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Annual report and accounts 2016

14 Key performance

14 Key performance indicators Maintaining our targets in a challenging environment We are committed to delivering our long-term goals to reach our strategic objectives and deliver sustainable cash returns to our shareholders despite the external challenges. Objectives Profitability Efficient growth RoIC 1 (%) R Operating Profit 1 R (€) Operating profit (€m) Adjusted EPS 1 (€ cents) R Adjusted operating margin 15 12 9 6 Goal 7.9 12.7 13.6 3,000 2,500 2,000 1,500 1,000 1,390 2,335 2,535 15 12 9 100 80 60 40 40.2 71.4 90.2 3 500 20 0 2014 2015 2016 0 2014 2015 2016 6 0 2014 2015 2016 Goals 2016 – 2020 Targeting sustainable 15% Adjusted operating margin 12%-15% Growth per annum 12%+ Why we measure? We use 12 months rolling RoIC 3 as a profitability indicator to assess efficient return on the Group’s asset base. It quantifies how well the airlines generate cash flow in relation to the capital invested in their businesses together with their ability to fund growth and to pay dividends. We measure improvement in the financial performance of each operating company through the operating profit before exceptional items It is also a key component of the Group’s remuneration policy. We use the operating margin ratio to measure the efficiency of our business which links with our strategic objective to reach a competitive cost position and to optimise revenues through market leadership. Earnings per share reflects the profitability of our business and the core elements of value creation for our shareholders. Growing earnings indicates that the Group is on the right path to create value for its shareholders. 2016 Performance In 2016 RoIC increased 0.9 points to 13.6 per cent making progress towards our goal of 15+ per cent by 2020. The improvement was from lower capital expenditure compared to last year and improved earnings. The Group’s operating profit, before exceptional items, improves by €200 million from last year. This increase reflects the Group’s drive towards achieving a competitive cost base and from improved productivity. The macroeconomic environment was challenging; driving €460 million of adverse currency impacts with significant pressure on our passenger unit revenues. We grew our adjusted earnings per share by 26.3 per cent in 2016. Profit after tax before exceptional items grew by 29.3 per cent this year. The increase reflects a solid operating profit performance and benefits from a better non-operating cost result with the timing of derivative revaluations and one time profits on fleet transactions. Adjusted operating margin increased by 1.1 points to 12.3 per cent. R Measure directly linked to remuneration of Management Committee. INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2016

15 The performance indicators presented in this report are the measures used to assess and monitor the Group’s performance against our long-term planning goals 2 . We evaluate opportunities based on the strategic objectives of the Group and using the performance indicators to identify and generate sustainable value for our shareholders. The IAG Management Committee reviews individual business plans of the operating companies and sets stretching annual financial targets for each operating Balance sheet and cash flow Adjusted Net Debt EBITDAR 1 to EBITDAR 1 (€m) 2.0 1.5 1.0 0.5 0.0 1.9 1.9 1.8 2014 2015 2016 Investment grade zone 5,500 Goal 5,000 4,500 4,000 3,500 3,000 2,500 3,137 company to support the delivery of the Group‘s long-term goals. These indicators influence the remuneration of the operating companies and of the IAG Management Committee. 4,301 4,581 2014 2015 2016 Average per annum €5.3bn Equity Free Cash Flow 1 (€m) 2,500 Goal 2,000 1,500 1,000 500 0 128 1,481 2014 2015 2016 Per annum €1.5-€2.5bn Non-financial metrics The Group measures a range of nonfinancial and sustainability metrics, such as the diversity of our people and the impact that our airlines have on the environment. In addition, the operating companies review nonfinancial measures, such as airline punctuality and customer satisfaction, which are linked to variable remuneration. These measures are reviewed regularly by the management teams of the airlines and, by exception, by the IAG Management Committee. Customer satisfaction is an important lead indicator of the Group financial performance. The customer measure “Net Promoter Score” (NPS) will be added as a non-financial performance indicator in 2017. This measure will be used in the Group’s 2017 incentive plan. 2,055 See pages 12 – 13 for more about strategy See pages 76- 97 for more about remuneration See pages 36 – 44 for the financial review See the glossary on pages 222 – 223 for definition of the indicators See pages 224 – 226 for reconciliation of the measures to the closest IFRS measure See pages 45 – 51 for non-financial performance in our Sustainability section and see Sustainability indicators on page 227 Strategic report Corporate governance Financial statements Additional information We use this measure to monitor our leverage and to assess financial headroom through the same lens as financial institutions. 3 EBITDAR is an indicator of the profitability of the business and of the core operating cash flows generated by our business model. This measure is not impacted by the financing structure of our aircraft. Equity free cash flow 4 is an indicator of the financial management of the business. It reflects the cash generated by the business that is available to return to our shareholders, to improve leverage and to undertake inorganic growth opportunities. Adjusted net debt to EBITDAR improved to 1.8 times from an improvement in net debt and higher EBITDAR. The Group’s EBITDAR improved by €280 million from last year contributing to increasing our core operating cash flows. The Group’s equity free cash flow reached €2.1 billion, up €574 million versus last year. The improvement was from stronger operating results, improving EBITDAR and from lower net capital expenditure spend as the Group focuses on its capital discipline and flexibility. 1 Before exceptional items. 2 IAG reviewed its long-term planning objectives as part of the Group’s Business Plan process and defined goals for the next five years. For each of the objectives The Business Plan is based on a number of assumptions relevant to our industry, including economic growth in our strategic markets, fuel price and foreign exchange rates. The goals and targets of the Group are therefore subject to risk. For a list of the risks to our business, see page 27 to 32. 3 In 2015, the full year results of Aer Lingus were included in the calculation. 4 Prior year information has been restated to reflect refinement of the definition. www.iairgroup.com

  • Page 1 and 2: INTERNATIONAL AIRLINES GROUP The be
  • Page 3 and 4: Strategic report “2016 was a chal
  • Page 5 and 6: 3 Chairman’s letter A firm focus
  • Page 7 and 8: 5 Q A And, importantly, we have to
  • Page 9 and 10: 7 IAG combines the leading airlines
  • Page 11 and 12: 9 Operating highlights British Airw
  • Page 13 and 14: 11 Business model and strategy Maxi
  • Page 15: 13 4 5 6 Grow share of Europeto-Afr
  • Page 19 and 20: 17 IT This year significant work ha
  • Page 21 and 22: 19 and additional summer aircraft a
  • Page 23 and 24: 21 This is why we have recently lau
  • Page 25 and 26: 23 Aer Lingus Making the most of ou
  • Page 27 and 28: 25 IAG Cargo Resilient performance
  • Page 29 and 30: 27 Risk management and principal ri
  • Page 31 and 32: 29 Risk Potential impact Management
  • Page 33 and 34: 31 Risk Potential impact Management
  • Page 35 and 36: 33 Financial overview A significant
  • Page 37 and 38: 35 However, continued weakness in t
  • Page 39 and 40: 37 Exchange impact before exception
  • Page 41 and 42: 39 By supplier cost category: Handl
  • Page 43 and 44: 41 Capacity 21% 11% 8% 60% Operatin
  • Page 45 and 46: 43 Cash flow € million 2016 2015
  • Page 47 and 48: 45 Sustainability Committed to our
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  • Page 51 and 52: 49 Aspect and link to SDGs Noise Wa
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  • Page 57 and 58: 55 I think we can be very proud tha
  • Page 59 and 60: 57 James Lawrence Non-Executive Dir
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  • Page 63 and 64: 61 The Board Secretary is Álvaro L
  • Page 65 and 66: 63 Induction programme New director
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    65 Other statutory information Dire

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    67 The significant shareholders of

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    69 Report of the Audit and Complian

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    71 ICFR, which is a Spanish Corpora

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    73 The Committee’s responsibiliti

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    75 Report of the Safety Committee D

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    77 Despite a growth in share price

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    79 The table below summarises the m

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    81 Malus and Clawback Provisions Th

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    83 Service contracts and exit payme

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    85 Annual Remuneration Report Commi

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    87 Additional explanations in respe

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    89 IAG PSP Award 2014 The IAG PSP a

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    91 Statement of Voting The table be

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    93 IAG’s total shareholder return

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    95 The second performance condition

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    97 Incentive Award Deferral Plan Th

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    Strategic Financial Statements Repo

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    101 Consolidated statement of other

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    103 Consolidated cash flow statemen

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    105 Consolidated statement of chang

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    107 the Income statement. All other

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    109 b Other interest-bearing deposi

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    111 Employee leaving indemnities an

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    113 IAG has initiated a project to

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    115 For the year to December 31, 20

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    117 7 Auditors’ remuneration The

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    119 For the year to December 31, 20

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    121 c Reconciliation of the total t

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    123 13 Property, plant and equipmen

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    125 16 Intangible assets and impair

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    127 Basis for calculating recoverab

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    129 19 Trade and other receivables

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    131 2 Floating rate euro mortgage l

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    133 depending on whether the employ

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    135 At December 31, 2016 the Group

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    137 27 Financial instruments a Fina

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    139 The carrying amounts and fair v

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    141 December 31, 2015 Financial ins

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    143 31 Other reserves and non-contr

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    145 Defined benefit schemes i. APS

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    147 d Fair value of scheme assets A

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    149 e Present value of scheme liabi

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    151 33 Contingent liabilities and g

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    Spanish corporate governance report

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    155 Indicate the most significant m

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    157 Explain any significant changes

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    159 B. SHAREHOLDERS’ MEETING B.1

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    161 C.1.3 Complete the following ta

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    163 Individual or corporate name of

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    165 When reviewing board appointmen

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    167 C.1.10 Indicate what powers, if

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    169 Selection of directors In ident

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    171 C.1.20 ter List any business re

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    173 C.1.31 Indicate whether the con

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    175 C.1.36 No Outgoing auditor Indi

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    177 C.1.42 Indicate and, where appr

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    179 C.2 Board committees C.2.1 Give

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    181 f. To establish the appropriate

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    183 F. Other responsibilities: a. T

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    185 c) Steps taken during the year:

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    187 C.2.2 b) Functions The main fun

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    189 D.4 List any relevant transacti

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    191 E.2 Identify the bodies respons

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    193 Main risk Government interventi

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    195 Audit and Compliance Committee

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    197 The financial risk assessment i

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    199 F.3.2 Internal control policies

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    201 F.4.2 Mechanisms in standard fo

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    203 6. Listed companies drawing up

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    205 21. The board of directors shou

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    207 37. When an executive committee

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    209 52. The terms of reference of s

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    211 IAG Remuneration Policy complie

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    213 Director Enrique Dupuy de Lôme

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    215 Strategic Report Corporate Gove

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    217 Name and address Principal acti

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    219 Associates Name and address Han

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    221 Strategic Report Corporate Gove

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    223 Operating margin Overall load f

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    225 In 2015, the definition of inve

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    227 Sustainability indicators Indic

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    Shareholder information Registered

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