REG - Intl Con Airline Grp - Final Results <Origin Href="QuoteRef">ICAG.L</Origin> - Part 3
24/02/2017 07:12
- Part 3: For the preceding part double click ID:nRSX7399Xb
reliably estimated, assets are carried at cost.
b Other interest-bearing deposits
Other interest-bearing deposits, principally comprising funds held with banks and other financial institutions, are carried
at amortised cost using the effective interest method.
c Derivative financial instruments and hedging activities
Derivative financial instruments, comprising interest rate swap agreements, foreign exchange derivatives and fuel hedging
derivatives (including options, swaps and futures) are initially recognised at fair value on the date a derivative contract
is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss
arising from remeasurement depends on whether the derivative is designated as a hedging instrument, and if so, the nature
of the item being hedged (as detailed below under cash flow hedges). The gains or losses related to derivatives not used as
effective hedging instruments are recognised in the Income statement.
Exchange gains and losses on monetary investments are taken to the Income statement unless the item has been designated and
is assessed as an effective hedging instrument. Exchange gains and losses on non-monetary investments are reflected in
equity until the investment is sold when the cumulative amount recognised in equity is recognised in the Income statement.
Long-term borrowings are recorded at amortised cost, including leases which contain interest rate swaps that are closely
related to the underlying financing and as such are not accounted for as an embedded derivative.
d Cash flow hedges
Changes in the fair value of derivative financial instruments are reported in the Income statement, unless the derivative
financial instrument has been designated as a hedge of a highly probable expected future cash flow. Gains and losses on
derivative financial instruments designated as cash flow hedges and assessed as effective, are recorded in equity. Gains
and losses recorded in equity are reflected in the Income statement when either the hedged cash flow impacts the Income
statement or the hedged item is no longer expected to occur.
Certain loan repayment instalments denominated in US dollars, euro and Japanese yen are designated as cash flow hedges of
highly probable future foreign currency revenues. Exchange differences arising from the translation of these loan repayment
instalments are recorded in equity and subsequently reflected in the Income statement when either the future revenue
impacts income or its occurrence is no longer expected to occur.
e Convertible debt
Convertible bonds are classified as compound instruments, consisting of a liability and an equity component. At the date of
issue, the fair value of the liability component is estimated using the prevailing market interest rate for similar
non-convertible debt, and is subsequently recorded at an amortised cost basis using the effective interest method until
extinguished on conversion or maturity of the bonds, and is recognised within Interest-bearing borrowings. The difference
between the proceeds of issue of the convertible bond and the fair value assigned to the liability component, representing
the embedded option to convert the liability into equity of the Group, is included in Equity portion of convertible bond in
Other reserves and is not subsequently remeasured.
Issue costs are apportioned between the liability and equity components of the convertible bonds where appropriate based on
their relative carrying values at the date of issue. The portion relating to the equity component is charged directly
against equity.
The interest expense on the liability component is calculated by applying the effective interest rate for similar
non-convertible debt to the liability component of the instrument. The difference between this value and the interest paid
is added to the carrying amount of the liability.
f Impairment of financial assets
The Group assesses at each balance sheet date whether a financial asset or group of financial assets is impaired. A
financial asset is considered impaired if objective evidence indicates that one or more events that have occurred since the
initial recognition of the asset have had a negative impact on the estimated future cash flows of that asset. In the case
of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security
below its cost is considered an indicator that the security is impaired. If any such evidence exists for available-for-sale
financial assets, the cumulative gain or loss previously reported in Other comprehensive income is included in the Income
statement.
An impairment loss in respect of a financial asset carried at amortised cost is calculated as the difference between its
carrying value and the present value of the estimated future cash flows discounted at the asset's original effective
interest rate.
Employee benefit plans
a Pension obligations
The Group has both defined benefit and defined contribution plans. A defined contribution plan is a pension plan under
which the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay
further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee
service in the current and prior years.
Typically defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually
dependent on one or more factors such as age, years of service and compensation.
The Group's net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating
the amount of future benefit that employees have earned in return for their service in the current and prior years. The
benefit is discounted to determine its present value, and the fair value of any plan assets are deducted. The discount rate
is the yield at the balance sheet date on AA-rated corporate bonds of the appropriate currency that have durations
approximating those of the Group's obligations. The calculation is performed by a qualified actuary using the projected
unit credit method. When the net obligation calculation results in an asset for the Group, the recognition of an asset is
limited to the present value of any future refunds from the plan or reductions in future contributions to the plan ('the
asset ceiling'). The fair value of the plan assets is based on market price information and, in the case of quoted
securities, is the published bid price.
Current service costs are recognised within employee costs in the year in which they arise. Past service costs are
recognised in the event of a plan amendment or curtailment, or when the Group recognises related restructuring costs or
termination benefits. The net interest is calculated by applying the discount rate used to measure the defined benefit
obligation at the beginning of the period to the net defined benefit liability or asset, taking into account any changes in
the net defined benefit liability or asset during the period as a result of contributions and benefit payments. Net
interest and other expenses related to the defined benefit plans are recognised in the Income statement. Remeasurements,
comprising actuarial gains and losses, the effect of the asset ceiling (excluding interest) and the return on plan assets
(excluding interest), are recognised immediately in Other comprehensive income. Remeasurements are not reclassified to the
Income statement in subsequent periods.
b Termination benefits
Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever
an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it
is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan
without realistic possibility of withdrawal, or providing termination benefits as a result of an offer made to encourage
voluntary redundancy.
Other employee benefits are recognised when there is deemed to be a present obligation.
Taxation
Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation
authorities, based on tax rates and laws that are enacted or substantively enacted at the balance sheet date.
Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and
their carrying amounts in the financial statements, with the following exceptions:
• Where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a
transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable
profit or loss;
• In respect of taxable temporary differences associated with investments in subsidiaries or associates, where the
timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences
will not reverse in the foreseeable future; and
• Deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be
available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised.
Deferred income tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to
apply when the related asset is realised or liability is settled, based on tax rates and laws enacted or substantively
enacted at the balance sheet date.
Income tax is charged or credited directly to equity if it relates to items that are credited or charged to equity.
Otherwise income tax is recognised in the Income statement.
Inventories
Inventories, including aircraft expendables, are valued at the lower of cost and net realisable value. Such cost is
determined by the weighted average cost method. Inventories include mainly aircraft spare parts, repairable aircraft engine
parts and fuel.
Cash and cash equivalents
Cash and cash equivalents include cash in hand and deposits with any qualifying financial institution repayable on demand
or maturing within three months of the date of acquisition and which are subject to an insignificant risk of change in
value.
Share-based payments
The Group operates a number of equity-settled, share-based payment plans, under which the Group awards equity instruments
of the Group for services rendered by employees. The fair value of the share-based payment plans is measured at the date of
grant using a valuation model provided by external specialists. The resulting cost, as adjusted for the expected and actual
level of vesting of the plan, is charged to the Income statement over the period in which the options vest. At each balance
sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has
expired and management's best estimate of the achievement or otherwise of non-market conditions, and accordingly the number
of equity instruments that will ultimately vest. The movement in the cumulative expense since the previous balance sheet
date is recognised in the Income statement with a corresponding entry in equity.
Provisions
Provisions are made when an obligation exists for a present liability in respect of a past event and where the amount of
the obligation can be reliably estimated.
Employee leaving indemnities and other employee provisions are recorded for flight crew who, meeting certain conditions,
have the option of being placed on reserve or of taking early retirement. The Group is obligated to remunerate these
employees until they reach the statutory retirement age. The calculation is performed by independent actuaries using the
projected unit credit method.
Other employee related provisions are recognised for direct expenditures of business reorganisation (restructuring
provisions) where plans are sufficiently detailed and well advanced, and where appropriate communication to those affected
has been undertaken at the balance sheet date.
If the effect is material, expected future cash flows are discounted using a rate that reflects, where appropriate, the
risks specific to the provision. Where discounting is used, the increase in the provision due to unwinding the discount is
recognised as a finance cost.
Revenue recognition
Passenger and cargo revenue is recognised when the transportation service has been provided. Passenger tickets net of
discounts are recorded as deferred revenue on ticket sales in current liabilities until the customer has flown. Unused
tickets are recognised as revenue using estimates regarding the timing of recognition based on the terms and conditions of
the ticket and statistical analysis of historical trends.
Other revenue including maintenance; handling; hotel and holiday and commissions is recognised at the time the service is
provided in accordance with the invoice or contract.
Customer loyalty programmes
The Group operates five loyalty programmes: Executive Club, Iberia Plus, Avios, Punto and Aer Club. The customer loyalty
programmes award travellers Avios points to redeem for various rewards, primarily redemption travel, including flights,
hotels and car hire. In accordance with IFRIC 13 'Customer loyalty programmes', the fair value attributed to the awarded
Avios points is deferred as a liability and recognised as revenue on redemption of the points and provision of service to
the participants to whom the Avios points are issued.
In addition, Avios points are sold to commercial partners to use in loyalty activity. The fair value of the Avios points
sold is deferred and recognised as revenue on redemption of the Avios points by the participants to whom the Avios points
are issued. The cost of the redemption of the Avios points is recognised when the Avios points are redeemed.
The Group estimates the fair value of Avios points by reference to the fair value of the awards for which they could be
redeemed and is reduced to take into account the proportion of award credits that are not expected to be redeemed based on
the results of statistical modelling. The fair value of the Avios point reflects the fair value of the awards for which
points can be redeemed.
Exceptional items
Exceptional items are those that in management's view need to be separately disclosed by virtue of their size or incidence.
The exceptional items recorded in the Income statement include items such as significant restructuring; the impact of
business combination transactions that do not contribute to the ongoing results of the Group; and the impact of the sale,
disposal or impairment of an investment in a business.
Business combination transactions include cash items such as the costs incurred to effect the transaction and non-cash
items such as accounting gains or losses recognised through the Income statement, such as bargain purchase gains and step
acquisition losses.
Critical accounting estimates and assumptions
The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the
application of policies and reported amounts of assets and liabilities, income and expenses. These estimates and associated
assumptions are based on historical experience and various other factors believed to be reasonable under the circumstances.
Actual results in the future may differ from estimates upon which financial information has been prepared. These underlying
assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period, or in the period of the revision and future periods if these
are also affected. The estimates and assumptions that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial year are discussed as follows.
a Employee benefit obligations, employee leaving indemnities, other employee related provisions and restructuring
The cost of employee benefit obligations, employee leaving indemnities and other employee related provisions is determined
using actuarial valuations. Actuarial valuations involve making assumptions about discount rates, expected rates of return
on assets, future salary increases, mortality rates and future pension increases. Due to the long-term nature of these
schemes, such estimates are subject to significant uncertainty. The assumptions relating to these schemes are disclosed in
notes 25 and 32. The Group exercises its judgement in determining the assumptions to be adopted, in discussion with
qualified actuaries.
Restructuring provisions are estimates of future obligations. The Group exercises judgement in determining the expected
direct expenditures of reorganisation based on plans which are sufficiently detailed and advanced.
b Revenue recognition
Passenger revenue is recognised when the transportation is provided. Ticket sales that are not expected to be used ('unused
tickets') are recognised as revenue using estimates regarding the timing of recognition based on the terms and conditions
of the ticket and historical trends.
In respect of customer loyalty programmes the fair value attributed to awarded points is deferred as a liability and is
recognised as revenue on redemption of the points and provision of service to the participants to whom the points are
issued. The fair value of the award credits is estimated by reference to the fair value of the awards for which the points
could be redeemed and is reduced to take into account the proportion of award credits that are not expected to be redeemed
by customers. The Group exercises its judgement in determining the assumptions to be adopted in respect of the number of
points not expected to be redeemed through the use of statistical modelling and historical trends and in determining the
mix and fair value of the award credits.
At December 31, 2016 the Group recognised E4,145 million in respect of deferred revenue on ticket sales (2015: E4,374
million) of which E1,287 million (2015: E1,545 million) related to customer loyalty programmes.
c Income taxes
The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the
worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination
is uncertain. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional
taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded,
such differences will impact the current and deferred income tax assets and liabilities in the period in which such
determination is made.
The Group recognises deferred income tax assets only to the extent that it is probable that the taxable profit will be
available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised.
Management consider the operating performance in the current year and the future projections of performance laid out in the
approved business plan in order to assess the probability of recoverability. The Business plan relies on the use of
assumptions, estimates and judgements in respect of future performance and economics.
d Impairment of non-financial assets
The Group assesses whether there are any indicators of impairment for all non-financial assets at each reporting date.
Goodwill and intangible assets with indefinite economic lives are tested for impairment annually and at other times when
such indicators exist. The recoverable amounts of cash-generating units have been determined based on value-in-use
calculations. These calculations require the use of estimates and assumptions as disclosed in note 16.
Other non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be
recoverable.
e Residual values and useful lives of assets
The Group exercises judgement to determine useful lives and residual values of property, plant and equipment, including
fleet assets. Useful lives and residual values are reassessed annually, taking into consideration the latest fleet plans
and other business plan information. The assets are depreciated to their residual values over their estimated useful
lives.
f Lease classification
A lease is classified as a finance lease when substantially all the risks and rewards of ownership are transferred to the
Group. In determining the appropriate classification, the substance of the transaction rather than the form is considered.
Factors considered include but are not limited to the following: whether the lease transfers ownership of the asset to the
lessee by the end of the lease term; the lessee has the option to purchase the asset at the price that is sufficiently
lower than the fair value on exercise date; the lease term is for the major part of the economic life of the asset; and the
present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset.
Details of the Group's operating lease commitments are disclosed in note 24.
g Maintenance provision
The Group has a number of contracts with service providers to replace or repair engine parts and other maintenance checks.
These agreements are complex and the Group exercises judgement in determining the assumptions used to match the consumption
of replacement spares and other costs associated with fleet maintenance with the appropriate income statement charge.
Changes in accounting policy and disclosures
a New and amended standards adopted by the Group
The Group has adopted a number of amendments to accounting standards for the first time in the year to December 31, 2016.
None of these amendments has resulted in a significant change to the financial position or performance of the Group, or
presentation and disclosures in the Group's financial statements.
b New standards, amendments and interpretations not yet effective
The IASB and IFRIC issued the following standards, amendments and interpretations with an effective date after the year end
of these financial statements which management believe could impact the Group in future periods. Unless otherwise stated,
the Group plans to adopt the following standards, interpretations and amendments:
IFRS 15 'Revenue from contracts with customers'; effective for periods beginning on or after January 1, 2018. The standard
establishes a five-step model that will apply to revenue arising from contracts with customers. Revenue is recognised at an
amount that reflects the consideration to which an entity expects to be entitled in exchange for goods and services and at
a point when the performance obligations associated with these goods and services have been satisfied.
IAG has initiated a project to identify the revenue streams throughout the Group, and to analyse them using the five-step
model. In addition, the Group has worked with other airlines through the International Air Transport Association (IATA)
Industry Accounting Working Group to ensure that the proposed approach is consistent with other industry participants. At
this stage, the Group expects the following main changes to revenue accounting on adoption of IFRS 15:
• A change in timing of the recognition of certain ancillary revenue, to align with the principal performance
obligations associated with the services provided;
• Changes to the gross or net presentation of revenue arising from the review of terms and conditions of certain
transactions undertaken by the operating companies where they may be identified as principal or agent.
The Group expects to adopt the standard from January 1, 2018 and is currently considering whether to use the full
retrospective application or the cumulative catch-up transition method. The Group does not expect a significant change to
its performance or financial position on adoption of this standard.
IFRS 9 'Financial instruments'; effective for periods beginning on or after January 1, 2018. The standard removes the
multiple classification and measurement models for financial assets required by IAS 39 and introduces a model that has only
two classification categories: amortised cost and fair value. Classification is driven by the business model for managing
the financial assets and the contractual cash flow characteristics of the financial assets. The accounting and presentation
for financial liabilities and for derecognising financial instruments is relocated from IAS 39 without any significant
changes. IFRS 9 (2010) introduces additional changes relating to financial liabilities. IFRS 9 adds new requirements to
address the impairment of financial assets and hedge accounting. The Group does not expect that there will be a significant
change in the classification and measurement of its financial instruments or in its hedging activities on adoption of this
standard.
IFRS 16 'Leases' (not yet endorsed by the EU); effective for periods beginning on or after January 1, 2019. Under IFRS 16,
a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a
period of time in exchange for consideration. The new standard eliminates the classification of leases as either operating
leases or finance leases and instead introduces a single lessee accounting model. Applying this model, lessees are required
to recognise a lease liability reflecting the obligation to make future lease payments and a 'right-of-use' asset for
virtually all lease contracts. IFRS 16 includes an optional exemption for certain short-term leases and leases of low-value
assets. The Group is currently assessing the impact of the new standard. It is expected that both net debt and non-current
assets will increase on implementation of this standard as obligations to make future payments under leases currently
classified as operating leases are recognised on the balance sheet, along with the related 'right-of-use' asset. Details of
the Group's operating lease commitments are disclosed in note 24.
IAS 7 (Amendment) 'Statement of cash flows' (not yet endorsed by the EU); effective for periods beginning on or after
January 1, 2017. The amendment requires disclosures that enable users of financial statements to evaluate changes in
liabilities arising from financing activities, including changes arising from cash flows and non-cash changes. The
amendment suggests that one way to fulfil the disclosure requirement is by providing a reconciliation between the opening
and closing balances in the statement of financial position for liabilities arising from financing activities. The adoption
of the amendment will result in additional disclosure requirements for the Group.
IFRS 2 (Amendment) 'Classification and measurement of share-based payment transactions' (not yet endorsed by the EU);
effective for periods beginning on or after January 1, 2018. The amendments address three main areas: the effects of
vesting conditions on the measurement of a cash-settled share-based payment transaction; the classification of a
share-based payment transaction with net settlement features for withholding tax obligations; and accounting where a
modification to the terms and conditions of a share-based payment transaction changes its classification from cash settled
to equity settled. The adoption of the amendments will not result in a change to the financial position or performance of
the Group.
There are no other standards, amendments or interpretations in issue but not yet adopted that the Directors anticipate will
have a material effect on the reported income or net assets of the Group.
The Group has not early adopted any standard, amendment or interpretation that has been issued but is not yet effective.
c Prior period reclassification
The financial statements for the prior year include reclassifications that were made to conform to the current year
presentation.
In 2016 the Group reviewed and amended the reporting of individual line items in the consolidated Income statement to
better reflect the nature of underlying transactions and improve comparability between reporting periods. As a result, for
the year to December 31, 2015, revenue previously reported as Other revenue has been reclassified to Passenger revenue and
Cargo revenue. Expenditure in respect of certain subcontracted services, previously allocated to Property, IT and other
costs, has been reclassified to Handling, catering and other operating costs. These reclassifications have not affected
reported total revenue, expenditure or operating profit for 2015. Details of these adjustments are provided in the table
below.
Consolidated Income statement for the year to December 31, 2015
E million Previously reported Reclassification Afterreclassification
Passenger revenue 20,350 (20) 20,330
Cargo revenue 1,024 70 1,094
Other revenue 1,484 (50) 1,434
Total revenue 22,858 - 22,858
Handling, catering and other operating costs 2,371 200 2,571
Property, IT and other costs 1,033 (200) 833
Other expenditure on operations 17,136 - 17,136
Total expenditure on operations 20,540 - 20,540
Operating profit 2,318 - 2,318
3 Business combination
On August 18, 2015, the Group acquired 100 per cent of the issued ordinary share capital of Aer Lingus Group for E2.55 per
share.
The fair values of the assets and liabilities arising from the acquisition were presented in the financial statements for
the year to December 31, 2015 on a provisional basis. During the twelve months to December 31, 2016 the valuation exercise
was finalised, resulting in an increase of E58 million to the fair value of property, plant and equipment arising from the
acquisition, a related E7 million deferred tax liability, and a corresponding decrease to goodwill. The comparative
information is restated to reflect this adjustment.
The goodwill is recognised as follows:
E million
Cash consideration 1,351
Fair value of identifiable net assets 1,079
Goodwill 272
4 Segment information
a Business segments
British Airways, Iberia, Vueling and Aer Lingus are managed as individual operating companies. Each airline operates its
network operations as a single business unit. The chief operating decision maker is responsible for allocating resources
and assessing performance of the operating segments, and has been identified as the IAG Management Committee. The IAG
Management Committee makes resource allocation decisions based on network profitability, primarily by reference to the
passenger markets in which the companies operate. The objective in making resource allocation decisions is to optimise
consolidated financial results. Therefore, based on the way the Group treats its businesses, and the manner in which
resource allocation decisions are made, the Group has four reportable operating segments for financial reporting purposes,
reported as British Airways, Iberia, Vueling and Aer Lingus. Other Group companies include the head office companies.
In 2016, the Avios business has been treated as a separate operating unit and is included in Other Group companies in the
Business segment information. In 2015, Avios was allocated to the British Airways and Iberia operating segments according
to the ownership percentage. The 2015 comparatives have been restated and Avios has been included in Other Group
companies.
For the year to December 31, 2016
2016
E million BritishAirways Iberia Vueling Aer Lingus Other Group companies Total
Revenue
External revenue 13,889 4,233 2,065 1,766 614 22,567
Inter-segment revenue 469 353 - - 452 1,274
Segment revenue 14,358 4,586 2,065 1,766 1,066 23,841
Depreciation, amortisation and impairment (950) (215) (19) (75) (28) (1,287)
Operating profit before exceptional items 1,786 271 60 233 185 2,535
Exceptional items (note 5) (93) - - - 42 (51)
Operating profit after exceptional items 1,693 271 60 233 227 2,484
Net non-operating costs (122)
Profit before tax 2,362
For the year to December 31, 2015
2015
E million BritishAirways Iberia Vueling Aer Lingus Other Group companies Total
Revenue
External revenue 15,413 4,339 1,962 622 522 22,858
Inter-segment revenue 420 359 - - 469 1,248
Segment revenue 15,833 4,698 1,962 622 991 24,106
Depreciation, amortisation and impairment (1,045) (205) (13) (27) (17) (1,307)
Operating profit before exceptional items 1,759 222 160 35 159 2,335
Exceptional items (note 5) (35) - - (3) 21 (17)
Operating profit after exceptional items 1,724 222 160 32 180 2,318
Net non-operating costs (517)
Profit before tax 1,801
b Geographical analysis
Revenue by area of original sale
E million 2016 2015
UK 7,877 8,256
Spain 3,632 3,462
USA 3,534 3,447
Rest of world 7,524 7,693
22,567 22,858
Assets by area
December 31, 2016
E million Property, plant and equipment Intangibleassets
UK 9,608 1,196
Spain 1,877 1,236
USA 20 18
Rest of world 722 587
12,227 3,037
December 31, 2015
E million Property, plant and equipment Intangible
assets
UK 11,112 1,346
Spain 1,798 1,221
USA 26 14
Rest of world 794 614
13,730 3,195
5 Exceptional items
E million 2016 2015
Employee costs1 93 -
Pre-acquisition cash flow hedge impact2 (42) (51)
Business combination costs3 - 33
Litigation provision4 - 35
Recognised in expenditure on operations 51 17
Total exceptional charge before tax 51 17
Tax on exceptional items (13) 6
Total exceptional charge after tax 38 23
1 Employee costs
British Airways has embarked on a series of transformation proposals to develop a more efficient and cost effective
structure. The overall costs of the programme principally comprise employee severance costs. The costs incurred in the year
to December 31, 2016 in respect of these projects amount to E144 million, with a related tax credit of E27 million.
During the year the Group made changes to the US PRMB (Post-Retirement Medical Benefits) to further bring the level of
benefits in line with national trends seen in the US. This scheme is accounted for in a similar way to a defined benefit
plan, so any reduction in benefit results in the recognition of a past service gain when the plan amendment occurs. This
change has resulted in a one-off gain in employee costs of E51 million in the year to December 31, 2016, and a related tax
charge of E9 million.
2 Pre-acquisition cash flow hedge impact
Under IFRS 3 Business combinations, gains or losses on cash flow hedges acquired should not be recycled to the income
statement but recognised in equity. Following the acquisition of Aer Lingus, IAG continued to unwind the cash flow fuel
hedges acquired in reported fuel expense. For the year to December 31, 2016, a credit of E42 million (2015: E51 million)
was recognised as an exceptional item, reversing the impact of unwinding the cash flow hedges to arrive at the total Fuel,
oil costs and emissions charges. A related tax charge of E5 million (2015: E6 million) was also recognised.
In the year to December 31, 2015:
3 Business combination costs
Transaction expenses of E33 million were recognised in relation to the Aer Lingus Business combination in the year to
December 31, 2015.
4 Litigation provision
The litigation provision represents the continuation of the civil claims brought against British Airways in 2006. This
provision represents a settled case against British Airways in the cargo claim for a total of E35 million. The final amount
required to pay the remaining claims detailed in note 33 is subject to significant uncertainty.
6 Expenses by nature
Operating profit is arrived at after charging
Depreciation, amortisation and impairment of non-current assets:
E million 2016 2015
Owned assets 739 834
Finance leased aircraft 391 346
Other leasehold interests 39 47
Impairment charge on property, plant and equipment - 5
Amortisation of intangible assets 104 75
Impairment on intangible assets 14 -
1,287 1,307
Operating leases costs:
E million 2016 2015
Minimum lease rentals - aircraft 759 659
- property and equipment 226 195
Sub-lease rentals received (2) (46)
983 808
Cost of inventories:
E million 2016 2015
Cost of inventories recognised as an expense, mainly fuel 3,966 4,899
7 Auditors' remuneration
The fees for audit and non-audit services provided by the auditor of the Group's consolidated financial statements and of
certain individual financial statements of the consolidated companies, Ernst & Young S.L., and by companies belonging to
Ernst & Young's network, were as follows:
2016 2015
E'000 Ernst &Young Ernst &Young Otherauditor1
Fees payable for the audit of the Group and individual accounts 3,313 3,552 40
Fees payable for other services:
Audit of the Group's subsidiaries pursuant to legislation 541 571 388
Other services pursuant to legislation 440 389 4
Other services relating to taxation 1 57 -
Other assurance services 604 552 -
Services relating to information technology 5 34 -
Services relating to corporate finance transactions2 90 610 -
All other services 22 85 -
5,016 5,850 432
1 Fees for services billed to Aer Lingus by PricewaterhouseCoopers LLP ('PwC') and by companies belonging to PwC's
network, being the auditors of Aer Lingus in 2015.
2 In 2015 this mainly included services in relation to the Aer Lingus acquisition.
The audit fees payable are approved by the Audit and Compliance Committee and have been reviewed in the context of other
companies for cost effectiveness. A description of the work of the Audit and Compliance Committee is set out in the Report
of the Audit and Compliance Committee and includes an explanation of how objectivity and independence is safeguarded when
non-audit services are provided.
8 Employee costs and numbers
E million 2016 2015
Wages and salaries 3,136 3,277
Social security costs 491 485
Costs related to pension scheme benefits 276 372
Cost of share-based payments 36 35
Other employee costs1 885 736
Total employee costs 4,824 4,905
1 Other employee costs include allowances and accommodation for crew
The average number of employees during the year was as follows:
2016 2015
Average number of employees Percentage of women Average number of employees Percentage of women
Senior executives 215 27% 214 24%
Ground employees:
Managerial 2,532 40% 2,385 41%
Non-managerial 33,313 35% 32,835 36%
Technical crew:
Managerial 6,257 11% 5,906 10%
Non-managerial 21,070 68% 19,522 67%
63,387 60,862
9 Finance costs and income
a Finance costs
E million 2016 2015
Interest expense on:
Bank borrowings (29) (23)
Finance leases (141) (138)
Provisions unwinding of discount (21) (21)
Other borrowings (90) (115)
Capitalised interest on progress payments 3 2
Change in fair value of cross currency swaps (1) 1
(279) (294)
b Finance income
E million 2016 2015
Interest on other interest-bearing deposits 33 42
c Net financing credit/(charge) relating to pensions
E million 2016 2015
Net financing credit/(charge) relating to pensions 12 (12)
10 Tax
a Tax charges and tax balances
Tax (charge)/credit in the Income statement, Other comprehensive income and Statement of changes in equity
For the year to December 31, 2016
E million Incomestatement Other comprehensive income Statementof changesin equity Total
Current tax
Movement in respect of prior years 13 - - 13
Movement in respect of current year (325) 143 10 (172)
Total current tax (312) 143 10 (159)
Deferred tax
Movement in respect of prior years (11) - 1 (10)
Movement in respect of current year (130) 158 (7) 21
Rate change 43 (40) - 3
Total deferred tax (98) 118 (6) 14
Total tax (410) 261 4 (145)
Current tax in Other comprehensive income all relates to employee benefit plans and current tax in the Statement of changes
in equity relates to share-based payment schemes (E5 million) and finance costs (E5 million).
For the year to December 31, 2015
E million Incomestatement Other comprehensive income Statementof changesin equity Total
Current tax
Movement in respect of prior years (5) - - (5)
Movement in respect of current year (337) 76 14 (247)
Total current tax (342) 76 14 (252)
Deferred tax
Movement in respect of prior years 32 1 - 33
Movement in respect of current year (59) (180) (4) (243)
Rate change 84 - - 84
Total deferred tax 57 (179) (4) (126)
Total tax (285) (103) 10 (378)
Current tax in the Other comprehensive income all relates to employee benefit plans and current tax in the Statement of
changes in equity all relates to share-based payment schemes.
Current tax (liability)/asset
E million Openingbalance Movement in respect of prior years Movementin respect of current year Cash Exchange movements Closingbalance
2016 (45) 13 (172) 318 13 127
2015 (48) (5) (247) 245 10 (45)
The current tax asset is E228 million (2015: E79 million) and the current tax liability is E101 million (2015: E124
million).
Deferred tax asset/(liability)
E million Openingbalance Movement in respect of prior years Movementin respect of current year Ratechange Business combinations Exchange movements Closingbalance
2016 297 (10) 21 3 - 39 350
2015 491 33 (243) 84 (42) (26) 297
The deferred tax asset is E526 million (2015: E723 million) and the deferred tax liability is E176 million (2015: E426
million).
b Deferred tax
For the year to December 31, 2016
E million Openingbalance Movementin respect ofprior years Movementin respect ofcurrent year Ratechange Exchangemovements Closingbalance
Fixed assets (1,208) (7) (8) 45 113 (1,065)
Employee leaving indemnities and other employee related provisions 472 1 (99) (1) (1) 372
Tax losses carried forward 410 16 (9) (1) (9) 407
Fair value losses recognised on cash flow hedges 298 (2) (192) (12) (24) 68
Employee benefit plans 168 - 332 (28) (31) 441
Tax assets in relation to tax credits and deductions 78 - - - - 78
Share-based payment schemes 22 1 (8) - (2) 13
Foreign exchange 8 (4) 6 - (1) 9
Deferred revenue in relation to customer loyalty programmes 1 - 1 - - 2
Other items 48 (15) (2) - (6) 25
Total deferred tax 297 (10) 21 3 39 350
Within tax in Other comprehensive income is a tax charge of E187 million that may be reclassified subsequently to the
Income statement and a tax credit of E345 million that may not. Within tax in Other comprehensive income arising from tax
rate changes is a tax charge of E12 million that may be reclassified subsequently to the Income statement and a tax charge
of E28 million that may not.
For the year to December 31, 2015
E million Opening balance Movementin respect ofprior years Movementin respect of current year Ratechange Transfer Exchangemovements Closingbalance
Fixed assets (1,126) 18 (10) 84 (47) (127) (1,208)
Employee leaving indemnities and other employee related provisions 492 (6) (13) - - (1) 472
Tax losses carried forward 396 15 (42) - - 41 410
Fair value losses recognised on cash flow hedges 330 - (41) - - 9 298
Employee benefit plans 248 - (125) - - 45 168
Tax assets in relation to tax credits and deductions 89 (10) (1) - - - 78
Share-based payment schemes 22 3 (4) - - 1 22
Foreign exchange (16) 4 20 - - - 8
Deferred revenue in relation to customer loyalty programmes 17 - (16) - - - 1
Other items
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