jón Karl Ólafsson

Interim Financial Statements of Icelandair Group hf. 30 June 2006 ______3 ______Auditors' Review Report

To the Board of Directors of Icelandair Group hf.

Introduction

We have reviewed the accompanying condensed consolidated balance sheet of Icelandair Group hf. as of 30 June 2006 and the related condensed consolidated statements of income, changes in equity and cash flows for the six month period then ended. Management is responsible for the preparation and presentation of this interim financial information in accordance with International Financial Reporting Standard IAS 34, Interim Financial Reporting. Our responsibility is to express a conclusion on this interim financial information based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity." A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the accompanying consolidated interim financial information is not prepared, in all material respects, in accordance with IAS 34, Interim Financial Reporting

Reykjavík, 11 August 2006.

Jón S. Helgason Sæmundur Valdimarsson

KPMG Endurskoðun hf.

Interim Financial Statements of Icelandair Group hf. 30 June 2006 ______4 ______Income Statement for the Six Months Ended 30 June 2006

Q2 H1 Note 2006 2006 1.4.-30.6. 1.1.-30.6. Operating income:

Transport revenue ...... 2 9,613 15,168 Aircraft and aircrew lease ...... 2,268 4,485 Other operating revenue ...... 3 2,600 4,423 14,481 24,076

Operating expenses:

Salaries and other personnel expenses ...... 4 4,447 8,287 Aircraft fuel ...... 2,575 4,229 Aircraft and aircrew lease ...... 1,253 2,128 Aircraft servicing, handling and communication ...... 1,049 1,657 Aircraft maintenance expenses ...... 808 1,503 Other operating expenses ...... 5 2,785 4,973 12,917 22,777

Operating profit before depreciation (EBITDA) ...... 1,564 1,299

Depreciation ...... 6( 409) ( 1,236)

Operating profit before net financial income (EBIT) ...... 1,155 63

Net financial income ...... 7 347 753 Share of profit of associates ...... 58 67

Profit before tax ...... 1,560 883

Income tax expense ...... ( 281) ( 159)

Profit for the period ...... 1,279 724

Profit per share:

Basic and diluted earnings per share (ISK) ...... 0.43 0.24

Interim Financial Statements of Icelandair Group hf. 30 June 2006 Amounts are in ISK million ______5 ______Balance Sheet as at 30 June 2006

Note 30.6.2006 1.1.2006

Assets: Operating assets ...... 8 23,800 20,595 Intangible assets ...... 9 16,542 14,549 Investments in associates ...... 1,292 319 Prepaid aircraft acquisitions ...... 10 15,782 16,886 Long-term receivables ...... 1,903 1,369 Total non-current assets 59,319 53,718

Inventories ...... 1,023 864 Trade and other receivables ...... 8,453 4,669 Cash and cash equivalents ...... 7,406 5,023 Total current assets 16,882 10,556

Total assets 76,201 64,274

Equity: Share capital ...... 3,000 3,000 Share premium ...... 16,350 16,350 Other reserves ...... 2,040 0 Retained earnings ...... 724 0 Total equity 11 22,114 19,350

Liabilities: Credit institutions ...... 12 15,145 22,728 Deferred income tax liability ...... 306 262 Total non-current liabilities 15,451 22,990

Credit institutions ...... 5,279 786 Trade and other payables ...... 12,932 8,486 Current maturities of non-current liabilities ...... 12 13,149 10,099 Prepaid income ...... 7,276 2,563 Total current liabilities 38,636 21,934

Total liabilities 54,087 44,924

Total equity and liabilities 76,201 64,274

Interim Financial Statements of Icelandair Group hf. 30 June 2006 Amounts are in ISK million ______6 ______Statement of Changes in Equity as at 30 June 2006

Other reserves

Share Share Hedging Translation Retained Total capital premium reserve reserve earnings equity Equity 31.12.2005 ...... 1 1 Issued share capital ...... 2,999 16,350 19,349 Equity 1.1.2006 ...... 3,000 16,350 19,350 Hedging reserve ...... 576 576 Translation differences ...... 1,464 1,464 Net profit for the period ...... 724 724 Equity 30.6.2006 ...... 3,000 16,350 576 1,464 724 22,114

Interim Financial Statements of Icelandair Group hf. 30 June 2006 Amounts are in ISK million ______7 ______Statement of Cash Flows for the Six Months Ended 30 June 2006

Note 2006 1.1.-30.6. Cash flows from operating activities:

Profit for the period ...... 724 Adjustments for: Depreciation ...... 6 1,236 Other operating items ...... 14( 662 ) Working capital from operations 1,298

Net change in operating assets and liabilities ...... 15 2,559 Net cash from operating activities 3,857

Cash flows from investing activities:

Acquisition of operating assets ...... ( 1,931 ) Acquisition of intangible assets ...... ( 67 ) Acquisition of subsidiary, net of cash acquired ...... 1 5,023 Proceeds from the sale of assets ...... 1,906 Long-term receivables, change ...... ( 276 ) Net cash from investing activities 4,655

Cash flows from financing activities:

Repayment of borrowings ...... ( 1,284 ) Net cash used in financing activities( 1,284 )

Increase in cash and cash equivalents ...... 7,228

Effect of exchange rate fluctuations on cash held ...... 178

Cash and cash equivalents at 1 January ...... 0

Cash and cash equivalents at 30 June ...... 7,406

Interim Financial Statements of Icelandair Group hf. 30 June 2006 Amounts are in ISK million ______8 ______Notes

Significant accounting policies

Icelandair Group hf.'s legal residence is at Reykjavíkurflugvöllur in Reykjavík, Iceland. The condensed consolidated interim financial statements of the Company for the six months ended 30 June 2006 comprise the Company and its subsidiaries, together referred to as the “Group”. Icelandair Group hf. is a subsidiary of FL GROUP hf. and the condensed consolidated interim financial statements of the Company are a part of the consolidated interim financial statements of the Parent Company wherein information regarding the financial performance and financial position of FL Group hf. can be found. The interim financial statements were authorised for issue by the directors on 11 August 2006.

a. Statement of compliance These condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standard IAS 34, Interim Financial Reporting. They do not include all of the information required for a complete set of consolidated annual financial statements.

b. Basis of preparation The condensed consolidated interim financial statements are prepared in Icelandic kronas, rounded to the nearest million. They are prepared on the historical cost basis except that securities and derivative financial instruments are stated at their fair value.

The preparation of consolidated interim financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

c. Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The interim financial statements of subsidiaries are included in the consolidated interim financial statements from the date that control commences until the date that control ceases.

(ii) Associates Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. The consolidated interim financial statements include the Group's share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases. When the Group's share of losses exceeds its interest in an associate, the Group's carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of an associate.

Interim Financial Statements of Icelandair Group hf. 30 June 2006 Amounts are in ISK million ______9 ______Notes, contd.:

(iii) Transactions eliminated on consolidation Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated interim financial statements. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group's interest in the entity and are deducted from the carrying value of associates. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

d. Foreign currency (i) Foreign currency transactions Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Icelandic kronas at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Acquisition of operating assets in foreign currencies is translated at the foreign exchange rate ruling at the date of the transaction. Operating expenses and sales in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction.

(ii) Financial statements in foreign currencies and of foreign operations Three domestic subsidiaries record their accounts in US dollars and prepare their financial statements in the same currency. One foreign subsidiary is a part of the consolidated interim financial statements. The assets and liabilities of these subsidiaries are translated to Icelandic kronas at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of these subsidiaries are translated to Icelandic kronas at the average exchange rate for the period. Foreign exchange differences arising on retranslation are recognised directly in a separate component of equity.

e. Derivative financial instruments The Group uses derivative financial instruments to hedge its exposure to foreign exchange rate risk, interest rate risk and fuel price risk arising from operational and financing activities. Derivative financial instruments are stated at fair value and the underlying assets are not recognised in the balance sheet.

f. Hedging (i) Cash flow hedges Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecasted transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. When the forecasted transaction affects profits or loss the associated cumulative gain or loss is removed from equity and recognised in the income statement. The ineffective part of any gain or loss is recognised immediately in the income statement.

(ii) Hedging of fuel price risk Forward contracts and options entered into with the purpose of limiting exposure to fluctuation of aircraft fuel prices are recognised in the financial statements when the related fuel is used.

Interim Financial Statements of Icelandair Group hf. 30 June 2006 Amounts are in ISK million ______10 ______Notes, contd.:

g. Operating assets (i) Aircrafts and flight equipment Aircrafts and flight equipment, e.g. aircraft engines and aircraft spare parts, are stated at cost less accumulated depreciation and impairment losses. When aircrafts are acquired the purchase price is divided between the aircraft itself and engine hours. Aircrafts are depreciated over the estimated useful life of the relevant aircraft until a residual value is met. Engine hours are depreciated according to flown hours. When an engine is overhauled the cost of the overhaul is capitalised and the remainder of the cost of the previous overhaul that has not already been depreciated, if there is any, is expensed in full.

(ii) Buildings and other operating assets Buildings and other operating assets are stated at cost less accumulated depreciation and impairment losses.

(iii) Subsequent costs The Group recognises in the carrying amount of an item of operating assets the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Group and the cost of the item can be measured reliably. All other costs are recognised in the income statement as an expense as incurred.

(iv) Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each item of operating assets. The estimated useful lives are as follows: Useful life

Aircrafts and flight equipment ...... 10-25 years Engine hours ...... Flying hrs. Buildings ...... 15-50 years Other property and equipment ...... 3-8 years

The residual value is estimated annually, if not immaterial.

h. Intangible assets (i) Goodwill and intangible assets with indefinite useful lives All business combinations are accounted for by applying the purchase method. Goodwill represents amounts arising on acquisition of subsidiaries. In respect of business acquisitions goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired.

Intangible assets with indefinite useful lives are stated at cost less accumulated impairment losses.

(ii) Other intangible assets Other intangible assets are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to the income statement on a straight line basis over the estimated useful life of the relevant asset. The estimated useful lives are specified as follows:

Software ...... 3 years Customer relations ...... 7-10 years Aircraft lease contracts ...... 2-3 years Other intangible assets ...... 6-10 years

Interim Financial Statements of Icelandair Group hf. 30 June 2006 Amounts are in ISK million ______11 ______Notes, contd.:

(iii) Subsequent expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.

i. Long-term receivables Long-term receivables consist of subordinate loans, pre-payments, insurance deposits, deposits and debt securities classified as held to maturity. Long-term receivables are stated on an effective interest basis.

j. Inventories Goods for resale and supplies are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Aircraft equipment is capitalised at the foreign exchange rate ruling at the date of acquisition.

k. Trade and other receivables Trade and other receivables are stated at cost less impairment losses.

Current maturities of bonds receivable are recognised among current assets in the balance sheet.

l. Cash and cash equivalents Cash and cash equivalents consist of cash balances and liquid bank deposits.

m. Impairment The carrying amounts of the Group's assets, other than inventories are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated. An impairment test is performed at least annually for intangible assets believed to have an indefinite useful life. (i) Calculation of recoverable amount The recoverable amount of long-term receivables is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate. Receivables with a short duration are not discounted.

(ii) Reversals of impairment An impairment loss in respect of receivables is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised.

n. Share capital Dividends Dividends are recognised as a decrease in equity in the period in which they are declared.

Interim Financial Statements of Icelandair Group hf. 30 June 2006 Amounts are in ISK million ______12 ______Notes, contd.:

o. Interest-bearing loans and borrowings Interest-bearing loans and borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing loans and borrowings are stated on an effective interest basis.

p. Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

q. Trade and other payables Trade and other payables are stated at cost.

r. Prepaid income Sold unused flight documents and other prepayments are presented as prepaid income in the balance sheet.

s. Operating income (i) Transport revenue Passenger ticket sales are not recognised as revenue until transportation has been provided. Sold documents not used within nine months from the month of sale are recognised as revenue. Revenue from mail and cargo transportation is recognised in the income statement after transportation has been provided.

(ii) Aircraft and aircrew lease Revenue from aircraft and aircrew lease is recognised in the income statement at the end of charter flight.

(iii) Other operating revenue Revenue from other services rendered is recognised in the income statement after the service has been provided.

Gain on sale of operating assets is recognised in the income statement after the risks and rewards of ownership have been transferred to the buyer.

Interim Financial Statements of Icelandair Group hf. 30 June 2006 Amounts are in ISK million ______13 ______Notes, contd.:

t. Expenses (i) Operating lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease.

(ii) Financial income and financial expenses Financial income and financial expenses comprise interest payable, indexation and other expenses arising from borrowings calculated using the effective interest rate method, interest receivable on assets and foreign exchange differences, and gains and losses on hedging instruments that are recognised in the income statement.

u. Income tax Income tax on the profit or loss for the period comprises current and deferred tax.

Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

Interim Financial Statements of Icelandair Group hf. 30 June 2006 Amounts are in ISK million ______14 ______Notes, contd.:

Investments in subsidiaries

1. At the beginning of the year 2006 the Company took over operations of the fourteen subsidiaries listed in note 13. The companies were all owned by the Parent Company, FL GROUP hf., except for IG Invest ehf. which took over the assets of FL GROUP hf., other than investments in subsidiaries, and liabilities relating to aviation services. The acquisitions, accounted for according to the purchase method, had the following effect on the Group's balance sheet:

Cash and cash equivalents ...... 5,023 Trade and other receivables ...... 5,533 Operating assets ...... 39,424 Deferred income tax ...... ( 263 ) Credit institutions ...... ( 32,492 ) Trade, payables and other liabilities ...... ( 11,049 ) Net assets ...... 6,176 Identified intangible assets ...... 4,404 10,580 Goodwill on acquisition ...... 9,891 Consideration paid ...... 20,471 Consideration satisfied by share issue ...... ( 18,850 ) Net borrowings ...... ( 1,621) Consideration satisfied in cash ...... 0

Included in the consideration paid are acquisition related expenses, for example expert advisors fees and other fees.

Operating income 2006 1.1.-30.6. 2. Transport revenue is specified as follows:

Passengers ...... 12,793 Cargo and mail ...... 2,375 Total transport revenue ...... 15,168

3. Other operating revenue is specified as follows:

Sale at airports and hotels ...... 932 Revenue from tourism ...... 828 Revenue from maintenance and aircraft handling ...... 313 Other operating revenue ...... 1,892 Gain on sale of operating assets ...... 458 Total other operating revenue ...... 4,423

Interim Financial Statements of Icelandair Group hf. 30 June 2006 Amounts are in ISK million ______15 ______Notes, contd.:

Operating expenses

2006 4. Salaries and other personnel expenses are specified as follows: 1.1.-30.6.

Salaries ...... 5,366 Salary-related expenses ...... 1,351 Other personnel expenses ...... 1,570 Total salaries and other personnel expenses ...... 8,287

5. Other operating expenses are specified as follows:

Operating cost of real estates and fixtures ...... 701 Communication expenses ...... 561 Advertising expenses ...... 609 Booking fee and commission expenses ...... 829 Cost of goods sold ...... 288 Customer services ...... 485 Tourism expenses ...... 495 Insurance expenses and claims incurred ...... 123 Professional services ...... 140 Administrative cost ...... 137 Lost trade receivables and change in provision ...... 25 Other operating expenses ...... 580 Total other operating expenses ...... 4,973

6. The depreciation charge in the income statement is specified as follows:

Depreciation of operating assets, see note 8 ...... 1,050 Amortisation of intangible assets, see note 9 ...... 186 Depreciation and amortisation recognised in the income statement ...... 1,236

Net financial income

7. Net financial income is specified as follows:

Interest income ...... 652 Interest expenses ...... ( 1,011) Net foreign exchange gain ...... 1,112 Net financial income ...... 753

Interim Financial Statements of Icelandair Group hf. 30 June 2006 Amounts are in ISK million ______16 ______Notes, contd.:

Assets

8. Operating assets and depreciation are specified as follows: Book value Depreciation 30.6.2006 Aircrafts and aircraft equipment ...... 18,630 604 Buildings ...... 2,098 53 Engine hours ...... 1,606 227 Other operating assets ...... 1,466 166 Total operating assets and depreciation ...... 23,800 1,050

9. Intangible assets and amortisation are specified as follows: Book value Amortisation 30.6.2006 Goodwill ...... 12,312 0 Trademarks and slots ...... 2,866 0 Customer relations and aircraft leases ...... 1,161 136 Long-term cost ...... 203 50 Total intangible assets and amortisation ...... 16,542 186

10. Prepaid aircraft acquisitions in the balance sheet is for the purchase of 6 Boeing 737-800 aircrafts which will be delivered to the Company in the second half of the year 2006. In the beginning of the year 2006 the Company took over a contract regarding the purchase of 5 Boeing 737-800 aircrafts which will be delivered in the year 2007. The intention is to lease all of the aforementioned aircrafts. The Company also has agreements with Boeing regarding the purchase of 4 Boeing 787 Dreamliner aircrafts to be delivered in the year 2010. The intention is to use these aircrafts on scheduled routes of Icelandair ehf. The Company has also entered into an agreement to buy two Dash aircrafts which will be delivered in July 2006 and will be used on both scheduled and charter routes of Air Iceland ehf.

Equity

11. The Company's share capital amounts to ISK 3,000 million as decided in its Articles of Association. One vote is attached to each ISK one share.

Interim Financial Statements of Icelandair Group hf. 30 June 2006 Amounts are in ISK million ______17 ______Notes, contd.:

11. Contd:

Hedging reserve The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred.

Translation reserve Foreign exchange differences arising on translation of financial statements of subsidiaries are recognised directly in a separate component of equity.

Interest-bearing loans and borrowings

12. Interest-bearing loans and borrowings are specified as follows: 30.6.2006

Borrowings for prepaid aircraft acquisitions ...... 13,046 Other interest-bearing loans and borrowings ...... 15,248 28,294 Current portion of borrowings for prepaid aircraft acquisitions ...... ( 11,464) Current portion of other interest-bearing loans and borrowings ...... ( 1,685) Total non-current interest-bearing loans and borrowings ...... 15,145

Group entities

13. The Company holds fourteen subsidiaries which are all included in the consolidated interim financial statements. Share

Air Iceland ehf...... 100% Blue Cargo ehf...... 100% Bluebird Cargo ehf...... 100% IceCap Gurnesey ...... 100% Iceland Travel ehf...... 100% Icelandair ehf...... 100% Icelandair Cargo ehf...... 100% Icelandair Ground Services ehf. (IGS) ...... 100% Icelandair Hotels ehf...... 100% Icelandair Shared Services ehf. (Fjárvakur) ...... 100% Icelandair Technical Services ehf. (ITS) ...... 100% IceLease ehf...... 100% IG Invest ehf...... 100% Loftleidir - Icelandic ehf. (Charter) ...... 100%

Interim Financial Statements of Icelandair Group hf. 30 June 2006 Amounts are in ISK million ______18 ______Notes, contd.:

Cash flow statement 2006 1.1.-30.6. 14. Other operating items in the cash flow statement are specified as follows:

Gain on the sale of operating assets ...... ( 458) Exchange rate difference and indexation of liabilities and assets ...... ( 296) Share of profit of associates ...... ( 67) Income tax expense ...... 159 Total other operating items in the cash flow statement ...... ( 662)

15. Net change in operating assets and liabilities in the cash flow statement is specified as follows:

Trade receivables ...... ( 2,969) Trade payables ...... 1,786 Prepaid income ...... 3,981 Other items ...... ( 239) Net change in operating assets and liabilities in the cash flow statement ...... 2,559

Ratios

16. The Group's primary ratios are specified as follows:

Working capital from operations ...... 1,298

Working capital ratio ...... 0.44 Equity ratio ...... 0.29 Intrinsic value of share capital ...... 7.37

Interim Financial Statements of Icelandair Group hf. 30 June 2006 Amounts are in ISK million ______19 ______Icelandair Group hf. Condensed Consolidated Interim Financial Statements 1 January - 30 September 2006

Icelandair Group hf. Reykjavíkurflugvöllur 101 Reykjavík

Reg. no. 631205-1780 Contents

Endorsement and Signatures of the Board of Directors and the CEO ...... 37Statement of Changes in Equity ......

Auditors' Report ...... 48 Statement of Cash Flows ......

Income Statement ...... 59Notes ......

Balance Sheet ...... 6

Interim Financial Statements of Icelandair Group hf. 30 September 2006 ______2 ______Endorsement and Signatures of the Board of Directors and the CEO

The Company was founded in December 2005 and started its operations on 1 January 2006. The condensed consolidated interim financial statements of Icelandair Group hf. for the period from 1 January to 30 September 2006 have been prepared in accordance with International Financial Reporting Standard (IFRS) for Interim Financial Statements (IAS 34). The interim financial statements comprise the consolidated interim financial statements of Icelandair Group hf. and its subsidiaries, which were fourteen at the end of September 2006.

Until mid-October 2006 the Company was a fully owned subsidiary of FL Group hf. In October 2006 the Company was acquired by Icelandair Group Holding hf. and is therefore part of Icelandair Group Holding´s hf. Group from that time.

According to the income statement net profit for the period amounted to ISK 3,265 million. According to the balance sheet, equity at the end of the period amounted to ISK 23,382 million, including share capital in the amount of ISK 3,000 million.

On 15 November 2006 the Company's shareholders meeting agreed to decrease the nominal value of share capital by ISK 2,000 million down to ISK 1,000 million. The decrease is to be allocated to retained earnings.

The Board of Directors and the CEO of Icelandair Group hf. hereby confirm the Company's consolidated interim financial statements for the period from 1 January to 30 September 2006 by means of their signatures.

Reykjavík, 15 November 2006.

Board of Directors:

CEO:

Interim Financial Statements of Icelandair Group hf. 30 September 2006 ______3 ______Auditors' Report

To the Board of Directors of Icelandair Group hf.

Introduction

We have audited the accompanying consolidated interim balance sheet of Icelandair Group hf. (the "Company") as of 30 September 2006 and the related consolidated interim statements of income, changes in equity and cash flows for the period then ended. These consolidated interim financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

Scope of audit

We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

Conclusion

In our opinion, the consolidated interim financial statements give a true and fair view of the financial position of the Company as of 30 September 2006 and of the results of its operations and its cash flows for the nine months period then ended in accordance with International Financial Reporting Standards as adopted by the EU.

Interim Financial Statements of Icelandair Group hf. 30 September 2006 ______4 ______Income Statement for the Nine Months Ended 30 September 2006

Q1-Q3 Note 2006 1.1.-30.9. Operating income:

Transport revenue ...... 3 27,648 Aircraft and aircrew lease ...... 7,775 Other operating revenue ...... 4 8,130 43,553

Operating expenses:

Salaries and other personnel expenses ...... 5 13,008 Aircraft fuel ...... 7,389 Aircraft and aircrew lease ...... 3,588 Aircraft servicing, handling and communication ...... 2,947 Aircraft maintenance expenses ...... 2,365 Other operating expenses ...... 6 8,536 37,833

Operating profit before depreciation (EBITDA) ...... 5,720

Depreciation ...... 7( 1,878)

Operating profit before net financial income (EBIT) ...... 3,842

Net financial income ...... 8 6 Share of profit of associates ...... 91

Profit before tax ...... 3,939

Income tax expense ...... ( 674)

Profit for the period ...... py 3,265

Earnings per share:

Basic and diluted earnings per share (ISK) ...... 1.09

Interim Financial Statements of Icelandair Group hf. 30 September 2006 Amounts are in ISK million ______5 ______Balance Sheet as at 30 September 2006

Note 30.9.2006 1.1.2006

Assets:

Operating assets ...... 9 22,684 20,598 Intangible assets ...... 10 15,969 14,549 Investments in associates ...... 1,744 319 Prepaid aircraft acquisitions ...... 11 11,499 16,885 Long-term receivables ...... 2,071 1,378 Total non-current assets 53,967 53,729

Inventories ...... 1,156 863 Trade and other receivables ...... 7,793 4,665 Cash and cash equivalents ...... 4,976 5,023 Total current assets 13,925 10,551

Total assets 67,892 64,280

Equity:

Share capital ...... 3,000 3,000 Share premium ...... 16,350 16,350 Other reserves ...... 767 0 Retained earnings ...... 3,265 0 Total equity 12 23,382 19,350

Liabilities:

Interest bearing loans and borrowings ...... 13 12,643 14,598 Deferred income tax liability ...... 988 263 Total non-current liabilities 13,631 14,861

Interest bearing loans from Parent Company ...... 4,102 5,250 Trade and other payables ...... 11,658 8,486 Current maturities of non-current liabilities ...... 13 11,110 13,770 Prepaid income ...... 4,009 2,563 Total current liabilities 30,879 30,069

Total liabilities 44,510 44,930

Total equity and liabilities 67,892 64,280

Interim Financial Statements of Icelandair Group hf. 30 September 2006 Amounts are in ISK million ______6 ______Statement of Changes in Equity as at 30 September 2006

Other reserves

Share Share Hedging Translation Retained Total capital premium reserve reserve earnings equity

Equity 31.12.2005 ...... 1 1 Issued share capital ...... 2,999 16,350 19,349 Equity 1.1.2006 ...... 3,000 16,350 19,350 Foreign currency translation differences for foreign operations ...... 700 700 Net profit on hedge of net investment in foreign operation ...... 13 13 Effective portion of changes in fair value of cash flow hedges, net of tax ...... 54 54 Profit for the period ...... 3,265 3,265 Total recognised income ...... 54 713 3,265 4,032 Equity 30.9.2006 ...... 3,000 16,350 54 713 3,265 23,382

Interim Financial Statements of Icelandair Group hf. 30 September 2006 Amounts are in ISK million ______7 ______Statement of Cash Flows for the Nine Months Ended 30 September 2006

Q1-Q3 Note 2006 1.1.-30.9.

Cash flows from operating activities:

Profit for the period ...... 3,265 Adjustments for: Depreciation ...... 7 1,878 Other operating items ...... 15( 28 ) Working capital from operations 5,115

Net change in operating assets and liabilities ...... 16 1,278 Net cash from operating activities 6,393

Cash flows from investing activities:

Acquisition of operating assets ...... ( 3,875 ) Acquisition of intangible assets ...... ( 517 ) Acquisition of subsidiaries, net of cash acquired ...... 2 4,571 Proceeds from the sale of assets ...... 1,896 Long-term receivables, change ...... ( 372 ) Net cash from investing activities 1,703

Cash flows from financing activities:

Repayment of borrowings ...... ( 1,996 ) Repayment of Parent Company loan ...... ( 1,148 ) Net cash used in financing activities( 3,144 )

Increase in cash and cash equivalents ...... 4,952

Effect of exchange rate fluctuations on cash held ...... 24

Cash and cash equivalents at 31 December 2005...... 0

Cash and cash equivalents at 30 September 2006 ...... 4,976

Investment and financing without cash flow effect: 2

Interim Financial Statements of Icelandair Group hf. 30 September 2006 Amounts are in ISK million ______8 ______Notes

Significant accounting policies

Icelandair Group hf.'s legal residence is at Reykjavíkurflugvöllur in Reykjavík, Iceland. The condensed consolidated interim financial statements of the Company for the nine months ended 30 September 2006 comprise the Company and its subsidiaries, together referred to as the “Group”. Icelandair Group hf. was a subsidiary of FL GROUP hf. on 30 September 2006 and the condensed consolidated interim financial statements of the Company are a part of the consolidated interim financial statements of the Parent Company wherein information regarding the financial performance and financial position of FL GROUP hf. can be found. In October 2006 the Company was acquired by Icelandair Group Holding hf. The interim financial statements were authorised for issue by the Board of Directors on 15 November 2006.

a. Statement of compliance These condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standard IAS 34, Interim Financial Reporting. They do not include all of the information required for a complete set of consolidated annual financial statements.

b. Basis of preparation The condensed consolidated interim financial statements are prepared in Icelandic kronas, which is the Company's functional currency. All financial information has been rounded to the nearest million. They are prepared on the historical cost basis except that derivative financial instruments are stated at their fair value.

The preparation of consolidated interim financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The Company started its operations on 1 January 2006 and therefore there are no comparative figures in the income statement and the cash flow statement. Comparative figures in the balance sheet show the figures on 1 January 2006 after the Company acquired assets and subsidiaries from FL GROUP hf. as stated in note 2.

c. Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The interim financial statements of subsidiaries are included in the consolidated interim financial statements from the date that control commences until the date that control ceases.

Interim Financial Statements of Icelandair Group hf. 30 September 2006 Amounts are in ISK million ______9 ______Notes, contd.:

(ii) Associates Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. The consolidated interim financial statements include the Group's share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases. When the Group's share of losses exceeds its interest in an associate, the Group's carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of an associate.

(iii) Transactions eliminated on consolidation Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated interim financial statements. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group's interest in the entity and are deducted from the carrying value of associates. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

d. Foreign currency (i) Foreign currency transactions Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Icelandic kronas at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Acquisition of operating assets in foreign currencies is translated at the foreign exchange rate ruling at the date of the transaction. Operating expenses and sales in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction.

(ii) Financial statements in foreign currencies and of foreign operations Three domestic subsidiaries record their accounts in US dollars and prepare their financial statements in the same currency. One foreign subsidiary is a part of the consolidated interim financial statements. The assets and liabilities of these subsidiaries are translated to Icelandic kronas at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of these subsidiaries are translated to Icelandic kronas at the average exchange rate for the period. Foreign exchange differences arising on retranslation are recognised directly in a separate component of equity.

(iii) Net investment in foreign operations Exchange differences arising from the translation of the net investment in foreign operations, and of related hedges are taken to translation reserve. They are recycled and recognised in profit or loss upon disposal of the operation.

e. Derivative financial instruments The Group uses derivative financial instruments to hedge its exposure to foreign exchange rate risk, interest rate risk and fuel price risk arising from operational and financing activities. Derivative financial instruments are stated at fair value and the underlying assets are not recognised in the balance sheet.

Interim Financial Statements of Icelandair Group hf. 30 September 2006 Amounts are in ISK million ______10 ______Notes, contd.:

f. Hedging (i) Cash flow hedges Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecasted transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. When the forecasted transaction affects profits or loss the associated cumulative gain or loss is removed from equity and recognised in the income statement. The ineffective part of any gain or loss is recognised immediately in the income statement.

(ii) Hedge of net investment in foreign operation The portion of the gain or loss on an instrument used to hedge a net investment in a foreign operation that is determined to be an effective hedge is recognised directly in equity. The ineffective portion is recognised immediately in profit or loss.

(iii) Hedging of fuel price risk Forward contracts and options entered into with the purpose of limiting exposure to fluctuation of aircraft fuel prices are recognised in the financial statements when the related fuel is used.

g. Operating assets (i) Aircrafts and flight equipment Aircrafts and flight equipment, e.g. aircraft engines and aircraft spare parts, are stated at cost less accumulated depreciation and impairment losses. When aircrafts are acquired the purchase price is divided between the aircraft itself and engines. Aircrafts are depreciated over the estimated useful life of the relevant aircraft until a residual value is met. Engines are depreciated according to flown hours. When an engine is overhauled the cost of the overhaul is capitalised and the remainder of the cost of the previous overhaul that has not already been depreciated, if there is any, is expensed in full.

(ii) Buildings and other operating assets Buildings and other operating assets are stated at cost less accumulated depreciation and impairment losses.

(iii) Subsequent costs The Group recognises in the carrying amount of an item of operating assets the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Group and the cost of the item can be measured reliably. All other costs are recognised in the income statement as an expense as incurred.

(iv) Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each item of operating assets. The estimated useful lives are as follows: Useful life

Aircrafts and flight equipment ...... 10-25 years Engines ...... Flying hrs. Buildings ...... 15-50 years Other property and equipment ...... 3-8 years The residual value is estimated annually, if not immaterial.

Interim Financial Statements of Icelandair Group hf. 30 September 2006 Amounts are in ISK million ______11 ______Notes, contd.:

h. Intangible assets (i) Goodwill and intangible assets with indefinite useful lives All business combinations are accounted for by applying the purchase method. Goodwill represents amounts arising on acquisition of subsidiaries. In respect of business acquisitions goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired.

Goodwill and trademarks with indefinite useful lives are stated at cost less accumulated impairment losses.

(ii) Other intangible assets Other intangible assets are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to the income statement on a straight line basis over the estimated useful life of the relevant asset. The estimated useful lives are specified as follows:

Software ...... 3 years Customer relations ...... 7-10 years Favourable aircraft lease contracts ...... 2-3 years Other intangible assets ...... 6-10 years

(iii) Subsequent expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.

i. Prepaid aircraft acquisitions Prepaid aircraft acquistions consist of pre-payments on Boeing aircrafts that are still to be delivered. Borrowing cost related to these pre-payments is capitalised based on the interest rate on the related financing.

j. Long-term receivables Long-term receivables consist of subordinate loans, pre-payments, insurance deposits, deposits and debt securities classified as held to maturity. Long-term receivables are stated on an effective interest basis.

k. Inventories Goods for resale and supplies are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Aircraft equipment is capitalised at the foreign exchange rate ruling at the date of acquisition.

l. Trade and other receivables Trade and other receivables are stated at cost less impairment losses.

Current maturities of bonds receivable are recognised among current assets in the balance sheet.

m. Cash and cash equivalents Cash and cash equivalents consist of cash balances and liquid bank deposits.

Interim Financial Statements of Icelandair Group hf. 30 September 2006 Amounts are in ISK million ______12 ______Notes, contd.:

n. Impairment The carrying amounts of the Group's assets, other than inventories are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated. An impairment test is performed at least annually for intangible assets believed to have an indefinite useful life.

(i) Calculation of recoverable amount The recoverable amount of long-term receivables is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate. Receivables with a short duration are not discounted.

(ii) Reversals of impairment An impairment loss in respect of receivables is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised.

o. Share capital Dividends Dividends are recognised as a decrease in equity in the period in which they are declared.

p. Interest-bearing loans and borrowings Interest-bearing loans and borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing loans and borrowings are stated on an effective interest basis.

q. Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

r. Trade and other payables Trade and other payables are stated at cost.

s. Prepaid income Sold unused flight documents and other prepayments are presented as prepaid income in the balance sheet.

Interim Financial Statements of Icelandair Group hf. 30 September 2006 Amounts are in ISK million ______13 ______Notes, contd.:

t. Operating income (i) Transport revenue Passenger ticket sales are not recognised as revenue until transportation has been provided. Sold documents not used within nine months from the month of sale are recognised as revenue. Revenue from mail and cargo transportation is recognised in the income statement after transportation has been provided.

(ii) Aircraft and aircrew lease Revenue from aircraft and aircrew lease is recognised in the income statement at the end of each charter flight.

(iii) Other operating revenue Revenue from other services rendered is recognised in the income statement after the service has been provided.

Gain on sale of operating assets is recognised in the income statement after the risks and rewards of ownership have been transferred to the buyer.

u. Expenses (i) Operating lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease.

v. Financial income and financial expenses Financial income and financial expenses comprise interest payable, indexation and other expenses arising from borrowings calculated using the effective interest rate method, interest receivable on assets and foreign exchange differences, and gains and losses on hedging instruments that are recognised in the income statement.

x. Income tax expense Income tax on the profit or loss for the period comprises current and deferred tax.

Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

y. Segment reporting A segment is a distinguishable component of the Group that is engaged in providing products or services and which is subject to risks and rewards that are different from those of other segments.

Interim Financial Statements of Icelandair Group hf. 30 September 2006 Amounts are in ISK million ______14 ______Notes, cont.:

Segment reporting

1. Segment information is presented in the condensed consolidated interim financial statements in respect of the Group's business segments, which are the primary basis of segment reporting. The business segment reporting format reflects the Group's management and internal reporting structure and is divided into four segments, scheduled airline operations, global capacity solutions and aircraft trading, travel and tourism infrastructure and finance, insurance and administration support. The Parent Company is included in the finance segment. In note 14 it is shown how the subsidiaries are classified.

Inter-segment pricing is determined on an arm's length basis.

Business segments for the nine months ended 30 September 2006:

Global Travel Finance, Scheduled capacity and and tourism insurance and Elemination airline operations aircraft trading infrastructure admin support entries Total

Segment revenue ...... 32,740 7,671 7,264 460 ( 4,582 ) 43,553

Segment EBITDA ...... 3,698 915 1,130 ( 23 ) 5,720

Operating profit ...... 2,573 707 805 ( 243 ) 3,842 Net financing cost ...... 359 ( 92 ) ( 245 ) ( 16 ) 6 Share of profit for associates ...... 0 93 ( 2 ) 0 91 Income tax expense ...... ( 536 ) ( 106 ) ( 102 ) 70 ( 674 ) Profit for the period ...... 2,396 602 456 ( 189 ) 3,265

Interim Financial Statements of Icelandair Group hf. 30 September 2006 Amounts are in ISK million ______15 ______Notes, contd.:

Investments in subsidiaries

2. At the beginning of the year 2006 the Company took over operations of the fourteen subsidiaries listed in note 14. The companies were all owned by the Parent Company, FL GROUP hf., except for IG Invest ehf. which took over the assets of FL GROUP hf. on 1 January 2006, other than investments in subsidiaries, and liabilities relating to aviation services.

During the period, subsidiaries of Icelandair Group hf. acquired two subsidiaries. Icelandair Shared Services ehf. acquired ASE, an Estonian revenue accounting Company, and Loftleidir-Icelandic ehf. acquired Latcharter, a Latvian charter airline. Both these companies are included in the consolidated interim financial statements since the date of acquisition, which was in the beginning of July for ASE and beginning of June for Latcharter. The acquisitions, accounted for according to the purchase method, had the following effect on the Group's balance sheet:

Acquired ASE / from FL Latcharter Total

Operating assets ...... 20,598 18 20,616 Intangible assets ...... 255 11 266 Investments in associates ...... 319 319 Prepaid aircraft acquisitions ...... 16,885 16,885 Long-term receivables ...... 1,378 164 1,542 Inventories ...... 863 17 880 Trade and other receivables ...... 4,663 243 4,906 Cash and cash equivalents ...... 5,023 159 5,182 Interest bearing loans and borrowings ...... ( 27,753 ) ( 27,753 ) Deferred income tax liability ...... ( 263 ) ( 263 ) Trade, payables and other liabilities ...... ( 11,049 ) ( 373 ) ( 11,422 )

Net assets ...... 10,919 239 11,158 Identified intangible assets ...... 4,156 378 4,534 15,075 617 15,692 Goodwill on acquisition ...... 10,138 605 10,743

Consideration paid ...... 25,213 1,222 26,435 Consideration satisfied by share issue ...... ( 19,346 ) 0 ( 19,346 ) Net borrowings ...... ( 5,867) ( 611) ( 6,478) Consideration satisfied in cash ...... 0 611 611

Included in the consideration paid are acquisition related expenses, i.e. expert advisors fees and other fees.

Operating income 2006 1.1.-30.9. 3. Transport revenue is specified as follows:

Passengers ...... 24,068 Cargo and mail ...... 3,580 Total transport revenue ...... 27,648

Interim Financial Statements of Icelandair Group hf. 30 September 2006 Amounts are in ISK million ______16 ______Notes, contd.:

2006 4. Other operating revenue is specified as follows: 1.1.-30.9.

Sale at airports and hotels ...... 1,568 Revenue from tourism ...... 2,149 Other operating revenue ...... 3,889 Gain on sale of operating assets ...... 524 Total other operating revenue ...... 8,130

Operating expenses

5. Salaries and other personnel expenses are specified as follows:

Salaries ...... 8,711 Salary-related expenses ...... 1,995 Other personnel expenses ...... 2,302 Total salaries and other personnel expenses ...... 13,008

6. Other operating expenses are specified as follows:

Operating cost of real estates and fixtures ...... 1,151 Communication expenses ...... 845 Advertising expenses ...... 861 Booking fee and commission expenses ...... 1,331 Customer services ...... 855 Tourism expenses ...... 1,500 Other operating expenses ...... 1,993 Total other operating expenses ...... 8,536

7. The depreciation charge in the income statement is specified as follows:

Depreciation of operating assets, see note 9 ...... 1,565 Amortisation of intangible assets, see note 10 ...... 313 Depreciation and amortisation recognised in the income statement ...... 1,878

Financial income and financial expenses

8. Financial income and financial expenses are specified as follows:

Interest income on bank deposits ...... 319 Other interest income ...... 320 Net foreign exchange gain ...... 596 Financial income total ...... 1,235

Interim Financial Statements of Icelandair Group hf. 30 September 2006 Amounts are in ISK million ______17 ______Notes, contd.:

8. Contd.:

Interest expenses on interest bearing loans and borrowings ...... 568 Other interest expenses ...... 661 Financial expenses total ...... 1,229

Net financial income ...... 6

Assets

9. Operating assets and depreciation are specified as follows: Book value 30.9.2006 Depreciation

Aircrafts and flight equipment ...... 17,504 921 Buildings ...... 2,063 80 Engines ...... 1,626 314 Other operating assets ...... 1,491 250 Total operating assets and depreciation ...... 22,684 1,565

10. Intangible assets and amortisation are specified as follows: Book value 30.9.2006 Amortisation Goodwill ...... 11,226 0 Trademarks and slots ...... 3,369 0 Customer relations and aircraft leases ...... 1,121 232 Long-term cost ...... 253 81 Total intangible assets and amortisation ...... 15,969 313

11. Prepaid aircraft acquisitions in the balance sheet is for the purchase of 8 Boeing 737-800 aircrafts which will be delivered to the Company in the last quarter of the year 2006 and the first three quarters of the year 2007. The intention is to lease or sell all of the aforementioned aircrafts. The Company also has agreements with Boeing regarding the purchase of 4 Boeing 787 Dreamliner aircrafts to be delivered in the year 2010. The Company capitalises the borrowing cost related to these prepayments based on the interest rate on the related financing.

Equity

12. The Company's share capital amounts to ISK 3,000 million as decided in its Articles of Association. One vote is attached to each share of one ISK. On 15 November 2006 the Company's shareholders meeting agreed to decrease the nominal value to ISK 1,000 million. The decrease is to be allocated to retained earnings.

Interim Financial Statements of Icelandair Group hf. 30 September 2006 Amounts are in ISK million ______18 ______Notes, contd.:

12. Contd.:

Hedging reserve The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred.

Translation reserve Foreign exchange differences arising on translation of financial statements of subsidiaries are recognised directly in a separate component of equity.

Interest-bearing loans and borrowings

13. Interest-bearing loans and borrowings are specified as follows: 30.9.2006

Borrowings for prepaid aircraft acquisitions ...... 9,990 Other interest-bearing loans and borrowings ...... 13,763 23,753 Current portion of borrowings for prepaid aircraft acquisitions ...... ( 8,927) Current portion of other interest-bearing loans and borrowings ...... ( 2,183) Total non-current interest-bearing loans and borrowings ...... 12,643

Group entities

14. The Company holds fourteen subsidiaries which are all included in the consolidated interim financial statements.

Share Scheduled airline operations: Icelandair ehf...... 100% Icelandair Cargo ehf...... 100% Icelandair Technical Services ehf. (ITS) ...... 100% Icelandair Ground Services ehf. (IGS) ...... 100% Global capacity solutions and aircraft trading: Blue Cargo ehf...... 100% Bluebird Cargo ehf...... 100% IceLease ehf...... 100% IG Invest ehf...... 100% Loftleidir - Icelandic ehf...... 100% Travel and tourism infrastructure: Air Iceland ehf...... 100% Iceland Travel ehf...... 100% Icelandair Hotels ehf...... 100% Finance, insurance and administration support: IceCap Gurnesey ...... 100% Icelandair Shared Services ehf...... 100%

The subsidiaries own 22 subsidiaries that are also included in the consolidated interim financial statements.

Interim Financial Statements of Icelandair Group hf. 30 September 2006 Amounts are in ISK million ______19 ______Notes, contd.:

Cash flow statement 2006 1.1.-30.9. 15. Other operating items in the cash flow statement are specified as follows:

Gain on the sale of operating assets ...... ( 524) Exchange rate difference and indexation of liabilities and assets ...... ( 87) Share of profit of associates ...... ( 91) Income tax expense ...... 674 Total other operating items in the cash flow statement ...... ( 28)

16. Net change in operating assets and liabilities in the cash flow statement is specified as follows:

Inventories ...... ( 293) Trade and other receivables ...... ( 3,047) Trade and other payables ...... 3,172 Prepaid income ...... 1,446 Net change in operating assets and liabilities in the cash flow statement ...... 1,278

Ratios

17. The Group's primary ratios are specified as follows:

Working capital ratio ...... 0.45 Equity ratio ...... 0.34 Intrinsic value of share capital ...... 7.79

Interim Financial Statements of Icelandair Group hf. 30 September 2006 Amounts are in ISK million ______20 ______28.9 ICELANDAIR GROUP’S PRO-FORMA STATEMENTS 28.9.1 PRO FORMA STATEMENT OF EARNINGS FOR THE YEAR 2005 28.9.1 PRO FORMA OPENING BALANCE SHEET 1 JANUARY 2006

Icelandair Group hf.

Pro forma Statement of Earnings 2005

and

Opening Balance Sheet January 1st 2006

Icelandair Group hf. Reykjavíkurflugvöllur 101 Reykjavík

Kt. 631205-1780 Contents

Signature of the Board of Directors ...... 3 Opening Balance Sheet ...... 6 Auditors Report ...... 4 Notes to the Financial Statements ...... 7 Pro forma Statement of Earnings ...... 5

Signature of the Board of Directors

Icelandair Group is founded in December 2005. On January 1st 2006 the company took over 12 companies from its mother company FL Group hf. The companies were the following: Icelandair, Icelandair Technical Services, Icelandair Ground Services, Loftleidir – Icelandic, Icelandair Cargo, Bluebird Cargo, Air Iceland, Iceland Travel, Icelandair Hotels, Icelandair Shared Services, Icelease and Icecap. The Icelandair Group took over also on the same day, property, equipment, shares and contracts relating to aircraft trading, from the mother company, FL Group hf.

To give indication of how Icelandair Group would have performed, a pro forma Statement of Earnings has been prepared for the years 2005 with opening Balance Sheet January 1st 2006 for going forward.

The Board of Directors and the President and CEO of Icelandair Group hf. hereby confirm the pro forma Statement of Earnings for the year 2005 and the opening Balance Sheet January 1st 2006

Reykjavík, May 9th 2006.

Board of Directors:

President and CEO:

3 Auditors Report

Board of Directors of Icelandair Group hf. Reykjavíkurflugvelli, 101 Reykjavik.

Reykjavik, May 9th 2006.

Subject: Pro Forma Balance Sheet as of 1 January 2006 and Pro Forma Income Statement for the year 2005 for Icelandair Group hf.

We have reviewed the accompanying pro forma consolidated balance sheet of Icelandair Group hf. as of January 1st 2006 and pro forma consolidated income statements for the year 2005. This consolidated financial information is the responsibility of the Company’s management. Our responsibility is to issue a report on this pro forma financial information based on our review.

We have conducted certain procedures which involved comparison to the audited financial statements for 2005 for each of the Companies in Icelandair Group hf., consideration of the evidence supporting the necessary adjustments, recalculating the amounts presented in the pro forma balance sheet and income statements based on the information obtained and discussing the pro forma financial information with the directors of Icelandair Group hf. Our review is limited and thus provides less assurance than an audit and accordingly, we do not express an audit opinion.

Based on our review procedures, nothing has come to our attention that causes us not to believe that: the pro forma financial information has been properly compiled on the basis stated such basis is consistent with the accounting principles used by the Companies in Icelandair Group hf. the adjustments are appropriate for the purposes of the pro forma financial information as disclosed.

Financial information for 2005 is prepared in accordance with IFRS.

Consent We consent to the inclusion of this letter and the reference to our opinion in the Prospectus to be issued by Icelandair Group hf. in the form and context in which it appears.

On behalf of KPMG Endurskodun hf.

Jón Sigurdur Helgason, State authorised public accountant Sæmundur Valdimarsson, State authorised public accountant

4 Pro forma Statement of Earnings for the year 2005

In Million ISK Notes 2005

Operating revenue:

Transport revenue: Passsengers ...... 25.549 Cargo and mail ...... 3.899 Charter revenue and aircraft lease ...... 8.092 Other operating revenue ...... 8.055 4 45.595

Operating expenses:

Salaries and related expenses ...... 15.463 Aircraft fuel ...... 7.315 Aricraft lease...... 2.989 Aircraft servicing, handling and communication ...... 3.591 Aircraft maintenance expenses ...... 1.894 Booking fees and commission expenses ...... 1.492 Other operating cost...... 7.898 40.642

Operating profit excluding depreciation (EBITDA) ...... 4.953

Depreciation ...... (2.362)

Operating profit before financial expense (EBIT) . 2.591

5

Opening Balance Sheet January 1st 2006

Assets

In Million ISK Notes

Intangible assets ...... 5 14.549 Property and equipment ...... 6 20.595 Aircraft purchase prepayments ...... 7 16.886 Interest bearing assets ...... 8 1.689 None interest bearing assets ...... 9 5.532 Cash ...... 5.023 Total assets 64.274

Stockholders equity and liabilities

Stockholders equity:

Capital stock and other equity ...... 10 19.350 Stockholders equity 19.350

Liabilities:

Interest bearing debt, excluding pre delivery financing of aircraft ...... 11 19.951 Pre delivery financing of aircraft ...... 7 13.890 None interest bearing liabilities ...... 12 11.083 Liabilities 44.924

Stockholders equity and liabilities total 64.274

6 Notes to the Financial Statements

Basis of preparation 1. Icelandair Group is founded in December 2005. Its legal residence is in Reykjavikurflugvöllur, Reykjavík, Iceland. On January 1st 2006 the company took over 12 companies, properties, equipments, shares and contracts relating to aircraft trading from the mother company, FL Group hf.

To give indication of how Icelandair Group would have performed, a pro forma Statement of Earnings has been prepared for the year 2005. The pro forma Statement of Earnings is based on the Consolidated audited annual reports of the companies that comprise Icelandair Group for the year 2005. All major Intra-company transactions have been eliminated from revenues and costs.

The Financial Statements of the companies that comprise Icelandair Group, for the year 2005 were prepared in accordance with International Financial Reporting Standards (IFRS) .

Adjustment to Consolidated Statement of Earnings for the year 2005

2. As Icelandair Group took over property and equipment which were rented from the mother company before, the leasing costs have been eliminated but the operational costs and depreciation associated with ownership of assets has been added to make the historical figures comparable to the ongoing operation of Icelandair Group from January 1st 2006.

Costs have been included to account for overhead as Icelandair Group has taken over the role of the mother company for these companies from January 1st 2006.

The operation of Iceland Travel offices in Europe have been eliminated, as the offices were sold at the end of 2005 and therefore not part of Icelandair Group.

Opening Balance Sheet January 1st 2006

3. The opening Balance Sheet is the Consolidated Balance Sheet of the companies comprising Icelandair Group. Also included is capital increase from the mother company and transfer of property, epuipment, shares, loans and contracts from aircraft trading which was trasferred from the mother company at January 1st 2006. All material balances between the Group companies are eliminated in the opening Balance Sheet.

Notes, cont.:

7

Pro forma Statement of Earnings

Operating Revenue 4. The revenue outside Group specifies as follows: 2005

Icelandair ...... 24.382 Icelandair Technical Services ...... 371 Icelandair Ground Services ...... 772 Loftleiðir – Icelandic ...... 2.709 Icelandair Cargo ...... 4.309 Bluebird (including Blue Cargo) ...... 5.323 Air Iceland ...... 3.461 Iceland Travel ...... 1.962 Icelandair Hotels ...... 1.920 Icelandair Shared Services ...... 59 Icelease (including aircraft trading) ...... 233 Icecap ...... 94 45.595

Opening Balance Sheet 1.1.2006 Intangible assets 5. Intangible assets specify as follows: Customers, contracts and leases ...... 1.605 Trade name and slots ...... 2.866 Goodwill ...... 9.887 Long term cost ...... 191 14.549

Property and equipment 1.1.2006 6. Property and equipment specifies as follows:

Aircraft ...... 16.950 Buildings ...... 2.143 Other equipment ...... 1.502 20.595

8 Notes, cont.:

Aircraft purchase prepayments 7. The company took over from the mother company the contracts, rights and obligation of 15 Boeing 737-800 and 2 Boeing 787 or in total of 17 aircraft. These aircraft will be delivered to the company in the years 2006 until 2010. The Icelandair Group management expects to sell the B737-800 aircraft at delivery date. The prepayments specify as follows:

15 Boeing 737-800 aircraft, delivered in 2006 and 2007 ...... 16.744 2 Boeing 787 aircraft, delivered in 2010 ...... 142 16.886

Interest bearing assets 8. Interest bearing assets specify as follows:

Long term notes ...... 917 Deposits ...... 395 Other ...... 377 1.689

None interest bearing assets 9. None interest bearing assets specify as follows:

Accounts receivable and other receivables ...... 3.744 Inventories ...... 864 Prepaid cost ...... 146 Other ...... 778 5.532

Stockholders equity 10. Icelandair Group capital stock amounts to ISK 3.000 million, as stipulated in its Articles of Association. Each share of one ISK in the company carries one vote. On January 1st. the companies capital stock was increased by a nominal value of ISK 2.999 million and ISK 19.349 million in total. Equity at January 1st 2006 specifies as follows:

Capital stock ...... 3.000 Statutory reserve ...... 16.350 19.350

9 Notes, cont.:

Interest bearing debt, excluding pre delivery financing of aircraft 11. The interest bearing loans are related to transfer of property, equipment and shares of the companies comprising Icelandair Group. The company expects to finish refinancing the debt before end of June 2006. The debt specifies as follows:

Loan from Credit institutions (where FL Group is creditor) ...... 12.390 Loan from mother company ...... 5.250 Loan from Credit institutions ...... 2.311 19.951

None interest bearing liabilities 12. None interest bearing liabilities specify as follows:

Accounts payable ...... 3.136 Unearned revenue ...... 2.335 Other none interest bearing liabilities ...... 5.612 11.083

10 28.10 PRO FORMA OPENING BALANCE SHEET 24 OCTOBER 2006

Icelandair Group Holding hf. 24 October 2006

Icelandair Group Holding hf. Reykjavík Airport 101 Reykjavík

Kt. 591006-2150 Consolidated Balance Sheet as at 24 October 2006

Icelandair Icelandair Group Group hf. Holding hf. Eliminations Consolidation

30.9.2006 24.10.2006 Assets:

Operating assets ...... 22.684 0 22.684 Intangible assets ...... 15.969 0 10.118 26.087 Investment in subsidiary ...... 33.500 ( 33.500 ) 0 Investments in associates ...... 1.744 0 1.744 Prepaid aircraft acquisitions ...... 11.499 0 11.499 Long-term receivables ...... 2.071 0 2.071 Total non-current assets 53.967 33.500 ( 23.382 ) 64.085

Inventories ...... 1.156 0 1.156 Trade and other receivables ...... 7.793 200 7.993 Cash and cash equivalents ...... 4.976 190 5.166 Total current assets 13.925 390 0 14.315

Total assets 67.892 33.890 ( 23.382 ) 78.400

Equity:

Share capital ...... 3.000 1.000 ( 3.000 ) 1.000 Share premium ...... 16.350 26.000 ( 17.117 ) 25.233 Other reserves ...... 767 120 887 Retained earnings ...... 3.265 0 ( 3.265) Total equity 23.382 27.120 ( 23.382 ) 27.120

Liabilities:

Interest bearing loans and borrowings ...... 12.643 4.700 17.343 Convertible bonds ...... 1.870 1.870 Deferred income tax liability ...... 988 0 988 Total non-current liabilities 13.631 6.570 20.201

Loans from Parent Company ...... 4.102 4.102 Trade and other payables ...... 11.658 200 11.858 Current maturities of non-current liabilities ...... 11.110 11.110 Prepaid income ...... 4.009 4.009 Total current liabilities 30.879 200 31.079

Total liabilities 44.510 6.770 51.280

Total equity and liabilities 67.892 33.890 ( 23.382 ) 78.400

Consolidated Balance Sheet of Icelandair Group Holding hf. Amounts are in ISK million ______