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Annual report and accounts 2016

40 Financial review

40 Financial review continued Financial performance by Brand Capacity Operating profit and loss performance of operating companies 21% 11% 8% Aer Lingus British Airways Iberia Vueling British Airways* £ million Aer Lingus € million 2016 Higher/ (lower) 2016 Higher/ (lower) ASKs 178,732 2.6% 23,533 9.6% RPKs 145,170 2.2% 19,194 9.5% Seat factor (per cent) 81.2 (0.3)pts 81.6 (0.0)pts 60% Operating profit 9% 11% 2% 78% Aer Lingus British Airways Iberia Vueling British Airways operating profit was £1,473 million, excluding exceptional items, an improvement of £223 million over the prior year on a capacity increase of 2.6 per cent. British Airways’ home market environment was impacted by the UK’s referendum vote to leave the EU with significant volatility in its primary currency and from weaker demand surrounding the vote. The devaluation of sterling benefitted British Airways’ revenues in sterling terms while it was adverse on the cost base. Passenger revenue increased for the year, as did BA Holidays revenue reflecting continued growth. British Airways launched Plan4 this year to streamline and simplify its operations and its head office function, this included recognising an exceptional charge for the year of £124 million. In 2016 cost savings have been achieved with efficiency gains in employee and operational costs. Overall, British Airways’ adjusted operating margin improved 1.9 points to 13.3 per cent. *For comparative purposes, the 2015 base has been restated to exclude British Airways’ share of Avios profits. Passenger revenue 10,340 1.3% 1,707 4.9% Cargo revenue 589 0.2% 45 (15.8%) Other revenue 514 4.0% 14 (62.5%) Total revenue 11,443 1.2% 1,766 2.8% Fuel, oil costs and emissions charges 2,469 (18.5%) 319 (17.8%) Employee costs 2,444 (1.4%) 327 (1.2%) Supplier costs 4,128 12.7% 721 0.8% EBITDAR 2,402 12.7% 399 40.2% Ownership costs 930 5.5% 166 3.8% Operating profit before exceptional items 1,473 17.8% 233 86.9% Adjusted operating margin 13.3% 1.9pts 14.9% 5.9pts Passenger yield (£ pence or € cents/RPK) 7.13 (1.1%) 8.90 (4.2%) Unit passenger revenue (£ pence or € cents/ASK) 5.78 (1.4%) 7.26 (4.3%) Total unit revenue (£ pence or € cents/ASK) 6.40 (1.3%) 7.51 (6.0%) Fuel unit cost (£ pence or € cents/ASK) 1.38 (20.6%) 1.36 (25.1%) Non-fuel unit costs (£ pence or € cents/ASK) 4.20 4.1% 5.16 (8.1%) Total unit cost (£ pence or € cents/ASK) 5.58 (3.3%) 6.53 (12.2%) For the full year, Aer Lingus operating profit was €233 million, an improvement of €109 million over last year on a like for like basis. Capacity was increased 9.6 per cent with the introduction of two additional Airbus A330s to support Aer Lingus’ longhaul expansion, including new destinations such as Los Angeles and Newark. Following on from the growth and facing significant industry pressure, passenger yields were down. The increase in operating profit reflects the benefit of a lower fuel price environment and cost savings, partially offset by the revenue weakness. Aer Lingus’ cost savings were achieved through efficient growth with higher productivity and from supplier and ownership initiatives leveraged through IAG. This included areas such as catering, cleaning, maintenance, ground handling and aircraft lease extension negotiations. Aer Lingus, adjusted operating margin increased 5.9 points to 14.9 per cent. This performance reflects a turnaround from prior years, creating a competitive cost base and positioning itself to continue on its growth strategy. INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2016

41 Capacity 21% 11% 8% 60% Operating profit 9% 11% 2% 78% Aer Lingus British Airways Iberia Vueling Aer Lingus British Airways Iberia Vueling Iberia’s operating profit was €271 million, up €49 million versus last year, achieving an adjusted operating margin of 7.6 per cent. Capacity for the year was up 4.0 per cent, on decreasing passenger unit revenues, impacted by capacity imbalance in longhaul, particularly in parts of Latin America and to a lesser degree in North America. Spain and the rest of Europe remain a challenging environment, while Iberia’s revenue performance was relatively stable. In 2016, Iberia’s MRO business increased its external revenues by approximately €100 million while continuing to provide services to other Group companies. On the cost side, airline non-fuel unit costs improved through higher productivity and from supplier initiatives, in particular efficiencies in IT and lower selling costs. Iberia is continuing on its transformation journey with a focus on improving profitability in its strategic markets and the launch of the Plan de Futuro II. *For comparative purposes, the 2015 base has been restated to exclude Iberia’s share of Avios profits. Operating profit and loss performance of operating companies Vueling’s operating profit was €60 million with an adjusted operating margin of 6.7 per cent, down 5.1 points versus last year. 2016 was a difficult year with significant Air traffic control industrial action impacting Vueling’s network operations. This high level of industrial action coupled with existing stretch in Vueling’s resources, due in part to the rate of growth and in part to time of year (the summer peak period), led to significant customer disruption. The issues were addressed through contingency plans and temporary resources. Iberia* € million Higher/ (lower) 2016 Vueling € million Higher/ (lower) 2016 ASKs 62,282 4.0% 33,884 11.2% RPKs 51,064 5.1% 28,046 13.2% Seat factor (per cent) 82.0 0.9pts 82.8 1.5pts Passenger revenue 3,393 (5.0%) 2,049 5.3% Cargo revenue 253 (5.4%) – – Other revenue 939 9.1% 16 (1.3%) Total revenue 4,586 (2.4%) 2,065 5.2% Fuel, oil costs and emissions charges 1,003 (19.8%) 504 (5.5%) Employee costs 1,032 0.6% 214 18.0% Supplier costs 1,813 4.8% 1,032 19.9% EBITDAR 738 6.5% 315 (18.6%) Ownership costs 467 (1.1%) 255 12.3% Operating profit before exceptional items 271 22.6% 60 (62.4%) Adjusted operating margin 7.6% 1.2pts 6.7% (5.1pts) Passenger yield (€ cents/RPK) 6.65 (9.6%) 7.31 (7.0%) Unit passenger revenue (€ cents/ASK) 5.45 (8.7%) 6.05 (5.3%) Total unit revenue (€ cents/ASK) 7.36 (6.2%) 6.09 (5.4%) Fuel unit cost (€ cents/ASK) 1.61 (22.9%) 1.49 (15.0%) Non-fuel unit costs (€ cents/ASK) 5.32 (1.4%) 4.43 6.4% Total unit cost (€ cents/ASK) 6.93 (7.4%) 5.92 0.1% Vueling’s underlying unit revenue performance, although down, was amongst the strongest in the Group. Vueling’s non-fuel unit cost performance reflects higher compensation and employee costs, in part from disruption, but also from the new EU Flight time legislation. The Vueling NEXT programme will build a stronger platform to support its future growth. Strategic report Corporate governance Financial statements Additional information www.iairgroup.com

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