Annual Report 1999 in PDF - Aer Lingus

AER LINGUS GROUP PLCAnnual Report& consolidated accountsfor the year ended 31 December 1999

ContentsChairman’s Statement 2Board of Directors 4Management 6Message from the Group Chief Executive 7Operating and Financial Review 8Directors’ Report 20Auditors’ Report 23Group Accounts 24Group Financial Record - Irish Pounds 46

Financial Highlights1998 1999 1999 1998IR£m IR£m em em796.8 893.3 Turnover - continuing 1,134.2 1,011.7104.6 31.8 - discontinued 40.5 132.9901.4 925.1 1,174.7 1,144.6Earnings before Interest, Tax, Depreciation,Amortisation and Aircraft155.9 167.5 rentals (EBITDAR) - continuing 212.7 198.0(75.7) (76.7) Aircraft rentals (97.4) (96.1)(27.5) (34.4) Depreciation and amortisation (43.7) (35.0)Operating Profit52.7 56.4 Continuing operations 71.6 66.94.7 2.0 Discontinued operations 2.6 6.057.4 58.4 Profit before interest and exceptional items 74.2 72.94.7 (0.6) Interest (net) (0.8) 6.0Profit before Employee Share Participation62.1 57.8 Scheme and exceptional items 73.4 78.9(5.7) (2.0) Employee Share Participation Scheme (2.6) (7.2)56.4 55.8 Profit before exceptional items 70.8 71.73.4 (8.9) Exceptional items (11.3) 4.359.8 46.9 Profit before taxation 59.5 76.0(1.0) (6.0) Taxation and Minority interests (7.6) (1.4)58.8 40.9 Profit for the year 51.9 74.6121.4 108.4 Capital Employed 137.7 154.2Financed by189.9 233.7 Shareholders’ funds 296.7 241.11.4 2.5 Minority Interests 3.2 1.8(69.9) (127.8) Net cash and liquid resources (162.2) (88.7)121.4 108.4 137.7 154.21

Chairman’s StatementI am pleased to report another successful year for the Aer Lingus Group with an increase of7% in operating profits on continuing operations to e71.6 million. This was achieved on aturnover of e1,134.2 million, an increase of 12% over 1998.For Aer Lingus, the year was also marked by the completion of new bilateral allianceagreements with both American Airlines and British Airways which led to Aer Lingus’ entry as afull member of the oneworld alliance.The Government decision to float shares in Aer Lingus is a very positive development in movingtowards the full commercialisation of the airline. This is vital for the Group to grow in theintensely competitive modern air transport environment. I believe it is especially positive for ourcustomers providing them with a greater range of choice and value whilst continuing with ourgrowth performance of recent years.Further significant initiatives in Aer Lingus, including the acquisition of new aircraft, routeexpansion with new gateways added in the US and UK together with record passengernumbers, contributed to a strong performance.Group operating profit before interest, exceptional items and Employee Share ParticipationScheme, and including discontinued operations, was e74.2 million, an increase of 1.8% on1998.There was a net interest charge of e0.8 million in 1999, against e6.0 million earned in theprevious year and, after allocation of profits to staff through the Employee Share ParticipationScheme of e2.6 million (1998: e7.2m), profit before exceptional items declined by 1.3% toe70.8 million.The 1999 results include a number of changes in accounting policies and methodologieswhich, in accordance with accounting standards, have given rise to a restatement of prior yearresults in certain cases and significant exceptional items also. These changes follow a detailedreview of industry practice undertaken in advance of the IPO and in close consultation with theGroup’s financial advisers.Exceptional items represented a net loss of e11.3 million, compared to a net gain of e4.3million in 1998. After a significantly increased charge for taxation and minority interests ofe7.6 million (1998: e1.4 million), the net profit for the year was e51.9 million (1998: e74.6million).Once again the Group enjoyed strong cash flows, with net cash inflow from operating activitiesincreasing by 72% to e253.7 million. Net cash and liquid resources at 31 December 1999 weree162.2 million, an 83% improvement on the 1998 figure of e88.7 million. Shareholders’funds showed a 23% improvement to e296.7 million.Facing the Future with ConfidenceLast year, I cautioned that there were external elements which could impact negatively onoperating performance within the industry. Issues such as transatlantic capacity increases, risingfuel costs and the economy in the Far East were core to many successful commercial airlines2

warning of lower profits. Those early signs have contributed to a number of major airlinessuffering profit setbacks as yields continued to fall and increases in fuel prices impacted onoperating costs.Aer Lingus, however, operates in the European and transatlantic markets where economicgrowth has continued. During 1999, the airline also benefited from the performance ofsterling. However, the strength of the dollar and, in particular, the significant increase in fuelprices have impacted negatively on costs.The aviation industry as a whole has continued to grow, with increased prosperity andinternational business stimulating demand for air transport, in both the full service and the nofrills sectors. Demands of consumers of full service airlines have never been greater. Comfort,flight frequency, punctuality, reliability and service are just some of the distinguishingcharacteristics that our customers have come to expect as “a given” from Aer Lingus.We have put in place a programme to deliver, on a consistent basis, those characteristics whichrepresent value for our customers. That programme has increased further our service levels andI am confident that Aer Lingus will continue to develop its position as a quality service provider.There are, however, issues which impact on our ability to deliver these standards. With therapid growth in passenger traffic, it is inevitable that airports throughout our network need toupgrade and expand their facilities. In some instances, this necessary work may lead to atemporary deterioration in some service levels for our customers while the work is being carriedout. Although we are not responsible for the disruption arising from the refurbishment work,I want to assure our customers that we regret the inconvenience to them and that we arestriving to work with the relevant authorities to minimise the disruption.Increased traffic can also lead to greater congestion in the skies over Europe and consequentair traffic control delays. Delivering a first class punctuality performance for our customers is akey objective for Aer Lingus and we invest heavily in pursuit of this objective. As a member ofthe Association of European Airlines (AEA), we are also involved in an international industrylobby to bring about an improved infrastructure to address the congestion issue.Our future lies in continuing to provide services to destinations to which people wish to travelor send goods. This involves continued selective expansion of our own route network anddevelopment of new destinations in alliance with other high quality, full service airlines.We opened new routes to Los Angeles and London City in 1999, followed by London Gatwick,Munich, Stockholm and, most recently, Baltimore / Washington, in the current year.We also formed two strong bilateral alliance agreements with American Airlines and BritishAirways. These relationships paved the way for Aer Lingus to become a partner in theoneworld alliance of international airlines, comprising American Airlines, British Airways,Cathay Pacific, Qantas, Finnair, Iberia and Lan Chile. These strategic alliances provide for mutualco-operation and are significantly more extensive than traditional alliance agreements. Theyinvolve co-operation between the alliance partners in such areas as scheduling, new services,connecting traffic, code-sharing and worldwide marketing. Most importantly of all they bringmajor customer benefits including “seamless travel” initiatives and reciprocity of frequent flyerprogrammes, airport lounge access and passenger support worldwide.3

Board of DirectorsBernie CahillChairmanMr Cahill has been Chairman since August1991 and was Executive Chairman for overtwo years within that period. He was reappointedChairman in June 1996. He isChairman of Greencore Group plc and IrishFood Processors Limited.Willie ClarkeMr Clarke was appointed to the Board as anelected Director in May 1998. He is anOperative in the Dublin Cargo Terminal.Michael FoleyMr Foley, a Chartered Accountant, wasappointed Group Chief Executive and joinedthe Board with effect from September 2000.He was President and CEO of Heineken USAINC., since 1994 and Managing Director ofMurphy Brewery Ireland Ltd., from 1989 to1993. Prior to that he had been Sales andMarketing Director and Financial Controllerof Murphy’s.Rose HynesMs Hynes was appointed to the Board inApril 1997. She is General Counsel of AerFiGroup plc (formerly GPA Group plc) and is aDirector of AerCo Limited.Dr John KeaneDr Keane was appointed to the Board inDecember, 1998. He is a ConsultantOphthalmic Physician with the Midland HealthBoard. He is elected by the medical professionto the Midland Health Board where he ismember of the Finance Committee. He is amember of the Heritage Council, WaterwaysCommittee, where he was directly engaged inthe preparation of the strategic plan on thefuture of the Waterways.Joan LoughnaneMs Loughnane was appointed to the Boardas an elected Director in May 1998. She is amember of Aer Lingus Cabin Crew and wasChairperson of the Cabin Crew Committeefrom May 1996 to April 1998.John O’DonovanMr O’Donovan, a Chartered Accountant,was appointed to the Board in July 2000. Hehas been Group Finance Director withAer Lingus since February 1995. Prior to thathe was Finance Director of Carbery MilkProducts. Between 1979 and 1992 he held anumber of senior positions, including GroupFinance Director, in the Irish Food Division ofthe Grand Metropolitan GroupDermot RaffertyCaptain Rafferty was appointed to the Boardas an elected Director in February 2000. He isan Airbus A330 Captain.Desmond J RichardsonMick SweeneyChris WallPatrick WrightMr Richardson was appointed to the Board inNovember 1997. He is an Executive Directorof the Marlborough Group.Mr Sweeney was appointed to the Board asan elected Director in January 1999. He is aclerical worker at Aer Lingus’ Head Office. Heis employed in the Network ManagementDepartment where he is a Senior SchedulesAnalyst.Mr Wall was appointed to the Board inDecember 1998. He is also a member of theBoard of Great Southern Hotels and aDirector of several other companies. He is abusiness consultant.Mr Wright was appointed to the Board inDecember 1992. He is Chairman of the RTEAuthority and Chairman of Aon InsuranceBrokers. He is also a Director of the JeffersonSmurfit Group and Anglo Irish Bank.4

These alliances are structured to provide Aer Lingus customers with a truly global network offully co-ordinated services. I expect that membership of oneworld, which we regarded as thebest alliance fit following detailed consideration of all our options, will provide major benefitsin terms of securing the loyalty of our existing customer base and of attracting new business.In the increasingly competitive industry environment, we must maintain strict control of ourcosts as we grow the business to the benefit of all stakeholders.AcknowledgementsGarry Cullen resigned as Group Chief Executive in February 2000 and I would like toacknowledge his dedicated service throughout his career in Aer Lingus.There has been a number of changes of personnel on the Board since I last reported. I wouldlike to thank and pay tribute to Aidan Dolan, Máire Geoghegan-Quinn and Jim O’Leary fortheir significant contribution to the work of the Board during their respective terms.I would like to welcome Captain Dermot Rafferty who joined the Board as a directly electedDirector. I would also like to welcome Michael Foley both to the Board and as Group ChiefExecutive. Mr. Foley is a highly experienced and accomplished international businessman.He brings to the company a promising blend of international business and public companyexperience, to lead an already strong management team through the challenges that lie ahead.John O’Donovan, Group Financial Director has also been appointed to the Board. I believe itstrengthens the Board considerably to have the experience and abilities of two seniorexecutives at the most senior level of the Group.I would like to express my thanks to the Minister for Public Enterprise, Mary O’Rourke, T.D. andto the officials of the Departments of Public Enterprise and Finance who provided muchvaluable support during the year.I also want to express my thanks to our customers. We are firmly committed to putting theirinterests first as the only way of guaranteeing a prosperous future for the Group.Finally, I would like to thank the employees of Aer Lingus - the people who make thingshappen for all stakeholders in this business. Through focus, commitment and sheer hard work,the people in Aer Lingus have brought the company to the stage where it can play a full andvital role at the start of the new millennium.Bernie CahillChairman5

ManagementLarry StanleyDeputy Chief Executive/Strategy DirectorJohn O’DonovanGroup Finance Director/Company SecretaryJohn BehanGroup Change andRestructuring DirectorDan LoughreyGroup Corporate AffairsDirectorWilliam WalshChief Operating OfficerMark MortellCommercial DirectorNiall WalshServices Director6

Message from theGroup Chief ExecutiveI am joining Aer Lingus at a time of rapid change for both the Group and the industry as awhole. This change presents many challenges and opportunities and I look forward to leadingthe airline through this most exciting of journeys.I am particularly excited to be joining Aer Lingus during its transition from a State ownedcompany to a publicly quoted one. Aer Lingus has identified the necessity for new capital tofacilitate the growth and development of the airline. The IPO will enable Aer Lingus to accesscapital markets in order to facilitate this growth.While Aer Lingus has long operated in a very competitive business environment, the airline hasdemonstrated an ability to maintain a strong market position and record healthy results.I believe there continues to be considerable growth potential for full service airlines such asAer Lingus within the current industry climate. However, as a leader in customer servicestandards, we must continue to turn the growth potential into results by focussing clearly onour customers.Important new strategies have been adopted in recent years to ensure that the airline isresponsive to its customers needs, that it does so in a consistently professional way and that itmanages its business effectively and efficiently.Our aim is to be the first choice airline for passenger and cargo customers on all the routes weoperate, to be recognised as a world class, full service airline, to provide high quality customercare at every stage of the travel experience, to offer a global route network with our alliancepartners and to operate a consistent, reliable and safe airline. The bottom line is that if weachieve these objectives, I believe we can continue to achieve profitable growth and enhanceshareholder value.Michael FoleyGroup Chief Executive7

É More, though, than all of this,ItÕs the architecture of the spiritBernard O’DonoghueOperating and Financial ReviewFinancial PerformanceIn 1999, Aer Lingus further continued the improvements in its overall operating performance,achieved over recent years.Capacity in the airline, as measured by available tonne kilometres (ATKs), increased by 14% to1,239 million ATKs, once again reflecting the introduction of larger aircraft and additionalflying. Output sold improved by 13% to 861 million revenue tonne kilometres (RTKs). Therewas strong growth in passenger numbers – up 13% to 6.5 million, while the airline’s passengerload factor remained unchanged at 74%.1134.21011.79899Group Turnoveron continuing operations(EMillions)The 1999 results include a number of changes in accounting policies and methodologies arisingfrom a detailed review of industry practice and the application of new accounting standards,notably FRS12 (Provisions, Contingent Liabilities and Contingent Assets) and FRS15 (TangibleFixed Assets). In accordance with accounting standards, certain of these changes give rise to arestatement of prior year results while others give rise to significant exceptional items.In the year to 31 December 1999 there was a 12% rise in Group turnover on continuingoperations from e1,011.7 million to e1,134.2 million.Operating profit on continuing operations, before the Employee Share Participation Schemecharge grew by 7.0% from e66.9m to e71.6 million while profits from discontinuedoperations declined from e6.0 million to e2.6 million. Discontinued operations in 1999comprised the Heathrow ground handling business and the third party maintenance operationat Shannon Airport, which were both sold during the year.Return on turnover on continuing operations was 6.3%, (1998: 6.6%), while our EBITDARmargin was 18.8% for 1999 (1998: 19.6%).Group operating profit before exceptional items and Employee Share Participation Scheme wase74.2 million, an increase of 1.8% on 1998 and a net interest charge was incurred ofe0.8 million, (1998: Net interest income e6.0 million).8

66.971.6The Employee Share Participation Scheme charge in 1999 of e2.6 million compares withe7.2 million in 1998. Following the allocation of the 1998 profit share, the maximum numberof shares available to staff under the Scheme was allocated. The reduction in the charge for1999 arises from the lack of an allocation of shares in respect of 1999 together with thebenefit of an overprovision of e1.1 million included in the 1998 accounts which has now beenreversed.Profit before exceptional items declined by 1.3% to e70.8 million. Net exceptional costs weree11.3 million, compared with a net exceptional gain in 1998 of e4.3 million. The main itemsin 1999 were losses on the exit from our maintenance and ground handling and cargobusinesses of e64.2 million and a charge of e6.0 million in respect of the proposedacceleration of payments from the Employee Share Participation Scheme to partially fund theEmployee Share Ownership Plan proposed as part of the IPO. These were partially offset bygains of e13.1 million on the partial sale of our shareholding in Equant, e10.8 million on thesale of aircraft and e30.2 million arising from a change in the method of estimating andrecognising revenue relating to expired coupons. Other exceptional items gave rise to a netgain of e4.8 million.The tax charge in 1999 was e6.3 million, compared with a charge of e0.8 million in 1998.The tax charge in recent years has benefited from the availability of tax losses, some of whichhave now been fully utilised, thereby resulting in an increase in the tax charge for 1999.The resulting retained profit for the year was e51.9 million, against e74.6 million in 1998.9899Operating Profiton continuing operations(EMillions)Net cash inflow from operating activities rose by 72% to e253.7 million and net cash at31 December 1999 was e162.2 million, up 83% on the 1998 figure. Shareholders’ fundsshowed a 23% improvement to e296.7 million.9

In the winter park there was spaceenough for a dreaming duo. The leavesthat had photographed New Yorkersthrough summer lay on the footpathlike wet prints...Thomas McCarthyNEW YORK…NEWARK…BOSTON…CHICAGO…BALTIMORE/WASHINGTON…LOS ANGELESTransatlanticWe provide regular, year-round services between Ireland and six US airports - New York/JFK,Newark, Boston, Chicago, Los Angeles and more recently Baltimore/Washington International.In addition to providing services between these cities and Ireland, Aer Lingus also providesservices between the US and the UK via Ireland.The overall number of passengers carried by Aer Lingus increased by 17% to 905,000.The expansion of Aer Lingus activities on the transatlantic routes is supported by our fleetacquisition programme and increased focus on the premium business and value leisurepassenger segments of the market. In May 1999 a sixth A330 was added to the fleet tofacilitate the new, strategically important gateway of Los Angeles which opened in May 1999.Our position has been strengthened by new code-sharing arrangements with AmericanAirlines, effective since July 2000, and membership of the oneworld alliance.As a result of the opportunities presented through our agreement with American Airlines, weexpect to increase frequencies on Aer Lingus’ key routes into the US. The opening of the newroute into Baltimore/Washington adds capacity in a key US region.Overall projected Aer Lingus capacity for transatlantic routes in 2000 is 1.4 million seats, anincrease of 16% on 1999.10

AMSTERDAM…BRUSSELS…DUSSELDORF…FRANKFURT…HELSINKI…MADRID…MILAN…MUNICH…PARIS…RENNES…STOCKHOLMContinental EuropeAer Lingus continued to provide regular scheduled services to eleven cities in eight ContinentalEuropean countries. In addition, through our recently implemented agreement with BritishAirways, we also provide code-share access to a number of other important Europeandestinations.Aer Lingus has experienced strong growth in both tourist and business traffic on its ContinentalEuropean routes in recent years. Overall Aer Lingus passenger numbers grew by 18% to1.3 million.The Aer Lingus strategy on this route group is to build frequency and improve the schedule forour customers. As part of this strategy, capacity on Continental European routes is beingexpanded through the introduction of new Airbus A320 and A321 aircraft.New direct services to Munich and Stockholm were inaugurated in March 2000, serving eachcity with five flights per week. Overall European capacity is up 9% and has beencomplemented by code-sharing agreements with British Airways, providing our customers witheasier access to destinations such as Berlin, Nice, Venice and Vienna.The opening of the Munich gateway gives Aer Lingus a strong strategic position in the Germanmarket. It is intended to enhance this further by increasing capacity on the Frankfurt route andto increase capacity on the Dusseldorf route through the use of larger aircraft.The new Stockholm route enables Aer Lingus to serve this key destination in the growingScandinavian market. This new service is a code-share operation with our oneworld partnerFinnair and complements the existing co-operative agreement with Finnair which has operatedsince 1997.11

No other thing can be so beautiful.Here the earth and heaven drink their fillalthough it is the night.Seamus HeaneyLONDON HEATHROW…LONDON GATWICK…LONDON CITY…BIRMINGHAMLondonAer Lingus carried 2.2 million passengers on its Ireland-London routes which represented anincrease of 11% over 1998. This growth was facilitated by continued investment in productand service, including the further deployment of A321 aircraft on these routes whichcommenced in 1998. Three new A321 aircraft joined the fleet in 1999 and were deployed onthe Ireland-Heathrow routes.A new route plan for the London region was adopted in 1999 following a fundamentalstrategic review of all Aer Lingus London operations. The re-shaped route structure now seesAer Lingus operate between Ireland and three London airports – Heathrow, London City andGatwick. The latter has become London’s second international hub and is an important locationfor connecting with our oneworld partners, especially British Airways. London City has beenselected to meet the growing demand for services to this premium city centre destination bythe business community.Aer Lingus CommuterIn 1999, 1.8 million passengers travelled with Aer Lingus Commuter, which served seven Britishand six Irish airports including services to certain Irish airports under Public Service Obligation(PSO) contracts.Traffic on routes between Ireland and British regional airports grew by 13% to 1.3 millionpassengers in 1999.12

BRISTOL…EDINBURGH…GLASGOW…LEEDS-BRADFORD…MANCHESTER…NEWCASTLE.CargoIn 1999 the Cargo division once again made a strong contribution to Group profits despiteincreased direct competition on the transatlantic routes. The economic conditions in Irelandhelped maintain overall Cargo tonnage at 1998 levels - 45,000 tonnes. In 1999 the Cargodivision utilised the increased capacity on the airline’s scheduled operations and withdrew fromleased-in dedicated freighter operations.The product offering was also strengthened in 1999 with the introduction of an additionalA330 aircraft for the Los Angeles route and further A321 aircraft on European services.During the year, work was completed on new handling facilities in Shannon which streamlinedthe handling of freight containers and led to improved customer service.FuturaOur subsidiary Futura, which operates a successful charter operation from bases in Palma,Tenerife and Malaga, enjoyed another good year’s trading.Operating in a highly competitive market, the introduction of Boeing 737-800s, with extendedrange, has enabled the company to enter the Scandinavian market.13

Strategic AlliancesIn November 1999 Aer Lingus concluded alliance agreements with both American Airlines andBritish Airways. Among the elements of these co-operative agreements were frequent flyerprogramme reciprocity, lounge access interchange and code-sharing across a range of keyroutes.Following the completion of these bilateral agreements, on 1 June 2000 Aer Lingus becamethe eighth member of the oneworld global alliance. This alliance now comprises Aer Lingus,American Airlines, British Airways, Cathay Pacific, Finnair, Iberia, Qantas and Lan Chile. In itsfirst year of operation oneworld member airlines carried almost 200 million passengers. Thealliance now serves over 550 destinations in more than 130 countries across the globe.Entry to the oneworld global alliance comes at a critical stage in the commercial developmentof Aer Lingus and we expect that the additional traffic accruing will further boost the growthachieved by the airline over recent years.Aer Lingus’ entry into oneworld coincided with the launch of the Irish element of an integratedglobal marketing communications campaign.The oneworld alliance offers customers benefits that are additional to the airlines’ individualnetworks, with enhanced travel options for customers and an integrated service for a growingcustomer base. The vision of the alliance is to make global travel easier and more rewarding forthe customer.Agreements between oneworld airlines enable customers to benefit from:• access to the global networks of oneworld carriers;• better customer service support, with oneworld staff trained and equipped to assistcustomers of all member airlines throughout the network;• smoother transfers across the networks of all member airlines;• closer linking of oneworld members’ frequent flyer programmes enabling customers toearn and redeem miles on any of the alliance carriers;• access to over 340 member airlines’ lounges for eligible frequent flyer club members.Aer Lingus membership of the alliance is already delivering benefits to Aer Lingus and itscustomers.14

The sun rises. Nations riseand the morning birdslift their territorial songover the day.Janice Fitzpatrick SimmonsEmployeesThe Aer Lingus strategy focuses on providing clearly differentiated, high quality service. Thisrequires sustained investment in the training and development of staff. Such investment isrequired to develop understanding throughout the organisation of our core brand values.Aer Lingus is committed to continuing to work with staff and their representatives to developfurther and strengthen a constructive partnership to achieve cost competitiveness, commercialgoals and business success. Through the Employee Share Participation Scheme, staff have anequity interest in the Group and it is envisaged that this will increase further in the context ofan IPO.1999 was the second year of the New Opportunities for Women Programme within the airline.This was part of an EU employment initiative. It involved participation in a specially developedthird level Business Management Certificate course, developed for Aer Lingus in associationwith Dublin City University.Aer Lingus retained its right to use the Positive to Disability symbol, accredited by the NationalRehabilitation Board, recognising Aer Lingus’ proactive policy in promoting equal opportunitiesand in achieving excellence in equality practice.15

You can surprise yourselves, speaking fluentlyOut of the corners of your eyes,A language you didnÕt even know you knew.Mark GranierCustomer ServiceWe have continued to invest in the Aer Lingus brand, in service quality, punctuality andfrequent flyer programmes. The core values of the Aer Lingus brand have continued to bereinforced by targeted advertising in a variety of media, sponsorships and other publicrelations activities.Progress has also been achieved in the area of service delivery and while increasinglycrowded skies and airports have made it difficult for all airlines to achieve the consistentlyhigh standards of punctuality desired, Aer Lingus continues to prioritise the delivery of thisimportant component of service for our customers.Other aspects of customer satisfaction were also addressed during 1999 and furtherimprovements made for frequent flyers. The Gold Circle Club and TAB loyalty programmeswere re-launched, implementing a tiered approach with differentiated and improvedincentives and rewards. A major initiative was commenced with the Gold Circle Clublounges in Dublin, New York and Heathrow undergoing extensive refurbishment and theopening of new Premier lounges at Dublin and, in March 2000, at Heathrow.The development of a strategic approach to e-business will see the introduction of the firstphase of an integrated plan aimed at delivering additional value and convenience to ourcustomers. Phase One will involve the launch of a new interactive website, incorporatingan online booking facility, to be followed with a number of special facilities beingdeveloped, particularly for Gold Circle Club and TAB frequent flyer members. Supplier andpartner relationships and the use of intranets to streamline processes and improveefficiencies are under development as part of the overall e-business initiative. During thecurrent year, the airline joined with seven other airlines to form Europe’s first multi-airlineleisure travel portal.16

FleetDuring 1999 Aer Lingus operated a peak fleet of 38 aircraft, of which 22 were owned orheld under finance leases and 16 held under operating leases. In addition, Futura has acore fleet of 12 aircraft held on operating leases.Deliveries received during the year included one Airbus A330-200 and three A321-200swith a further A330-200 and one A320-200 delivered in the current year.The Aer Lingus Group fleet strategy involves the implementation of a fleet re-balancingprogramme with the objective of owning approximately two thirds of the aircraftoperated. This will address an imbalance in the proportion of operating leases versusaircraft owned or held under finance leases.The Aer Lingus fleet will be progressively standardised to no more than two aircraft typeson European routes and one on transatlantic routes.17

EnvironmentOne of the Group’s objectives is to show concern for the environment and thecommunities in which we operate. This is supported by a focused environmental approachin such areas as noise, fuel efficiency and emissions to the atmosphere.Aer Lingus continues to operate a young aircraft fleet. The fleet renewal programmeensures that the airline meets its environmental obligations, as well as its commercialobjectives. The modern aircraft in the Aer Lingus fleet are more fuel-efficient, produce lesspollution and generate less noise than their predecessors. The latest addition to theAer Lingus fleet - the Airbus A320 - has a noise footprint of just 75 decibels affectingseventeen times less area than older generation aircraft, while burning on average 40%less fuel.The Group is also committed to safeguarding the health and safety of its employees,passengers, contractors and others affected by its activities. Continued implementation ofhealth and safety policies and procedures is a key management objective withperformance monitored by the Board Committee on Safety.18

Is dœn n— da ingean ia ddo ghŽaga i mo thimpea ll,do ghua ilne leathanaa m chosa int ar a l‡n.Nuala Ní DhomhnaillDUBLIN…CORK…SHANNON…BELFAST…GALWAY…KERRYCommunity InvolvementAer Lingus continues to undertake appropriate sponsorships in order to develop a close affinitywith the communities in the markets it serves. We regard this as an essential element of theAer Lingus brand, which espouses empathy and involvement with those communities.During 1999 Aer Lingus undertook a wide range of activities to foster this involvement,including support for charitable endeavours and local community events, as well as sponsorshipof cultural and sporting events.Aer Lingus announced a two-year sponsorship contract as Club sponsors of London Irish RugbyFootball Club. This contract has given the airline exposure to key audiences in importantmarkets.As one of the four partners bringing the Ryder Cup to Ireland in 2005, we leveragedAer Lingus involvement in this prestigious event through significant brand exposure in Ireland,the UK and in selected Continental European markets.Together with a significant programme of youth-related community activities, our keyinvestment in the US market was our continued association with the Wall Street 50 Awards.This event, run in association with Irish America magazine, honours people of Irish extractionwho have achieved business success.In Ireland, key community activities include the co-sponsorship of the National Junior SportsStars Awards, in association with the Irish Examiner newspaper and the continuing sponsorshipof the GAA Museum at Croke Park in Dublin. Aer Lingus also grants a bursary to the winner ofthe Taispeántas Irish fashion designers award. This is an annual nationwide event run by RTE, inassociation with Aer Lingus.The outstanding success of the Change for Good scheme has facilitated a variety of LesserDeveloped Country initiatives. The programme operates on transatlantic services and since thescheme’s inception in 1997, over IR£1 million has been raised for UNICEF sponsored projects.19

AER LINGUS GROUP PLCDirectors’ ReportYear Ended 31 December, 1999IntroductionThe Directors present their report to shareholders, together with the consolidated accounts of Aer Lingus Group plc and theauditors’ report thereon, for the year ended 31 December, 1999.Principal Activities and Business ReviewThe principal continuing activities of the Group during the year were the provision of passenger and cargo air transportationservices to the UK, mainland Europe, the US and within Ireland.During the year, the Group discontinued its ground and cargo handling activities at London Heathrow through the sale of thebusiness. The Group also completed the disposal of its Shannon based aircraft maintenance subsidiary, Shannon MRO Limited,and disposed of 49% of its cargo handling subsidiary, Manchester Cargo Centre Limited.Results for the Year and State of Affairs as at 31 December, 1999The consolidated profit and loss account for the year ended 31 December, 1999 and the consolidated balance sheet at thatdate are set out on pages 24 and 25. The profit for the year, after net exceptional losses of e11.3 million, amounted toe51.9 million (1998 - e74.6m, after net exceptional profits of e4.4m).The movement on the consolidated profit and loss account for the year is as follows:e millionBalance, 31 December, 1998 – as previously reported (57.4)Prior year adjustment (23.7)Balance, 31 December, 1998 – as restated (81.1)Profit for the year 51.9Other movements, net 1.1Balance, 31 December, 1999 (28.1)As a result of the profit for the year of e51.9 million, currency translation and other adjustments of e1.1 million, a prior yearadjustment of e23.7 million arising from a change in accounting policies and the issue of 2.0 million ordinary shares of IR£1(e1.269738) each under the Employee Share Participation Scheme, shareholders’ funds increased by e31.8 million since thosereported at 31 December, 1998. No further transfers to or from reserves are proposed by the Directors.DividendsThe Directors do not propose the payment of any dividends in respect of the year ended 31 December, 1999.Important Events since 31 December, 1999No significant events affecting the Group have taken place between 31 December, 1999 and the date of approval of theseaccounts.Future DevelopmentsThe Directors intend to continue the development of the Group’s activities by focusing on core businesses, consolidating onprogress achieved to date, and seeking prudent expansion in the context of growth opportunities. Following the IrishGovernment announcement on 14 December, 1999 that a decision had been taken to arrange an Initial Public Offering (IPO) ofthe Company’s shares, work has been ongoing on preparations for an IPO.20

AER LINGUS GROUP PLCEmployee ParticipationIn accordance with the formal agreement as provided for in the Worker Participation (State Enterprises) Acts ("the Acts") therewere regular meetings during the year between the Central Representative Council (comprising staff representatives) andmembers of senior management to discuss business issues. Local participation councils, which have been set up in a number ofdepartments, and the European Central Representative Council were also active during the year. As indicated below fouremployees served on the Board during the year under the provisions of the Acts.Employee Health and SafetyAll trading subsidiaries in the Group have produced and implemented corporate safety statements in accordance with theSafety, Health and Welfare at Work Act, 1989.DirectorsThe Directors who served during the year are listed below:Bernie Cahill (Chairman)Willie Clarke*Aidan Dolan*Máire Geoghegan-QuinnRose HynesJohn KeaneJoan Loughnane*Jim O’LearyDesmond RichardsonMick Sweeney*Chris WallPatrick Wright*Worker Director, elected under provisions of Worker Participation (State Enterprises) Acts.Mick Sweeney was appointed to the Board on 29 January, 1999. Aidan Dolan retired from the Board on 30 November, 1999 inaccordance with the provisions of the Worker Participation (State Enterprises) Acts and was replaced by Dermot Rafferty on03 February, 2000. Jim O’Leary retired from the Board on 17 January, 2000 and Máire Geoghegan-Quinn retired from theBoard on 29 February, 2000. John O’Donovan was appointed to the Board on 14 July, 2000.Directors’ and Secretary’s Shareholdings and Other InterestsThe beneficial interests, including family interests, of the directors and secretary in office at 31 December, 1999 in the sharecapital of the Company or any Group undertaking at 01 January, 1999 and 31 December, 1999 were:Aer Lingus Group plcIR£1 (e1.269738) Shares31 December, 1999 01 January, 1999*Willie Clarke 2,410 1,864Joan Loughnane 2,410 1,864Mick Sweeney 2,410 1,864John O’Donovan (Secretary) 1,890 1,344*at date of appointment if later.All the above shares were held in trust under the Employee Share Scheme. The directors and secretary and their families hadno other beneficial interests in the shares of the Company or any other Group undertaking at 31 December, 1999.There were no contracts or arrangements entered into during the year in which a Director was materially interested and whichwere significant in relation to the Group’s business.21

AER LINGUS GROUP PLCDirectors’ Report (continued)Directors’ Responsibility StatementAs required by Irish company law, the Directors have had prepared and are responsible for the accompanying accounts, thenotes to these accounts, the choice of the accounting policies used in their preparation and the other related financialinformation contained in this report, which give a true and fair view of the state of affairs of the Group and of its profit, cashflows, and total recognised gains and losses for the year. The Group’s accounts have been prepared in conformity withaccounting standards generally accepted in Ireland and the Irish Companies Acts, 1963 to 1999, applying prudent andreasonable estimates and informed judgements as required. The accounts have been prepared on the going concern basis.The Group maintains systems of internal control which have been designed to give reasonable assurance that transactions areexecuted in accordance with management’s authorisation, that assets are safeguarded, that fraud is prevented and that properfinancial records are maintained. To assist in the effective application of the Group’s internal controls, the services of qualifiedpersonnel have been secured and duties properly allocated among them.Internal auditors monitor the Group’s control systems by examining financial reports, by testing the accuracy of the reporting oftransactions, and by otherwise obtaining assurances that the systems are operating in accordance with the Group’s objectives.The Audit Committee of the Board of Directors is composed of non-executive Directors. The Committee meets periodically withthe internal auditors and the external auditors to discuss the Group’s internal accounting controls, the internal audit function,the choice of accounting policies, the external audit programme, the statutory audit report, financial reporting and other relatedmatters. The internal auditors and the external auditors have full and unrestricted access to the Audit Committee.Payment PracticesThe Directors acknowledge their responsibility for ensuring compliance, in all material respects, with the provisions of thePrompt Payment of Accounts Act, 1997 ("the Act"). Procedures have been implemented to identify the dates upon whichinvoices fall due for payment and to ensure that payments are made by such dates. Such procedures provide reasonableassurance against material non-compliance with the Act. The payment policy throughout 1999 was to comply with therequirements of the Act.AuditorsThe Auditors, PricewaterhouseCoopers, will continue in office in accordance with the provisions of S.160 of the Companies Act,1963.ON BEHALF OF THE DIRECTORSB.M. CahillCHAIRMAN05 September, 2000R. HynesDIRECTOR22

AER LINGUS GROUP PLCAuditors’ ReportAuditors’ Report to the Members of Aer Lingus Group plcWe have audited the accounts on pages 24 to 45.Respective Responsibilities of Directors and AuditorsThe Directors are responsible for preparing the Directors’ Report and, as described on page 22, for preparing the accounts inaccordance with Accounting Standards generally accepted in Ireland. Our responsibilities, as independent auditors, areestablished in Ireland by statute, the Auditing Practices Board and our profession’s ethical guidance.We report to you our opinion as to whether the accounts give a true and fair view and are properly prepared in accordancewith Irish statute comprising the Companies Acts, 1963 to 1999, and the European Communities (Companies: Group Accounts)Regulations, 1992. We state whether we have obtained all the information and explanations we consider necessary for thepurposes of our audit and whether the Company balance sheet is in agreement with the books of account. We also report toyou our opinion as to:• whether the Company has kept proper books of account• whether the Directors’ Report is consistent with the accounts; and• whether at the balance sheet date there existed a financial situation which may require the Company to convene anextraordinary general meeting; such a financial situation may exist if the net assets of the Company, as stated in theCompany balance sheet, are not more than half of its called-up share capital.We also report to you if, in our opinion, information specified by law regarding Directors’ remuneration and transactions is notdisclosed.We read the other information contained in the Annual Report and consider the implications for our report if we becomeaware of any apparent misstatements or material inconsistencies with the accounts.Basis of Audit OpinionWe conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includesexamination, on a test basis, of evidence relevant to the amounts and disclosures in the accounts. It also includes anassessment of the significant estimates and judgements made by the Directors in the preparation of the accounts, and ofwhether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed.We planned and performed our audit so as to obtain all the information and explanations which we considered necessary inorder to provide us with sufficient evidence to give reasonable assurance that the accounts are free from material misstatement,whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of thepresentation of information in the accounts.OpinionIn our opinion, the accounts give a true and fair view of the state of affairs of the Company and Group at 31 December, 1999and of the profit and cash flows of the Group for the year then ended and have been properly prepared in accordance with theCompanies Acts, 1963 to 1999 and the European Communities (Companies: Group Accounts) Regulations, 1992.We have obtained all the information and explanations we consider necessary for the purposes of our audit. In our opinion,proper books of account have been kept by the Company. The Company balance sheet is in agreement with the books ofaccount.In our opinion, the information given in the Directors’ Report on pages 20 to 22 is consistent with the accounts.The net assets of the Company, as stated in the balance sheet on page 26, are more than half of the amount of its called-upshare capital and, in our opinion, on that basis there did not exist at 31 December, 1999 a financial situation which, underSection 40(1) of the Companies (Amendment) Act, 1983, would require the convening of an extraordinary general meeting ofthe Company.PricewaterhouseCoopersChartered Accountants and Registered AuditorsDublin05 September, 200023

AER LINGUS GROUP PLCConsolidated Profit and Loss AccountYear Ended 31 December, 19991999 1998 (As Restated)Continuing Discontinued Continuing DiscontinuedOperations Operations Exceptional Operations Operations ExceptionalBefore Exceptional Items Items Total Before Exceptional Items Items TotalNotes e000 e000 e000 e000 e000 e000 e000 e000(Note 3) (Note 3)Turnover 2 1,134,224 40,444 33,013 1,207,681 1,011,720 132,878 - 1,144,598Cost of sales 2 (786,754) (37,732) - (824,486) (713,880) (109,674) - (823,554)Gross Profit 347,470 2,712 33,013 383,195 297,840 23,204 - 321,044Other operating expenses- operating (275,848) (129) (2,793) (278,770) (230,880) (18,759) - (249,639)- employee participation 20 (2,564) - (5,993) (8,557) (7,248) - - (7,248)(278,412) (129) (8,786) (287,327) (238,128) (18,759) - (256,887)Operating Profit 2 69,058 2,583 24,227 95,868 59,712 4,445 - 64,157Share of operating profitin associates - - - - - 1,516 - 1,51669,058 2,583 24,227 95,868 59,712 5,961 - 65,673Exceptional Items:Profit on disposal of fixed assets - - 10,779 10,779 - - - -Cost of fundamental restructuring - - (1,415) (1,415) - - -Writedown of fixed assets - - - - - - (6,014) (6,014)(Loss)/Profit on exit fromnon-core activities - - (44,860) (44,860) - - 10,365 10,365Profit/(Loss) on OrdinaryActivities before Interest 69,058 2,583 (11,269) 60,372 59,712 5,961 4,351 70,024Interest receivable and similar income 26,873 - - 26,873 29,401 - - 29,401Interest payable andsimilar charges 4 (27,689) - - (27,689) (23,433) - - (23,433)Profit/(Loss) on OrdinaryActivities before Taxation 5 68,242 2,583 (11,269) 59,556 65,680 5,961 4,351 75,992Taxation 7 (6,270) - - (6,270) (796) - - (796)Profit/(Loss) on OrdinaryActivities after Taxation 61,972 2,583 (11,269) 53,286 64,884 5,961 4,351 75,196Minority interests 18 (1,347) - - (1,347) (560) - - (560)Profit/(Loss) for Year 60,625 2,583 (11,269) 51,939 64,324 5,961 4,351 74,636Earnings per Share (Cents) 8 20.4c 29.7cEarnings per Share- continuing operations beforeexceptional items (Cents) 8 23.8c 25.6cB.M. CahillR. HynesCHAIRMANDIRECTORApproved by the Board of Directors on 05 September, 2000.24

AER LINGUS GROUP PLCConsolidated Balance Sheetas at 31 December, 1999Notes 1999 1998As Restatede000e000Fixed AssetsTangible assets 9 541,096 435,723Current AssetsStocks 11 6,651 5,681Debtors 12 129,307 162,243Cash, short term deposits and liquid resources 13 761,155 433,084897,113 601,008Creditors: Amounts falling due within one year 14 (428,588) (366,237)Net Current Assets 468,525 234,771Total Assets less Current Liabilities 1,009,621 670,494Creditors: Amounts falling due after more than one year 15 (507,535) (300,242)Provisions for Liabilities and Charges 16 (202,218) (127,285)Net Assets 299,868 242,967Capital and ReservesCalled-up share capital 17 324,786 322,270Profit and loss account (28,085) (81,125)Shareholders’ Funds - equity interests 296,701 241,145Minority Interests 18 3,167 1,822299,868 242,967B.M. CahillR. HynesCHAIRMANDIRECTORApproved by the Board of Directors on 05 September, 2000.25

AER LINGUS GROUP PLCCompany Balance Sheetas at 31 December, 1999Notes 1999 1998e000 e000Fixed AssetsFinancial assets 10 328,494 214,217Creditors: Amounts falling due within one yearAmounts due to subsidiary undertakings (3,708) (6,224)Net Current Liabilities (3,708) (6,224)Net Assets 324,786 207,993Capital and ReservesCalled-up share capital 17 324,786 322,270Profit and loss account - (114,277)Shareholders’ Funds - equity interests 324,786 207,993B.M. CahillR. HynesCHAIRMANDIRECTORApproved by the Board of Directors on 05 September, 2000.26

AER LINGUS GROUP PLCConsolidated Cash Flow StatementYear Ended 31 December, 1999Notes 1999 1998e000 e000Net cash inflow from Operating Activities 19A 253,721 147,327Returns on Investments and Servicing of Finance 19B 107 6,102Taxation (4,059) (314)Capital Expenditure and Financial Investment 19B (146,219) (96,726)Acquisitions and Disposals 19B (23,673) (30,951)Cash inflow before use of liquid resources and financing 79,877 25,438Management of Liquid Resources 19C (59,477) 12,455Financing - Decrease in debt 19B (11,706) (45,859)Increase/(Decrease) in cash in year 8,694 (7,966)Reconciliation of net cash flow to movement in net funds (Note 19C)Increase/(Decrease) in cash in year 8,694 (7,966)Cash outflow from decrease in debt and lease financing 11,706 45,859Cash inflow from change in liquid resources 59,477 (12,455)Change in net funds resulting from cash flows 79,877 25,438Other movements (6,297) 131Movement in net funds in the year 73,580 25,569Net funds at 01 January 88,655 63,086Net funds at 31 December 162,235 88,65527

AER LINGUS GROUP PLCOther Consolidated StatementsYear Ended 31 December, 1999Notes 1999 1998As Restatede000e000Statement of Total Recognised Gains and LossesProfit for the year 51,939 74,636Other movements, principally currency translation adjustmentsProfit and Loss account 1,101 (3,641)Total recognised gains for the year 53,040 70,995Prior year adjustment 1 (23,751)Total gains and losses recognised since last annual report 29,289Reconciliation of Movements in Shareholders’ FundsBalance, beginning of year- As previously reported 264,896 193,956- Prior year adjustment (23,751) (29,011)- As restated 241,145 164,945Total recognised gains for the year 53,040 70,995Issue of share capital - employee share scheme 2,516 5,205Balance, end of year 296,701 241,145Movements on Profit and Loss AccountProfit and Loss Account, beginning of year- As previously reported (57,374) (123,109)- Prior year adjustment (23,751) (29,011)- As restated (81,125) (152,120)Profit retained for year 51,939 74,636Currency translation adjustment 1,101 (3,641)Profit and Loss Account, end of year (28,085) (81,125)28

AER LINGUS GROUP PLCStatement of Accounting PoliciesThe Group’s principal accounting policies are set out below. All of these policies have been applied consistently throughout theyear and the preceding year except where indicated.ABCDEFPrinciples of PreparationThe consolidated accounts have been drawn up in euros under the historical cost convention in accordance withaccounting standards generally accepted in Ireland and Irish statute, comprising the Companies Acts, 1963 to 1999 andthe European Communities (Companies: Group Accounts) Regulations, 1992. Accounting standards generally acceptedin Ireland in preparing accounts giving a true and fair view are those published by the Institute of Chartered Accountantsin Ireland and issued by the Accounting Standards Board.To facilitate comparability, certain amounts for 1998 have been re-classified to conform with the current year’spresentation.Basis of ConsolidationThe consolidated accounts include the accounts of the Company and all its subsidiaries made up to 31 December. Theresults of subsidiaries disposed of during the year are included in the consolidated accounts up to the effective date ofdisposal. The results of associated undertakings are included, using the equity method of accounting.Income RecognitionTurnover comprises revenues (excluding VAT and similar taxes, trade discounts and transactions between companies inthe Group) from passenger and cargo operations and airline services activities arising in the normal course of business.Revenues from passenger and cargo operations are recognised when transportation is provided. The value of sales made,for which transportation has not been provided at year-end, is included in creditors falling due within one year under thecaption "Passenger and Cargo sales in advance". Expired coupons are recognised as revenue on a systematic basis.Pension and Other Post-Retirement ObligationsThe Group provides pensions to substantially all employees through contributions to a variety of separately administeredschemes, the majority of which are defined benefit pension schemes.The amount charged to the profit and loss account in respect of such schemes and other post-retirement obligations isthe estimated regular cost of providing the benefits accrued in the year (as advised by professionally qualified actuaries),adjusted to reflect variations from that cost. The regular cost is calculated so that it represents a substantially levelpercentage of current and future pensionable payroll. Variations from regular cost are charged or credited to the profitand loss account over the estimated average remaining service lives of employees.TaxationIrish and overseas corporation tax payable is provided on taxable profits at current rates.Deferred taxation is provided, using the liability method, on material timing differences to the extent that it is expected tobecome payable in the foreseeable future.Tangible Fixed AssetsAll tangible fixed assets are stated at cost, net of accumulated depreciation.In prior years, aircraft which were financed in whole or in part in foreign currency, were regarded together with therelated liabilities as separate groups of assets and liabilities and accounted for in foreign currency. The amounts in foreigncurrency were translated into the reporting currency at rates ruling at the balance sheet date and the net differencesarising from the translation of aircraft net book values and related foreign currency liabilities were taken to reserves. Theaccounting policy was changed in 1999 and as a result all aircraft, regardless of how they are financed, are recorded ineuros at the date of acquisition. Gains or losses on foreign currency liabilities which finance aircraft are now dealt with inthe profit and loss account. The effect of the change in policy is set out in Note 1.Depreciation is provided on all tangible fixed assets at rates calculated to write off the cost less estimated residual valueof each asset on a straight line basis over its expected useful life.29

AER LINGUS GROUP PLCStatement of Accounting Policies (continued)Useful lives and residual values are re-appraised regularly and currently fall in the following ranges:Useful lifeResidual value(Years) (%)Flight Equipment:Aircraft fleet and major spares- Fokker 50s 15 Nil- Other shorthaul aircraft 18 10- Longhaul aircraft 20 10Rotable spares 5 to 15 NilModifications to leased aircraft Period of lease NilDepreciable Property:Freehold Principally 50 NilLeasehold Period of lease NilEquipment:Ground equipment 3 to 20 NilOther 3 to 10 NilA proportion of the cost of owned aircraft, equivalent to the estimated cost of the next major airframe and engineoverhaul, is amortised over the period to the date of the next major maintenance check. The costs of major airframe andengine overhauls for owned aircraft are capitalised as part of the cost of the aircraft.Interest attributable to progress payments made in respect of aircraft is capitalised and added to the cost of the assetsconcerned. Capitalisation of interest ceases when the asset is placed in service.GHIFinancial Fixed AssetsInvestments in associated undertakings, where the Group has a long-term strategic interest, are recorded using the equitymethod of accounting under which the Group’s current year share of post-acquisition profits less losses is included in theprofit and loss account and added to the carrying value of the investments in the balance sheet. The results of suchassociated undertakings which were disposed of during the year are accounted for under the equity method up to theeffective date of disposal. Other investments in associated companies are recorded on the basis of dividends receivable.Interests in subsidiary undertakings are stated in the Company’s balance sheet at cost, less provision for any permanentimpairment in value.StocksStocks are stated at the lower of cost and net realisable value.Cost is based on average invoice price. Net realisable value is based on estimated normal selling price, less further costsexpected to be incurred to completion and disposal. Stocks which are known to be obsolete at the balance sheet dateare written off and provision is made in respect of stocks which may become obsolete in the future.Cash and Liquid ResourcesCash is defined as cash on hand together with deposits repayable on demand. Deposits repayable on demand aredefined as those which can be withdrawn at any time and without penalty or where a maturity or period of notice of notmore than 24 hours has been agreed.Liquid resources are defined as stores of value which are readily convertible into known amounts of cash at or close totheir carrying amount without curtailing or disrupting the business. They primarily consist of deposits held with a periodof notice greater than 24 hours.30

AER LINGUS GROUP PLCJKLMLeasesAssets held under finance leases, which transfer substantially all the risks and rewards of ownership to the Group, areinitially recorded at their fair value at the inception of the lease. The equivalent liability, categorised as appropriate, isincluded under "Creditors due within and after one year". Assets are depreciated over the lease term or their usefuleconomic lives, as appropriate. Finance lease charges are allocated over the periods of the leases to produce constantrates of return on the outstanding balances.Rentals under operating leases are charged on a straight line basis over the lease term.Aircraft MaintenanceProvision is made, on a time apportioned basis, for aircraft maintenance costs to be incurred in connection with majorairframe and engine overhauls on leased aircraft where the lease terms impose obligations on the lessee to have theseoverhauls carried out. The actual costs of the overhauls are charged against the provision.As indicated in accounting policy F, the costs of major mainframe and engine overhauls in respect of owned aircraft arecapitalised as part of the cost of the related aircraft. This represents a change in accounting policy arising from theadoption of FRS12 (Provisions, contingent liabilities and contingent gains), as previously provision was made on a timeapportioned basis for aircraft maintenance costs in respect of all aircraft. The effect of the change in policy is notmaterial.Foreign CurrencyIn the accounts of individual companies, transactions denominated in foreign currencies are recorded in the local currencyat actual exchange rates at the date of the transaction or, where appropriate, at the rates of exchange in related forwardexchange contracts. Monetary assets and liabilities denominated in foreign currencies are translated using the rates ofexchange prevailing at the balance sheet date or, where appropriate, the rates of exchange in related forward exchangecontracts.Gains and losses arising from foreign currency translations and on settlement of amounts receivable and payable inforeign currency are dealt with in the profit and loss account.In prior years, changes in the reporting currency value of outstanding foreign currency liabilities which financed aircraftwere offset as reserve movements to the extent of the exchange differences arising on the translation of related aircraft.In the light of movements in exchange rates the policy has been changed with all such exchange differences now dealtwith in the profit and loss account. This policy is considered more appropriate given developments in internationalfinancial markets and as a result the carrying value of aircraft in the balance sheet is not exposed to exchange ratemovements. The effect of this change in policy is set out in Note 1.For the purposes of consolidation of subsidiaries and application of the equity method of accounting in respect ofassociated undertakings, the closing rate/net investment method is used, under which translation gains or losses areshown as movements on reserves. Profit and loss accounts of overseas subsidiaries are translated at average exchangerates.Treasury InstrumentsThe Group enters into transactions in the normal course of business using a variety of treasury instruments in order tohedge against exposures to fluctuating exchange rates, interest rates and fuel costs. These transactions are accounted forin accordance with their economic substance.The principal transactions are forward contracts and currency swaps entered into in order to change the currencyexposure of foreign currency debt positions. Such forward contracts and swaps are revalued at closing spot rates ofexchange and the resulting gains and losses are accounted for on a consistent basis with gains and losses on theretranslation of the related debt (Accounting Policy L). The interest effect of these transactions is accounted for evenlyover the duration of the contracts.Forward contracts and related instruments designated to hedge future transactions, such as foreign currency expenditure,are disclosed in the accounts as commitments and are accounted for on a consistent basis with the related transactions.31

AER LINGUS GROUP PLCNotes to the Consolidated AccountsYear ended 31 December, 19991. Prior year adjustmentThe accounting policy for recording foreign currency aircraft debt and the related aircraft was changed in 1999. In prioryears, aircraft which were financed in whole or in part by foreign currency loans or finance leases were regarded,together with the related liabilities, as separate groups of assets and liabilities and accounted for in foreign currency.These foreign currency amounts were translated to the reporting currency at the end of each financial year at the yearend exchange rates and the net exchange differences were taken to reserves.The policy was changed in 1999 and aircraft, regardless of how financed, are now recorded in euros at the date ofacquisition and gains or losses on foreign currency loans or finance leases which finance such aircraft are taken to theprofit and loss account as they occur.The effect of the changes in policy is to increase operating profit in 1998 by e6.4 million, comprising e2.1 million inrespect of the elimination of the depreciation charge on cumulative foreign exchange differences and e4.3 million inrespect of a gain on foreign currency loans and finance leases. The effect of the changes in 1999 is to reduce operatingprofit in 1999 by e9.8 million, comprising a loss of e12.2 million on foreign currency loans and finance leases, offset bye2.4 million in respect of the elimination of the depreciation charge on cumulative foreign exchange differences.The effect of the changes in policy on the consolidated balance sheet is to reduce the previously reported net book valueof tangible fixed assets and shareholders’ funds at 31 December, 1998 by e23.7 million.2. Turnover and Operating ProfitContinuing Discontinued 1999 Continuing Discontinued 1998TotalTotale000 e000 e000 e000 e000 e000TurnoverPassenger and Cargo Services- Normal 1,134,224 40,444 1,174,668 1,011,720 44,222 1,055,942- Exceptional 33,013 - 33,013 - - -Airline Services - - - - 88,656 88,6561,167,237 40,444 1,207,681 1,011,720 132,878 1,144,598Cost of Sales 786,754 37,732 824,486 713,880 109,674 823,554Other Operating ExpensesSelling and Marketing- Normal 170,055 - 170,055 147,743 2,117 149,860- Exceptional 2,793 - 2,793 - - -Administrative 105,793 129 105,922 83,137 15,050 98,187Distribution - - - - 1,592 1,592Employee Participation- Normal 2,564 - 2,564 7,248 - 7,248- Exceptional 5,993 - 5,993 - - -287,198 129 287,327 238,128 18,759 256,887Operating Profit 93,285 2,583 95,868 59,712 4,445 64,157Segmental disclosure of turnover by source and destination, and the results and net assets of the Group are not providedas the Directors are of the opinion that disclosure of such information would be prejudicial to the interests of the Group.32

AER LINGUS GROUP PLC3. Exceptional ItemsDetails of Exceptional Items under the captions indicated within the profit and loss account are set out below.1999 1998e000e000Continuing OperationsTurnover/Selling and Marketing Expenses- Passenger sales (a) 30,220 -Employee Participation (b) (5,993) -Profit on Disposal of Fixed Assets- Disposals of aircraft and flight equipment 10,779 -Costs of Fundamental Restructuring- Strategic alliance (c) (1,415) -Writedown of Fixed Assets- Aircraft and flight equipment (d) - (6,014)33,591 (6,014)Discontinued Operations(Loss)/Profit on Exit from Non-Core Activities- Maintenance activities (e) (56,097) -- Ground and cargo handling (f) (8,195) -- Equant NV (g) 13,059 -- GPA Group - 9,821- Fernley Airport Services - 740- Other 6,373 (196)(44,860) 10,365Net Exceptional Items (11,269) 4,351(a)(b)The Group has revised its method of estimating and recognising revenue relating to expired coupons. Included as anexceptional item in the 1999 accounts is an exceptional net credit of e30.2 million which relates to the financial years1998 and prior, resulting from the adoption of the revised methodology. In addition to the exceptional credit, theapplication of the revised methodology in 1999 has also resulted in an increase in the 1999 operating profit fromcontinuing operations of e7.1 million when compared with that calculated under the previous methodology. Had therevised method been applied in 1998, the operating profit from continuing operations for that year would have increasedby e3.9 million.Following the Irish Government announcement on 14 December, 1999 that a decision had been taken to arrange anInitial Public Offering of the Company’s shares, agreement was reached on the establishment of an Employee ShareOwnership Plan (ESOP). Part of the funding for the ESOP is the payment of the remaining balance on the existingEmployee Share Participation Scheme (e9.66 million) and full provision has been made for this amount in the 1999accounts. The amount charged in the profit and loss account is e8.55 million, being the amount to be paid e9.66million less an overprovision of e1.11 million from previous years. Of the total amount charged, e5.99 million has beenclassified as an exceptional item with the balance, e2.56 million, representing the 1999 profit share (net of theoverprovision of e1.11 million) charged to operating profit. Further details are set out in Note 20.(c) Aer Lingus was elected as a member of the oneworld alliance in December, 1999. Costs incurred to 31 December, 1999in becoming a member have been written off as an exceptional item. Further costs will be incurred in 2000 in preparingfor full participation as a member and these will be recorded in the 2000 financial statements.(d)The writedown of fixed assets in 1998 comprises a provision to reduce the carrying value of certain commuter aircraft tonet realisable value.33

AER LINGUS GROUP PLCNotes to the Consolidated Accounts (continued)3. Exceptional Items (continued)(e) The 1997 accounts included the Directors’ estimate of the loss on the Group’s exit from its maintenance activities. Theadditional loss charged in 1999 represents an adjustment to that estimate and is based on the amount estimated by theDirectors to be necessary to state certain maintenance contracts at fair value. The amount provided is the present valueof the excess of the contracted amounts over their fair value. The provision will be released over the life of the contracts(10 years from 01 January, 1999). A credit of e8.7 million to operating profit has arisen in respect of this in 1999, with adiscount charge of e3.6 million included in interest payable. The amount provided of e65.7 million comprises anexceptional charge in 1999 of e56.1 million, together with provisions of e9.6 million made in previous years relating tothe Group’s exit from its maintenance activities.(f)(g)The loss on exit from ground and cargo handling activities comprises the net loss on the disposal of the majority of theGroup’s UK based ground and cargo handling operations.During the year, the Group disposed of 53% of its indirect interest in Equant NV acquired through its membership of theairline telecommunications co-operative, SITA.4. Interest Payable and Similar Charges1999 1998e000e000On bank loans, overdrafts and other loans:- repayable within five years, by instalments 4 9- repayable within five years, not by instalments 2,051 3,469Finance lease interest 18,599 18,805Interest on irredeemable capital 373 461Other interest, principally on loansrepayable after more than five years 3,043 689Finance charge on discounted provision (Note 3(e)) 3,619 -27,689 23,4335. Profit on Ordinary Activities before Taxation1999 1998e000e000Profit on ordinary activities before taxationis stated after charging (crediting):Depreciation of tangible fixed assets- owned 19,154 20,934- held under finance leases 27,825 20,505Operating lease rentals payable- plant and machinery 385 437- aircraft 97,418 96,073- property 9,716 13,055Operating lease rentals receivable (3,804) (3,564)Auditors’ remuneration 189 197Directors’ emoluments- fees 79 79- other emoluments (including pension contributions) 146 208- pensions paid to former directors 93 95Net losses/(gains) on foreign currency borrowings less deposits 9,764 (4,422)In accordance with Section 3 (2) of the Companies (Amendment) Act, 1986, the profit and loss account of the Companyis not presented. The profit of the Company for the year ended 31 December, 1999 amounted to e114 million arisingfrom the reversal of a provision against the book value of shares in subsidiary undertakings which is no longer required.34

AER LINGUS GROUP PLC6. Staff CostsThe average number of persons employed by the Group in the financial year, analysed by business activity, was asfollows:1999 1998No. No.Passenger and Cargo Services 7,044 6,489Airline Services - 1,8277,044 8,316Group employee costs during the year 1999 1998amounted to: e000 e000Wages and salaries 241,725 269,002Social welfare costs 25,093 27,512Pension costs (Note 21) 12,129 13,274278,947 309,788Employee Share Participation Scheme (Note 20) 3,670 7,248Over provision in prior year (1,106) -Net charge 2,564 7,2487. TaxationThe tax charge (credit) for the year comprises:281,511 317,0361999 1998e000e000IrelandCorporation tax 4,801 37Share of tax - associated undertakings - 1884,801 225OverseasCorporation tax 1,347 1,034Adjustments relating to previous years - (766)Deferred tax arising from capital allowances 122 3036,270 796The charge for corporation tax has been reduced by the utilisation of tax losses carried forward from previous years andaccelerated capital allowances.8. Earnings per share1999 1998Weighted average number of shares in issue (‘000) 254,655 251,135Profit for the year (e000) 51,939 74,636Earnings per share (cents) 20.4c 29.7cProfit for the year from continuing operations before exceptional items (e000) 60,625 64,324Earnings per share - continuing operations before exceptional items (cents) 23.8c 25.6c35

AER LINGUS GROUP PLCNotes to the Consolidated Accounts (continued)9. Tangible AssetsFlight Property Ground Other TotalEquipment Freehold/ Equipment EquipmentLeaseholde000 e000 e000 e000 e000CostBeginning of year, as restated 583,983 39,018 59,399 37,243 719,643Additions 149,586 4,553 10,326 8,512 172,977Disposals (44,617) (2,738) (15,210) (2,071) (64,636)Foreign exchange - - - 42 42End of year 688,952 40,833 54,515 43,726 828,026DepreciationBeginning of year, as restated 198,574 23,326 37,953 24,067 283,920Charge for year 34,302 3,019 5,465 4,193 46,979Disposals (29,524) (1,283) (11,271) (1,900) (43,978)Foreign exchange - - - 9 9End of year 203,352 25,062 32,147 26,369 286,930Net Book ValueEnd of year 485,600 15,771 22,368 17,357 541,096Beginning of year, as restated 385,409 15,692 21,446 13,176 435,723Leased assets included in the above:Net book value - end of year 402,413 - - 13 402,426Net book value - beginning of year, as restated 255,594 - - 19 255,61310. Financial AssetsCompanyCostShares in subsidiaryundertakingse000At beginning and end of year 328,494ProvisionsAt beginning of year 114,277Reduction in year (114,277)At end of year -Net Book Value31 December, 1999 328,49431 December, 1998 214,217A list of the Principal Group Companies at 31 December, 1999, their principal activities, country of incorporation, and theGroup holding percentage is set out in Note 24.36

AER LINGUS GROUP PLC11. Stocks1999 1998e000e000Consumable aircraft spares 2,239 2,265Other stocks 4,412 3,416The replacement cost of stocks is not significantly different from their balance sheet values.6,651 5,68112. Debtors1999 1998e000e000Amounts falling due within one year:Trade debtors 70,559 83,234Other debtors 40,678 34,180Prepayments and accrued income 8,891 35,654Value Added Tax 3,738 3,155123,866 156,223Amounts falling due after more than one year:Other debtors 5,441 6,020129,307 162,24313. Cash, short-term deposits and liquid resources1999 1998e000e000Cash and demand deposit balances 17,964 11,925Other deposit balances and liquid resources 311,340 247,500329,304 259,425Restricted cash deposit balances heldto repay certain finance lease obligations (a) 398,152 155,293Other restricted deposits (b) 33,699 18,366431,851 173,659761,155 433,084(a)(b)The Group holds foreign currency deposits in order to meet certain finance lease obligations which are denominatedin the same currency. The deposits together with the interest receivable thereon will be sufficient to meet in full thelease obligations and related lease interest over the period of the leases.The Group also holds other restricted deposits to meet certain loan obligations.37

AER LINGUS GROUP PLCNotes to the Consolidated Accounts (continued)14. Creditors: Amounts falling due within one year1999 1998e000e000Bank loans and overdrafts (Note 15) 22,851 22,982Finance lease obligations (Note 15) 68,534 21,205Trade creditors 55,815 39,208Accruals and deferred income 112,096 118,152Passenger and Cargo sales in advance 117,470 134,922Taxation and Social Welfare (a) 27,142 18,752Other creditors 24,680 11,016428,588 366,237(a)Taxation and Social Welfare creditors include:PAYE 4,694 690Social Welfare 2,870 394Overseas taxation 14,189 16,642Value Added Tax - 179Corporation tax 5,389 84727,142 18,75215. Creditors: Amounts falling due after more than one year1999 1998e000e000Loan capitalRepayable- within one year (Note 14) 22,851 22,982- from one to two years 9,421 1,562- from two to five years 25,019 25,989- after five years 25,471 31,221Irredeemable capital (a) 6,349 6,34989,111 88,103Included in Creditors fallingdue within one year (Note 14) (22,851) (22,982)66,260 65,121Finance lease obligationsRepayable - within one year (Note 14) 68,534 21,205- from one to two years 86,736 43,673- from two to five years 133,428 125,938- after five years 221,111 65,510509,809 256,326Included in Creditors falling duewithin one year (Note 14) (68,534) (21,205)441,275 235,121507,535 300,24238

AER LINGUS GROUP PLC(a) This loan, which is not repayable in the event of a winding up, was advanced by the principal shareholder (Note 23).Interest is payable thereon, as determined by the Minister for Finance from time to time, and the current rate is 4%per annum (1998 - 7.25% per annum).(b) Loan capital and lease obligations of e539 million (1998 - e285m) are secured on various assets of the Group,principally aircraft. Repayments of capital and interest in respect of loan capital of e0.04 million (1998 - e0.13m)are guaranteed by the Irish Government.(c) Loan capital and lease obligations of e368 million (1998 - e197m) at 31 December, 1999 are denominated invarious foreign currencies, including US Dollar, Sterling and Yen.16. Provisions for Liabilities and ChargesBusiness Aircraft Maintenance Deferred Aircraft Post Other TotalRepositioning Maintenance Contracts Taxation Operating EmploymentLease BenefitsEqualisation(a) (b) (c) (d) (e)e000 e000 e000 e000 e000 e000 e000 e000Beginning of year 48,203 50,056 - 659 8,641 2,579 17,147 127,285Provided during year - 37,612 56,097 122 35,121 4,537 6,613 140,102Finance charge ondiscounted provision - - 3,619 - - - - 3,619Utilised during year (3,313) (29,462) (8,723) (13) (36,223) (699) (184) (78,617)Released to exceptionalitems during year (3,809) - - - - - - (3,809)Reclassifications (f) (15,302) - 6,204 - - 6,349 2,749 -Transfers from netcurrent assets (1,060) - 3,446 - - 8,766 - 11,152Translation adjustment 321 - - - 1,443 415 1,372 3,551Other (139) - - (768) - - (158) (1,065)End of year 24,901 58,206 60,643 - 8,982 21,947 27,539 202,218(a) Business RepositioningA provision for business repositioning costs is recognised when a constructive obligation exists. The amount of theprovision is based on the terms of business repositioning measures communicated to employees and represents theDirectors’ best estimate of the cost of these measures having regard to the current status of negotiations. Theprovision is expected to be utilised within two years.(b) Aircraft MaintenanceIn accordance with the requirements of FRS12 (Provisions, Contingent Liabilities and Contingent Assets), the Grouphas changed its accounting policy for providing for the cost of major airframe and engine overhauls in respect ofowned aircraft. Costs incurred on major overhauls of owned aircraft are now treated as an addition to tangible fixedassets. Provision continues to be made on a time apportioned basis for maintenance of leased aircraft. The effect ofthe change in policy is not material. The provisions will be utilised as the major airframe and engine overhauls takeplace.(c) Maintenance ContractsA fair value provision has been made for contracts entered into as part of the disposal of the Group’s maintenanceactivities and is expected to be utilised over a period of nine years.(d) Post Employment BenefitsThis comprises a provision for post cessation of employment/retirement obligations to current and former employeesof the Group.39

AER LINGUS GROUP PLCNotes to the Consolidated Accounts (continued)16. Provisions for Liabilities and Charges (continued)(e) OtherOther provisions relate mainly to expected costs of terminating financing arrangements in relation to aircraft sold in1994 and frequent flyer provisions.(f)ReclassificationsThese represent reclassifications of provisions consequent on the remeasurement of their amounts in accordancewith FRS12.The deferred tax provision comprises: 1999 1998e000e000Excess of tax allowances over book depreciation of fixed assets - 659The amounts of unprovided deferred taxation are as follows:Excess of tax allowances over book depreciation of fixed assets 69,175 83,904Tax effect of losses carried forward (10,971) (24,887)Other provisions (3,961) (10,665)The amount of unprovided deferred taxation has been calculated using current tax rates, which in the case ofIreland is 24% (1998: 28%).54,243 48,35217. Called-Up Share CapitalNumbere000Authorised:Shares of IR£1 (e1.269738) each 500,000,000 634,869Issued and fully paid:Shares of IR£1 (e1.269738) eachBeginning of year 253,807,852 322,270Allotted during year (a) 1,982,703 2,516End of year 255,790,555 324,786(a)On 29 July, 1999 an additional 1,982,703 shares of IR£1 (e1.269738) each were issued to employees under theEmployee Share Participation Scheme (Note 20).18. Minority Interests1999 1998e000e000Beginning of year 1,822 364Share of retained profit for year 1,347 560Other movements (2) 898End of year 3,167 1,82240

AER LINGUS GROUP PLC19. Consolidated Cash Flow StatementA. Reconciliation of Operating Profit to Net Cash Inflow from Operating Activities1999 1998e000e000Operating profit before exceptional items 71,641 64,157Depreciation of tangible fixed assets 46,979 41,439Amortisation of investment grants - (97)Movement in provisions 6,804 6,405Increase in stocks (2,416) (94)Decrease/(increase) in debtors 52,003 (7,505)Increase in creditors 68,946 47,444Loss/(gain) on exchange 9,764 (4,422)Net Cash Inflow from Operating Activities 253,721 147,327B. Analysis of Cash Flows for Headings netted in the Cash Flow Statement1999 1998e000e000Returns on investments and servicing of financeInterest received 23,629 33,950Interest paid (9,416) (9,490)Finance lease interest paid (14,106) (18,358)Net cash inflow for returns on investments and servicing of finance 107 6,102Capital expenditure and financial investmentPurchase of tangible fixed assets (172,977) (98,193)Sale of tangible fixed assets 26,758 1,467Net cash outflow for capital expenditure and financial investment (146,219) (96,726)Acquisitions and disposalsSale of financial fixed assets:Maintenance activities (22,669) (42,544)Equant NV 6,212 -GPA Group - 9,821Handling activities (9,528) -Other 2,312 1,772Net cash outflow from acquisition and disposals (23,673) (30,951)FinancingCapital element of finance leases 225,227 (24,546)New loan capital 131 -Repayment of loan capital - (32,540)(Increase)/decrease in restricted deposits (237,064) 11,227Net cash outflow from financing (11,706) (45,859)41

AER LINGUS GROUP PLCNotes to the Consolidated Accounts (continued)19. Consolidated Cash Flow Statement (continued)C. Analysis of Changes in Net Funds (Debt)Net Funds Cash Exchange Other Net Funds(Debt) Flow Movement Non-Cash (Debt)01 Jan 99 Changes 31 Dec 99e000 e000 e000 e000 e000CashCash in hand, at bank 11,925 5,743 296 - 17,964Overdrafts (22,487) 2,951 (866) - (20,402)(10,562) 8,694 (570) - (2,438)FinanceDebt due within one year (495) (1,954) - - (2,449)Debt due after one year (65,121) 1,823 (3,741) 779 (66,260)Finance leases (256,326) (225,227) (28,256) - (509,809)Restricted deposits 173,659 237,064 21,128 - 431,851(148,283) 11,706 (10,869) 779 (146,667)Liquid ResourcesOther cash deposits and liquid resources 247,500 59,477 4,363 - 311,340Total 88,655 79,877 (7,076) 779 162,23520. Employee Share Participation SchemeAn Employee Share Participation Scheme (the "Scheme") was established by a Trust Deed executed on 13 March, 1996.The Scheme provides that employees satisfying certain service criteria are entitled to share equally in a maximum of 10%of the Group’s profit before tax and exceptional items, subject to the following:• half the profit share must be taken in the form of shares in Aer Lingus Group plc, while the remainder may betaken in either cash or further shares• when 5% of the issued share capital of Aer Lingus Group plc as at 31 December, 1995 has been issued under theScheme (12,180,503 shares), no more shares may be issued to employees and the profit share thereafter cannotexceed 5% of the Group’s profit before tax and exceptional items• when e15.5 million (IR£12.2 million) has been paid out in respect of the cash element of the profit share,entitlement to participate in any further cash payment of the profit share will cease.The maximum permitted number of shares in Aer Lingus Group plc (12,180,503 shares) has been issued to the Trusteesof the Scheme for appropriation to employees and accordingly no further shares may be issued.The employees’ share of the Group’s profits for 1999 amounts to e3.67 million, which represents 5% of the Group’sprofit before tax and exceptional items of e73.4 million. This is arrived at by adjusting the Group’s profit on ordinaryactivities before taxation of e59.5 million for net exceptional costs of e11.3 million (Note 3) and the net charge of e2.56million for the employees’ share of profits. The net charge of e2.56 million comprises the 1999 profit share of e3.67million, less an over provision of e1.11 million made in 1998.42

AER LINGUS GROUP PLCMovements on the Employee Share Participation Scheme from inception are as follows:Number of CashSharesMillionemMaximum entitlement 12.2 15.5Distributions made:1996 (in respect of 1995) (2.7) (0.7)1997 (in respect of 1996) (3.4) (0.8)1998 (in respect of 1997) (4.1) (0.6)1999 (in respect of 1998) (2.0) (3.7)Balance available for distribution Nil 9.7Following the announcement by the Irish Government on 14 December, 1999 that a decision had been taken that therewould be an Initial Public Offering (IPO) of the Company’s shares, discussions have taken place between employeerepresentatives, the Departments of Public Enterprise and Finance, and the Company on the establishment of anEmployee Share Ownership Plan (ESOP). Agreement has been reached on the terms of the ESOP, one of which is that theremaining balance on the Employee Share Participation Scheme (e9.66 million) will be utilised to partly fund thepurchase of shares to be held on behalf of the ESOP. Full provision has been made in these accounts for the amountpayable of e9.66 million, e3.67 million of which is recorded as a charge against operating profit representing the shareof profits for 1999. The remaining balance, e5.99 million, has been included as an exceptional charge.21. PensionsThe Group operates a number of externally funded defined benefit pension schemes for the majority of its employees.Regular actuarial valuations are carried out, normally every three years, in respect of the schemes. The latest actuarialreports, based on valuations at dates ranging from 31 March, 1997 to 01 January, 1999, were completed by independentactuaries and disclosed the schemes to have a surplus of assets over liabilities. The principal actuarial method used wasthe Aggregate Method which involved determining appropriate future Group contribution rates designed to fund theprojected liabilities of the schemes over the remaining working lifetime of the current members. The primary financialassumption underlying the actuarial valuations was that the yield on the schemes’ investments will earn a real rate ofinvestment return of 2% per annum over general salary inflation for members. No explicit provision was made for futurepension increases. The total market value of the assets of the schemes at the valuation dates was e1,170 million and thelevel of funding was 117%. Actuarial reports are not available for public inspection.The Group’s pension contributions charged for the year were e12.1 million (1998 - e13.3m), based on rates as advisedby the actuaries. An amount of e3.8 million (1998 - e3.2m) is included in Creditors, being the excess of theaccumulated pension cost together with other pension liabilities over the amounts paid to the schemes at 31 December,1999.22. Guarantees and Other Financial Commitments(a)Capital commitmentsAt 31 December, 1999 the Group had capital commitments as follows:1999 1998e000e000Contracted for but not provided- Aircraft and equipment 219,037 316,326- Other 11,687 10,915Authorised but not contracted for- Aircraft and equipment - 359- Other 1,230 4,442231,954 332,04243

AER LINGUS GROUP PLCNotes to the Consolidated Accounts (continued)22. Guarantees and Other Financial Commitments (continued)(b) Lease commitmentsAt 31 December, 1999 the Group had annual commitments under operating leases as set out below:Plant andProperty Aircraft Machinerye000 e000 e000Operating leases which expire:Within one year 2,710 21,500 132Between two and five years 759 46,700 42After five years 2,462 45,811 -5,931 114,011 174(c)Contingent liabilities(i)(ii)The Company has irrevocably guaranteed the liabilities as defined in Section 5(c) of the Companies(Amendment) Act, 1986 of the following subsidiary undertakings incorporated in Ireland: Aer Lingus Limited,Aer Lingus Shannon Limited, Aer Lingus Commuter Limited, Aer Lingus Investments Limited, Aer LingusFinancial Services Limited, Aberport Limited, Aviation Services (Ireland) Limited, Dirnan Ireland Limited, ShinaghLimited and SRS Aviation (Ireland) Limited.There are certain legal and other claims, which arise from the Group’s activities which the Directors consider willnot materially affect the financial position of the Group.(d)Treasury contractsDue to the scale of its international operations and the nature of its business, the Group is exposed to the effects offluctuations in exchange rates and interest rates. These exposures arise principally in relation to foreign currencydebt, anticipated revenues and expenditure commitments. In order to hedge against these exposures, the Grouphas entered into various treasury arrangements to change the currency exposure of certain debt and to fix interestrates and exchange rates. The principal commitments outstanding under treasury arrangements at 31 December,1999 are forward purchases of US Dollars 88 million (1998: US Dollars 162m) and forward sales ofSterling £107 million (1998: Sterling £93m).23. Related Party Transactions(a)(b)(c)Ownership of the Company95.24% of the issued share capital of the Company was held by the Minister for Finance on behalf of the IrishGovernment at the balance sheet date.Purchase of services from entities owned by the Irish GovernmentIn the ordinary course of its business the Group purchases services from entities controlled by the Irish Government(including Aer Rianta, Irish Aviation Authority and ESB). Purchases of services from these entities during the yearwere less than 5% of group operating costs.Deposits with the National Treasury Management Agency of Ireland and with financial institutionsowned by the Irish GovernmentIn the ordinary course of its business the Group deposits funds with the National Treasury Management Agency ofIreland and financial institutions owned by the Irish Government (ACC Bank and ICC Bank). At 31 December, 1999deposits with these entities amounted to e48 million.44

AER LINGUS GROUP PLC24. Principal Group CompaniesCountry of Principal GroupIncorporation Activity Holding %Aer Lingus Limited Ireland Air Transportation 100Aer Lingus Beachey Limited Isle of Man Aircraft Financing 100Compania Hispano Irlandesade Aviacion SA (trading as Futura) Spain European Charter Services 85Timas Limited (trading as Galileo Ireland) Ireland Reservations Systems Support 75Manchester Cargo Centre Limited United Kingdom Cargo Handling 51Aviation Services (Ireland) Limited Ireland Revenue Accounting Services 100Full details of all group companies will be filed with the Company’s annual return. In addition, the Group trades througha number of overseas branches.45

AER LINGUS GROUP PLCGroup Financial Record - Irish Pounds1999 1998IR£’000 IR£’000Summarised Profit and Loss AccountTurnover - continuing operations 893,274 796,794- discontinued operations 31,852 104,650925,126 901,444Cost of sales (649,335) (648,601)Gross Profit 275,791 252,843Other operating expenses - operating (217,350) (196,607)- employee participation (2,019) (5,708)(219,369) (202,315)Operating Profit - continuing operations 54,388 47,027- discontinued operations 2,034 3,50156,422 50,528Share of operating profit in associates - 1,194Exceptional Items (8,875) 3,427Net interest (payable)/receivable (643) 4,700Profit before tax 46,904 59,849Taxation (4,938) (627)Profit after tax 41,966 59,222Minority interests (1,061) (441)Profit for the year 40,905 58,781Summarised Balance SheetFixed Assets 426,148 343,160Net current assets 368,993 184,897Creditors: amounts falling due after more than one year (399,716) (236,460)Provisions for liabilities and charges (159,260) (100,245)236,165 191,352Shareholders’ funds 233,671 189,917Minority interests 2,494 1,435236,165 191,35246

AER LINGUS GROUP PLCNotesAer Lingus wishes to acknowledge the assistance of Poetry Ireland in researching the poetry excerpts for this report.47