3 months ago

Annual report and accounts 2016

30 Risk management

30 Risk management and principal risk factors continued Risk Potential impact Management and mitigation Business and operational Economic conditions IAG remains sensitive to economic conditions in the markets in which it operates. Deterioration in either a domestic market or the global economy may have a material impact on our financial position, while foreign exchange and interest rate movements create volatility. In 2016, the Group performance was negatively impacted by terrorist attacks, the UK Referendum vote to leave the EU, operational disruption including air traffic control industrial action and adverse exchange rates, partially offset by lower fuel prices. In 2016 the UK contributed 35 per cent of Group revenue, Spain 16 per cent of Group revenue and USA 16 per cent of Group revenue. There is continued uncertainty as we move into 2017 with upward pressure on fuel price and the changing political landscape. The IAG Board and the Management Committee review the financial outlook and business performance of the Group through the financial planning process and regular reforecasts. These reviews are used to drive the Group’s financial performance through the management of capacity and the deployment of that capacity in geographic markets, together with cost control, including management of capital expenditure and the reduction of operational and financial leverage. External economic outlook, fuel prices, and exchange rates are carefully considered when developing strategy and plans and are regularly reviewed by the Board and IAG Management Committee as part of the monitoring of financial and business performance. Employee relations The Group continues to evaluate the potential changes following the UK Referendum vote to ensure that we are able to operate effectively during the transition. At this stage, we do not believe that it will have a significant impact on our business in the longer term. The Group has a large unionised workforce represented by a number of different trade unions. Human resource departments within the operating companies engage in collective bargaining with the many trade unions representing our staff. Collective bargaining takes place on a regular basis and we face a significant level of negotiation across our operating companies in 2017. Event causing significant network disruption Failure of a critical IT system Any breakdowns in the bargaining process and subsequent strike action may disrupt operations and adversely affect business performance. Several possible events may cause a significant network disruption. Example scenarios include persistent air traffic control industrial action; war; civil unrest or terrorism; major failure of the public transport system; the complete or partial loss of the use of terminals; adverse weather conditions such as snow, fog or volcanic ash. Such a disruption may result in lost revenue and/or additional costs. IAG is dependent on IT systems for most of our key business processes. The failure of a critical system may cause significant disruption to our operation and/or lost revenue. Management has business continuity plans to mitigate this risk to the extent feasible. In 2016 the Group was impacted by air traffic controller strikes resulting in disruption to our operations with delays and cancellations and increased costs under Regulation EU261/04. The impact of the industrial action in Europe on Vueling resulted in additional depth being built into the management team to increase resilience against any similar strike action or external network disruption. System controls, disaster recovery and business continuity arrangements exist to mitigate the risk of a critical system failure. In 2016, British Airways completed the implementation of its new customer management system that provides passenger check-in and aircraft boarding functionality. INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2016

31 Risk Potential impact Management and mitigation Business and operational Landing fees and security charges Pandemic Safety/security incident Financial Debt funding Financial risk Airport charges represent a significant operating cost to the airlines and have an impact on operations. Whilst certain airport and security charges are itemised to passengers, others are not. Regulation provides some assurance that such costs will not increase in an uncontrolled manner; however, the Group may incur increased costs in the UK, Spain, Ireland or elsewhere. If there is a significant outbreak of infectious disease such as swine flu, staff absence may increase which may seriously impact the operation. Leisure customers may not book holidays and corporate clients may discourage travel, significantly impacting sales. The safety and security of our customers and employees are fundamental values for the Group. Failure to prevent or respond effectively to a major safety or security incident may adversely impact our brand, operations and financial performance. The Group has substantial debt that will need to be repaid or refinanced. The Group’s ability to finance ongoing operations, committed aircraft orders and future fleet growth plans is vulnerable to various factors including financial market conditions and financial institutions’ appetite for secured aircraft financing. We used approximately 8.9 million tonnes of jet fuel in 2016. Volatility in the price of oil and petroleum products can have a material impact on our operating results. The Group is exposed to currency risk on revenue, purchases and borrowings in foreign currencies. The Group engages in regulatory reviews of supplier pricing, such as the UK Civil Aviation Authority’s periodic review of charges at Heathrow and Gatwick airports. Also, the Group is active both at an EU policy level and in consultations with airports covered by the EU Airport Charges Directive. Management has business continuity plans to mitigate this risk to the extent feasible. The corresponding safety committees of each of the airlines of the Group, satisfy themselves that they have appropriate resources and procedures which include compliance with Air Operator Certificate requirements. Their incident centres respond in a structured way in the event of a safety or security incident. The IAG Management Committee regularly reviews the Group’s financial position and financing strategy. The Group continues to have good access to a range of financing solutions. In 2016, British Airways, Iberia and Vueling all raised secured debt from a broad range of financial institutions. The Group’s high cash balances and committed financing facilities mitigate the risk of short-term interruptions to the aircraft financing market. Fuel price risk is partially hedged through the purchase of oil derivatives in forward markets which can generate a profit or a loss. The objective of the hedging programme is to increase the predictability of cash flows and profitability. The IAG Management Committee regularly reviews its fuel and currency positions. The results of these are discussed with management and the appropriate hedging action taken. The Group seeks to reduce foreign exchange exposures arising from transactions in various currencies through a policy of matching, as far as possible, receipts and payments in each individual currency and actively managing the surplus or shortfall through treasury hedging operations. Strategic report Corporate governance Financial statements Additional information The approach to financial risk management is set out in note 26 to the Financial statements.

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