BRITISH AIRWAYS PLC - 20-F - 20040802 - RESULTS_OF_OPERATIONS
Results of Operations
The
following table sets out the year-over-year percentage changes in Group
turnover and selected Group operating statistics (volume, capacity and yield)
for the three-year period ended March 31, 2004:
Year ended March 31
2004
2003
2002
(Change%)
Group
operating revenue
(1.7
)
(7.8
)
(10.1
)
Group
operations:
Volume
(RTKs)
3.9
(2.9
)
(13.9
)
Capacity
(ATKs)
2.5
(6.7
)
(9.3
)
Yield
(Revenue/RTK) (1)
(5.4
)
(3.8
)
4.2
(1)
Scheduled services (passenger and cargo) and non-scheduled passenger services
revenue as a percentage of RTKs
Year by
Year Analysis
Year ended March 31, 2004 compared with year ended March 31, 2003
Revenue
Group
turnover fell in the year by 1.7% to £7,560 million in fiscal 2004. Passenger
and cargo revenue (turnover from airline operations scheduled and non-scheduled
services) accounted for approximately 92% of Group operating revenue. For the
year, airline operations revenue fell by 1.7% to £6,953 million on a flying
program 2.5% larger in ATKs.
Compared
with fiscal 2003, in fiscal 2004 airline operations passenger traffic (RPKs)
increased by 3%, while capacity (ASKs) was 1.5% higher. As a result passenger
load factor increased by 1.1 points compared with fiscal 2003 to 73%. Passenger
yield (scheduled and non-scheduled passenger revenue per RPK) declined by 4.3%
for the year.
Cargo (i.e.
freight and mail) volumes (CTKs) were up 6% compared with fiscal 2003 but
yields fell by 9.7%. Cargo revenue was down 4.3% from £484 million to £463
million.
Other
revenue fell 1.1% to £607 million.
33
Expenditure
Net
operating expenditure (total operating expenditure less other revenue),
decreased by 3.4% compared to fiscal 2003. Unit costs (net operating
expenditure per ATK) were 5.7% lower than fiscal 2003.
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 total Group operating expenditure and year on year changes in
expenditure over the three financial years ended March 31, 2004:
Year ended March 31
2004
2003
2002
2004
2003
2002
(% Increase / (decrease))
(£ million)
Employee
costs
4
(13
)
1
2,180
2,107
2,409
Depreciation
and amortization
(8
)
(5
)
8
679
734
770
Aircraft
operating lease costs
(29
)
(5
)
(10
)
135
189
199
Fuel and oil
costs
10
(18
)
(7
)
922
842
1,028
Engineering
and other aircraft costs
(14
)
(12
)
2
511
592
673
Landing fees
and en route charges
(5
)
(6
)
(5
)
549
576
615
Handling
charges, catering and other operating
costs
(3
)
(13
)
(15
)
934
961
1,110
Selling
costs
(22
)
(14
)
(27
)
554
706
824
Accommodation,
ground equipment costs and
currency differences
1
(17
)
11
691
686
822
Total Group
operating expenditure
(3
)
(13
)
(5
)
7,155
7,393
8,450
The
operating expenditure for the year ended March 31, 2003 included a charge of
£84 million relating to Concorde - - the retirement of the Concorde fleet took
place on October 24, 2003
In fiscal
2004, employee costs increased by 3.5% to £2,180 million as pension, wage and
National Insurance increases were only partially offset by manpower reductions
and other efficiencies together with the disposal of dba. Total Manpower
Equivalents (“MPEs”) at Group level were down by 3,798 (7.4%) compared with
March, 2003.
Depreciation
and amortization costs reduced by 7.5% compared with fiscal 2003 to £679
million reflecting primarily the £58 million prior year charge relating to the
impairment of Concorde capitalized engineering modifications and rotable
inventory. Increases in depreciation
relating to the continuing embodiment of new products on the Boeing 777 fleet
were offset by the favorable exchange impact of the weaker US Dollar.
Aircraft
operating lease costs reduced by 28.6% to £135 million compared with fiscal
2003 as a result of the return to lessors of Boeing 737-300s, 737-400s and
Boeing 757s, the disposal of dba (which reduced leased Boeing 737-300s by 16
aircraft), and exchange impacts. Onerous lease charges in the year were £15
million (relating to the withdrawal of the British Airways CitiExpress ATP
fleet), £12 million lower than fiscal 2003 when the sub-lease of the J41 fleet
resulted in a charge of £27 million.
Fuel and
oil costs increased by 9.5% compared with fiscal 2003 to £922 million due to a
9.9% increase in fuel price, the unwinding of prior year hedging benefits and
the impact of the increased flying schedule. These were partially offset by the
favorable exchange impact of the weaker US Dollar and the disposal of dba.
34
Engineering
and other aircraft costs reduced by 13.7% to £511 million compared with fiscal
2003, reflecting increased recoveries of insurance costs from franchisees, the
disposal of dba and the impact of exchange together with the prior year charge
of £26 million relating to the write-down of Concorde stock. This was partially
offset by the costs of additional cargo freighter activity.
Landing
fees and en route charges fell by 4.7% compared with fiscal 2003 to £549 million.
This principally reflects increased recoveries of Passenger Service Charges
(including those relating to transfer passengers) as well as efficiencies and
the impact of the disposal of dba. These are partially offset by increases in
price and the adverse exchange impact of the stronger Euro.
Handling
charges, catering and other operating costs decreased by 2.8% compared with
fiscal 2003 to £934 million, as a result of a reduction in subcontract costs,
efficiencies across the operational areas and the impact of dba, partially
offset by the costs of the unofficial industrial action in July, 2003 and costs
associated with increased cargo freighter activity.
Selling and
marketing costs fell by 21.5% compared with fiscal 2003 to £554 million. The
impact of the restructuring of travel agent commissions and the increase in
online sales (leading to savings in booking payments) were partially offset by
increases in marketing costs.
Accommodation,
ground equipment costs and currency differences increased by 0.7% compared with
fiscal 2003 to £691 million. Reductions in information management spend,
property costs and vehicle contract costs were more than offset by adverse
exchange impacts of £29 million, primarily due to the impact of the weaker US
Dollar on the balance sheet retranslation.
Geographical
analysis
See “Item 4
– Information on the Company – Segmental Information – Geographical Analysis”
and Note 3 to the Financial Statements.
With the
exception of Asia Pacific, the operating result for the year improved in all
regions despite the impact of the Iraq War, SARS and economic weakness at the
start of the year. Asia Pacific was most affected by the impact of SARS and
fuel price increases.
The short-haul
result improved significantly on previous years – overall losses were halved to
£60 million. However, new entrant growth on regional routes reduced British
Airways CitiExpress results, triggering aggressive cost reduction initiatives.
The short-haul result also included a one-off £18 million charge relating to
the withdrawal of the ATP fleet.
Share of operating
profit in associates
BA’s share
of operating profits from associated undertakings improved by £19 million to
£58 million during the year, principally due to improvement in the operating
profits of Qantas.
In April
2003, Amadeus Global Travel Distribution took a 16.67% stake in Opodo. This
resulted in the dilution of the Group’s shareholding from 22.86% to 19.05%, and
a profit on deemed disposal of £5 million.
Profit/loss on
disposal of fixed assets and investments
Losses on
disposals of fixed assets and investments for fiscal 2004 were £46 million,
compared to fiscal 2003 when profits of £60 million were generated from
disposals of aircraft and rationalization of our property portfolio.
The losses
on disposal in this financial year primarily reflect the disposal of dba on
June 30, 2003 for a loss in the period of £83 million. This was partially
offset by profits on the sale and leaseback of five Airbus A320 aircraft and
V2500 spare engines. Other disposals during the year included the sale of a 20%
holding in China Aircraft Services, the Speedwing Mobile Communications
business and the sale and leaseback of two Boeing 777-200 aircraft.
35
Net interest payable
Net
interest expense for fiscal 2004 was £200 million, £55 million lower than
fiscal 2003. This included a credit relating to the revaluation of Yen debts
(used to fund aircraft acquisitions) of £15 million, compared to a charge the
previous year of £10 million. The revaluation -- a non-cash item required by UK
GAAP-- results from the weakening of the Yen against Sterling.
Excluding
the revaluation, the improvement in interest expense reflected lower rates, a
higher cash balance and lower gross debt, together with exchange benefits.
Other income/charges
Other
income of £13 million for fiscal 2004 primarily relates to lease transfer
consent fees. This compares to a charge of £4 million in fiscal 2003.
Tax
The
analysis of the tax charge is set out in Note 11 to the Financial Statements.
In fiscal
2004, as in fiscal 2003, there is no tax payable on operating results in the
UK, as adjusted for taxation. During the fiscal 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.
Earnings per share
For the
year ended March 31, 2004, profits attributable to shareholders were £130
million, equivalent to earnings of 12.1 pence per share, compared with earnings
of 6.7 pence per share in the prior year.
Capital expenditure
During the
three-year period ended March 31, 2004, capital expenditure and investments
totaled approximately £1,527 million for the Group, principally related to the
acquisition of aircraft and other equipment.
The
following table summarizes Group capital expenditure in the three-year period
ended March 31, 2004:
2004
2003
2002
(£ million)
Aircraft,
spares, modifications and refurbishments
(net of refund of progress payments)
154
225
739
Property and
equipment (net of refund of progress
payments)
67
95
121
Landing
rights
14
32
12
235
352
872
Investments
0
24
44
235
376
916
See
Notes 13, 14 and 17 to the Financial Statements.
36
Working capital
At March
31, 2004, net current liabilities were £231 million, up £52 million on the
prior year. This change principally reflects higher creditors (£92 million) due
to increased sales in advance of carriage and reductions in stock. These were
partially offset by an increase in debtors, due to improved sales volumes and
revenue and an £18 million increase in cash, short-term loans and deposits.
Sales in
advance of carriage increased from £783 million to £859 million due to improved
forward bookings.
Cash flow
Net cash
inflow from operating activities totaled £1,093 million, £92 million less than
last year as the improvement in operating profit was more than offset by the
reduction in depreciation and the impact of working capital movements.
The net
cash flow before management and liquid resources and financing was £874
million, a reduction of £357 million from last year, due to the decrease in
operating cash flow and a reduction in disposal proceeds, partially offset by a
reduction in capital expenditure.
Leases and other
financing arrangements
The following
table sets out the movements in loans and capital obligations under finance
leases and hire purchase arrangements for the three-year period ended March 31,
2004 (see also note 28):
Finance leases
and hire
Total
Bank and
purchase
other loans
arrangements
2004
2003
2002
(£ million)
Balance at
April 1
1,332
5,357
6,689
7,401
7,043
New loans
raised
81
—
81
13
495
Assumed from
subsidiary acquired during
the year
—
—
—
—
117
Non-cash
refinancing
193
(225
)
(32
)
—
—
Loans,
finance leases and hire purchase
arrangements undertaken to finance the
acquisition of aircraft and other assets
—
97
97
221
512
Repayment of
amounts borrowed
(339
)
(576
)
(915
)
(797
)
(712
)
Effect of
exchange rate changes
(42
)
(162
)
(204
)
(149
)
(54
)
Balance at
March 31
1,225
4,491
5,716
6,689
7,401
Three
A320 aircraft were delivered during the year ended March 31, 2004. The aircraft were financed on balance sheet
through US Dollar denominated cross border finance leases. Five older A320
aircraft were sold and leased back for a period of five years. Two Boeing
777-200 aircraft were sold and leased back for a period of ten years. These
were the first of our Boeing 777-200 aircraft to be taken off balance sheet,
thereby starting to manage the Group’s residual value exposure to this aircraft
fleet.
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 £169 million (2003: £139 million gain).
Net debt/total
capital ratio
Net debt at
March 31, 2004 amounted to £4,158 million, including convertible bonds of £112
million and net of cash and short-term loans and deposits totaling £1,670
million. This reduction of £991 million reflected the application of the
operating cash flow to the net repayment of debt and exchange effects.
37
The net
debt/total capital ratio stood at 53.8%, a 6.9 point reduction versus last year
mainly due to the reduction in net debt. Including operating leases, net debt
was 58.2%, a 6.4 point reduction from last year.
Share capital
The number
of shares allotted, called up, and fully paid on March 31, 2004 was
1,082,845,000 (March 31, 2003: 1,082,784,000). On June 16, 2003, 11,000
ordinary shares were issued in exchange for 26,000 Convertible Capital Bonds
2005 on the basis of one ordinary share for every 2.34 Bonds held. During the
year ended March 31, 2004, 50,000 shares were issued on the exercise of options
under Employee Share Option schemes.
Year ended March 31, 2003 compared with year ended March 31, 2002
Revenue
Group
turnover fell by 7.8% to £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 year, traffic
revenue fell by 6.6% to £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 (i.e.
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 £483 million to £484 million.
Other revenue
fell 20.2% to £614 million, primarily due to a reduction in revenue from the
Qantas Joint Services Agreement, as well as deterioration in third party
engineering revenue.
Expenditure
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
operating expenditure for the year ended March 31, 2003 includes a charge of
£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 £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 £80 million in 2002 (see Note 30 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 £734 million
reflecting primarily the withdrawal of the Boeing 747-200 fleet (including the
prior year accelerated depreciation), partially offset by the £58 million
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 £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 £27 million onerous lease
provision relating to the sub-lease of the British Airways CitiExpress Limited
Jetstream 41 fleet (12 aircraft) to Eastern Airways.
38
Fuel and
oil costs fell by 18% compared with fiscal 2002 to £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 £592
million, reflecting a volume related reduction in subcontract costs, cost
efficiencies and exchange benefits, partially offset by the charge of £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 £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 £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 £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 £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.
Geographical
analysis
See “Item 4
– Information on the Company – Segmental Information – Geographical Analysis”
and Note 3 to the Financial Statements.
Operating
profit improved in all regions compared with the prior year as cost reductions
more than offset the deterioration in revenue. Traffic was down in all areas
except in the UK where lower prices throughout fiscal 2003, stimulated demand.
The effect
of the war in Iraq and terrorism on America’s traffic and yield was more than
offset by cost improvements, and despite the impact of the 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.
Share of operating profit from associates
BA’s share
of operating profit from associated undertakings improved by £17 million to £39
million during fiscal 2003, principally due to improvement in the operating
profits of Qantas.
In November
2002, BA 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 fitted the strategies of either company. The
British Airways Holidays brand reverted to the Company’s control. In December,
2002, BA sold its stake in the Australian travel businesses Concorde
International Travel and World Aviation Services.
39
Profit on sale of
fixed assets and investments
Profit on
disposals of fixed assets and investments for the year ended March 31, 2003 was
£60 million, down £85 million from the prior year when our disposal of Go Fly
Limited in June, 2001 generated £98 million.
Disposals
during fiscal 2003 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
Net
interest payable for the year ended March 31, 2003 was £255 million, £23 million
lower than the previous year. This included a charge for the retranslation of
the Yen debt (used to fund aircraft acquisitions) of £10 million, compared to a
credit the previous year of £49 million. The retranslation 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 income/charges
Other
charges of £4 million for the year ended March 31, 2003 primarily related to
the write-down of our investments in the trade exchange Cordiem and The Airline
Group (NATS), partially offset by £7 million of lease transfer income.
The £5
million write-down in the value of NATS equity to £7.3 million reflected
revised estimates of the future long-term benefits of the investment.
This
compared to other income of £21 million in the prior year, relating primarily
to £22 million compensation received from the UK Government for the closure of
US airspace immediately following September 11, 2001.
Tax
The
analysis of the tax charge is set out in Note 11 to the Financial Statements.
There was
no tax payable on operating results in the UK. During the year ended March 31,
2003, 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 arose on profits on disposals as such profits were
covered by tax losses from current and prior periods.
Earnings per share
Profit for
the year attributable to shareholders was £72 million, equivalent to net
earnings per Ordinary Share of 6.7 pence, compared with a loss for the year of
£142 million equivalent to a net loss per Ordinary Share of 13.2 pence in the
prior year.
Aircraft fleet
changes
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 would be
retired from service in October 2003.
40
Cash flow
Cash inflow
from operating activities in fiscal 2003 totaled £1,185 million, an improvement
of £319 million on the prior year principally due to the improvement in
operating profit. Tangible fixed assets purchased for cash amounted to £293 million,
£452 million less than the prior year and the sale of tangible fixed assets and
investments generated proceeds of £351 million. The reduction in capital spend
and the continuing asset disposals reflected the ongoing implementation of the
FSAS program.
Leases and other
financing arrangements
Eleven A320
aircraft were delivered during the year ended March 31, 2003. 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 fiscal
2003, 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 fiscal 2003, 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 £139 million (2002: £4 million
loss).
Share capital
The number
of shares allotted, called up, and fully paid on March 31, 2003 was
1,082,784,000 compared with 1,082,757,000 on March 31, 2002. On June 17, 2002,
24,000 Ordinary Shares were issued in exchange for 57,000 Convertible Capital
Bonds 2005 on the basis of one Ordinary Share for every 2.34 Bonds held. During
the year, 3,000 shares were issued on the exercise of options under Employee
Share Option schemes.
Outlook
Additional
security expenditure is expected to continue and our fuel costs for the year
ahead are projected to be approximately £150 million higher than 2004. At the same time intercontinental premium
travel volumes are recovering steadily, while short-haul premium traffic
remains at lower levels. Demand for non premium travel is meeting expectations
with the help of competitive offers in most major markets. We continue to
forecast a small revenue improvement in the current year. We expect that small
yield declines during the year will be more than offset by volume.
Although
FSAS is now a reality and that particular strategy phase is complete,
competitive pressures emphasize the need to continue simplifying the business
and reduce costs further. The ultimate objective is a sustainable annual
operating margin of 10%, in order to achieve long-term stability and acceptable
rewards for shareholders, employees and customers.
41
Other matters
Future Size and
Shape
Cost
reduction targets were exceeded for all the FSAS programs – manpower costs,
distribution, procurement and information technology.
In
addition to the cost programs, targets were also set and achieved for manpower,
capital spend and disposals.
Business Plan
The 2004/06
Business Plan was communicated internally on January 28, 2004 and includes a
further savings in employment costs, together with the continuing delivery of
the prior year’s Business Plan programs of Customer Enable BA (ceBA), Employee
Self Service and External Spend.
British Airways
CitiExpress
BA is
continuing to simplify and strengthen its UK regional operation.
In October,
2003, British Airways CitiExpress transferred the operation of its
Plymouth-Gatwick route to Air Southwest.
As part of
the strategy to move to an all-jet regional operation, the entire remaining
fleet of eight British Aerospace ATPs has been stood down, five returned to
lessor and three sub-leased to Loganair. In March, 2004, the transfer took
place of five British Airways CitiExpress intra-Scotland routes to Loganair;
the three sub-leased ATPs will be operated on these routes. It has also been
announced that British Airways CitiExpress will no longer operate four Isle of
Man routes, previously ATP-operated, but will retain routes from London Gatwick
and Manchester to the island with different aircraft types.
Alliance benefits
The
one
world alliance includes eight members:
BA, Aer Lingus, 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.
A
commercial agreement with Swiss International Air Lines was concluded in
September, 2003, involving the transfer of eight slot pairs to BA and
codesharing on the Heathrow-Geneva route.
A proposal that Swiss would merge its frequent flyer program into the BA
Executive Club and go on to join
one
world
was rejected by Swiss on June 21, 2004.
The final
US Department of Transportation order, approving the American/BA behind and beyond codeshare, was issued on
May 30, 2003. The codeshare commenced in September, 2003, and by February,
2004, all initial phases of the codeshare had been implemented. In total,
American have placed their code on 68
BA routes to 58 destinations, spanning 34 countries and using nearly 300 flight
numbers. In turn, BA have placed their code on 104 routes to 12 countries
serving 85 destinations, of which 72 are new to the BA network. This includes
the first transatlantic codeshares introduced – Manchester and Glasgow to
Chicago and Manchester to New York.
Outside
one
world, co-operation with Japan Airlines
(JAL) continues in the form of Frequent Flyer Program agreements and
codesharing. Codesharing commenced in January, 2004, on JAL flights between
Tokyo and Seoul, Fukuoka, Osaka and Nagoya. JAL places its code on BA services
between Heathrow and Hamburg and Stuttgart.
Subsidiaries
On June 30,
2003, the sale was completed of dba to Intro GmbH, for a loss on disposal of
£83 million.
On August
27, 2003, the Group completed the disposal of Speedwing Mobile Communications,
which formed part of Speedwing International Limited, to Air Radio
Limited. The profit on disposal from
this sale was £3 million.
42
Qantas
Dating from
1993, the relationship with Qantas is BA’s longest standing and deepest
alliance relationship. Under the Joint Services Agreement (“JSA”) there is full
strategic, tactical and operational co-operation on all of BA’s and Qantas’
flights that serve markets between the UK 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,
offering the very best of customer service to all passengers.
BA 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 saving and revenue co-operation across almost all functions.
Qantas’
pre-tax profit for the six months ended December 31, 2003 (included in the
March 31, 2004 result) amounted to A$530.3 million, an increase of 3.4% on the
corresponding period in the prior year. Group profit after tax amounted to
A$357.8 million, up 1.5%. Revenue for the six months was A$5.8 billion, down
4.4% compared to the prior year. Passenger revenue decreased by 4.8% and was
due to a decline in RPKs of 0.8% and a yield deterioration of 5.2%.
In April,
2003 and October, 2003, Qantas issued new shares by way of shareholder
placings. On each occasion, BA did not take up its allocation, which resulted
in the dilution of the Group’s shareholding from 18.93% to 18.25%.
Iberia
In December
2003, the European Commission granted BA, Iberia and our franchise partner, GB
Airways exemption for a period of three years under Article 81 of the EU
Treaty. The three airlines have used this exemption to deepen co-operation on
routes between the UK and Spain including from London Heathrow and Gatwick, to
Madrid and Barcelona.
In addition
BA and Iberia have agreed that joint proposals will be developed for field
sales co-operation and joint dealing in the UK and Spanish markets, for enhanced
co-operation in revenue management, for systems co-operation and for a benefit
share on routes between the UK and Spain.
Iberia’s
profit before tax for the 12 months to December 31, 2003 (included in the March
31, 2004 result) was €201.7 million, compared to a profit before tax last year
of €194.1 million.
Franchising
As at March
31, 2004 there were six franchises operating to 78 destinations of which 60 are
additional to the BA (including British Airways CitiExpress) network.
Pensions
We continue
to account for our Group pension schemes under the current accounting standard
SSAP 24.
However, we
are also required to disclose the impact of the new standard FRS 17 in the
notes to the Financial Statements. As
at March 31, 2004, the accounting valuation of the Group pension schemes under
FRS 17 shows a post-tax deficit of £1.2 billion, in line with the previous
year’s valuation. The FRS 17 valuation reflects a snapshot of the pension
scheme assets and liabilities at March 31, 2004 and does not impact employer’s
contributions.
The
triennial actuarial review of the main UK pension schemes (APS and NAPS) was
completed in October, 2003 and confirmed the cash contributions required to be
made into the schemes. For APS, the Company is required to restart
contributions at the rate of £26 million per year from November 1, 2003. For
NAPS, the increase in the deficit requires additional contributions of £107
million to be made per year commencing from January 1, 2004. As a result, total
contributions to APS and NAPS for the year ended March 31, 2004, were £158
million (excluding augmentation payments). Contributions for the financial year
ending March 31, 2005 are expected to be approximately £250 million.
43
Liquidity and investments
The Iraq
war and the continuing risk of terrorist attacks led us to maintain high
liquidity throughout the year. Cash flow was managed effectively through this
period by achievement of the FSAS targets on capital and disposals.
This strong
cash generation has allowed us to accelerate debt repayments. During the year
ended March 31, 2004, the Group repaid £344 million of debt early and intends
to continually review liquidity requirements and repay debt early to utilize
long-term surplus liquidity.
At March
31, 2004 the Group had at its disposal short-term loans and deposits and cash
at bank and in hand amounting to £1,670 million (2003: £1,652 million). In
addition, the Group had undrawn long-term committed aircraft and general
financing facilities totaling approximately US$761 million, a committed
short-term unsecured revolving credit facility of US$100 million and undrawn
uncommitted overdraft and money market lines totaling £46 million.
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 future committed aircraft deliveries due in the next three
years.
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 counterparty, taking into account its credit rating. Such
counterparty exposures are regularly reviewed and adjusted as necessary.
Accordingly, the possibility of material loss arising in the event of
non-performance by counterparties is considered to be unlikely.
Management of financial and fuel price risks
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, fuel price 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 risks. The governance statement is under on-going 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 which is chaired
by the Chief Financial Officer.
A monthly
Treasury Committee, chaired by the Group Treasurer, approves risk management
strategies and reviews major foreign exchange, fuel and interest rate exposures
and actions taken during the month to manage those exposures.
Group
Treasury implements the agreed policies on a day-to-day basis to meet 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 – Quantitative and Qualitative Disclosures about Market Risk”.
Financing and interest rate 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 27 to the Financial Statements.
The Group demonstrated its continuing ability to raise new financing by
financing all aircraft deliveries during the year and maintaining committed
facilities for all planned aircraft deliveries.
At March
31, 2004 approximately 66% of the Group’s borrowings (after swaps), net of
cash, short-term loans and deposits, were at fixed rates of interest and 34%
were at floating rates. This proportion of fixed rate borrowings has increased
from 58% at March 31, 2003 as the Group chose to focus its early debt
repayments on floating rate debt, leaving fixed rate debt intact.
44
The Group’s
borrowings are predominantly denominated in Sterling, US Dollars and Japanese
Yen. Sterling represents the Group’s natural “home” currency, whilst 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 27 to the Financial Statements.
In July,
2003 the Company’s senior unsecured debt rating was lowered by one notch to
sub-investment grade having been put on credit watch due to the Iraq War and
SARS. The impact of the downgrade was limited as there are no financial covenants
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”.
Foreign currency risk
The Group
generates a surplus in most of the currencies in which it does business. The US
Dollar can be an exception to this as capital expenditure, together with
ongoing operating lease and fuel payments denominated in US Dollars, can create
a deficit. In the year to March 31, 2004 lower levels of US Dollar capital
expenditure and US Dollar disposal proceeds resulted in the generation of a
surplus.
As a
result, the Group can experience adverse or beneficial effects arising from
exchange rate movements. For example, the Group is likely to experience
beneficial effects from a strengthening of foreign currencies and an adverse
effect from a 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 2004 and 2011. The Group utilizes its stream of
Yen traffic revenues as a natural hedge against these maturing Yen liabilities
as they fall due. At times, the Group will also purchase and hold Yen as a
partial hedge against the balance sheet translation risk.
The Group’s
forward transactions in foreign currency are detailed in Note 38 to the
Financial Statements.
See also
“Item 11 – Quantitative and Qualitative Disclosures about Market Risk”.
Fuel price risk
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.
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
counterparties and within approved limits.
Derivative financial instruments
BA uses
derivative financial instruments (derivatives) with off-balance sheet risk
selectively for treasury and fuel risk management purposes. The Group’s policy
is not to trade in derivatives but to use these instruments to hedge
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 34 to the Financial Statements.
Forward
foreign exchange contracts and “collars” are used to cover near term future net
revenues in a variety of currencies. Forward foreign exchange contracts
outstanding at March 31, 2004 are summarized in Note 38 to the Financial
Statements.
45
The Company
considers the purchase of interest rate, foreign exchange and fuel 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 physical position, 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.
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. Counterparty credit risk is generally restricted to any hedging gain
from time to time and is controlled through mark to market based credit limits.
See also
“Item 11 – Quantitative and Qualitative Disclosures about Market Risk”.
Economic and Monetary Union
The airline is maintaining its corporate readiness for UK entry should
a decision to join be taken.
International Financial Reporting Standards
BA will
prepare its March 31, 2006, consolidated Financial Statements under
International Financial Reporting Standards (“IFRS”). The IFRS convergence
project team report quarterly to the Audit Committee and progress continues in
accordance with the plan. The detailed implementation planning phase is
underway and on track to deliver IFRS compliant information for comparative
purposes during 2004/05. Communication to the investor community will commence
during the second half of the year.
Interest cover
The Group’s
interest cover for fiscal 2004 was 2.1 times. The increase in interest cover
from fiscal 2003 (1.5 times) reflects the improvement in the profitability of
the Group between fiscal 2004 and fiscal 2003 and a reduction in net interest
payable. This reduction principally reflects the lower level of net debt of the
Group.
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.
See Item 3
-footnote (3) on page 9 for the calculation of interest cover.
Debt and other
contractual obligations
The Group
has amounts falling due, excluding interest payable, under various debt and
other contractual obligations as follows:
Payments due by period
Total
Less than one year
1-3 years
3-5 years
More than 5 years
(£ millions)
Long-term
debt
Obligations
1,225
102
146
217
760
Capital
lease
Obligations
4,491
580
886
798
2,227
Operating
lease
Obligations
2,131
196
291
200
1,444
Total
7,847
878
1,323
1,215
4,431
See also Notes
16 and 27 to the Financial Statements.
Capital
expenditure commitments authorized and contracted for, but not provided for in
the Group’s fiscal 2004 Financial Statements, amounted to £347 million for the
Group (2003: £482 million), and £346 million for the Company (2003: £476
million), in each case as of March 31, 2004. These outstanding commitments
include £323 million which relates to the acquisition of Airbus A320 family
aircraft scheduled for delivery over the next four 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.
46
Critical Accounting Policies and New Accounting Standards
Introduction
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 UK GAAP. The preparation of these Financial Statements requires
the development of estimates and judgments 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
judgments 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.
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