Group financial statements Group consolidated income statement Group statement of other comprehensive income Balance sheets Cash flow statements Statements of changes in equity Notes to the accounts Operating and financial statistics Fleet table Principal investments Glossary Subsidiary undertakings 16 17 18 19 20 21 79 80 81 82 83 British Airways Plc Officers and professional advisers Directors Sir Martin Broughton Alison Reed Keith Williams Nick Swift Andrew Crawley Frank van der Post Enrique Dupuy de Lome Ken Smart Gavin Patterson Garrett Copeland Julia Simpson Secretary Kulbinder Dosanjh Chairman) (Deputy Chairman) (Chief Executive Officer) (Chief Financial Officer) Registered office Waterside PO Box 365 Harmondsworth UB7 0GB Parent company International Consolidated Airlines Group S. A. Calle Velazquez 130 Madrid, 28006 Spain Independent auditors Ernst & Young LLP 1 More London Place London SE1 2AF 1 British Airways Plc Business review and Directors’ report The Directors present their annual report and the audited financial statements for the year ended 31 December 2012. Business review
British Airways (‘BA’ or ‘the Group’) is the UK’s largest international scheduled airline and one of the world’s leading global premium airlines. The Group’s principal place of business is London with significant presence at Heathrow, Gatwick and London City airports. BA also operates a worldwide air cargo business, largely in conjunction with its scheduled passenger services. Operating one of the most extensive international scheduled airline route networks, together with its joint business agreements, code share and franchise partners, BA flies to more than 400 destinations worldwide.
BA’s vision is to be the most admired airline across the world’s key cities. The business review is presented in the following three sections: Management review; Financial review; and Internal control and risk management. Management review 2012 was a good year for British Airways. The acquisition and integration of bmi was a significant achievement, introducing 1,400 new colleagues to BA, strengthening our presence at Heathrow and outperforming against our financial expectations.
The Olympics proved to be a great opportunity to showcase the UK to the world and we were pleased to be so closely associated with its success, resulting in record improvements in our brand engagement. Customer satisfaction reached all-time highs and our levels of colleague engagement showed marked improvement. The Group continues to operate in a challenging environment of elusive economic growth and high oil prices, but we have seen the benefits of our customer focus translate into a solid operating and financial performance for the year. bmi
BA acquired British Midland Limited (‘bmi’) from Deutsche Lufthansa AG (‘Lufthansa’) in April 2012 and completed the full integration of the mainline operation into BA by the end of 2012 with minimal customer disruption thanks to the dedication of both bmi and BA colleagues. The acquisition has already enabled BA to operate 20 new routes from Heathrow for the winter 2012 season. The coming years will see the airline further optimise its network by converting some of the former bmi slots from short-haul to long-haul operations to forge links with emerging economies.
Outstanding service and customer insight Customer satisfaction and brand bonding improved in 2012. This reflects the airline’s renewed vigour in putting customers at the heart of the operation. Running a robust operation is crucial for meeting our customers’ expectations and delivering a cost-effective business. We monitor our operational performance through a broad range of measures at many levels. Departure punctuality is our primary measure, as high performance here requires other operational processes to run smoothly, and also because it is a key driver of customer satisfaction.
Our headline measure of punctuality is ‘Ready to Go’, which focuses on the aspects of the departure process within our control. In 2012 55 per cent of flights were ‘Ready to Go’, being prepared for departure at three minutes before the scheduled departure time, and 79 per cent of flights departed within 15 minutes of schedule. The use of technology to improve the customer service experience is paying dividends in goodwill. For example, iPads have now been issued to more than 2,000 enior cabin crew, which enables them to provide insight into our customers’ preferences across a whole range of areas, from special meal requests to onward travel plans. Cabin crew can deliver a truly bespoke service with this information at their fingertips. Furthermore, if any customer service issues arise in the air, cabin crew can inform ground-based colleagues in a timely fashion and action can be taken quickly to resolve any problems. Towards the end of 2012 BA also conducted a series of real-time customer survey trials. The trials were part of the airline’s commitment to customer service.
Investing selectively in the product BA is investing ? 5 billion over five years in new aircraft, smarter cabins, elegant lounges and new technologies to make life more comfortable in the air and on the ground. A large scale refurbishment programme of the long-haul fleet is underway, which includes new cabins and technology being fitted onboard 18 of the airline’s older Boeing 777-200 aircraft, a refresh of 14 Boeing 767s, and the installation of business class lie-flat beds in the seven Airbus A321s acquired from bmi. 2 British Airways Plc Management review continued Attention has been paid to onboard catering.
World Traveller Plus customers can now enjoy a choice of meals from the Club World cabin, further enhancing the service customers receive in premium economy. There is also an improved wine choice in Club World and Laurent-Perrier Grand Siecle is now served in First. Short-haul customers are enjoying new catering with a focus on quality, choice and generosity. Customers flying to New York through Newark Airport have access to the new lounge which opened in 2012, modeled on the highly popular Galleries Lounge complexes in Terminal 5 at Heathrow. Passion and belief in the BA brand
The BA brand has had a very successful year in 2012. The airline’s sponsorship of the London 2012 Olympic and Paralympic Games provided the backdrop for a number of successful advertising and brand awareness campaigns. The airline flew more than 2,250 athletes from 28 countries to London and supported more than 2,400 British athletes, and their coaching teams, with flights to travel around the world to train, compete and qualify. The London Games TV campaign had a very positive effect with 92 per cent of colleagues stating they felt proud to work for BA having seen the advertisement.
Engagement with customers via social media also proved a success with more than six million people interacting with the advert by taking an aircraft down their own street. The highest awareness of the BA brand for five years was achieved as a result of the Games sponsorship and the campaign delivered a 30 per cent increase in people who were ‘inclined to fly with BA’ and a 20 per cent increase in positive sentiment towards the brand. Growing revenue through airline partnerships and commercial innovation A common theme in the airline industry this year has been the development of strategic partnerships and consolidation activity.
BA has been no exception. A Joint Business agreement with Japan Airlines Co. Ltd (‘JAL’) commenced in October 2012. The two airlines share revenue on applicable flights between Japan and Europe and there has been an expansion in codeshare arrangements. Frequent flyers are reaping the benefits of the reciprocal loyalty schemes and better aligned schedules. New codeshare arrangements with the Canadian carrier WestJet began in September 2012, allowing BA’s customers to buy connecting services from key cities to Victoria, Edmonton and Ottawa.
The North Atlantic Joint Business agreement with Iberia Lineas Aereas de Espana S. A (‘Iberia’) and American Airlines celebrated its second anniversary in October 2012 and continues to deliver customer benefits and revenue to the business. Where appropriate, BA will continue to seek to deepen other partnerships through the extension of codeshare relationships and the development of joint businesses. The airline continues to be committed to the future development of the oneworld alliance and in October 2012 sponsored the introduction of Qatar Airways to the alliance.
Aircraft, technology and infrastructure The acquisition of bmi has seen a further 25 short and mid-haul aircraft enter operations for BA, enabling the airline to grow its presence at Heathrow. Planning is well underway to introduce 12 Airbus A380s and 24 Boeing 787 Dreamliners to the fleet. Delivery will commence from summer 2013, providing exciting opportunities for improved customer experience and route development. BA is engaged with the Davies Commission, which will make recommendations to the Government on options for maintaining the UK’s status as a global aviation hub.
It is the airline’s position that the Commission should undertake a thorough, objective assessment of all the options for extra hub capacity, including full analyses of the financial and economic costs. The case for extra hub airport capacity for the UK is overwhelming and its creation is long overdue. Competitive cost base Given the difficult economic times and the sustained high price of fuel, it is essential that BA focuses on managing controllable costs. The airline has prioritised short-haul improvements in its drive to secure a competitive cost base.
Good progress has been made with the transformation plan at Gatwick where the cost base is now competitive with low-cost carriers. During 2013 there will be additional focus on driving more revenue per flight through ancillary services, exploiting underutilised assets such as Avios, and maximising the value from major supplier contracts. International Consolidated Airlines Group S. A. (‘lAG’, BA’s parent company) has also committed to deliver €560 million in synergies across the combined business within five years and significant progress has been made on this during 2012. 3 British Airways Plc Management review continued
Setting the standard for responsible aviation BA has led the industry in adopting a responsible approach to the environmental impact of aviation. This is not only imperative for the environment, but is the right financial approach when faced with high fuel costs, and it is an increasingly important consideration for customers. The Group’s approach is threefold: reducing net carbon emissions by 50 per cent by 2050, campaigning for a global approach to reducing carbon emissions which is both effective and cost efficient, and minimising local community effects from air quality and noise.
BA is working to establish Europe’s first sustainable bio-jet plant with US energy company Solena Fuels Corporation, which is expected to power some of BA’s planes from 2015. The airline has committed to purchasing sustainable fuel from the plant at market competitive rates. Culture and capabilities for success BA recognises that its most valuable asset is its people. Genuine and effective engagement with colleagues is key and enables them to provide a service which puts the customer first and helps make BA a great place to work.
In 2012 the employee opinion survey, “Speak Up”, was simplified in response to feedback from colleagues, featuring fewer, more relevant, questions. The improved survey, conducted by independent research organisation ORC International, provided a confidential means for every colleague to voice their views on what they feel about working at BA. The 2012 survey achieved the highest ever response rate. Management was pleased with the high scores for colleague engagement and pride in the airline, and is committed to taking action as a result of the detailed feedback.
This year BA forged a partnership with the University of Glamorgan. Aircraft Maintenance Engineering students at the University will have the opportunity to undertake industry-standard training at the airline’s maintenance facility in Cardiff, which will form part of their BSc degree. Engineering staff at BA will in turn have the opportunity to study academic modules from the University at undergraduate and postgraduate level. In 2012, 50 new graduates were introduced to BA.
Graduates are extremely important to the long-term strength of BA and alumni from the graduate scheme can be found throughout the business. The current scheme has been running for over five years and BA has a long history of recruiting and developing graduates going back many decades, many of whom are in senior management positions in the Company today. Two new apprenticeship schemes were offered in 2012: Heathrow Operations and IT Operations. This built upon the successful engineering schemes that have been developed over the last two years.
Across the business, and across the UK, BA recruited more than 200 people into apprenticeship programmes this year. This adds to the 340 students already undertaking apprenticeships or completing college courses in preparation for beginning apprenticeships. Outlook In summary, BA has made great progress during 2012 with both the brand and the customer. Looking forward, we need to continue to invest in the work we are doing to enhance the customer proposition and in improving our knowledge of our customer base.
The acquisition of bmi has given BA a significant opportunity for long-term growth and network optimisation. opportunity will be coupled with the benefits of fuel savings generated from the new fleet. In the forthcoming years, this BA remains strongly focused on being disciplined with its cost base and ensuring that any future savings generated are not reversed by cost inflation, whilst at the same time ensuring that it continues to invest in projects that improve the customer experience. 4 British Airways Plc Financial review
As such, these are not included as exceptional items in the 2012 consolidated financial statements. 26 2 Summary of significant accounting policies continued Key accounting estimates and judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. These estimates and associated assumptions are based on historical experience and various other factors believed to be reasonable under the circumstances. Actual results could differ from these estimates. These underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if these are also affected. The estimates and assumptions that have a significant risk of causing a material adjustment within the next financial year are discussed below. a Business combinations Accounting for business combinations using the acquisition method requires the determination of the fair value of the consideration transferred, together with the fair value of the identifiable assets acquired and liabilities assumed at the acquisition date. Judgement is required in determining whether a transaction meets the criteria to be treated as a business combination or not.
Judgements and estimates are also required in order to determine the fair values of the assets acquired and the liabilities assumed, and the Group uses all available information, including external valuations and appraisals where appropriate, to determine these fair values. If necessary, the Group has up to one year from the acquisition date to finalise the determinations of fair value. Details of the business combinations undertaken by the Group in 2012 are provided in note 3. b Impairment of non-financial assets The Group assesses whether there are any indicators of impairment for all non-financial assets at each reporting date. Goodwill and intangible assets with indefinite economic lives are tested for impairment annually and at other times when such indicators exist. The recoverable amounts of cashgenerating units have been determined based on value-in-use calculations.
These calculations require the use of estimates as disclosed in note 18. Other non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable. c Pensions and other post-retirement benefits The cost of defined benefit pension plans and other post-employment medical benefits is determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the long-term nature of these schemes, such estimates are subject to significant uncertainty and are disclosed in note 35. d