Group turnover Sterling 7,688 million; operating profit Sterling 295 million; profit before taxation Sterling 135 million.

        Group turnover fell in the year by 7.8% to Sterling 7,688 million in fiscal 2003. Passenger and cargo revenue (turnover from airline operations scheduled and non-scheduled services) accounted for approximately 92% of Group turnover. For the twelve-month period, traffic revenue fell by 6.6% to Sterling 7,074 million on a flying program 6.7% smaller in ATKs.

        Compared with fiscal 2002, in fiscal 2003 airline operations passenger traffic in RPKs declined 5.8%, while capacity in ASKs was reduced by 7.9%. Passenger load factor (RPKs/ASKs) increased by 2 points compared with fiscal 2002 to 72%. Passenger yield (scheduled and non-scheduled passenger revenue per RPK) declined by 1.3% for the full year.

        Cargo (ie freight and mail) volumes (CTKs) were up 4.4% compared with fiscal 2002 but yields (cargo revenue per CTK) fell by 4.0%. Cargo revenue was almost flat, up 0.2% from Sterling 483 million to Sterling 484 million.

        Other revenue fell 20.2% to Sterling 614 million, primarily due to a reduction in revenue from the Qantas Joint Services Agreement, as well as deterioration in third party engineering revenue.

        Net operating expenditure (total operating expenditure less other revenue) decreased by 11.7% as compared to fiscal 2002. Unit costs (net operating expenditure per ATK) were 5.5% lower than fiscal 2002 (total Group operating expenditure was 12.5% lower than in fiscal 2002).

        See footnote (7) to the operating statistics in Item 3 for the calculation of total operating expenditure per RTK and per ATK.

        The table below summarizes changes in total Group operating expenditure over the three financial years ended March 31, 2003:

        The operating expenditure for the year ended March 31, 2003 includes an exceptional charge of Sterling 84 million relating to the retirement of the Concorde fleet. See Note 4 to the Financial Statements and "Item 4 -- Information on the Company -- Marketing and Sales -- Concorde".

        In fiscal 2003, employee costs fell by 13% to Sterling 2,107 million primarily reflecting reduced staff numbers due to the FSAS program and other efficiency actions, as well as the FSAS restructuring charge of Sterling 80 million in 2002 (see Note 32 to the Financial Statements). Total Manpower Equivalents (MPEs) at Group level, were down by 4,854 at March 2003 compared with March 2002 and by 11,880 compared with August 2001. Compared with fiscal 2002, in fiscal 2003 the average number of employees in the Group, in manpower equivalents (MPE), fell by 11.6% to 53,440 and productivity (ATKs per MPE) improved by 5.6%.

        Depreciation and amortization costs reduced by 5% compared with fiscal 2002 to Sterling 734 million reflecting primarily the withdrawal of the Boeing 747-200 fleet (including the prior year accelerated depreciation), partially offset by the Sterling 58 million exceptional charge relating to the impairment of capitalized Concorde engineering modifications and rotable inventory.

        Aircraft operating lease costs reduced by 5% compared with fiscal 2002 to Sterling 189 million as a result of the return to lessors of Embraer 145s and Dash 8s, as well as Boeing 737-300s. These were partially offset by a Sterling 27 million onerous lease provision relating to the sub-lease of the British Airways CitiExpress Limited Jetstream 41 fleet (12 aircraft) to Eastern Airways.

        Fuel and oil costs fell by 18% compared with fiscal 2002 to Sterling 842 million due to hedging benefits, reduced flying, efficiencies from smaller, newer aircraft and the exchange rate effect of the weaker US Dollar, which more than offset the increase in spot price.

        Engineering and other aircraft costs reduced by 12% compared with fiscal 2002 to Sterling 592 million reflecting a volume related reduction in subcontract costs, cost efficiencies and exchange benefits, partially offset by the exceptional charge of Sterling 26 million relating to the write-down of Concorde stock and committed spend, together with increased costs of hull insurance post September 11, 2001.

        Landing fees and en route charges fell by 6% compared with fiscal 2002 to Sterling 576 million. This principally reflects benefits from reduced flying and the recovery of passenger service charges from transfer passengers, as well as efficiencies.

        Handling charges, catering and other operating costs decreased by 13% compared with fiscal 2002 to Sterling 961 million, as a result of reduced passenger numbers, reduction in subcontract costs and efficiencies across the operational areas.

        Selling costs fell by 14% compared with fiscal 2002 to Sterling 706 million. The introduction of the new agent commission structures, reduced sales volume and exchange rate effects were the main reasons for this reduction, partially offset by increases in advertising and promotional activity to support the launch of the new short-haul pricing model.

        Accommodation, ground equipment costs and currency differences fell by 17% compared with fiscal 2002 to Sterling 686 million. This reflected a reduction in contractors, reduced information systems spend, reduced property costs, exchange differences and lower bad debt provisions, partially offset by increases in insurance.

        See "Item 4 -- Information on the Company -- Segment Information -- Geographical Analysis" and Note 3 to the Financial Statements.

        Operating profit improved in all regions compared with last year as cost reductions more than offset the deterioration in revenue. Traffic was down in all areas except in the United Kingdom where lower prices throughout the year stimulated demand.

        The effect of the war in Iraq and terrorism on Americas traffic and yield was more than offset by cost improvements, and despite the impact of the exceptional charges relating to Concorde, Americas remained the most profitable region.

        In addition to cabin mix benefits and lower fuel prices, Africa and South Asia both benefited from underlying passenger yield improvements.

        Reduced capacity on the Far East and Australasia routes and improvements in scheduling had a positive impact on loads and yields.

Short-haul prices fell, reducing yields in an intensely competitive environment, but an 11% reduction in capacity (measured in ASKs) out of London cut volume-related costs and raised passenger load factors. Combined with aggressive cost initiatives and lower fuel prices, this halved the fiscal 2002 loss in Europe.

        British Airways' share of operating profit from associated undertakings improved by Sterling 17 million to Sterling 39 million during fiscal 2003, principally due to improvement in the operating profits of Qantas.

        In November 2002, British Airways sold its 50% shareholding in accoladia, the joint venture between Thomas Cook Limited and the outbound tour business of British Airways Holidays as the partnership no longer fits the strategies of either company. The British Airways Holidays brand reverted to the Company's control. In December 2002, British Airways sold its stake in the Australian travel businesses Concorde International Travel and World Aviation Services.

        Profit on disposals of fixed assets and investments for the year was Sterling 60 million, down Sterling 85 million from last year when our disposal of Go Fly Limited in June, 2001 generated Sterling 98 million.

        Disposals during the year included Boeing 777-200, 737-400, 757-200 and the sale and leaseback of Airbus A320 aircraft as well as GE90 engines. There was also significant rationalization of our property portfolio including the sale of the New York crew hotel, Astral Towers Crawley and Odyssey Business Park. Where necessary, these property sales were accompanied by the leasing of space from the purchaser for differing periods depending on future business requirements.

        Net interest payable for the year was Sterling 255 million, Sterling 23 million lower than the previous year. This included a charge for the retranslation of the Yen debt (used to fund aircraft acquisitions) of Sterling 10 million, compared to a credit the previous year of Sterling 49 million. The retranslation -- a non-cash item required by UK Generally Accepted Accounting Principles -- results from the movement of the Yen against Sterling . See Note 10 to the Financial Statements.

        Excluding the retranslation, the improvement in interest payable reflected lower rates, a higher cash balance and lower gross debt, together with foreign exchange benefits.

        Other charges of Sterling 4 million for the year primarily relate to the write-down of our investments in the trade exchange Cordiem and The Airline Group (NATS), partially offset by Sterling 7 million of lease transfer income.

        The Sterling 5 million write-down in the value of NATS equity to Sterling 7.3 million reflects revised estimates of the future long-term benefits of the investment.

        This compares to other income of Sterling 21 million in the prior year, relating primarily to Sterling 22 million compensation received from the UK Government for the closure of US airspace immediately following September 11, 2001.

        The analysis of the tax charge is set out in Note 11 to the Financial Statements.

        There is no tax payable on operating results in the UK. During the year, the Group has remitted profits to the UK from subsidiaries and associates including those in Australia and Spain. The UK tax charge arising on such profits has been offset partially by credits for taxes paid overseas and by other loss surrenders. No tax arises on profits on disposals as such profits are covered by tax losses from current and prior periods.

        For the twelve-month period, retained profit was Sterling 72 million, equivalent to net earnings per Ordinary Share of 6.7 pence, compared with a loss for the year of Sterling 142 million equivalent to a net loss per Ordinary Share of 13.2 pence last year.

        The number of Group aircraft in service at March 31, 2003 was 330, a reduction of 30 on the prior year. Aircraft disposals and returns to lessors comprised nine Boeing 757-200, two Boeing 777-200, six Boeing 737-300, two Boeing 737-400, four de Havilland Canada DHC-8 and two Embraer RJ145 aircraft. Deliveries comprised 11 Airbus A320 and one Embraer RJ145 aircraft. Of the 12 British Airways CitiExpress Limited Jetstream 41 aircraft, one had been sub-leased and 11 stood down pending sub-lease to Eastern Airways.

        Other stand-downs included one Boeing 757-200, and two Boeing 737-400 aircraft pending disposal or return to lessor, together with two Concorde, reflecting the announcement on April 10, 2003 that the fleet will be retired from service in October 2003.

        During the three years ended March 31, 2003, capital expenditures and investments totaled approximately Sterling 2,753 million for the Group, principally related to the acquisition of aircraft and other equipment.

         The following table summarizes Group capital expenditure in the three years ended March 31, 2003:

        See Notes 14, 15 and 18 to the Financial Statements.

        During the three years ended March 31, 2003, divestitures of fixed assets and investments yielded proceeds of approximately Sterling 1,114 million to the Group, principally related to disposals of aircraft, property and investments.

        At March 31, 2003 current liabilities were Sterling 2,904 million, down Sterling 297 million from March 31, 2002; current assets were Sterling 2,725 million, up Sterling 166 million from March 31, 2002.

        The reduction in current liabilities was primarily due to reduced trade creditors driven by reduced operational expenditure. However, sales in advance of carriage increased from Sterling 716 million to Sterling 783 million due principally to the timing of Easter.

        The increase in current assets reflects higher short-term loans and deposits and cash (an increase of Sterling 433 million) partially offset by a reduction in debtors, mainly due to lower volumes and revenue, and reductions in stock.

        It is management's opinion that the Group has working capital sufficient for its current requirements.

        Cash at bank and in hand equaled Sterling 222 million at March 31, 2003, an increase of Sterling 158 million as compared to Sterling 64 million at March 31, 2002. Cash inflow from operating activities in fiscal 2003 totaled Sterling 1,185 million, an improvement of Sterling 319 million on last year principally due to the improvement in operating profit. Tangible fixed assets purchased for cash amounted to Sterling 293 million, Sterling 452 million less than last year and the sale of tangible fixed assets and investments generated proceeds of Sterling 351 million. The reduction in capital spend and the continuing asset disposals reflects the ongoing implementation of the FSAS program.

        The following table sets out the movements in loans and capital obligations under finance leases and hire purchase arrangements for the three years ended March 31, 2003 (see also Note 29 to the Financial Statements):

        Eleven A320 aircraft were delivered during the year. Five of the aircraft were financed through US Dollar denominated operating leases and two aircraft were financed through UK operating leases. The remaining four aircraft were financed on balance sheet; two through US Dollar denominated cross border finance leases and two through UK finance leases.

        Three A319 aircraft that were delivered in the previous year were financed during the year through US Dollar denominated cross border finance leases. Five short-haul Airbus aircraft that had been delivered and financed on operating leases shortly after September 11, 2001 were refinanced during the year at lower rates on US Dollar denominated operating leases. A Boeing 777-200 which had also been delivered and financed in the previous year was refinanced at lower rates through a cross-border US Dollar denominated finance lease.

        In June 2002, US$85 million was raised by way of a 30 year New York municipal bond issue to finance the recently completed renovation of the JFK terminal in New York. The bond represents an unsecured debt obligation of the company and carries interest at 7.5/8%.

        For the purposes of the financial statements foreign currency debt is translated into Sterling at year-end exchange rates. Gains and losses on translation are recognized in the profit and loss account except for changes in the Sterling value of US Dollar denominated debt that finances US Dollar denominated fixed assets. These gains or losses are taken to reserves, together with the differences arising on the translation of the related assets. The debt translation gain taken to reserves amounted to Sterling 139 million (2002: Sterling 4 million loss).

        Net debt is defined as total debt (loans, finance leases and hire purchase agreements) plus Convertible Capital Bonds net of (i) short-term loans and deposits and (ii) cash less overdrafts. See Note 25 to the Financial Statements.

        Net debt at March 31, 2003 amounted to Sterling 5,149 million, including Convertible Capital Bonds of Sterling 112 million, and net of cash and short-term loans and deposits totaling Sterling 1,652 million. This reduction in net debt of Sterling 1,145 million from last year resulted from additional cash, short-term loans and deposits (Sterling 433 million), and exchange effects. Debt repayments were partially offset by new loans and finance leases taken out.

        The net debt/total capital ratio at March 31, 2003 stood at 60.7%, a 5.3 point reduction versus fiscal 2002 mainly due to the reduction in net debt.

        Total capital is defined as the sum of capital, reserves, (including minority interests) and net debt, with the provision for deferred tax added back.

        See Item 3 - footnote (6) to the Operating Statistics for the calculation of total capital and net debt.

        The number of shares allotted, called up, and fully paid on March 31, 2003 was 1,082,784,318 compared with 1,082,757,107 on March 31, 2002. On June 16, 2003, 10,949 Ordinary Shares were issued in exchange for 25,877 Convertible Capital Bonds 2005 on the basis of one Ordinary Share for every 2.34 Bonds held. During the year, 3,323 shares were issued on the exercise of options under Employee Share Option schemes.

        Group turnover Sterling 8,340 million; operating loss Sterling 110 million; loss before taxation Sterling 200 million.

        Group turnover fell by 10.1% to Sterling 8,340 million in fiscal 2002 (compared with Sterling 9,278 million in fiscal 2001).

        For fiscal 2002, traffic revenue (turnover from scheduled passenger and cargo and non-scheduled passenger services) fell by 10.2% to Sterling 7,571 million on a flying program 9.3% smaller in ATKs. The ATK reduction reflected a continuation of our strategy, which was accelerated after the events of September 11, 2001. At a Group level, the disposal of go further reduced capacity, partially offset by increases due to the acquisition of British Regional Air Lines Group (BRAL).

        Compared to fiscal 2001, in fiscal 2002 airline operations passenger traffic (scheduled and non-scheduled RPKs) declined 13.7%, while capacity (ASKs) reduced by 12.4%. Passenger load factor (RPKs/ASKs) fell only 1.0 point compared with fiscal 2001 to 70.4%. Passenger yield (scheduled and non-scheduled passenger revenue per RPK) improved by 4.7%.

        In fiscal 2002, cargo volumes (CTKs) were down 14.8% compared with fiscal 2001 whilst yields (cargo revenue per CTKs) fell by 2.0%. Cargo revenue was down 16.6% from Sterling 579 million in fiscal 2001 to Sterling 483 million in fiscal 2002.

        Net operating expenditure (see Item 3 - footnote (7) to Operating Statistics) improved by 5% (total operating expenditure declined by 5%). Unit costs (net operating expenditure per ATK) were 5.2% higher compared with fiscal 2001 (total Group operating expenditure was 5% lower than in fiscal 2001).

        See the table under "Item 5 -- Operating and Financial Review and Prospects -- Year by Year Analysis -- Year ended March 31, 2003 compared with year ended March 31, 2002 - Expenditure" for details of changes in Group operating expenditure from fiscal 2002 to fiscal 2001.

        Employee costs (including an Sterling 80 million restructuring provision relating to the FSAS program) increased by 1.4% compared with fiscal 2001 to Sterling 2,409 million primarily reflecting reduced staff numbers from efficiency actions taken post September 11, 2001, more than offset by the FSAS restructuring provision. Total MPEs, at Group level, were down 7,000 by year-end compared with August 2001. The average number of employees in the Group, in terms of manpower equivalent (MPE), fell by 3.8% to 60,468 and productivity (ATKs per MPE) was down by 5.7%.

        Restructuring costs of Sterling 80 million were incurred in 2002 relating to the delivery of the initial phase of the FSAS program.

        Depreciation and amortization costs increased by 7.7% compared with fiscal 2001 to Sterling 770 million reflecting the increased value of the aircraft fleet, principally from the addition of Boeing 777s and Airbus and additional product embodiment costs. Aircraft operating lease costs reduced 10.0% to Sterling 199 million as a result of the disposals of Boeing 737-200s and the Boeing 737-300s operated by go, partially offset by the effects of the BRAL acquisition.

        Fuel and oil costs fell by 6.7% compared with fiscal 2001 to Sterling 1,028 million due to a reduction in fuel price, reduced flying, efficiencies from smaller, newer aircraft and the disposal of go .

        Engineering and other aircraft costs increased by 1.7% compared with fiscal 2001 to Sterling 673 million reflecting increased insurance costs following September 11, 2001, write-downs of expendable stock, and the effects of the BRAL acquisition. This was partially offset by reductions in subcontract costs, cost efficiencies, volume savings driven by changes in fleet type and savings from the disposal of go .

        Landing fees and en route charges fell by 4.7% compared with fiscal 2001 to Sterling 615 million. This principally reflected benefits from reduced flying and efficiencies.

        Handling charges, catering and other operating costs decreased by 14.8% compared with fiscal 2001 to Sterling 1,110 million, as a result of reduced passenger numbers and cost efficiencies across the operational areas.

        Selling costs fell by 27.4% compared with fiscal 2001 to Sterling 824 million. The introduction of the new commission structure in the UK, reduced sales volume and lower advertising and promotional activity were the main reasons for this reduction, only partly offset by exchange rate effects and the acquisition of BRAL.

        Accommodation, ground equipment costs and currency differences increased by 11.2% compared with fiscal 2001 to Sterling 822 million. This reflected costs of outsourcing, implementing new systems, increased property costs for new facilities, and exchange differences.

        See "Item 4 -- Information on the Company -- Segmental Information -- Geographical Analysis" and Note 3 to the Financial Statements.

        At the operating profit level, most regions suffered from reduced economic activity, and the resulting traffic loss in the aftermath of September 11, 2001.

        Least affected was Africa, where strategic reductions in capacity saved operational costs and raised load factors, resulting in no material change in operating profit for the region.

        Product improvements on Americas routes preserved the premium/economy mix at a time of falling loads and the region was again the most profitable. The Far East and Australasia result was impacted by lower traffic levels and increased fuel costs and aircraft charges. Seat factor fell 3.0 points, although improved cabin mix increased passenger yields.

        Overall reduction in short-haul revenue (RPK down 9%) was matched by reductions in capacity thereby maintaining seat factors at the same level as last year. The second half of the year was particularly difficult for the premium business resulting in declining yields due to cabin mix and a significant worsening in the total short-haul result.

        British Airways' share of operating profit in associated undertakings decreased by Sterling 42 million to Sterling 22 million during fiscal 2002, principally due to reduction in the operating results of Qantas and Iberia. In April 2001, in partnership with Thomas Cook Holdings Limited, British Airways acquired a 50% holding in a newly formed company, Accoladia Ltd, into which the outbound business of British Airways Holidays was transferred.

        Profit on disposals of fixed assets and investments was Sterling 145 million, reflecting primarily the disposal of our investment in go in June, 2001. Also disposed of during 2002 was our investment in France Telecom (formerly shares held in Equant) and other fixed assets; aircraft disposals included 8 Boeing 747-200 and 18 Boeing 757-200. This represented an improvement of Sterling 214 million compared with last year, which saw a loss on our disposal of Participations Aéronautiques (the holding company for Air Liberté).

        Net interest payable for the year was Sterling 278 million. This included a book credit for the retranslation of Yen debts (used to fund aircraft acquisitions) of Sterling 49 million, compared to a credit in 2001 of Sterling 73 million. The retranslation -- a non-cash item required by UK Generally Accepted Accounting Practices - -- resulted from the weakening of the Yen against Sterling . See Note 10 to the Financial Statements.

        Other income included Sterling 22 million received from the UK Government as compensation for the closure of the US airspace immediately following September 11, 2001.

        An analysis of the tax charge is set out in Note 11 to the Financial Statements.

        There is no tax payable on operating results in the UK. During the year, the Group remitted profits to the UK from subsidiaries and associates including those in Australia and Spain. The UK tax charge arising on such profits was offset partially by credits for taxes paid overseas and by other loss surrenders. No tax arises on profits on disposals as such profits are covered by tax losses from current and prior periods.

        During fiscal 2002, the Company implemented Financial Reporting Standard 19 'Deferred Tax'. As a result the Company recognized deferred tax on the full liability method. The deferred tax liability is included on the balance sheet and at March 31, 2002 amounted to Sterling 1,031 million (see Note 31 to the Financial Statements).

        For the year ended March 31, 2002, the Group's loss was Sterling 142 million, equivalent to a loss of 13.2 pence per share, compared with profit of Sterling 67 million, equivalent to 6.2 pence per share for fiscal 2001.

        The number of Group aircraft in service at March 31, 2002 was 360, an increase of 22 on the prior year. The increase primarily reflected the acquisition of BRAL with 12 Jetstream 41, 13 British Aerospace ATP, 21 Embraer RJ145 and 5 British Aerospace 146 in service at year-end. The sale of go reduced Boeing 737-300 aircraft by 13. Other changes, in line with the ongoing fleet strategy, included new deliveries of 5 Boeing 777, 12 Airbus A319, 3 Airbus A320, 2 Boeing 737-300, 1 Avro RJ100 and 1 Embraer RJ145. Disposals included 8 Boeing 747-200, 18 Boeing 757-200, 2 Boeing 737-300, 3 Boeing 737-400, 1 ATR72 and 1 DHC-8. In addition, 5 Boeing 747-200 and 4 Boeing 757-200 were stood down awaiting disposal and 2 Boeing 737-300 went into service having previously been undergoing pre-service preparation at March 31, 2001.

        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" for capital expenditure during fiscal 2002 as compared to fiscal 2001.

        At March 31, 2002 current liabilities were Sterling 3,201 million, down Sterling 107 million from March 31, 2001; current assets were Sterling 2,559 million, up Sterling 9 million from March 31, 2001. The reduction in current liabilities was due to reduced sales in advance of carriage primarily as a result of lower revenue, together with a reduction in trade creditors, due to reduced operational expenditure. The improvement in current assets reflects higher short-term loans and deposits and cash excluding overdrafts together with reduced debtors due to lower volumes and revenue, and reductions in stock.

        Cash at bank and in hand equaled Sterling 64 million at March 31, 2002, a decrease of Sterling 7 million as compared to Sterling 71 million at March 31, 2001. Cash inflow from operating activities totaled Sterling 866 million, a decline of Sterling 385 million from fiscal 2001 due principally to a reduction in operating profit. Fixed assets purchased for cash amounted to Sterling 757 million (tangible assets: Sterling 745 million; intangible assets: Sterling 12 million), Sterling 358 million less than in fiscal 2001. The sale of tangible fixed assets and investments generated proceeds of Sterling 465 million, compared to Sterling 298 million in fiscal 2001. The reduction in capital spend and increase in disposals reflected cash conservation measures implemented post September 11, 2001.

        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 -- Leases and other financing arrangements" with respect to movements in loans and capital obligations under finance leases and hire purchase arrangements for fiscal 2002 as compared to fiscal 2001.

Net debt/total capital ratio

        Net debt is defined as total debt - - loans, finance leases and hire purchase agreements - - plus Convertible Capital Bonds net of (i) short term loans and deposits and (ii) cash less overdrafts. See Note 25 to the Financial Statements and footnote (6) to the Operating Statistics in Item 3.

        Net debt at March 31, 2002 amounted to Sterling 6,294 million, including Convertible Capital Bonds of Sterling 112 million, and net of cash and short-term loans and deposits totaling Sterling 1,219 million. This represented an increase of Sterling 71 million from March 31, 2001, resulting from an increase in short term loans and deposits, partially offset by exchange effects, and new finance leases and hire purchase arrangements.

        The net debt/total capital ratio stood at 66.0%, compared to 64.5% at March 31, 2001, with the increase mainly due to increased borrowing and the reduction of capital and reserves .

        The Company expects the business environment will continue to be challenging in 2003/04 ahead of an economic recovery.

        Forecasting revenue against a backdrop of continuing global economic weakness and the threat of terrorism is very difficult, however, the outlook is that revenue in the first fiscal quarter will be lower than last year. Visibility beyond the first quarter is not clear.

        The implementation of our FSAS program and other cost cutting initiatives is on track and delivering more than the expected cost savings.

        The FSAS restructuring program continued during the year, with all fiscal 2003 targets delivered; short-haul pricing model, manpower, capital and disposals, distribution, procurement and information technology. See "Item 4 -- Information on the Company -- Strategic Developments and Investments -- Cost Reduction."

        The two-year Business Plan announced in February 2003 reaffirmed our commitment to delivery of the fiscal 2004 FSAS objectives, together with additional focus on external spend and CEBA. CEBA is the umbrella name for a program emerging as a major transformational force in British Airways. It covers:

        British Airways is continuing to take steps towards simplifying and strengthening its UK regional operation. During the year, Manx Airlines, a wholly owned subsidiary, was integrated into British Airways CitiExpress, which also assumed full operational control of another subsidiary, British Airways Regional.

        During the year it was announced that two bases (Cardiff and Leeds-Bradford) would close and British Airways CitiExpress would withdraw from 21 regional routes. These changes are complemented by fleet simplification, with Airbus and 737 fleets having been transferred to mainline operations and Regional Jets switched from mainline to British Airways CitiExpress.

        In addition, the entire fleet of 12 BAe Jetstream 41 Turboprop aircraft are being sublet to Air Kilfoyle Limited (trading as Eastern Airways). Eastern Airways will now operate a number of routes previously operated by British Airways CitiExpress using this aircraft type. This was the first part of an accelerated strategy to move to an all-jet regional operation.

        In April 2003, British Airways CitiExpress began flying from London City Airport to Frankfurt and to Paris Charles de Gaulle, and to Glasgow in May 2003.

        In April 2003, British Airways CitiExpress announced extensive further cost reductions following a review of the future direction of the regional operation. Immediate actions are intended to reduce the cost base by Sterling 20 million, Sterling 7 million of which is expected to be achieved in the financial year ending March 31, 2004. The next phase of the plan is expected to generate improvements in the areas of network optimization, product and distribution costs.

        The one world alliance includes eight airline members; British Airways, Aer Lingus, American Airlines (AA), Cathay Pacific, Finnair, Iberia, LanChile and Qantas. Co-operation across the alliance in a number of areas benefits the customer and increases the airlines' effectiveness. one world offers a substantial package of customer benefits, including reciprocal reward and recognition programs, common lounge access, smoother transfers, increased customer support and greater value.

        In January 2002, the US Department of Transportation's conditions for an anti-trust immune deal with AA were deemed by BA/AA to be too onerous to proceed with the plans. Both parties remain committed to an alliance relationship and on May 30, 2003 following a joint application, the Department of Transportation granted rights for the two airlines to codeshare on each others' routes excluding those between the US and London. This permission will be reviewed after a period of two years.

        Outside one world, co-operation with Japan Airlines continues in the form of frequent flyer program agreements. In addition, British Airways and British Airways CitiExpress Limited now codeshare with SN Brussels Airlines on routes between the UK and Brussels. Exemption from the anti-competitive provisions of Article 81 of the Treaty of Rome was granted by the European Commission on March 10, 2003 in respect of British Airways/SN Brussels Airlines co-operation for a six-year period.

        Following LOT Polish Airlines' decision to join the STAR alliance a number of bilateral arrangements between British Airways and LOT focusing on the London Heathrow - Warsaw route were terminated in March 2003.

        The nine-year relationship with Qantas is British Airways' longest standing and deepest alliance relationship. Under the Joint Services Agreement (JSA) between the two parties, there is full strategic, tactical and operational co-operation on all of British Airways' and Qantas' flights that serve markets between the United Kingdom and Continental Europe, Southeast Asia and Australia. This co-operation continues to strengthen and provides customers with improved flight departure times, routings and value for money.

        British Airways and Qantas continue to co-ordinate sales and marketing activities worldwide, and to share all costs and revenues on the JSA routes, giving both companies an incentive to improve the joint business. Additional value has been generated with cost savings and revenue co-operation across almost all functions.

        Qantas' Australian GAAP pre-tax profit for the six months ended December 31, 2002 amounted to A$513.1 million, an increase of 122% on the corresponding period last year. Profit after tax amounted to A$352.5 million, up 130%. Revenue for the six months was A$5.9 billion, up 9.3% compared to last year. Passenger revenue increased by 10.8% and was due to growth in RPKs of 9.4% and an increase in yield of 1.2%.

        Qantas' overall capacity measured in ASKs grew by 5.2% compared with the prior half-year. However, due to the effects of terrorism and the war in Iraq, Qantas moved capacity from the international network to the domestic network. International capacity measured in ASKs reduced by 3.3% across the period and domestic capacity increased by 24.9%. International RPKs increased by 2.5% and domestic by 24.5% helping to increase overall passenger load factor (RPKs as a percentage of ASKs) by 3.0 points to 79.9%.

        Total expenditure, including interest, increased by 4.3% to A$5.4 billion mainly due to costs associated with the increase in capacity, although a decrease in fuel costs has partially offset this. Cost per ASK decreased by 0.9%.

        In September and October 2002, Qantas issued new shares by way of an institutional placement and shareholder placing respectively. British Airways did not take up its allocation, which resulted in the dilution of the Group's shareholding from 21.4% to 18.9%.

        Following the acquisition of a 9% stake in Iberia in 2000, work was undertaken to generate value through commercial co-operation. The two airlines expanded bilateral cooperation by introducing codesharing on routes between the UK and Spain including London Heathrow and Gatwick to Madrid and Barcelona.

        Iberia's Spanish GAAP profit before tax for the year ended December 31, 2002 (included in the Group's fiscal 2003 results) was Euro 194.1 million, compared to a loss before tax last year of Euro 85.2 million.

        As at March 31, 2003, there were seven franchisees (Loganair, GB Airways, Maersk Air UK, British Mediterranean Airways, Sun-Air of Scandinavia, Comair of South Africa and Regional Air of Kenya) operating to 94 destinations of which 65 are additional to the British Airways and British Airways CitiExpress network. During the year, Zambian Air Services Limited, previously a franchisee, suspended operations.

        The Board of Directors sets the treasury policies and objectives of the Group, and lays down the parameters within which the various aspects of treasury risk management are operated. The Board has approved a treasury governance statement that outlines the Group's policies governing corporate and asset financing, interest rate risk, foreign exchange risk and cash and liquidity management. The governance statement also lists the financial instruments that the Group's treasury function is authorized to use in managing financial risk. The governance statement is under ongoing review to ensure best practice in the light of prevailing conditions.

        Responsibility for ensuring that treasury practices are consistent and compatible with the agreed governance statement is vested in a Finance Committee. Group Treasury implements the agreed policies on a day-to-day basis with a view to meeting the treasury objectives in a risk averse though cost effective manner. These objectives include ensuring that the Group has sufficient liquidity to meet its day-to-day needs and to fund its capital investment program and other investments; deploying any surplus liquidity in a prudent and profitable manner; managing currency, fuel, interest rate and credit exposures; and managing the Group's relationship with a large number of banks and other financial institutions world-wide.

        See also "Item 11 -- Quantative and Qualitative Disclosures about Market Risk".

        Most of the Group's debt is asset related, reflecting the capital-intensive nature of the airline industry and the attractiveness of aircraft as security to lenders and other financiers. These factors are also reflected in the medium to long-term maturity profiles of the Group's loans, finance leases and hire purchase arrangements. The incidence of repayments is shown in Note 28 to the Financial Statements. The Group demonstrated its continuing ability to raise new financing by financing all aircraft deliveries during the year and putting in place committed facilities for all aircraft deliveries through March 31, 2004.

        At March 31, 2003 approximately 58% of the Group's borrowings (after swaps), net of cash, short-term loans and deposits, were at fixed rates of interest and 42% were at floating rates. This proportion of fixed rate borrowings has increased from 48% at March 31, 2002 as the Group has taken advantage of the availability of historically low fixed rate Sterling and US Dollar funds and increased its short-term loans and deposits.

        The Group's borrowings are predominantly denominated in Sterling, US Dollars and Japanese Yen. Sterling represents the Group's natural "home" currency, while a substantial proportion of the Group's fixed assets are priced and transacted in US Dollars. The Japanese Yen liabilities arise as a result of the Group's substantial Japanese cross-border hire purchase arrangements entered into during the period 1990 to 1999. Details of the currency mix of the Group's gross borrowings are shown in Note 28 to the Financial Statements.

        During the year the Company's senior unsecured debt rating was maintained at one notch below investment grade although the rating was placed on credit watch because of the war in Iraq and the possible impact on the Company's revenue. In July 2003, Moody's left their credit ratings unchanged, but Standard & Poor's reduced the Group's corporate rating to BB+ (stable) and the senior unsecured debt rating to BB-. The impact of a downgrade is limited as there are no rating triggers in the existing debt portfolio. Furthermore, the Group's main source of external funding, being secured aircraft financing, is less sensitive to credit ratings than the unsecured bond market.

        See also "Item 11 -- Quantitative and Qualitative Disclosures about Market Risk".

        The continuing risk of terrorist attacks and the war in Iraq led us to build and maintain a significant degree of liquidity during the year. Cash flow was managed through this period by the implementation of the first year of our FSAS program. This involved restoring our positive operating margin through cost cutting, reducing capital spend, and a program of asset sales. We have also maintained the substantial committed borrowing facilities established in 2001.

        The Group's holdings of cash and short-term loans and deposits, together with committed funding facilities and net cash flow, are expected to be sufficient to cover the cost of all currently committed aircraft deliveries.

        Surplus funds are invested in high quality short-term liquid instruments, usually bank deposits. Credit risk is managed by limiting the aggregate exposure to any individual counter party, taking into account its credit rating. Such counter party exposures are regularly reviewed and adjusted as necessary. Accordingly, the possibility of material loss arising in the event of non-performance by counter parties is considered to be unlikely.

        The Group's interest cover for fiscal 2003 was 1.5 times. The increase in interest cover from fiscal 2002 (0.4 times) reflects the improvement in the profitability of the Group between fiscal 2003 and fiscal 2002 and a reduction in net interest payable. This reduction reflects both the lower level of net debt of the Group and the reduction in pounds Sterling and US Dollar interest rates between fiscal 2003 and 2002.

        The Group's interest cover for fiscal 2002 was 0.4 times. The reduction in the coverage ratio from fiscal 2001 (1.5 times) represents the reduction in the profitability of the Group between fiscal 2002 and fiscal 2001 reflecting the impact of the September 11, 2001 terrorist attacks and the general economic downturn. In addition, the Group's net interest payable increased between fiscal 2001 and fiscal 2002 as the Group's level of net debt increased.

        See Item 3 -footnote (3) on page 9 for the calculation of interest cover.

        The Group has amounts falling due, excluding interest payable, under various debt and other contractual obligations as follows:

        See also Notes 17 and 28 to the Financial Statements.

        Capital expenditure commitments authorized and contracted for, but not provided for in the Group's fiscal 2003 Financial Statements, amounted to Sterling 482 million for the Group (2002: Sterling 749 million), and Sterling 476 million for the Company (2002: Sterling 723 million), in each case as of March 31, 2003. These outstanding commitments include Sterling 456 million that relates to the acquisition of Airbus A320 family aircraft scheduled for delivery over the next three years. It is intended that these aircraft will be financed partially by cash holdings and internal cash flow and partially through external financing, including committed facilities arranged prior to delivery.

        The Group does business in more than 100 foreign currencies, and generates a surplus in most of these currencies. In recent years the US Dollar has been an exception to this as capital expenditure, together with ongoing operating lease and fuel payments denominated in US Dollars has created a deficit. However, in the year ended March 31, 2003 the Group generated a surplus of US Dollars as its capital expenditure and fuel costs reduced.

        As a result, the Group can experience adverse or beneficial effects arising from exchange rate movements. The Group is likely to experience beneficial effects from strengthening of foreign currencies against Sterling and an adverse effect from strengthening in Sterling.

        The Group seeks to reduce its foreign exchange exposure arising from transactions in various currencies through a policy of matching, as far as possible, receipts and payments in each individual currency. Surpluses of convertible currencies are sold, either spot or forward, for US Dollars and Sterling. The Group has substantial liabilities denominated in Yen, which consist mainly of purchase option payments falling due under various Japanese leveraged lease arrangements maturing between 2003 and 2011. The Group expects to utilize its Yen traffic revenues as a partial natural hedge against these maturing Yen liabilities as they fall due.

        The Group's forward transactions in foreign currency are detailed in Note 36 to the Financial Statements.

        British Airways uses derivative financial instruments (derivatives) with off-balance sheet risk selectively for treasury and fuel risk management purposes. The risk management strategy for both treasury and fuel operations is implemented within the guidelines and parameters laid down by the Board of Directors, and is designed to limit risk. The Company's policy is not to trade in derivatives but to use these instruments to hedge actual and anticipated exposures.

        As part of its treasury risk management activities, the Company has entered into a number of swap agreements in order to hedge its direct exposure to interest rates. The majority of these swaps are embedded in lease and loan agreements. A smaller number of interest rate swaps are not associated with specific loans and leases and are disclosed in Note 37 to the Financial Statements. During the year the Company increased the use of such instruments through fixing the interest payable on US$240 million for a period of five years as US Dollar fixed rates continued to fall.

        Forward foreign exchange contracts and collars are used to cover near term future revenues and operating payments in a variety of currencies. Forward foreign exchange contracts and collars outstanding at March 31, 2003 are summarized in Note 36 to the Financial Statements.

        The Company considers the purchase of interest rate and foreign exchange options as bona fide treasury exposure management activities. It would not generally contemplate the opening of new exposures by selling options, except where the risks arising from selling the option are covered by other elements of the hedging portfolio or underlying exposure, for example, as a component of a collar. Other treasury derivative instruments would be considered on their merits as valid and appropriate risk management tools and, under the treasury governance framework, require Board approval before adoption.

        The Company's fuel risk management strategy aims to provide the airline with protection against sudden and significant increases in oil prices while ensuring that the airline is not competitively disadvantaged in a serious way in the event of a substantial fall in the price of fuel. The strategy operates within limits set by the Board and is agreed in detail by the Treasury Committee, which is made up of representatives from relevant internal departments.

        In meeting these objectives, the fuel risk management program allows for the judicious use of a number of derivatives traded on regulated exchanges in London (the International Petroleum Exchange) and New York (the New York Mercantile Exchange), as well as on the Over The Counter (OTC) markets, with approved counter parties and within approved limits. The instruments used include futures contracts, options and swaps. The Treasury Committee reviews the use of these instruments on a regular basis.

        As derivatives are used for the purposes of risk management, they do not expose the Group to market risk because gains and losses on the derivatives offset losses and gains on the matching asset, liability, revenues or costs being hedged. Counter party credit risk is generally restricted to any hedging gain from time to time and is controlled through mark to market based credit limits.

        The airline is maintaining its corporate readiness for UK entry into the Economic and Monetary Union should a decision to join be taken.

        The discussion and analysis of the Company's financial condition and results of operations are based on the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United Kingdom (UK GAAP). The preparation of these financial statements requires the development of estimates and judgements that affect the reported amount of assets and liabilities, revenues and costs and related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.

        Critical accounting policies are defined as those that are reflective of significant judgements and uncertainties and potentially result in materially different results under different assumptions and conditions. It is believed that the Company's critical accounting policies are limited to those described below. The Company's management has discussed the development of the estimates and disclosures related to each of these matters with the Audit Committee.