The following table sets out the Group's results by geographical area.

        See "Item 5 --- Operating and Financial Review and Prospects --- Year By Year Analysis --- Year ended March 31, 2003 compared with year ended March 31, 2002 -- Geographical Analysis" and "Item 5 -- Operating and Financial Review and Prospects -- Year By Year Analysis -- Year ended March 31, 2002 compared with year ended March 31, 2001 -Geographical Analysis."

        BA's scheduled route network forms the basis of its business and is one of the world's most extensive. As of July 2003, BA (including subsidiary carrier British Airways CitiExpress) served some 156 destinations in 75 countries. Including codesharing and franchise arrangements, flights with BA codes served some 265 destinations in 101 countries. Adding the services of BA's alliance partners, the global network served some 563 destinations in 132 countries.

        During the 12 months ended May 2003, BA introduced services to Krakow, London City and Luanda and Group services with the BA brand were introduced to the Isle of Man, Liverpool and Luton as the subsidiary company Manx Airlines Ltd switched to operating under the BA brand. Services to Cardiff, Charlotte, Gothenburg, Leeds Bradford, London Stansted and Sheffield were discontinued.

        Details of the Group's fleet at March 31, 2003 are set out below:

        In the five years ended March 31, 2003, 78 new (British Airways Plc, CityFlyer Express, British Airways CitiExpress) aircraft were purchased or acquired under finance leases representing a total capital investment of approximately $5,937 million. 44 new aircraft with an initial purchase price to the lessors of approximately $1,103 million were obtained under operating leases, and a further 15 used aircraft, with an approximate market value of $320 million, were obtained under short-term operating leases. In the same period, 147 aircraft were disposed from the BA fleet.

        During fiscal 2003, BA made further changes to future fleet commitments, to facilitate its continuing strategy to match capacity more closely to profitable demand and in response to the events of September 11, 2001 and the world economic and political climate.

        BA has confirmed future deliveries for three Airbus A319s, six Airbus A320s and 10 Airbus A321s. BA also has 99 option positions on the Airbus family and British Airways CitiExpress has 17 option positions for Embraer RJ145 aircraft.

        In fiscal 2003 the number of in service aircraft in the Group was reduced by 30 to 330.

        BA took delivery of 11 Airbus A320s and British Airways CitiExpress took delivery of one Embraer RJ145.

        During the same period, two Boeing 777-200s were sold, and 10 Boeing 757-200s disposed (seven sold, two returned to lessor and one stood down pending disposal). In addition, six Boeing 737-300s were returned to lessor and four Boeing 737-400s disposed (one sold, one returned to lessor and two stood down pending return to lessor). Two Concordes were stood down, and remain stood down due to the announcement on April 10, 2003 that the fleet will be retired from service in October, 2003.

        British Airways CitiExpress returned to lessor four de Havilland Canada DHC-8s and two Embraer RJ145s. In addition, one Jetstream 41 has been sub-leased to Eastern Airways and 11 stood down pending sub-lease to Eastern Airways.

        A total of twenty aircraft were financed during the year ended March 31, 2003.

        Eleven A320 aircraft were delivered during the year, all of which were financed by third parties. Seven of these deliveries were financed through off-balance sheet operating leases. Five were financed in US Dollars and two in Sterling. The remaining four aircraft were financed on balance sheet: two through US Dollar denominated cross-border finance leases and two through UK finance leases.

        In addition the Company financed three deliveries from fiscal 2002 through US Dollar cross border finance leases and six aircraft which had been delivered and financed temporarily shortly after September 11, 2001, were refinanced during the year at lower rates, five on US Dollar denominated operating leases and one on a US Dollar denominated finance lease.

        As at March 31, 2003 the Company had committed facilities totaling approximately $541 million in addition to its cash and deposits which totaled Sterling 1,652 million.

        The committed facilities relate in part to future deliveries of aircraft. At March 31, 2003, the Group had $148 million in undrawn committed aircraft facilities for new aircraft deliveries. The use of these facilities plus other commitments covered all aircraft deliveries scheduled through December 2004. Because of the necessity to plan aircraft orders well in advance of delivery, it is not economic for British Airways to have committed funding in place now for all outstanding orders, many of which relate to aircraft that will not be delivered for several years. British Airways believes its policies in this regard are in line with the funding policies of comparable airlines.

        See " Item 5 -- Operating and Financial Review and Prospects --Year by Year Analysis -- Year ended March 31, 2003 compared with year ended March 31, 2002 -- Capital expenditures" and "Item 5 -- Operating Financial Review and Prospects -- Year by Year Analysis -- Year ended March 31, 2002 compared with year ended March 31, 2001 -- Capital expenditure".

        Offices, maintenance hangars and other support facilities used by BA at Heathrow, Gatwick and other UK airports are either owned freehold or held under long-term leases from the respective airport owners, principally BAA plc ("BAA") or its subsidiaries.

        BA's most important overseas base is at New York's John F. Kennedy International Airport ("JFK"), where it leases its terminal building. At other overseas airports, BA generally obtains premises as required on a short-term basis from the relevant authorities.

        Details of BA's principal non-aircraft properties are given under "Item 4 --- Information on the Company --- Property, Plants and Equipment".

        In the UK, BA itself provides most of the operational services it requires for the handling of passengers and cargo. At overseas airports, BA subcontracts the provision of the majority of its ground handling requirements.

        Runway, ramp and terminal facilities are provided by airport operators which charge airlines for the use of these facilities, principally through landing, parking and passenger charges. Navigation services are provided to aircraft by countries through whose airspace they fly or by international bodies such as Eurocontrol. Navigation charges are generally based on distance flown and weight of aircraft.

        BA's ability to obtain arrival and departure times ("slots") at airports for the purpose of producing schedules attractive to passengers is very important. Allocation of slots at a significant number of airports where BA operates, including Heathrow and Gatwick, is decided by the Airport Coordinator, who acts in accordance with guidelines laid down by the International Air Transport Association ("IATA"), sometimes supported by the local Scheduling Committee or Co-ordination Committee. These committees include representatives from the carriers flying to the relevant airport who may mediate disputes over slots. The Airport Coordinator makes the initial slot allocations within IATA guidelines, which give priority to the historic rights of existing users. Pursuant to Council Regulation (EC) No. 95/93, which is implemented in accordance with UK regulations, the UK government must ensure the Airport Coordinator advises BA at the biannual IATA Schedule Co-ordination Conference of their slot allocations. These provide the basis for slot negotiations with the Airport Coordinator and other airlines. Most congested airports in the world apply IATA guidelines. Co-ordination of European airports is governed by the Council Regulation. Pursuant to the Council Regulation, the UK government must ensure that the Airport Coordinator acts independently and in a non-discriminatory manner. This regulation remains under review by the European Commission and a revised regulation is expected in the future. Regulations governing the allocation of slots in the United States are different, but the United States has stated that it is committed by its international obligations to treat all carriers in a non-discriminatory manner.

        BA obtains aviation fuel, which is priced mainly in US Dollars, from a number of sources and locations throughout its network. In most countries, aviation fuel is supplied under term contracts, generally with major oil companies. Most fuel is purchased from suppliers under contracts which have a duration of one or two years. Prices under these contracts are determined either by formulae applicable for the duration of the contract or are subject to review by the parties in light of market conditions. If agreement on a price adjustment is not reached, the contracts can normally be terminated. BA also enters into forward contracts and other hedging arrangements in an attempt to counter fluctuations in the price of jet fuel. See "Item 11 --- Quantitative and Qualitative Disclosures about Market Risk -- Fuel Risk". In the United States, BA is a member of a number of consortia that own or lease fuel distribution facilities at certain airports so that aviation fuel may be purchased from a wide range of suppliers. In both the United Kingdom and the United States, BA also buys aviation fuel in the spot market and in the futures market. In certain countries, aviation fuel is only obtainable through government sources.

        The Group's engineering and maintenance facilities are centered at Heathrow, Gatwick, Glasgow and at three facilities in South Wales: the Boeing 747 maintenance facility at Cardiff Airport, an avionics repair operation in Llantrisant and an aircraft seat and interior repair operation at Blackwood. In addition, maintenance capability exists at most airports served by BA.

        The engineering department is a cost center within the Group and approximately 90% of its airframe maintenance capacity is dedicated to maintaining BA aircraft. In addition to supporting BA's needs, the engineering department pursues third party business with respect to certain maintenance services.

        On longhaul services, BA has a portfolio of four cabins to suit the needs of different customers: First, Club World with its space-efficient flat beds, World Traveller Plus, which offers more space and legroom for premium economy customers and World Traveller, the standard economy cabin.

        BA has completed a three-month trial of onboard broadband internet connectivity on one 747 aircraft on the JFK route. This was a collaboration with Connexions by Boeing to give internet and corporate intranet access to customers in the First, Club World and World Traveller Plus cabins at a flat rate charge. The success of the trial is now being evaluated as part of our future inflight technology strategy.

        On shorthaul services BA provides a choice of two cabins: Club Europe, its business class cabin and Eurotraveller, its economy cabin. On UK domestic services only one cabin is available.

        New pricing and inventory management strategies for economy fares were rolled out on all shorthaul European and UK domestic routes during the year, supported by price advertising campaigns to enable us to compete vigorously with no frills competitors. This initiative was enabled by a leading edge booking engine which allows customers to view a calendar on our website showing which flights to a particular destination offer the best prices. As a result market share on these routes has been regained.

        The overall European business class market has remained severely depressed but the investment in an improved product in fiscal 2001 has continued to help grow Club Europe market share in fiscal 2003.

        Updated and relocated self service check-in kiosks have ensured increased usage by customers and helped them move more quickly and efficiently through the airport.

        As part of BA's FSAS program, BA has improved the cost efficiency of all of its products and services with the objective of minimizing delivery costs while maintaining quality standards. This has been achieved successfully while maintaining or in some cases increasing customer satisfaction scores.

        Due to the severe economic downturn and the view of Airbus that technical support for Concorde was no longer economically viable, it was announced on April 10, 2003, that Concorde will be retired from service in October 2003.

        The Executive Club is British Airways' worldwide customer loyalty program for recognizing, retaining and communicating with our most valuable customers. For people who travel frequently, the Executive Club seeks to provide an exceptional level of service, preferential treatment, enhanced travel related benefits, as well as mileage awards on eligible fares.

        As part of the FSAS program, work has taken place to simplify the Executive Club from five regional programs to a single global program. This will improve customer understanding and make it easier and less costly to develop in the future. It is also more cost efficient to run. This was launched to customers in March 2003 and went live on July 1, 2003.

        British Airways has built and maintains relationships with all its key customer groups around the world (both in countries where it flies as well as selected other countries). This includes large corporations, small and medium sized enterprises, governments, tour operators, individual customers, etc. Relationships are also maintained with business and leisure travel agents, the computer reservation systems and the credit card companies. In addition, BA itself operates contactBA call centers around the world, airport ticket desks, BA Travel Shops and on-line booking channels. Increasingly e-tickets are issued and airport check-in is done via self service kiosks. The UK outbound package holiday program previously run by the joint venture accoladia between Thomas Cook Holidays and British Airways Holidays is now run by Thomas Cook Holidays under license for 2003 departures and by our wholly owned subsidiary British Airways Holidays for 2004 departures. The joint venture was disbanded in November 2002. New products and services are introduced periodically to enhance sales effectiveness --- such as the On Business loyalty scheme for small and medium sized enterprises.

        As at March 31, 2003, British Airways had seven franchise partner airlines: Loganair, GB Airways, Maersk Air UK, British Mediterranean Airways, Sun Air of Scandinavia, Comair of South Africa, and Regional Air of Kenya.

        During the year Zambian Air Services, previously a franchisee, suspended operations. In April 2003, franchise contracts with Sun Air and Loganair were renewed

        These seven carriers carried approximately 3.8 million passengers during the fiscal year to 106 destinations (72 destinations in addition to the mainline network) in the United Kingdom, continental Europe, the Middle East and Africa, using BA flight numbers. In addition to providing connecting passengers to British Airways' mainline services, the franchisees pay a franchise fee and pay for any services provided to them by British Airways.

        High performing IT and telecommunications systems are vital to the running of the Group's business. Most areas of British Airways' business are facilitated by IT systems which are closely interconnected.

        Some of these systems have been developed, and most of them integrated, by BA's IT department. The majority of systems are operated within BA's two data center facilities at Heathrow. Major exceptions to this are Reservations, Departure Control (check-in), Inventory, Flight Planning and other transaction processing facility (TPF) platform systems which are operated by Amadeus SA in Germany.

        The following technical infrastructure elements are provided to BA by third party suppliers:

        British Airways began its relationship with Amadeus SA in 2000, with the start of the program to transfer the provision of Reservations, Departure Control and Inventory capability to Amadeus. In February 2002, BA and Amadeus successfully transferred BA's Reservations system to Amadeus' System User, a facility utilized by over 100 airlines. This extensive business change project was the largest ever undertaken by either company and took a year to implement. The next phases of the program involve the development by Amadeus of 'New Generation' Departure Control and Inventory systems, with the objective of making these systems available to a community of airlines.

        Recent improvements to the Company's technology infrastructure have helped to improve its on-line ticket sales. BA established its own web-site (www.ba.com) in December 1995, began selling through it in December 1996 and has continuously increased its use of electronic channels ever since. The FSAS program, announced in February 2002, included a radical refocusing of the shorthaul business enabled by a substantial increase in the use of electronic channels, new pricing models and a reduction in the underlying cost of sale. A substantial increase in the technology capacity of the web-site since September 2001 was successfully implemented by June 2002 through a 90 day development program. This increase in capacity was brought into service in connection with the launch in June 2002 of new fare structures for European and UK Domestic fares. The innovative Fare Explorer booking engine clearly demonstrates to the customer the cost of traveling at particular times of the day and provides greater convenience in selecting cost effective flights. BA has made ba.com the primary direct booking channel. BA is making a further increase in the volume of on-line bookings since the launch of recent modifications to British Airways' shorthaul operations and is extending customer self-service to all areas of customer interaction within the airline. This is known as the Customer Enabled BA ("CEBA") program and is placed to bring substantial benefits in the case of customer interaction and cost savings.

        Following a review of the way in which BA operates its technology, an IT operations change program, called iT21, was started in July 2001. The Information Management department is already delivering results from that program in the form of higher quality IT at lower cost (Sterling 50 million less over two years) and will continue to simplify BA's technology base and reduce the overall cost of the Group's operating technology. This is being achieved within a climate of increased data volumes and the demands of technology enabled business change.

        IT security and control has been an increasing area of focus over the last two years and the IM department is working closely with Internal Control on the security of BA's systems, processes and data.

        BA's cargo business is operated as an independent contribution center. The majority of its cargo is carried in the holds of passenger aircraft, the balance on leased or part-chartered freighter aircraft where market conditions allow their deployment. This allows the Group to maximize the use of its scheduled route network to provide a worldwide cargo service. In Europe, the Group utilizes trucks to feed cargo from continental Europe to BA's Heathrow and Gatwick based intercontinental services. With the completion of the new cargo centre, the operating environment at London Heathrow benefits from improved operational processes and performance and has seen a significant increase in throughput capacity.

        The Group provides a variety of services to other airlines. The most important of these are cargo handling at airports, airframe maintenance, computer and communications services and consultancy services.

        In 1999, BA took a 10% equity stake in Inter-Capital & Regional Rail Limited ("ICRRL"), a consortium company jointly held with National Express Group plc along with the French and Belgian railway companies, SNCF and SNCB, which was selected by the UK government to manage Eurostar UK Ltd ('EUKL'). EUKL is responsible for operating Eurostar trains between London, Lille, Paris and Brussels. The contract expiry date is December 31, 2010.

        Under the terms of the contract with EUKL, ICRRL receives an annual management fee and is subject to a mechanism allowing it to share in the upside or downside of EUKL's performance by reference to a pre-determined forecast. In February 2003, ICRRL shareholders were required to contribute additional funding to the company to enable it to satisfy its obligations under the performance mechanism for its year ended December 31, 2002. BA's share of this funding requirement was Sterling 968,000. In previous years, any such payments by ICRRL were met from its existing resources.

        See "Item 3 --- Key Information --- Risk Factors --- Seasonal and Other Variations."

        Health concerns are one of the factors that can adversely affect demand for air travel. For example, in the spring of 2003, an outbreak of SARS caused concerns among many travelers about the spread of the disease and related health issues. This resulted in a decline in demand for certain of the Group's routes, most notably in routes involving the Far East. Future health concerns that affect the demand for air travel generally or the demand for air travel involving a geographic area could have an adverse affect on the Group's operations and financial results.

        British Airways maintains an occupational health service whose role is to analyze health-related issues for passengers and staff as they arise and provide advice on appropriate measures for the Group to take in response to such issues.

        The international airline industry is subject to a high degree of global, European and UK government regulation covering most aspects of airlines' operations. This framework governs commercial activity (for example route flying rights, fare setting, access to airport slots) as well as operational standards (relating to areas such as safety, security, aircraft noise, immigration and passenger rights). British airlines are also affected by wider EU and UK policies, laws and regulation, particularly in relation to competition, airports and air traffic control.

        The UK civil aviation industry is regulated by the Secretary of State for Transport and the Civil Aviation Authority ("CAA"), an independent statutory body. Under the UK Civil Aviation Act 1982 and various statutory instruments, the CAA has a wide range of functions in relation to British airlines, including supervision of many aspects of their financial condition, management and operations. European airlines are also subject to a number of EU regulations, drawn up under the provisions of the European Treaty (chiefly Article 71). Responsibility for enforcement is shared between the European Commission and the relevant Member States.

        The present basis for international regulation of airline operations derives from the Chicago Convention of 1944, to which nearly all countries are parties. The Convention also established the International Civil Aviation Organization ("ICAO"), a specialized agency of the United Nations, to foster the planning and development of international air transport. Under the auspices of ICAO, rules establishing minimum operational standards are normally agreed on a multilateral basis. Airlines' rights to fly over, or make stops in, foreign countries for technical reasons in operating their international scheduled services are generally derived from the International Air Services Transit Agreement of 1944, to which most countries are parties. However, rights to carry traffic between countries and the regulation of fares are normally agreed on a bilateral basis between governments. A notable exception is the multilateral single market arrangements which apply within the European Union.

        BA's traffic rights to carry scheduled passengers and cargo on particular international routes generally derive from air services agreements between the UK government and the governments of foreign states concerned. Under these agreements, each government grants to the other the right to designate an airline or airlines of its state to operate scheduled services between specified points in their respective countries, and sometimes to or from points in third countries, although this also requires the agreement of the third country's government. The UK government's policy regarding the granting of route rights to British airlines is referred to under "Competition" below.

        Once an agreement has been reached, it is for the UK government to designate the British airline or airlines which will operate the agreed services. As well as being designated, an airline must obtain the necessary operating permits from the foreign governments concerned. These are unlikely to be withheld so long as the Group meets the required international safety standards. One ground on which a contracting government usually has the right to prevent a designated airline from operating the agreed services is if it is not satisfied that the Group is substantially owned and effectively controlled by the other government or its nationals. For this reason, BA's Memorandum and Articles of Association (the "Articles") contain provisions that may limit the rights of Non-UK and Non-European nationals who own shares in the Company. For more information, see "Item 10 --- Additional Information --- Memorandum and Articles of Association --- Limitations on Voting and Shareholding".

        The Council of the European Union decided on June 5, 2003 to begin the process of transferring responsibility for third country relations in air transport to the European Commission. The first major manifestations of this are a mandate from the Council to the Commission to negotiate a liberal agreement with the United States on behalf of all EU Member States and a general framework covering all other third country relationships and the processes whereby Member States may continue to negotiate bilaterally with them whilst remaining within EU law as clarified by the Judgment of the European Court of Justice of November 2002. This judgment made it clear that Member States could no longer negotiate bilaterally with third countries on any subject which is covered by EU law. These include ownership and control of airlines, pricing on intra-community routes and rules concerning computer reservation systems.

        In the European Union , there is a single internal market for air transportation. The most significant elements of the single market legislation are a liberal pricing regime, free access to all routes within the EU for airlines and a carrier licensing procedure. Certain constraints continue to apply for infrastructure reasons. Under a separate agreement, EU single market policies have been extended to the European Economic Area ("EEA") comprising all the countries of the EU and the countries of the European Free Trade Area ("EFTA") except Switzerland. Agreement has been reached between Switzerland and the EU which will have the effect of bringing Switzerland into the same arrangements.

        Under the UK Civil Aviation Act 1982, the CAA must balance a number of objectives in making air transport or route licensing decisions where applications to operate a particular route are contested. These include encouraging British airlines to provide air services at the lowest fares consistent with safety; an economic return to efficient operators and the sound development of the UK air transport industry; furthering the reasonable interests of users; ensuring that British airlines compete as effectively as possible with other airlines on international routes; and securing the most effective use of UK airports.

        The CAA will grant global route licenses for scheduled and charter services. The absence of the necessary bilateral rights will not result in refusal to grant a license application. If scarce bilateral capacity arises, this will be addressed through a process designed to deal with this.

        In its June 2002 policy review, the CAA said that the interests of users will be best served if airlines are free to operate air services in competition with one another according to their commercial judgments, subject only to the application of normal competition policy.

        Specific route licenses are no longer required with respect to routes to, from and within the EU.

        Charter operations are not generally covered by air services agreements. The CAA adopts a broadly liberal policy towards applications from British airlines for charter flying rights. It is then for the airline to seek the consent of the other government. Within the EEA no distinction is drawn between charter and scheduled operations.

Fare Setting

        It is a provision of most air services agreements that the fares, rates and charges for scheduled services on the agreed routes must be filed with, and approved by, both governments concerned or their agencies. It is a condition of the air transport and route licenses granted to British airlines by the CAA that the tariffs to be charged for international carriage and the commissions to be paid by the airline to any agent shall be filed with and approved by the CAA. Under some air services agreements, airlines are required to co-ordinate fares through IATA, (whose role in setting fares is described under "Item 4 --- Information on the Company --- Competition" below), though this is now rare. Pricing on intra-Community air routes is covered by EU Regulation.

        Notwithstanding this regulatory position, it is a widespread practice among airlines to sell a substantial proportion of their seats and cargo space in many parts of the world at tariffs lower than the approved levels or on other unapproved special terms. BA is no exception. See "Item 4 --- Information on the Company --- Competition" below. The Group responds competitively to market conditions and a large proportion of its revenue is derived from such sales.

        Safety standards are generally agreed on a multilateral basis under the auspices of ICAO. The country of registration of an aircraft is generally responsible for ensuring that the aircraft and its crew meet these guidelines. Certification of compliance by the state of registry is normally recognized by all other members of ICAO.

        British airlines are required, except in limited circumstances, to operate British registered aircraft. The CAA is the body responsible for British registered aircraft, and it maintains and enforces a comprehensive system of operational safety and technical standards which, in common with those of many other countries, are more stringent than the internationally agreed minimum standards.

        All British airlines are required to hold a CAA air operator's certificate relating to the competence of the holder to operate and maintain its aircraft safely. Each aircraft operated under an air operator's certificate may only be flown if it has a certificate of airworthiness. The aircraft's engines, equipment and all maintenance procedures must also be certificated, and flight crew and certain maintenance staff must be licensed.

        To continue to improve high safety standards is a primary objective of the Group. All departments, especially engineering and flight operations, pay continual attention to operational safety and the health and safety of employees. Specific responsibility for advising on safety matters rests with a separate department under the Director of Safety, Security and Risk Management. A comprehensive monitoring system exists within BA to ensure that incidents are reported and action is taken whenever appropriate.

        In the UK, the Secretary of State for Transport has the power to direct the aviation industry to take measures to prevent acts of criminal violence. The measures so directed sometimes exceed the international standards developed by ICAO. Responsibility for implementing the measures and meeting their costs falls on both airlines and airport authorities. A number of foreign countries have also developed aviation security programs which place an onus on BA to meet specified security standards. BA's own security department continuously assesses the threat to its operations, develops policies for the protection of BA's operations and assets, and directs its staff or agents to implement appropriate countermeasures while monitoring their effectiveness. There are also circumstances in which governments may seek to prevent airlines from flying to or from various destinations or otherwise hinder their operation. Similarly changes in customs, immigration or other regulation may have the same effect.

        BA's environmental management system commits the Group to working constructively with those concerned for the environment and to observing rules and regulations aimed at protection of the environment. The Group's activities are covered by a comprehensive network of regulations at local, national and international levels, affecting emissions to the atmosphere, disposal of solid waste and aqueous effluents, aircraft noise and other relevant parameters. The Group's strategy takes compliance as the baseline of environmental performance and aims to exceed standards and regulations.

        The BA fleet meets existing noise standards and is subject to a minimum of restriction, although Concorde is more limited in the destinations to which it can fly. Aircraft are categorized by the ICAO into "Chapters" which represent noise certification standards. European and US regulations prohibited the use of Chapter 2 aircraft after March 2002. None of the BA subsonic fleet is Chapter 2. In 2001, ICAO approved a new noise standard, "Chapter 4", to apply to new aircraft designs after 2006. BA supported the need for the new noise standard which is already met by 78% of the BA fleet. In 2001, the UK government introduced more stringent departure noise regulations at the London airports. The Group is proactively involved in other efforts to mitigate the effect of aircraft noise, including minimizing movements at night and, with other stakeholders, has developed a code of conduct for arriving aircraft to reduce noise on approach to airports.

        The Group is playing an active role in development of the understanding of the effects of aircraft emissions to the atmosphere. This has included involvement in the work of the Intergovernmental Panel on Climate Change, co-operating with research programs and promoting discussion of possible ways in which to control emissions of greenhouse gases. The Group is involved in work within ICAO aimed at developing mechanisms to control and mitigate the effect of aircraft engine exhaust emissions. BA is also a member of the UK emissions trading scheme and supports emissions trading.

        Each year, the Group publishes an environmental report that details progress with particular reference to measurement against headline indicators. In 2000 the report was extended to include both social and economic considerations. In June 2002, BA issued a new standard for bribery and corruption and an accompanying educational primer. A BA standing instruction has been issued that sets out what is and what is not acceptable and once agreed with trade unions will become a contractual obligation for all staff employed by BA. The standard also offers reassurance that no staff will be held accountable for business lost due to upholding of this standard.

        Responsibility for airport policy in the United Kingdom lies with the UK government and is defined in the Airports Policy White Paper 1985 and the UK Airports Act 1986. Some elements of Government aviation policy were updated in the Transport White Paper of 1998. The government is in the process of reviewing its aviation and airport policies and is expected to produce a new White Paper in late 2003. This will incorporate a 30-year vision for UK airport development needs. Options for expanding airport capacity in South-east England has been subjected to a public consultation exercise in preparation for the new policy. The government previously announced the criteria against which airport expansion options will be assessed. The criteria are based on the government's broader approach to sustainable development under which economic, social and environmental factors are taken into account and quantified as much as possible. The government has also initiated a major overhaul of the planning system for major national infrastructure projects. The intention of the government's reform proposals are to speed up decision making in a way that is fair and efficient. The construction of a third runway at London Heathrow is one of several proposals under discussion.

        BAA plc has been granted planning permission to develop a fifth terminal at Heathrow subject to a number of formal conditions, including a limit on the number of movements at the airport. The proposed terminal would ultimately have a capacity of about 30 million passengers per annum, and BA and its alliance partners will occupy the new terminal subject to agreement with BAA, which is under negotiation. Work has begun on Terminal 5, which is due to open in 2008.

        Obtaining take-off and landing authorization (also known as obtaining a "slot") is a necessary condition for providing service to many airports. The availability of slots generally is often beyond the control of a carrier and can be subject to capacity limits, government regulation and market conditions, including the actions of competitors. British Airways believes that it has sufficient slots to operate its existing routes and generally has been able to obtain slots in connection with its previous route changes and expansions. However, British Airways can provide no assurance that it will be able to maintain its existing slots or obtain desired slots in the future.

        Slots at UK airports are allocated under EU rules which are currently being revised. British Airways is attempting to ensure that a market oriented approach is maintained under any new rules, so that essential flexibility and the possibility of exchanges between carriers remains.

        Most of the markets in which BA operates are highly competitive. BA faces competition from other airlines on the same city-pair routes, from indirect flights, from charter services and from other forms of transport. The intensity of the competition varies from route to route, depending on the number and nature of the competitors, particularly whether or not they are state-owned or state-supported, and on the regulatory environment and other factors. At one extreme, there are relatively few international routes on which competition is largely limited to the other state's designated airline and fares are regulated. At the other extreme, there are some routes on which both governments adopt a liberal attitude to fares approval and to multiple designation of a number of airlines from several countries competing for the available traffic. For further discussion of the effects of regulations on competition, see "Item 4 --- Information on the Company --- Regulation".

        On many of the routes with multiple carriers, BA's pricing decisions are affected by competition from other airlines, some of which have cost structures that are lower than BA's or other competitive advantages and could therefore operate at lower fare levels.

        In October 1984, in advance of the privatization of BA, the UK Government published a White Paper setting out its policy for British airlines on both domestic and international routes. The White Paper restated the UK Government's objective to encourage a sound and competitive multi-airline industry with a variety of airlines of different characteristics serving the whole range of travelers' needs and strong enough to compete aggressively against foreign airlines. It stated that the UK Government's policy is to favor increased competition, so long as it is fair and UK interests are not prejudiced, and to promote, wherever possible, changes in air service agreements to that end. The 1984 White Paper is expected to be replaced by a new White Paper in 2003.

        The White Paper also recorded the UK Government's view that the existing statutory framework was sufficiently flexible to allow the competitive development of services by British airlines. The White Paper left it principally to the CAA to take action against anti-competitive behavior by British airlines including rapid consideration of any application made to stop an airline from pursuing a course of conduct which is alleged to be anti-competitive. In addition, the Secretary of State indicated that, in deciding appeals against CAA licensing decisions, he would take into account, among others, the objectives set out in the White Paper.

        The CAA from time to time issues statements of the policies it intends to carry out in pursuit of its statutory licensing role. The current statement came into force in June 2002. This confirmed that the CAA would give greater weight to the interests of users in balancing the interests of the users on the one hand and the airlines on the other. Additionally, the CAA considered that competition, where possible, is the most effective way of ensuring that passengers' interests are met. The new policy also removed the requirement for air carriers to be licensed on individual routes.

        Since March 2000, the UK's Competition Act has been in force. It outlaws agreements and business practices which have a damaging effect on competition in the UK. Its provisions mirror EU competition rules and can be applied to competition cases within the UK. The Enterprise Act which came into force in June 2003 introduced a new enforcement regime that includes disqualification of directors and criminal liability for individuals for certain serious infringements of the Competition rules.

        Certain air services agreements require airlines to co-ordinate fares before approval by the governments concerned. IATA, the trade association for international airlines, provides a forum for tariff co-ordination on international routes by convening traffic conferences. Many international airlines take part in these conferences although, partly reflecting the increase in competition, fewer than in the past.

        BA attends traffic conferences and discusses tariffs bilaterally when it is lawful to do so and tariff co-ordination is required under the relevant air services agreement or is commercially necessary.

        BA has commercial arrangements with other airlines covering scheduled passenger and cargo services on a small number of its international routes. Some of these are necessary under the relevant air services agreement. Commercial arrangements can govern, among other things, capacity offered by each airline over flight approvals, the apportionment of revenues between airlines and the co-ordination of schedules.

        Commercial arrangements of this sort are not allowed on routes to or from the United States, and such arrangements as existed within the EU have been withdrawn to promote a more competitive environment.

        There is a single, liberalized air transport market in Europe, covering European Union countries and the wider EEA area. EU rules govern matters such as airport slot allocation, computer reservation systems and general competition policy.

        While the US domestic airline industry has been largely deregulated, routes between the United Kingdom and the United States are still subject to regulation of market access, capacity and fares under an air service agreement known as Bermuda 2. However, both countries have adopted a relatively liberal approach to fare approval and other regulatory matters. The market has seen substantially increased competition over the last decade with major airlines and new market entrants offering a wide range of services and fare types. In addition, BA faces further competition from airlines operating other routes between the United States and continental Europe, including a number of carriers operating on these routes with antitrust immunity. BA has responded with both price and service initiatives and has continued to carry more passengers between the United Kingdom and the United States than any other carrier.

        In June 1995 a modification of Bermuda 2 was agreed between the US and UK Governments liberalizing codeshare arrangements and access to UK airports other than Heathrow and Gatwick from airports in the United States.

        The US and UK Governments have been involved in a series of talks with a view to agreeing further liberalization of the air services agreement, but no progress on the talks has been made.

        The European Commission has been granted a mandate to negotiate with the United States government a liberal set of air services arrangements to replace the bilateral agreements concluded by the EU Member States. This is likely to be a lengthy process but the outcome is expected to improve access to the US market for EU carriers (and to improve access to the European market for US carriers) and to provide a better environment for industry consolidation, especially in Europe.

        The business and operations of the BA Group are conducted within British Airways Plc and its subsidiaries. The following table sets forth the principal subsidiary companies of the Group as at March 31, 2003:

        * Owned directly by British Airways Plc

        The following table sets forth the principal property and equipment of the Group. The table does not include the Group's fleet of aircraft which are described under "Item 4 --- Information on the Company --- Airline Fleet".

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        The BA Group also has other freehold and leasehold interests in real estate in numerous countries throughout the world, that are less significant to the Group as a whole. See Note 17 to the Financial Statements.

        In June 2002, $85 million was raised by way of a 30 year New York municipal bond issue, for the renovation of the British Airways JFK terminal in New York. The bond represents an unsecured debt obligation of the Company and carries interest at 7 5/8%.