Annual report and accounts 2016

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36 Financial review IATA market growths The air travel industry had another strong year reporting an increase in demand. There was an upward trend in the latter part of the year following the headwinds in the first six months with terrorist attacks and political instability. Average fares fell benefitting from the lower fuel environment. Overall capacity increased 6.2 per cent and the fastest growing regions were the Middle East, Europe, Africa and Asia, with passenger load factors down on the Middle East. North America saw the highest load factor, although it was down 0.4 points. Overall passenger load factor improved 0.1 points to 80.5 per cent. IATA market growths Year to December 31, 2016 Capacity ASKs Passenger load factor Higher/ (lower) Europe 4.4% 82.4 0.2 pts North America 3.7% 83.5 (0.4) pts Latin America 1.9% 80.8 1.3 pts Africa 6.3% 68.6 0.1 pts Middle East 13.5% 74.7 (1.6) pts Asia Pacific 8.1% 79.7 0.8 pts Total market 6.2% 80.5 0.1 Source: IATA Air Passenger Market analysis IAG capacity In 2016, IAG increased capacity, measured in available seat kilometres (ASKs) by 4.3 per cent including Aer Lingus from January 1 st in the base. With the exception of Africa, Middle East and South Asia, IAG capacity was increased across all regions, reflecting continued expansion at Vueling and Aer Lingus; restoration of routes as part of Iberia’s Plan de Futuro; and new destinations and larger aircraft at British Airways. IAG passenger load factor was 81.6 per cent which was higher than the IATA average and broadly flat versus last year. IAG network by region 16.0% 8.9% 6.5% 12.6% 29.1% 26.8% Domestic Europe North America Latin America and Caribbean Africa, Middle East and South Asia Asia Pacific IAG capacity Year to December 31, 2016 Capacity ASKs Passenger load factor Higher/ (lower) Domestic 4.0% 81.3 3.2 pts Europe 7.6% 79.9 0.8 pts North America 4.6% 83.0 (1.1) pts Latin America and 1.0% 83.1 0.0 pts Caribbean Africa, Middle East (2.7%) 79.5 0.9 pts and South Asia Asia Pacific 11.3% 82.5 (0.7) pts Total network 4.3% 81.6 0.2 pts North America continued to represent the largest part of the IAG network at almost 30 per cent, with a strong passenger load factor, although down slightly, at 83 per cent. Capacity was increased through Aer Lingus’ expansion with three new routes to Los Angeles, Newark, New Jersey and Hartford, Connecticut. British Airways also launched routes to San Jose, California and to New York JFK from London Gatwick. Latin America and Caribbean capacity was broadly flat. British Airways launched two new destinations Lima, Peru and San Jose, Costa Rica, while Iberia reintroduced its service to San Juan, Puerto Rico. Passenger load factor in this region was flat and was two points ahead of the industry average. IAG decreased its capacity to Africa, Middle East and South Asia due to weaker demand resulting from geopolitical issues. Flying was reduced this year to Angola, Nigeria, Morocco, Tunisia and Uganda. Other decreases resulted from the full year impact of reductions made last year to Entebbe, Senegal and Gambia. Additional capacity was deployed to South Africa with Iberia reintroducing Johannesburg and British Airways launching a Cape Town route from London Gatwick. Passenger load factor improved 0.9 points. In Asia Pacific, the capacity increase was driven by the full year impact of the network and aircraft changes made by British Airways last year on Kuala Lumpur, Singapore and Haneda. In 2016, Iberia launched its new service to Tokyo and Shanghai. Passenger load factors increased to 82.5 per cent, one of the highest regions on the IAG network. Acquisitions The 2016 Group performance includes Aer Lingus for the full year. Aer Lingus was acquired on August 18, 2015, therefore the Group’s 2015 comparator performance only includes Aer Lingus since the acquisition date. Metrics reported as on a like-for-like basis include Aer Lingus for the full year in the base. Market segments Our Domestic and European passenger load factors improved in both regions, but remain lower than the European average reported by IATA. The Group launched 74 new intra-European routes, including London-Inverness, Madrid-Marseille, Paris- Venice and Dublin-Florence. INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2016
37 Exchange impact before exceptional items Exchange rate movements are calculated by retranslating current year results as though they had been generated at prior year exchange rates. The reported results are impacted by translation currency from converting results from currencies other than euro to the Group’s reporting currency of euro, primarily British Airways and Avios. From a transaction perspective, the Group performance is impacted by the fluctuation of exchange rates, primarily exposure to the pound sterling, euro and US dollar. The Group exchange rates used and the estimated impact of translation and transaction exchange rates on operating profit before exceptional items are set out as follows. At constant currency, the Group’s operating profit before exceptional items would have been €2,995 million, €460 million higher than the reported result. The Group hedges its transaction exposures but not any potential impact from translation. Higher/ € million (lower) Reported revenue Translation impact (1,781) Transaction impact 532 Total exchange impact on revenue (1,249) Reported operating expenditure Translation impact 1,523 Transaction impact (734) Total exchange impact on operating expenditures 789 Reported operating profit Translation impact (258) Transaction impact (202) Total exchange impact on operating profit (460) Higher/ 2016 (lower) Translation (average) £ to € 1.23 (10.2%) Transaction £ to € 1.23 (10.2%) € to $ 1.11 (0.9%) £ to $ 1.36 (11.7%) Revenue Higher/(lower) € million 2016 Year over year Per ASK at ccy Passenger revenue 19,924 (2.0%) (5.4%) Cargo revenue 1,022 (6.6%) Other revenue 1,621 13.0% Total revenue 22,567 (1.3%) Passenger revenue On a reported basis, passenger revenue for the Group was down 2.0 per cent, with 5.6 points of adverse currency, while capacity was increased 9.4 per cent. At constant currency (‘ccy’), passenger unit revenue (passenger revenue per ASK) decreased 5.4 per cent from lower yields (passenger revenue/ revenue passenger kilometre) with a small, 0.2 point, increase in load factor. Including Aer Lingus results from January 1, 2015, on a like-for-like basis, passenger unit revenue decreased 5.6 per cent. In the first half of 2016 yields decreased with demand impacted by the increased frequency of terrorist attacks (Paris, Brussels, and Nice) and from fare pressure driven by a low fuel commodity price environment. Lower fuel prices impacted oil related routes and stimulated industry capacity growth, creating areas of demand weakness, particularly across Latin America, Africa, and the Middle East. Revenue performance across the Group was strongest in the Domestic and European markets. The economic weakness in Latin America, together with industry capacity growth in North America has had an impact on Iberia and British Airways’ year over year passenger unit revenue performance. Aer Lingus continued its expansion into North America through Dublin leveraging the strength of its shorthaul network. The summer period saw British Airways revenue performance impacted by the UK’s referendum vote to leave the EU, creating economic uncertainty leading up to and following the vote. Summer also saw a high level of air traffic control industrial action in Europe which contributed to significant temporary operational disruption at Vueling. The Vueling operational performance recovered and stabilised in the fourth quarter. In summary, the revenue environment has been challenging in 2016, and although passenger unit revenues remain down versus last year, the end of the period saw an improvement in trend. Despite the lower fares, the Group’s operating margin improved with the benefit of a reduction in fuel cost. Together, the Group carried over 100 million passengers, an increase of 12 million from 2015, with passenger load factor improvement across three of the four carriers. Cargo revenue The competitive trading environment for the airfreight industry continued into 2016. Global supply from freighter and new generation passenger fleets have continued to outstrip demand for general freight. Cargo volume measured in tonne kilometres (CTK) increased by 3.0 per cent with a reduction in yield of 9.3 per cent at ccy. IAG Cargo continue to focus on premium product growth and has been able to grow its revenue share of the market this year despite the industry challenges. IAG Cargo also integrated Aer Lingus to add breadth to its network and allow access to new products such as its industry leading constant climate product. Strategic report Corporate governance Financial statements Additional information 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 and 16: 13 4 5 6 Grow share of Europeto-Afr
Page 17 and 18: 15 The performance indicators prese
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: 35 However, continued weakness in t
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
Page 49 and 50: 47 UN Sustainable Development Goals
Page 51 and 52: 49 Aspect and link to SDGs Noise Wa
Page 53 and 54: 51 Air quality - electric tug trial
Page 55 and 56: “2016 has really tested the Group
Page 57 and 58: 55 I think we can be very proud tha
Page 59 and 60: 57 James Lawrence Non-Executive Dir
Page 61 and 62: 59 The Group operating companies Av
Page 63 and 64: 61 The Board Secretary is Álvaro L
Page 65 and 66: 63 Induction programme New director
Page 67 and 68: 65 Other statutory information Dire
Page 69 and 70: 67 The significant shareholders of
Page 71 and 72: 69 Report of the Audit and Complian
Page 73 and 74: 71 ICFR, which is a Spanish Corpora
Page 75 and 76: 73 The Committee’s responsibiliti
Page 77 and 78: 75 Report of the Safety Committee D
Page 79 and 80: 77 Despite a growth in share price
Page 81 and 82: 79 The table below summarises the m
Page 83 and 84: 81 Malus and Clawback Provisions Th
Page 85 and 86: 83 Service contracts and exit payme
Page 87 and 88: 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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