Annual report and accounts 2016

42
Financial review continued
Exceptional items
For a full list of exceptional items, refer to note 5 of the Financial
statements. Below is a summary of the significant exceptional
items recorded.
In 2016, net exceptional charges at the operating profit level
were €51 million (2015: €17 million). The net exceptional charge
included in Employee costs relate to items at British Airways.
In 2016, changes to the US Post-Retirement Medical Benefits
were made to align with national trends in the US resulting in
a credit of €51 million which has been offset by a €144 million
restructuring charge related to initiatives developed to improve
overall efficiency and effectiveness. The exceptional item in
Fuel, oil and emissions in 2016 and 2015 reflects the impact
of recording Aer Lingus fuel cost at the hedged price in
the pre-exceptional column, rather than at spot price in the
reported column.
In 2015, exceptional charges in Property, IT and other relate
to Aer Lingus acquisition costs of €33 million and a legal
settlement at British Airways.
Non-operating costs and taxation
Net non-operating costs after exceptional items were
€122 million, down from €517 million last year. The improvements
are non-recurring, reflecting a:
• €230 million positive swing in partially unrealised gains from
losses on derivative instruments not qualifying for hedge
accounting; and
• €105 million improvement in profit or loss on the sale of
property plant, equipment and investments. The Group
recognised a gain on the sale and lease back of Airbus A319s
and Boeing 787s in 2016, versus a loss on disposal of the
Boeing 737s last year.
The great majority of the Group’s activities are taxed in
the countries of effective management of the main airline
operations (UK, Spain or Ireland, with corporation tax rates
during 2016 of 20 per cent, 25 per cent and 12.5 per cent
respectively). The Group’s effective tax rate for the year is
19.6 per cent (2015: 20 per cent).
Although the Group continues to offset prior year tax losses
and other tax assets against its current year taxable profit,
in 2016 the Group paid corporation taxes of €318 million
(2015: €245 million). This represents 13.5 per cent (2015: 13.6 per
cent) of the Group’s accounting profit before tax.
Profit after tax and Earnings per share (EPS)
Profit after tax before exceptional items was €1,990 million,
up 29.3 per cent. The increase reflects a solid operating profit
performance in a challenging environment. Diluted earnings per
share before exceptional items is one of our key performance
indicators and increased by 26.3 per cent.
Dividends
The Board is proposing a final dividend to shareholders
of 12.5 euro cents, which brings the full year dividend to
23.5 euro cents. The final dividend will be paid, subject to
shareholder approval at the Annual General Meeting to
shareholders on the register on the record date.
Dividend policy statement
In determining the level of dividend in any year, the Board
considers a number of factors, including:
• Earnings of the Group
• On-going cash requirements and prospects of the Group and
its operating companies
• Levels of distributable reserves by operating company and
efficiency of upstreaming options
• Dividend coverage and
• Its intention, to distribute regular returns to its shareholders in
the medium and long term.
The Company received distributions from each of the four
airlines in 2016, although due to accumulated losses in certain
companies they were not all distributable. Distributions may
also be restricted by certain matching principles associated
with the Group’s pension schemes, see note 32 of the
Financial statements.
Notwithstanding these factors, the Company’s distributable
reserves position was strong, with €6.1 billion available at
December 31, 2016.
Liquidity and capital risk management
IAG’s objectives when managing capital are to safeguard the
Group’s ability to continue as a going concern, to maintain an
optimal capital structure in order to reduce the cost of capital
and to provide future returns to shareholders.
The Group monitors capital using adjusted gearing, adjusted
net debt to EBITDAR and liquidity.
In 2016, the Group’s financial headroom increased as adjusted
net debt to EBITDAR decreased to 1.8 from 1.9 in 2015.
Adjusted net debt reduced to €8,159 million and adjusted
gearing improved 3 points to 51 per cent for the period from
higher profit after tax.
The Group’s equity free cash flow improved €574 million
in 2016 due to the increase in EBITDAR and EBITDA before
exceptional items with a stronger operating result and from
lower net capital expenditure (‘CAPEX’) spend. The EBITDAR
improvement brings the Group closer to its average long term
planning goal of c.€5.3 billion on average per annum.
Overall, the Group generated sufficient equity free cash flow
in 2016 to support the recommendation of an interim and final
cash dividend of €498 million for its shareholders with cash
coverage of 4.1 times (2015: 2.8 times).
In February 2017, the Group also announced its intention to
carry out a share buyback programme as part of its corporate
finance strategy to return cash to shareholders while reinvesting
in the business and managing leverage. The programme will be
€500 million, carried out during the course of 2017 and may be
implemented through one or more share buyback programmes.
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2016