11 months ago

Annual report and accounts 2016

32 Risk management

32 Risk management and principal risk factors continued Risk Potential impact Management and mitigation Financial Financial risk The Group is exposed to currency devaluation of cash held in currencies other than the airlines’ local currencies of euro and sterling. This risk is minimised by holding cash in euro and sterling wherever possible but exchange controls in some countries will from time to time delay conversion and repatriation of funds. Interest rate risk arises on floating rate debt and floating rate leases. The Group is exposed to non-performance of financial contracts by counterparties, for activities such as money market deposits, fuel and currency hedging. Failure of financial counterparties may result in financial losses. Tax The Group is exposed to systemic tax risks arising from either changes to tax legislation or a challenge by tax authorities on interpretation of tax legislation. There is a reputational risk that the Group’s tax affairs are questioned by the media. Compliance and regulatory Group governance structure Non-compliance with competition, bribery and corruption law The governance structure the Group put in place at the time of the merger had a number of complex features, including nationality structures to protect British Airways’ and Iberia’s route and operating licences. The Group is exposed to the risk of individual employees’ or groups of employees’ unethical behaviour resulting in reputational damage, fines or losses to the Group. When there are delays in the repatriation of cash coupled with the risk of devaluation, risk is mitigated by the review of commercial policy for the route. This may involve capacity reductions and rebalancing the point of sale away from the local market towards the airline’s home market and renegotiating supplier contracts to allow payment in local currencies. The impact of rising interest rates is mitigated through structuring selected new debt and lease deals at fixed rate throughout their term. The approach to interest rate risk management and proportions of fixed and floating debt is set out in note 26 to the Financial statements. The approach to financial counterparty credit risk management and the Group’s exposure by geography is set out in note 26 to the Financial statements. The Group seeks to comply with the law, act with integrity in all tax matters and maintain an open relationship with regulators. The Group complies with the tax policy approved by the IAG Board. Tax risk is managed by the IAG tax department and reviewed by the IAG Management Committee. The governance structure continued to work well in 2016. We will continue to engage with the relevant regulatory bodies as appropriate regarding the Group structure. The Group has comprehensive policies designed to ensure compliance, together with mandatory training programmes in place to educate employees in these matters. Viability statement The directors have assessed the viability of the Group over a five year period to December 2021. The assessment takes account of the Group’s current position and plans and the potential impact of the Group’s principal risks. Based on this assessment, the directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period to December 2021. In making this statement the directors have considered the impact on our Group Business Plan of severe but plausible scenarios in which combinations of principal risks materialise together. The effectiveness of mitigating management actions has also been considered. Each scenario considered the impact on liquidity, solvency and the ability to raise financing over the period to December 2021. The directors have determined that the five year period to December 2021 is an appropriate period over which to provide its viability statement. In making this assessment, the directors have taken account of the planning horizon of the five year Group Business Plan and the Group’s financial targets. In selecting the five year horizon for the viability statement, it is recognised that such future assessments are subject to a level of uncertainty that increases with time and, as a result, future outcomes cannot be guaranteed or predicted with certainty. INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2016

33 Financial overview A significant step forward 2016 was a positive year for IAG in quite a challenging political, economic and operational environment. We achieved a strong operating profit of €2,535 million before exceptional items. Both our Operating profit and Equity free cash flow were in excess of €2,000 million, and were aligned with our medium‐term targets. Net profit after tax before exceptional items reached €1,990 million and diluted earnings per share increased by 26.3 per cent to 90.2 euro cents per share. The challenges we have been facing through most of the year were related to: terrorist attacks in Europe, pre and post Brexit vote uncertainties, foreign exchange and fuel price instability, higher than normal air traffic controller disruptions and airline sector capacity expansion. This changing and volatile environment has driven us to recalibrate our growth priorities and also give a greater focus to an efficient use and allocation of capital through time. Taking these factors into consideration, the Group has moderated its growth plans during the year, while simultaneously giving priority to support Aer Lingus’ expansion and its strategic North Atlantic routes. In the last quarter of 2016, the political and economic environment stabilised somewhat, and accordingly our revenue and yield performance has been improving in most of our strategic markets. In parallel we have kept our focus on non-fuel unit cost management with significant success in improving the productivity of our workforce through programmes such as Plan de Futuro (in Iberia), Plan 4 (in British Airways) and an efficient expansion model (in Aer Lingus). Vueling’s performance suffered significant disruption through the beginning of the summer, returning to normality in the last quarter of the year. The supplier cost performance has been negatively affected by operational disruption, higher passenger compensation claims and changes in some of our maintenance contracts, while fleet ownership unit costs have remained near to flat, even through the fleet renewal programmes progress. As a whole, and taking into account the significant fuel cost decrease through the year, the total unit cost reduction has been 7.3 per cent in constant euro terms, which more than offsets the unit revenue decline of the year. “Through 2016 IAG has achieved a significant step forward, keeping us aligned with our Business Plan Targets, allowing us to improve our regular dividend payments and to face with confidence future investment opportunities.” Enrique Dupuy de Lôme Chávarri Chief Financial Officer There was a significant negative impact of sterling weakness (pre and post Brexit vote) on the Group profits. At an Operating profit level our results would have been circa €460 million higher excluding the volatility of foreign exchange. Finally, I think it is important to mention the significant improvement of our Equity Free Cash Flow generation, consistent with profitability, margin increases and CAPEX efficiency. Through 2016 IAG has achieved a significant step forward, keeping us aligned with our Business Plan Targets in terms of Profitability, Returns and Cash Generation, allowing us to improve our regular dividend payments and to face with confidence future investment opportunities and shareholder return increases. Enrique Dupuy de Lôme Chávarri Chief Financial Officer See pages 34 – 35 for more about our economic landscape See pages 36 – 44 for the financial review Strategic report Corporate governance Financial statements Additional information See pages 27 – 32 for risk management and principal risk factors

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