Annual report and accounts 2016

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Basis for calculating recoverable amount
The recoverable amounts of CGUs have been measured based on their value-in-use.
Value-in-use is calculated using a discounted cash flow model, with the royalty methodology used for brands. Cash flow
projections are based on the Business plan approved by the Board covering a five year period. Cash flows extrapolated beyond
the five year period are projected to increase based on long-term growth rates. Cash flow projections are discounted using the
CGU’s pre-tax discount rate.
Annually the Group prepares and the Board approves five year business plans. Business plans were approved in the fourth quarter
of the year. The business plan cash flows used in the value-in-use calculations reflect all restructuring of the business that has been
approved by the Board and which can be executed by Management under existing agreements.
Key assumptions
For each of the CGUs the key assumptions used in the value-in-use calculations are as follows:
2016
Per cent
British
Airways Iberia Vueling Aer Lingus Avios
Lease adjusted operating margin 12–15 8–14 7–15 12–15 n/a 1
Average ASK growth per annum 2 4 7 8 n/a 1
Long-term growth rate 2.5 2.0 2.0 2.0 2.4
Pre-tax discount rate 8.5 9.8 10.6 7.8 9.1
2015
Per cent
British
Airways Iberia Vueling Avios
Lease adjusted operating margin 12–15 8–14 12–15 n/a 1
Average ASK growth per annum 2–3 7 10 n/a 1
Long-term growth rate 2.5 2.0 2.0 2.4
Pre-tax discount rate 8.6 9.7 10.3 9.1
1 Lease adjusted operating margin and ASK growth per annum assumptions are not applicable for the Avios loyalty reward business, which conducts business with partners both within
and outside IAG.
Lease adjusted operating margin is the average annual operating result, adjusted for aircraft operating lease costs, as a percentage
of revenue over the five year Business plan to 2021. It is presented as a percentage point range and is based on past performance,
Management’s expectation of the market development and incorporating risks into the cash flow estimates.
ASK growth is the average annual increase over the Business plan, based on past performance and Management’s expectation of
the market.
The long-term growth rate is calculated for each CGU based on the forecasted weighted average exposure in each primary market
using gross domestic product (GDP) (source: Oxford Economics). This is reviewed each year and updated as necessary to reflect
management’s view on specific market risk.
Strategic Report Corporate Governance Financial Statements Additional Information
Pre-tax discount rates represent the current market assessment of the risks specific to each CGU, taking into consideration the
time value of money and underlying risks of its primary market. The discount rate calculation is based on the circumstances of
the airline industry, the Group and the CGU. It is derived from the weighted average cost of capital (WACC). The WACC takes into
consideration both debt and equity available to airlines. The cost of equity is derived from the expected return on investment by
airline investors and the cost of debt is broadly based on the Group’s interest-bearing borrowings. CGU specific risk is incorporated
by applying individual beta factors which are evaluated annually based on available market data. The pre-tax discount rate reflects
the timing of future tax flows.
Summary of results
In 2016, Management reviewed the recoverable amount of each of its CGUs and concluded the recoverable amounts exceeded the
carrying values.
In 2016, British Airways recognised an impairment charge of €14 million in respect of landing rights associated with its Openskies
operation, €11 million of which related to landing rights in the EU that have an indefinite life. The impairment has arisen as a result
of changes in Business plan assumptions for the Openskies operation. At December 31, 2016 the remaining carrying value was
€12 million, representing its value-in-use.
Sensitivities
Sensitivities have been considered for each CGU. No reasonable possible change in the key assumptions for any of the Groups
CGUs would cause the carrying amounts to exceed the recoverable amounts.
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