International Airlines Group

International Consolidated Airlines Group (IAG) today (February 23, 2018) presented Group consolidated results for the year to December 31, 2017.

IAG period highlights on results:

• Fourth quarter operating profit €585 million before exceptional items (2016: €620 million)
• Passenger unit revenue for the quarter up 0.4 per cent, up 2.4 per cent at constant currency
• Non-fuel unit costs before exceptional items for the quarter are up 0.5 per cent, up 3.2 per cent at constant currency
• Fuel unit costs before exceptional items for the quarter up 1.2 per cent, up 2.2 per cent at constant currency
• Operating profit before exceptional items for the year to December 31, 2017 of €3,015 million (2016: €2,535 million),
  up 18.9 per cent
• Passenger unit revenue for the year down 1.0 per cent and up 1.5 per cent at constant currency
• Fuel unit costs for the year before exceptional items down 7.8 per cent, down 9.1 per cent at constant currency
• Non-fuel unit costs for the year before exceptional items down 1.3 per cent and up 2.7 per cent at constant currency
• Cash of €6,676 million at December 31, 2017 was up €248 million on 2016 year end
• Adjusted net debt to EBITDAR decreased 0.3 to 1.5 times
• Profit after tax before exceptional items €2,243 million up 12.7 per cent, and adjusted earnings per share up 14.0 per cent

Performance summary:

Willie Walsh, IAG Chief Executive Officer, said:

“We’re reporting a very good full year performance with an operating profit of €3,015 million before exceptional items, up 18.9 per cent compared to last year.

“Passenger unit revenue improved 1.5 per cent at constant currency and we benefitted from reduced fuel costs for most of 2017 though our fuel bill started to rise in quarter 4. 

“All our airlines performed extremely well with their best-ever individual financial results, strong operational performances and commitment to customer service. The turnaround in Vueling, following the challenges of 2016, has been particularly outstanding.

“In quarter 4 we reported an operating profit of €585 million, down from €620 million last year. Our strong performance continued with passenger unit revenue up 2.4 per cent at constant currency. The operating profit was impacted significantly by changes in the employee bonus provision in the quarter compared to the previous year.

“We’re pleased to confirm that the Board is proposing a final dividend of 14.5 euro cents per share. This brings the full year dividend to 27.0 euro cents per share, subject to shareholder approval at our AGM in June. With the dividend and share buyback, we returned more than €1 billion to our shareholders last year.

“Our confidence in IAG’s future remains undaunted and today we’re announcing our intention to undertake a share buyback of €500 million during 2018”.

Trading outlook

At current fuel prices and exchange rates, IAG expects its operating profit for 2018 to show an increase year-on-year. Both passenger unit revenue and non-fuel unit costs are expected to improve at constant currency.

LEI: 959800TZHQRUSH1ESL13

This announcement contains inside information and is disclosed in accordance with the Company’s obligations under the Market Abuse Regulation (EU) No 596/2014.

Enrique Dupuy, Chief Financial Officer

Forward-looking statements:

Certain statements included in this report are forward-looking and involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statements.

Forward-looking statements can typically be identified by the use of forward-looking terminology, such as “expects”, “may”, “will”, “could”, “should”, “intends”, “plans”, “predicts”, “envisages” or “anticipates” and include, without limitation, any projections relating to results of operations and financial conditions of International Consolidated Airlines Group S.A. and its subsidiary undertakings from time to time (the ‘Group’), as well as plans and objectives for future operations, expected future revenues, financing plans, expected expenditure and divestments relating to the Group and discussions of the Group’s Business plan. All forward-looking statements in this report are based upon information known to the Group on the date of this report. Other than in accordance with its legal or regulatory obligations, the Group does not undertake to update or revise any forward-looking statement to reflect any changes in events, conditions or circumstances on which any such statement is based.

It is not reasonably possible to itemise all of the many factors and specific events that could cause the forward-looking statements in this report to be incorrect or that could otherwise have a material adverse effect on the future operations or results of an airline operating in the global economy. Further information on the primary risks of the business and the risk management process of the Group is given in the Annual Report and Accounts 2016; these documents are available on www.iagshares.com.

IAG Investor Relations
Waterside (HAA2),
PO Box 365,
Harmondsworth,
Middlesex,
UB7 0GB

Tel: +44 (0)208 564 2900
Investor.relations@iairgroup.com

Consolidated income statement

Consolidated income statement

Financial review

IATA market growths

The air travel industry had another strong year, with above-trend growth. Momentum increased over the year following on from a weak six months in 2016.

Overall capacity increased 6.3 per cent and the fastest growing regions were the Middle East, Europe and Asia, with passenger load factors down on the Middle East. Europe saw the highest load factor, up 1.5 points, followed by North America, although the latter’s load factor was broadly flat against last year. Overall passenger load factor improved 0.9 points to 81.4 per cent, having improved for more than five consecutive years.

IATA market growths

IAG capacity

In 2017, IAG increased capacity, measured in available seat kilometres (ASKs) by 2.6 per cent including the launch of LEVEL in June. Capacity was higher at all airlines and through each region except for Europe. This partially reflects new longhaul routes at British Airways, Aer Lingus and LEVEL as well as the full year impact of Iberia and Aer Lingus routes launched in 2016. Vueling increased capacity in off-peak quarters to reduce its seasonality in line with its strategy.

IAG passenger load factor was one point higher than last year and at 82.6 per cent, was 1.2 points higher than the IATA average.

Market segments

In IAG’s Domestic markets capacity was higher by 5.4 per cent with increases at Vueling and Iberia. As part of its NEXT strategy, Vueling increased frequencies on existing routes and launched five new routes. Capacity in Iberia’s domestic market was increased with growth in the Balearics and Canaries. This was partially offset by the introduction of the Club Europe product on British Airways domestic flights in April 2017, reducing the number of seats. Passenger load factor performance was strong, almost two points higher versus last year.

IAG capacity

The Group’s European capacity was broadly flat year on year. Increases at Aer Lingus, including a new service to Split and additional winter flying was offset by reductions at Iberia and Vueling. Load factor rose two points, with improvements at British Airways, Vueling and Iberia.

North America continued to represent the largest part of the IAG network at almost 30 per cent. Capacity was increased mainly at Aer Lingus, with a new route connecting Dublin and Miami and the full year impact of the routes launched in 2016, and through the launch of LEVEL’s routes to Oakland (San Francisco) and Los Angeles. British Airways also increased its capacity, with three new routes to New Orleans, Fort Lauderdale and Oakland (San Francisco), although this was partially offset by cancellations related to the adverse weather. Passenger numbers increased at a slightly slower pace than capacity, and seat factor for the region remained high at 82.3 per cent.

IAG increased its capacity to Latin America and Caribbean with British Airways’ new route to Santiago de Chile and LEVEL’s new routes to Buenos Aires and Punta Cana. Iberia increased frequencies to Mexico City and Buenos Aires during the year, although it had an overall decrease in capacity from frequency reductions on other routes including Brazil and Costa Rica. Passenger load factor in this region improved and was almost two points ahead of the industry average.

After decreases in 2016, Africa, Middle East and South Asia capacity was up in 2017, with British Airways’ increases in the Middle East from de-tagged routes (Doha/Abu Dhabi/Muscat/Bahrain) and the full year impact of Iberia’s route to Johannesburg. Passenger load factor improved 1.3 points.

In Asia Pacific, the capacity increase was driven by the full year impact of Iberia’s routes to Shanghai and Tokyo, partially offset by a decrease in British Airways’ capacity, through the discontinuation of Chengdu and gauge changes in Japan. Passenger load factors rose 2.1 points, and continued to be the highest in the IAG network.

LEVEL launch

On March 17^th, IAG launched LEVEL, a new longhaul low‑cost airline brand that started its operations in June 2017 with flights from Barcelona to Los Angeles, Oakland (San Francisco), Buenos Aires and Punta Cana. LEVEL is flying two new Airbus A330 aircraft fitted with 293 economy and 21 premium economy seats. From March 2018, LEVEL will also fly between Barcelona and Boston.

In November 2017, IAG announced the opening of LEVEL’s new base in Paris-Orly. Flights will begin in July 2018 and will connect the French airport with Montreal, New York, Guadaloupe and Martinique with two additional aircraft.

Exchange impact before exceptional items

Exchange rate movements are calculated by retranslating current year results at prior year exchange rates. The reported revenues and expenditures 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 generates a surplus in most currencies in which it does business, except the US dollar, as capital expenditure, debt repayments and fuel purchases typically create a deficit. At constant currency, the Group’s operating profit before exceptional items would have been €35 million higher.

The Group hedges its economic exposure from transacting in foreign currencies. The Group does not hedge the translation impact of reporting in euros.

The annual weighted average exchange rates from a translation and transaction perspective are set out as follows.

Revenue

Passenger revenue

On a reported basis, passenger revenue for the Group rose 1.6 per cent versus the prior year, with 2.5 points of adverse currency, while capacity was increased 2.6 per cent. At constant currency (‘ccy’), passenger unit revenue (passenger revenue per ASK) increased 1.5 per cent with slightly higher yields (passenger revenue/revenue passenger kilometre) up 0.3 per cent and a 1 point rise in passenger load factor.

Continuing the upward trend in revenues reported at the end of 2016, passenger unit revenues improved throughout the year with increases versus last year in all quarters except quarter one. The performance was based on stronger yields and higher passenger load factors. In the Domestic market, the Group’s passenger unit revenues were down due to capacity increases at Vueling aimed to reduce seasonality peaks in its schedule. Europe performed strongly for the Group with significant unit revenue improvements at Iberia and Vueling on slightly lower capacity.

Capacity growth in North America impacted the Group’s year over year passenger unit revenue performance, with declines at Iberia and Aer Lingus, and the dilutive impact of the introduction of LEVEL. At British Airways, passenger unit revenues increased. North America unit revenue trends were positive during the period.

Latin America and Caribbean and Asia Pacific passenger unit revenues showed the strongest signs of recovery with increases at both British Airways and Iberia. Latin American economies such as Brazil and Argentina improved, while demand in Asia Pacific rose with lower terrorist activity in Europe.

Africa, Middle East and South Asia passenger unit revenue was broadly flat versus last year with mixed performance throughout the year and across the Group’s network.

The Group carried over 104 million passengers, an increase of 4.1 per cent from 2016, with strong demand at LEVEL and passenger load factor improvement at three of the other four airlines. The Group’s Net Promoter Score was 16.8 per cent, achieving our on target performance of 16.5. This was a new metric for the Group this year.

Cargo revenue

Following a competitive trading environment in 2016, IAG Cargo adapted to an unexpectedly buoyant market in 2017 particularly in the second half of the year. Cargo revenue for the period increased by 8.0 per cent at constant currency, with volume measured in tonne kilometres (CTK) increasing by 5.6 per cent on a capacity increase of 4.8 per cent. Trading conditions were challenging in certain regions, however benefitted from a strong performance in Asia Pacific, following a weak performance in the same period last year. Yield benefitted in the final part of the year as demand on key IAG Cargo markets exceeded supply. Strategic focus continued to be on premium products, investing for growth and modernising the business.

Other revenue

Other revenue includes activity from the BA Holidays programme, Avios revenue from points issued and from product redemptions, maintenance and handling activity. Other revenue rose 1.4 per cent, 5.6 per cent at constant currency primarily from an increase in Iberia’s third party maintenance (MRO) and handling businesses. The MRO business performed more heavy maintenance in 2017 versus 2016. BA Holidays and Avios revenues also increased reflecting additional points sold to finance partners and from higher product redemptions.

Total revenue for the Group rose 1.8 per cent with increases in passenger, cargo and other revenue. At ccy, total revenue was stronger up 4.4 per cent.

Expenditure before exceptional items

Employee costs

On a reported basis, employee costs for the Group were up 0.2 per cent and up 4.6 per cent at ccy. On a unit basis and at ccy, employee unit costs increased 2.0 per cent with productivity gains partially offsetting performance awards and inflation on salaries.

Employee unit costs rose at British Airways while productivity increased through efficiency improvements. The employee unit cost rise was from a higher pension charge due to lower AA bond yields, an increase in variable pay awards from achieving 2017 performance targets and inflation on wages. Vueling’s employee unit costs also rose from an increase in variable pay awards and due to a significant rise in average manpower equivalents (MPEs) in line with Vueling’s NEXT programme. The increase in MPEs reflects the full year impact of the shift in 2016 to strengthen its internal workforce on relatively low full year capacity growth, as it de-peaks its schedule. Aer Lingus and Iberia reported strong employee unit cost performance versus last year from efficient growth, also improving productivity.

Overall Group productivity improved 2.5 per cent with a slight increase in MPEs versus last year (up 0.1 per cent); the Group employed on average 63,422 MPEs in 2017.

Employee costs

Productivity

Fuel, oil and emissions costs

Total fuel costs for the year decreased 5.4 per cent, at ccy and on a unit basis fuel costs are down 9.1 per cent. Fuel benefitted from lower average fuel prices net of hedging and efficiencies from the new fleet and improved operational procedures. The foreign exchange transaction impact on fuel costs net of hedging was adverse 5.9 percentage points for the Group, reflecting the stronger US dollar primarily against the pound sterling.

Fuel, oil and emissions costs

Supplier costs

Total supplier costs for the year increased 1.8 per cent and benefitted from 4.2 points of currency exchange. At ccy and on a unit basis, supplier costs rose 3.4 per cent. In 2017, the Group’s non-ASK related businesses, such as MRO, BA Holidays and Avios grew, increasing supplier costs, in particular Handling, catering and other operating costs and Engineering and other aircraft costs with a corresponding increase in Other revenue.

Supplier costs

British Airways’ airline supplier unit costs at ccy are up, impacted by compensation fees related to the operational disruption following the power outage in May 2017, higher maintenance costs from additional flying hours and price escalation on pay-as-you-go engine contracts and the new distribution model (NDM) increasing both costs (and revenues). Iberia airline supplier unit cost at ccy increased from NDM and in marketing related to its 90^th anniversary campaign, provisions related to VAT litigation and net accounting impact from acquisition of four Airbus A340-600s at the end of their lease term. Vueling supplier unit costs are favourable, cycling over compensation costs related to operational disruption in 2016 including a reduction in engineering costs, from fewer wet leases. Aer Lingus had a favourable supplier unit cost performance from cost saving initiatives and efficient growth.

By supplier cost category:

Handling, catering and other operating costs rose 6.5 per cent excluding currency. Costs increased from higher Cargo volumes and additional product purchases at BA Holidays and redemptions at Avios with a corresponding rise in revenues. The increase also reflects higher compensation fees and baggage claims related to the operational disruption at British Airways. In addition, the Group carried 4.1 per cent more passengers during the year. 

Landing fees and en-route charges were higher by 2.0 per cent excluding currency. Costs rose from higher activity, with flying hours up 1.6 per cent and sectors flown up 1.2 per cent, partially offset by price reductions in Europe and Africa. The Group also recognised certain elements of airport recharges as a cost (c.2pts) in the year, rather than against revenues as in prior years, following a change in contractual agreements with no net impact in margin.

Engineering and other aircraft costs were up 6.1 per cent excluding currency. Increases are driven by additional third party maintenance activity at Iberia (c.3.5 points) from higher flying hours and price escalation on pay-as-you-go engine contracts. These increases were partially offset by cost saving efficiencies including sub-contracted maintenance and global logistics.

Property, IT and other costs were up 5.2 per cent, 9.4 per cent excluding currency. The increase reflects lower capitalised IT charges reflecting the completion of internal projects, a provision related to exercising options on leased aircraft and legal settlements including a VAT audit.

Selling costs increased 11.8 per cent excluding currency. Costs rose c.4pts from the new distribution model, which increased both expenses and revenues while allowing the Group to bring more direct access to the customer. Selling costs were also higher from the increase in passenger bookings and from marketing initiatives including Iberia’s 90^th year anniversary.

Ownership costs

The Group’s ownership costs were up 4.1 per cent excluding currency. Depreciation costs were down due to the retirement of Iberia’s Airbus A340-300s and from a number British Airways’ longhaul Boeing aircraft being disposed of or becoming fully depreciated during the year. Aircraft operating lease costs were up due to a tax provision release which benefitted the base and from additional aircraft on operating lease (Boeing 787-9s and Airbus A330s) in the period.

Ownership costs

Number of fleet

Non-fuel unit costs

At constant currency, total non-fuel unit costs increased 2.7 per cent. Adjusted for non-airline businesses (such as MRO, handling, BA Holidays) and currency, the increase was 2.1 per cent with increases at British Airways and Iberia. Aer Lingus non-fuel unit costs were down from efficient growth and Vueling improved with a better operational performance and through cost saving initiatives.

Operating profit

In summary, the Group’s operating profit before exceptional items for the year was €3,015 million, a €480 million improvement from last year. The Group’s adjusted operating margin also improved 2.1 points to 14.4 per cent. These results reflect a good revenue performance from a better macro-economic environment with improvements in our main strategic markets, in particular North America and South America. Management continued to focus on customer proposition, operational resilience and delivery of cost savings. This was partially offset by higher costs from disruption, variable pay awards and an increase in pension costs. This performance reflects the Group’s drive towards achieving a competitive cost base with improved productivity and management initiatives, aligned with an improved focus in customer satisfaction, brand value and resilience of our operational model.

Financial performance by Brand

Operating profit before exceptionals

For the full year, Aer Lingus operating profit was €269 million, an improvement of €36 million over last year. Capacity was increased 12.1 per cent with the introduction of an additional Airbus A330 and the full year impact of Airbus A330s delivered during 2016 to support Aer Lingus’ longhaul expansion.

Passenger revenues increased, although on a unit basis were down from lower yields due to the significant capacity growth, and competitive pressure. Aer Lingus’ adjusted operating margin increased 1.3 points to 16.2 per cent.

Aer Lingus achieved significant cost savings through efficient growth with higher productivity and from cost initiatives. This included areas such as maintenance, selling and IT.

British Airways operating profit was £1,754 million, excluding exceptional items, an improvement of £281 million over the prior year on a capacity increase of 0.7 per cent. Despite a strong financial result British Airways faced some challenges in 2017 including a power failure in May causing significant customer disruption. Improving the customer experience remains a key focus for the airline.

Passenger revenue rose for the year, with improvements in both yield and passenger load factors. Premium yields improved with strong business sector performance.

British Airways’ non-fuel unit costs increased during the year impacted by compensation fees, NDM, airport charges and also from growth at BA Holidays and Cargo. 2017 saw the first full year of British Airways Plan4; savings were made in several areas including the head office function, engineering through outsourcing and property rationalisation.

Overall, British Airways’ adjusted operating margin improved 1.4 points to 14.9 per cent.

Iberia’s operating profit was €376 million, up €105 million versus last year, achieving an adjusted operating margin of 9.6 per cent. Capacity for the year was up 2.2 per cent, with an increase in passenger unit revenues and improvements across most regions.

In 2017, Iberia’s MRO business also increased its external revenues by approximately €90 million, while continuing to provide services to other Group companies.

On the cost side, airline non-fuel unit costs rose from an increase in provisions including VAT litigation, the accounting impact of the acquisition of the leased Airbus A340-600s and higher selling costs partially due to NDM. Employee unit costs and productivity improved through efficiency initiatives as part of Iberia’s Plan de Futuro II.

* Iberia’s results exclude LEVEL.

Vueling’s operating profit was €188 million with an adjusted operating margin of 12.7 per cent, up 6.0 points versus last year. Through its NEXT programme Vueling has restored operational and financial performance. Capacity was up 1.5 per cent with increases in the first and fourth quarter with the aim to reduce the seasonality of its network.

Vueling’s passenger unit revenue improved versus last year with lower yields but higher passenger load factors. Vueling’s improvement in Europe was partially offset by decreases in domestic, impacted by growth in quarter one and four.

Vueling’s non-fuel unit cost decreased with savings in supplier unit costs from lower maintenance fees and compensation costs. Employee unit costs rose from the increase in MPEs as part of its NEXT programme to improve operational resilience and from variable pay awards linked to this year’s results.

Vueling’s performance reflects a significant turnaround from last year both operationally and financially with stronger margins and operating profit, allowing it to return to its growth strategy.

Exceptional items

For a full list of exceptional items, refer to note 4 of the Financial statements. Below is a summary of the significant exceptional items recorded.

The Group recognised an exceptional charge of €288 million during the year related to restructuring costs. In 2017, Iberia reached an agreement with employees for a collective redundancy programme, as part of their transformation plan Plan de Futuro II which is voluntary for both the employees and the company and aimed at improving productivity. In the year, €180 million of restructuring costs were recognised in relation to this.

British Airways’ Plan4 transformation initiatives began in 2016, aimed at improving non-fuel unit cost performance, particularly through employee costs and increased productivity. During 2017, this resulted in headcount reductions throughout the business, from back office functions to engineering and sales, and resulted in a €108 million exceptional charge (2016: €144 million).

The Group also made changes to the US PRMB (Post-Retirement Medical Benefits) at British Airways during the prior year to bring the level of benefits in line with national trends in the US. These changes resulted in the recognition of a one-off gain in employee costs of €51 million.

The exceptional item in 2016 recorded in Fuel, oil and emissions 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.

Non-operating costs and taxation

Net non-operating costs after exceptional items were €234 million, up from €122 million last year. The increases are non-recurring in nature and are due to a:

• €97 million negative difference in profit or loss on the sale of property plant, equipment and investments, due to the sale of an Airbus A340 by Iberia with an accounting loss of €11 million, and the prior year benefiting from a €30 million gain on the sale and lease back of 12 Airbus A319s;
• €81 million negative swing from unrealised gains in 2016 to losses in 2017 on derivative instruments not qualifying for hedge accounting; and
• €52 million swing in net foreign exchange on the retranslation of monetary non-current assets and liabilities.
• These increases were partially offset by a €66 million reduction in net financing costs following a reduction in net debt.

Taxation

The vast majority of the Group’s activities are taxed in the countries of effective management of the main operations (UK, Spain or Ireland, with corporation tax rates during 2017 of 19.25 per cent, 25 per cent and 12.5 per cent respectively). The Group’s effective tax rate for the year was 18.9 per cent (2016: 19.6 per cent) and the tax charge was €472 million (2016: charge €410 million).

The Group continues to offset prior year tax losses and other tax assets against its current year taxable profit, in 2017 the Group paid corporation taxes of €237 million (2016: €318 million).

Profit after tax and Earnings per share (EPS)

Profit after tax before exceptional items was €2,243 million, up 12.7 per cent. The increase reflects a very good operating profit performance. Fully diluted earnings per share before exceptional items is one of our key performance indicators and increased by 14 per cent also benefitting from the positive impact of the share buyback programme.

Profit after tax and exceptional items was €2,021 million, up 3.5 per cent.

Dividends

The Board is proposing a final dividend to shareholders of 14.5 euro cents, which brings the full year dividend to 27.0 euro cents. The final dividend will be paid on July 2, 2018, subject to shareholder approval at the Annual General Meeting, to shareholders on the register on June 29, 2018.

Dividend policy statement

In determining the level of dividend in any year, the Board considers several 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 main airlines in 2017, although due to accumulated losses in certain companies they were not all recorded as distributable income. Distributions may trigger additional pension contributions if higher than pre-agreed thresholds, see note 31 of the Financial statements.

Notwithstanding these factors, the Company’s distributable reserves position was strong, with €6.1 billion available at December 31, 2017 (2016: €6.1 billion).

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 to reduce the cost of capital and to provide sustainable returns to shareholders.

The Group monitors capital using adjusted gearing, adjusted net debt to EBITDAR and liquidity. In 2017 the Group’s financial headroom rose as adjusted net debt to EBITDAR decreased to 1.5 from 1.8 in 2016 with both adjusted net debt and EBITDAR improving. Adjusted net debt reduced by €400 million to €7,759 million from a stronger cash position and lower long-term borrowings, partially offset by an increase in the notional aircraft operating lease debt. EBITDAR increased €506 million versus last year reflecting the Group’s profitable growth as the EBITDAR margin improved 2 points with ASKs up 2.6 per cent. Adjusted gearing of 51 per cent in 2016 was within the Group’s investment grade aim, and improved by an additional 6 points to 45 per cent from higher profit after tax.

The Group’s equity free cash flow (EqFCF) rose €630 million in 2017 due to the increase in EBITDAR and EBITDA before exceptional items and lower net CAPEX. Net CAPEX is acquisition and sale of PPE and intangible assets (2017: €1,184 million; 2016: €1,301 million).

In 2017, the Group CAPEX included delivery of three new aircraft, one Boeing 787-8 and two Airbus A330s. This capital expenditure has been partially offset by €287 million of proceeds from the sale and leaseback of seven new aircraft (four Airbus A321 and three Airbus A330).

In comparison, in 2016 the Group CAPEX included delivery of 11 new aircraft, two Airbus A380s, two Boeing 787-9s, four Airbus A330s, and three aircraft from the Airbus A320 family. This capital expenditure was partially offset by €1,582 million of proceeds from the sale and leaseback of 26 new aircraft (nine Airbus A321, eight Airbus A330 and nine Boeing 787-9s). The Group also received proceeds for the sale and leaseback of 12 of its owned Airbus A319s, which were divested to reduce any residual value risk. Due to the timing of aircraft deliveries in 2017, CAPEX was low and below the planning target of an average of €2,100 million per annum.

Movements in Working capital and other non-cash generated €558 million in free cash flow (2016: €235 million) primarily from the Group’s growth with higher sales in advance of carriage and impacted by the timing of prepayments and tax payments.

Pension and restructuring payments reflect payments made to the British Airways APS and NAPS plans and restructuring payments made under British Airways’ Plan4 and Iberia’s Plan de Futuro II.

In 2017, the cash Dividend paid reflects the 2016 final dividend and the 2017 interim dividend.

Cash flow

During the year IAG carried 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 total was €500 million and IAG acquired 74,999,449 ordinary shares, which were subsequently cancelled.

In addition to the share buyback programme, the Group generated sufficient equity free cash flow to support the recommendation of an interim and final cash dividend of €554 million for its shareholders with cash coverage of 4.0 times. The Group returned over €1 billion to shareholders in 2017.

In February 2018, the Group also announced its intention to carry out a €500 million share buyback programme during the course of 2018.  

Taking these factors into consideration, the Group’s cash inflow for the year was €573 million and after net foreign exchange differences, the increase in cash net of exchange was €248 million. Each operating company holds adequate levels of cash with balances exceeding 20 per cent of revenues, and sufficient to meet obligations as they fall due.

Net debt, adjusted net debt and adjusted gearing

Net debt

Net debt at December 31, 2017 was €655 million, a reduction of €1,432 million in the year from the stronger cash position.

Net debt from regular financing activities decreased €795 million, with new borrowings below the current year’s regular debt and lease repayments. The level of 2017 and 2016 new borrowings and finance leases reflect the timing of fleet deliveries for the Group.

Capitalised aircraft lease costs rose during the year from the full year impact of aircraft financed through operating leases delivered in 2016 such as the Boeing 787s and Airbus A330s.

Off balance sheet arrangements and capital commitments

The Group has entered into commercial leases on certain property and equipment but primarily for aircraft. Contracts cover primarily a 21 year period with total payments of €7,642 million (2016: €8,314 million); see note 23 for further details on the timing. The Group’s adjusted net debt metric includes an estimation for the debt related to the aircraft operating leases (‘capitalised aircraft lease costs’) by taking the current year’s aircraft operating lease cost multiplied by 8.

Capital expenditure authorised and contracted for amounted to €12,137 million (2016: €14,022 million) for the Group. Most of this is in US dollars and includes commitments until 2023 for 113 aircraft from the Airbus A320 family, 17 Boeing 787s, 43 Airbus A350s, and 4 Airbus A330s.

Overall, the Group maintains flexibility in its fleet plans with the ability to defer, to exercise options and to negotiate different renewal terms. IAG does not have any other off-balance sheet financing arrangements.

Strategic framework

IAG’s mission is to be the leading international airline group. This means we will:

• Win the customer through service and value across our global network;
• Deliver higher returns to our shareholders through leveraging cost and revenue opportunities across the Group;
• Attract and develop the best people in the industry;
• Provide a platform for quality international airlines, leaders in their markets, to participate in consolidation; and
• Retain the distinct cultures and brands of the individual airlines.

By accomplishing our mission, IAG will help to shape the future of the industry, set new standards of excellence and provide sustainability, security and growth.

 IAG’s strategic priorities are as follows:

• Strengthening a portfolio of world-class brands and operations
• Growing global leadership positions
• Enhancing the common integrated platform

Principal risks and uncertainties

During the year we have continued to embed our risk framework, which includes processes to identify, assess and manage risks.  The principal risks and uncertainties affecting us, detailed on pages 27 to 32 of the Annual Report and Accounts 2016, remain relevant. In general, the Group’s strategic risk was stable during the year. The Group continued to evaluate and prepare for the potential changes following the UK’s decision to leave the EU. As we move into 2018, there is continued political uncertainty, upward pressure on fuel price and the ongoing risk of impact to our operations and reputation as the frequency, nature and sophistication of cyber attacks increases.

International Consolidated Airlines Group S.A.

Unaudited Full year Consolidated Financial Statements

January 1, 2017 – December 31, 2017

Consolidated income statement

Consolidated statement of other comprehensive income

Items in the consolidated Statement of other comprehensive income above are disclosed net of tax.

Consolidated balance sheet

Consolidated cash flow statement

Consolidated statement of changes in equity

For the year to December 31, 2017

Consolidated statement of changes in equity

For the year to December 31, 2016

Notes to the consolidated financial statements

For the year to December 31, 2017

1.   Background and general information

International Consolidated Airlines Group S.A. (hereinafter ‘International Airlines Group’, ‘IAG’ or the ‘Group’) is a leading European airline group, formed to hold the interests of airline and ancillary operations. IAG is a Spanish company registered in Madrid and was incorporated on April 8, 2010. On January 21, 2011 British Airways Plc and Iberia Líneas Aéreas de España S.A. Operadora (hereinafter ‘British Airways’ and ‘Iberia’ respectively) completed a merger transaction becoming the first two airlines of the Group. Vueling Airlines S.A. (‘Vueling’) was acquired on April 26, 2013, and Aer Lingus Group Plc (‘Aer Lingus’) on August 18, 2015. A list of the subsidiaries of the Group is included in the Group investments section.

IAG shares are traded on the London Stock Exchange’s main market for listed securities and also on the stock exchanges of Madrid, Barcelona, Bilbao and Valencia (the ‘Spanish Stock Exchanges’), through the Spanish Stock Exchanges Interconnection System (Mercado Continuo Español).

2    Significant accounting policies

Basis of preparation

The consolidated financial statements of the Group have been prepared in accordance with the International Financial Reporting Standards as endorsed by the European Union (IFRSs as endorsed by the EU). The consolidated financial statements herein are not the Group's statutory accounts and are unaudited. The consolidated financial statements are rounded to the nearest million unless otherwise stated. These financial statements have been prepared on a historical cost convention except for certain financial assets and liabilities, including derivative financial instruments and available-for-sale financial assets that are measured at fair value. The carrying value of recognised assets and liabilities that are subject to fair value hedges are adjusted to record changes in the fair values attributable to the risks that are being hedged. In order to provide additional information on the nature of non-operating items included in the Income statement, the Group has included an additional line to separate the unrealised movements on open derivatives from realised gains and losses.

The Group’s financial statements for the year to December 31, 2017 were authorised for issue, and approved by the Board of Directors on February 22, 2018.

The Directors have considered the business activities, the Group’s principal risks and uncertainties, and the Group’s financial position, including cash flows, liquidity position and available committed facilities. The Directors consider that the Group has adequate resources to remain in operation for the foreseeable future and have therefore continued to adopt the going concern basis in preparing the financial statements.

Consolidation

The Group financial statements include the financial statements of the Company and its subsidiaries, each made up to December 31, together with the attributable share of results and reserves of associates and joint ventures, adjusted where appropriate to conform to the Group’s accounting policies.

Subsidiaries are consolidated from the date of their acquisition, which is the date on which the Group obtains control and continue to be consolidated until the date that such control ceases. Control exists when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.

The Group applies the acquisition method to account for business combinations. The consideration paid is the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Group. Identifiable assets acquired and liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Non-controlling interests represent the portion of profit or loss and net assets in subsidiaries that are not held by the Group and are presented separately within equity in the consolidated Balance sheet. Acquisition-related costs are expensed as incurred.

If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through the Income statement.

Goodwill is initially measured as the excess of the aggregate of the consideration transferred and the fair value of non-controlling interest over the net identifiable assets acquired and liabilities assumed.

All intra-group account balances, including intra-group profits, are eliminated in preparing the consolidated financial statements.

Segmental reporting

Operating segments are reported in a manner consistent with how resource allocation decisions are made by the chief operating decision-maker. The chief operating decision-maker, who is responsible for resource allocation and assessing performance of the operating segments, has been identified as the IAG Management Committee.

Foreign currency translation

a    Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the functional currency, being the currency of the primary economic environment in which the entity operates. In particular, British Airways and Avios have a functional currency of pound sterling. The Group’s consolidated financial statements are presented in euros, which is the Group’s presentation currency.

b    Transactions and balances

Transactions in foreign currencies are initially recorded in the functional currency using the rate of exchange prevailing on the date of the transaction. Monetary foreign currency balances are translated into the functional currency at the rates ruling at the balance sheet date. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at balance sheet exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Income statement, except where hedge accounting is applied. Foreign exchange gains and losses arising on the retranslation of monetary assets and liabilities classified as non-current on the Balance sheet are recognised within ‘Net currency retranslation credits/(charges)’ in the Income statement. All other gains and losses arising on the retranslation of monetary assets and liabilities are recognised in operating profit.

c    Group companies

The net assets of foreign operations are translated into euros at the rate of exchange ruling at the balance sheet date. Profits and losses of such operations are translated into euros at average rates of exchange during the year. The resulting exchange differences are taken directly to a separate component of equity until all or part of the interest is sold, when the relevant portion of the cumulative exchange difference is recognised in the Income statement.

Property, plant and equipment

Property, plant and equipment is held at cost. The Group has a policy of not revaluing property, plant and equipment. Depreciation is calculated to write off the cost less the estimated residual value on a straight-line basis, over the economic life of the asset. Residual values, where applicable, are reviewed annually against prevailing market values for equivalently aged assets and depreciation rates adjusted accordingly on a prospective basis.

a    Capitalisation of interest on progress payments

Interest attributed to progress payments, and related exchange movements on foreign currency amounts, made on account of aircraft and other qualifying assets under construction are capitalised and added to the cost of the asset concerned. All other borrowing costs are recognised in the Income statement in the year in which they are incurred.

b    Fleet

All aircraft are stated at the fair value of the consideration given after taking account of manufacturers’ credits. Fleet assets owned or held on finance leases are depreciated at rates calculated to write down the cost to the estimated residual value at the end of their planned operational lives (which is the shorter of their useful life or lease term) on a straight-line basis. Depreciation rates are specific to aircraft type, based on the Group’s fleet plans, within overall parameters of 23 years and 5 per cent residual value for shorthaul aircraft and 25 years and 5 per cent residual value for longhaul aircraft.

Cabin interior modifications, including those required for brand changes and relaunches, are depreciated over the lower of five years and the remaining economic life of the aircraft.

Aircraft and engine spares acquired on the introduction or expansion of a fleet, as well as rotable spares purchased separately, are carried as property, plant and equipment and generally depreciated in line with the fleet to which they relate.

Major overhaul expenditure, including replacement spares and labour costs, is capitalised and amortised over the average expected life between major overhauls. All other replacement spares and other costs relating to maintenance of fleet assets (including maintenance provided under ‘pay-as-you-go’ contracts) are charged to the Income statement on consumption or as incurred respectively.

c    Other property, plant and equipment

Provision is made for the depreciation of all property, plant and equipment. Property, with the exception of freehold land, is depreciated over its expected useful life over periods not exceeding 50 years, or in the case of leasehold properties, over the duration of the lease if shorter, on a straight-line basis. Equipment is depreciated over periods ranging from 4 to 20 years.

d    Leased assets

Where assets are financed through finance leases, under which substantially all the risks and rewards of ownership are transferred to the Group, the assets are treated as if they had been purchased outright. The amount included in the cost of property, plant and equipment represents the aggregate of the capital elements payable during the lease term. The corresponding obligation, reduced by the appropriate proportion of lease payments made, is included in borrowings.

The amount included in the cost of property, plant and equipment is depreciated on the basis described in the preceding paragraphs on fleet and the interest element of lease payments made is included as an interest expense in the Income statement.

Total minimum payments, measured at inception, under all other lease arrangements, known as operating leases, are charged to the Income statement in equal annual amounts over the period of the lease. In respect of aircraft, certain operating lease arrangements allow the Group to terminate the leases after a limited initial period, without further material financial obligations. In certain cases the Group is entitled to extend the initial lease period on predetermined terms; such leases are described as extendable operating leases.

In determining the appropriate lease classification, the substance of the transaction rather than the form is considered. Factors considered include but are not limited to the following: whether the lease transfers ownership of the asset to the lessee by the end of the lease term; the lessee has the option to purchase the asset at the price that is sufficiently lower than the fair value on exercise date; the lease term is for the major part of the economic life of the asset; and the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset.

Intangible assets

a    Goodwill

Goodwill arises on the acquisition of subsidiaries, associates and joint ventures and represents the excess of the consideration paid over the net fair value of the identifiable assets and liabilities of the acquiree. Where the net fair value of the identifiable assets and liabilities of the acquiree is in excess of the consideration paid, a gain on bargain purchase is recognised immediately in the Income statement.

For the purpose of assessing impairment, goodwill is grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Goodwill is tested for impairment annually and whenever indicators exist that the carrying value may not be recoverable.

b    Brands

Brands arising on the acquisition of subsidiaries are initially recognised at fair value at the acquisition date. Long established brands that are expected to be used indefinitely are not amortised but assessed annually for impairment.

c    Customer loyalty programmes

Customer loyalty programmes arising on the acquisition of subsidiaries are initially recognised at fair value at the acquisition date. A customer loyalty programme with an expected useful life is amortised over the expected remaining useful life. Established customer loyalty programmes that are expected to be used indefinitely are not amortised but assessed annually for impairment.

d    Landing rights

Landing rights acquired in a business combination are recognised at fair value at the acquisition date. Landing rights acquired from other airlines are capitalised at cost.

Capitalised landing rights based outside the EU are amortised on a straight-line basis over a period not exceeding 20 years. Capitalised landing rights based within the EU are not amortised, as regulations provide that these landing rights are perpetual.

e    Contract based intangibles

Contract based intangibles acquired in a business combination are recognised initially at fair value at the acquisition date and amortised over the remaining life of the contract.

f     Software

The cost to purchase or develop computer software that is separable from an item of related hardware is capitalised separately and amortised on a straight-line basis generally over a period not exceeding five years, with certain specific software developments amortised over a period of up to 10 years.

g    Emissions allowances

Purchased emissions allowances are recognised at cost. Emissions allowances are not revalued or amortised but are tested for impairment whenever indicators exist that the carrying value may not be recoverable.

Impairment of non-financial assets

Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the value by which the asset’s carrying value exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less cost to sell and value-in-use. Non-financial assets other than goodwill that were subject to an impairment are reviewed for possible reversal of the impairment at each reporting date.

a    Property, plant and equipment

The carrying value is reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable and the cumulative impairment losses are shown as a reduction in the carrying value of property, plant and equipment.

b    Intangible assets

Intangible assets are held at cost and are either amortised on a straight-line basis over their economic life, or they are deemed to have an indefinite economic life and are not amortised. Indefinite life intangible assets are tested annually for impairment or more frequently if events or changes in circumstances indicate the carrying value may not be recoverable.

Investments in associates and joint ventures

An associate is an undertaking in which the Group has a long-term equity interest and over which it has the power to exercise significant influence. Where the Group cannot exercise control over an entity in which it has a shareholding greater than 51 per cent, the equity interest is treated as an associated undertaking.

A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The considerations made in determining significant influence or joint control are similar to those necessary to determine control over subsidiaries.

Investments in associates and joint ventures are accounted for using the equity method, and initially recognised at cost. The Group’s interest in the net assets of associates and joint ventures is included in Investments accounted for using the equity method in the Balance sheet and its interest in their results is included in the Income statement, below operating result. The attributable results of those companies acquired or disposed of during the year are included for the periods of ownership.

Financial instruments

a    Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets including listed and unlisted investments, excluding interests in associates and joint ventures. After initial recognition, available-for-sale financial assets are measured at fair value, with changes in fair value recognised in Other comprehensive income until the investment is sold or becomes impaired, at which time the cumulative gain or loss previously reported in equity is recognised in the Income statement.

The fair value of quoted investments is determined by reference to bid prices at the close of business on the balance sheet date. Where there is no active market, fair value is determined using valuation techniques. Where fair value cannot be reliably estimated, assets are carried at cost.

b    Other interest-bearing deposits

Other interest-bearing deposits, principally comprising funds held with banks and other financial institutions, are carried at amortised cost using the effective interest method.

c    Derivative financial instruments and hedging activities

Derivative financial instruments, comprising interest rate swap agreements, foreign exchange derivatives and fuel hedging derivatives (including options, swaps and futures) are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss arising from remeasurement depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged (as detailed below under cash flow hedges). The gains or losses related to derivatives not used as effective hedging instruments are recognised in the Income statement.

Exchange gains and losses on monetary investments are taken to the Income statement unless the item has been designated and is assessed as an effective hedging instrument. Exchange gains and losses on non-monetary investments are reflected in equity until the investment is sold when the cumulative amount recognised in equity is recognised in the Income statement.

Long-term borrowings are recorded at amortised cost, including leases which contain interest rate swaps that are closely related to the underlying financing and as such are not accounted for as an embedded derivative.

d    Cash flow hedges

Changes in the fair value of derivative financial instruments are reported in the Income statement, unless the derivative financial instrument has been designated as a hedge of a highly probable expected future cash flow. Gains and losses on derivative financial instruments designated as cash flow hedges and assessed as effective, are recorded in equity. Gains and losses recorded in equity are reflected in the Income statement when either the hedged cash flow impacts the Income statement or the hedged item is no longer expected to occur.

Certain loan repayment instalments denominated in US dollars, euros, Japanese yen and Chinese yuan are designated as cash flow hedges of highly probable future foreign currency revenues. Exchange differences arising from the translation of these loan repayment instalments are recorded in equity and subsequently reflected in the Income statement when either the future revenue impacts income or its occurrence is no longer expected to occur.

e    Convertible debt

Convertible bonds are classified as compound instruments, consisting of a liability and an equity component. At the date of issue, the fair value of the liability component is estimated using the prevailing market interest rate for similar non-convertible debt, and is subsequently recorded at an amortised cost basis using the effective interest method until extinguished on conversion or maturity of the bonds, and is recognised within Interest-bearing borrowings. The difference between the proceeds of issue of the convertible bond and the fair value assigned to the liability component, representing the embedded option to convert the liability into equity of the Group, is included in Equity portion of convertible bond in Other reserves and is not subsequently remeasured.

Issue costs are apportioned between the liability and equity components of the convertible bonds where appropriate based on their relative carrying values at the date of issue. The portion relating to the equity component is charged directly against equity.

The interest expense on the liability component is calculated by applying the effective interest rate for similar non-convertible debt to the liability component of the instrument. The difference between this value and the interest paid is added to the carrying amount of the liability.

f     Impairment of financial assets

The Group assesses at each balance sheet date whether a financial asset or group of financial assets is impaired. A financial asset is considered impaired if objective evidence indicates that one or more events that have occurred since the initial recognition of the asset have had a negative impact on the estimated future cash flows of that asset. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered an indicator that the security is impaired. If any such evidence exists for available-for-sale financial assets, the cumulative gain or loss previously reported in Other comprehensive income is included in the Income statement.

An impairment loss in respect of a financial asset carried at amortised cost is calculated as the difference between its carrying value and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate.

Employee benefit plans

a    Pension obligations

The Group has both defined benefit and defined contribution plans. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior years.

Typically defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.

The Group’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior years. The benefit is discounted to determine its present value, and the fair value of any plan assets are deducted. The discount rate is the yield at the balance sheet date on AA-rated corporate bonds of the appropriate currency that have durations approximating those of the Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method. When the net obligation calculation results in an asset for the Group, the recognition of an asset is limited to the present value of any future refunds from the plan or reductions in future contributions to the plan (‘the asset ceiling’). The fair value of the plan assets is based on market price information and, in the case of quoted securities, is the published bid price. The fair value of insurance policies which exactly match the amount and timing of some or all benefits payable under the scheme are deemed to be the present value of the related obligations. Longevity swaps are measured at their fair value.

Current service costs are recognised within employee costs in the year in which they arise. Past service costs are recognised in the event of a plan amendment or curtailment, or when the Group recognises related restructuring costs or severance obligations. The net interest is calculated by applying the discount rate used to measure the defined benefit obligation at the beginning of the period to the net defined benefit liability or asset, taking into account any changes in the net defined benefit liability or asset during the period as a result of contributions and benefit payments. Net interest and other expenses related to the defined benefit plans are recognised in the Income statement. Remeasurements, comprising actuarial gains and losses, the effect of the asset ceiling (excluding interest) and the return on plan assets (excluding interest), are recognised immediately in Other comprehensive income. Remeasurements are not reclassified to the Income statement in subsequent periods.

b    Severance obligations

Severance obligations are recognised when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises a provision for severance payments when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without realistic possibility of withdrawal, or providing severance payments as a result of an offer made to encourage voluntary redundancy.

Other employee benefits are recognised when there is deemed to be a present obligation.

Taxation

Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and laws that are enacted or substantively enacted at the balance sheet date.

Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, with the following exceptions:

• Where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss;
• In respect of taxable temporary differences associated with investments in subsidiaries or associates, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and
• Deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised.

Deferred income tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the related asset is realised or liability is settled, based on tax rates and laws enacted or substantively enacted at the balance sheet date.

Income tax is charged or credited directly to equity if it relates to items that are credited or charged to equity. Otherwise income tax is recognised in the Income statement.

Inventories

Inventories, including aircraft expendables, are valued at the lower of cost and net realisable value. Such cost is determined by the weighted average cost method. Inventories include mainly aircraft spare parts, repairable aircraft engine parts and fuel.

Cash and cash equivalents

Cash and cash equivalents include cash in hand and deposits with any qualifying financial institution repayable on demand or maturing within three months of the date of acquisition and which are subject to an insignificant risk of change in value.

Share-based payments

The Group operates a number of equity-settled, share-based payment plans, under which the Group awards equity instruments of the Group for services rendered by employees. The fair value of the share-based payment plans is measured at the date of grant using a valuation model provided by external specialists. The resulting cost, as adjusted for the expected and actual level of vesting of the plan, is charged to the Income statement over the period in which the options vest. At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management’s best estimate of the achievement or otherwise of non-market conditions, and accordingly the number of equity instruments that will ultimately vest. The movement in the cumulative expense since the previous balance sheet date is recognised in the Income statement with a corresponding entry in equity.

Provisions

Provisions are made when an obligation exists for a present liability in respect of a past event and where the amount of the obligation can be reliably estimated.

Employee leaving indemnities and other employee provisions are recorded for flight crew who, meeting certain conditions, have the option of being placed on reserve or of taking early retirement. The Group is obligated to remunerate these employees until they reach the statutory retirement age. The calculation is performed by independent actuaries using the projected unit credit method.

Other employee related provisions are recognised for direct expenditures of business reorganisation such as severance payments (restructuring provisions) where plans are sufficiently detailed and well advanced, and where appropriate communication to those affected has been undertaken at the balance sheet date.

If the effect is material, expected future cash flows are discounted using a rate that reflects, where appropriate, the risks specific to the provision. Where discounting is used, the increase in the provision due to unwinding the discount is recognised as a finance cost.

Revenue recognition

Passenger and cargo revenue is recognised when the transportation service has been provided. Passenger tickets net of discounts are recorded as deferred revenue on ticket sales in current liabilities until the customer has flown. Unused tickets are recognised as revenue using estimates regarding the timing of recognition based on the terms and conditions of the ticket and statistical analysis of historical trends.

Other revenue including maintenance; handling; hotel and holiday and commissions is recognised at the time the service is provided in accordance with the invoice or contract.

Customer loyalty programmes

The Group operates five loyalty programmes: Executive Club, Iberia Plus, Avios, Vueling Club and Aer Club. The customer loyalty programmes award travellers Avios points to redeem for various rewards, primarily redemption travel, including flights, hotels and car hire. In accordance with IFRIC 13 ‘Customer loyalty programmes’, the fair value attributed to the awarded Avios points is deferred as a liability and recognised as revenue on redemption of the points and provision of service to the participants to whom the Avios points are issued.

In addition, Avios points are sold to commercial partners to use in loyalty activity. The fair value of the Avios points sold is deferred and recognised as revenue on redemption of the Avios points by the participants to whom the Avios points are issued. The difference between the consideration received and the amount deferred is recognised on the issuance of the points. The cost of the redemption of the Avios points is recognised when the Avios points are redeemed.

The Group estimates the fair value of Avios points by reference to the fair value of the awards for which they could be redeemed and is reduced to take into account the proportion of award credits that are not expected to be redeemed based on the results of statistical modelling. The fair value of the Avios point reflects the fair value of the awards for which points can be redeemed.

Exceptional items

Exceptional items are those that in management’s view need to be separately disclosed by virtue of their size or incidence. The exceptional items recorded in the Income statement include items such as significant restructuring; the impact of business combination transactions that do not contribute to the ongoing results of the Group; and the impact of the sale, disposal or impairment of an investment in a business.

Business combination transactions include cash items such as the costs incurred to effect the transaction and non-cash items such as accounting gains or losses recognised through the Income statement, such as bargain purchase gains and step acquisition losses.

Critical accounting judgements, estimates and assumptions

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. These judgements, estimates and associated assumptions are based on historical experience and various other factors believed to be reasonable under the circumstances. Actual results in the future may differ from judgements and estimates upon which financial information has been prepared. These underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if these are also affected.

Estimates

The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows.

a    Employee benefit obligations, employee leaving indemnities, other employee related restructuring provisions

The cost of employee benefit obligations, employee leaving indemnities and other employee related provisions is determined using actuarial valuations. Actuarial valuations involve making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the long-term nature of these schemes, such assumptions are subject to significant uncertainty. The assumptions relating to these schemes are disclosed in notes 24 and 31. The Group determines the assumptions to be adopted in discussion with qualified actuaries. In respect of future pension increases in the Airways Pension Scheme, following legal proceedings the Group has appealed the initial judgement that the Trustee has the power to award discretionary increases to pensions in payment in the 2013/14 scheme year. Further information on these proceedings is disclosed in note 32. The sensitivity to changes in pension increase assumptions is disclosed in note 31.

Restructuring provisions are estimates of future obligations. The Group exercises judgement in determining the expected direct expenditures of reorganisation based on plans which are sufficiently detailed and advanced.

b    Revenue recognition

At December 31, 2017 the Group recognised €4,159 million in respect of deferred revenue on ticket sales (2016: €4,145 million) of which €1,217 million (2016: €1,287 million) related to customer loyalty programmes.

Passenger revenue is recognised when the transportation is provided. Ticket sales that are not expected to be used (‘unused tickets’) are recognised as revenue using estimates regarding the timing of recognition based on the terms and conditions of the ticket and historical trends.

In respect of customer loyalty programmes the fair value attributed to awarded points is deferred as a liability and is recognised as revenue on redemption of the points and provision of service to the participants to whom the points are issued. The fair value of the award credits is estimated by reference to the fair value of the awards for which the points could be redeemed and is reduced to take into account the proportion of award credits that are not expected to be redeemed by customers. The Group determines the assumptions to be adopted in respect of the number of points not expected to be redeemed through the use of statistical modelling and historical trends and the mix and fair value of the award credits. A one point change in the assumption on the percentage of points not expected to be redeemed will increase or reduce the amount recognised as revenue in the year by less than €10 million.

c    Income taxes

The Group is subject to income taxes in numerous jurisdictions. Estimates are required when determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Group recognises liabilities for anticipated tax audit assessments. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made.

The Group recognises deferred income tax assets only to the extent that it is probable that the taxable profit will be available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised. Management consider the operating performance in the current year and the future projections of performance laid out in the approved business plan in order to assess the probability of recoverability. The Business plan relies on the use of assumptions, estimates and judgements in respect of future performance and economics. The deferred income tax asset recognised at December 31, 2017 was €521 million (2016: €526 million). Further information on current and deferred tax liabilities is disclosed in note 9.

d    Impairment of non-financial assets

The Group assesses whether there are any indicators of impairment for all non-financial assets at each reporting date. Goodwill and intangible assets with indefinite economic lives are tested for impairment annually and at other times when such indicators exist. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates and assumptions as disclosed in note 15.

Other non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable.

e    Residual values and useful lives of assets

The Group estimates useful lives and residual values of property, plant and equipment, including fleet assets based on network plans and recoverable values. Useful lives and residual values are reassessed annually, taking into consideration the latest fleet plans and other business plan information. Information on the net book values of property, plant and equipment and related depreciation charges is disclosed in note 12.

Judgement

Engineering and other aircraft costs

The Group has a number of contracts with service providers to replace or repair engine parts and other maintenance checks. These agreements are complex and the Group exercises judgement in determining the assumptions used to match the consumption of replacement spares and other costs associated with fleet maintenance with the appropriate income statement charge. Aircraft maintenance obligations are based on aircraft utilisation, expected maintenance intervals, future maintenance costs and the aircraft’s condition. At December 31, 2017, the Group recognised €1,125 million in respect of maintenance, restoration and handback provisions (2016: €1,201 million). Information on movements on the provision is disclosed in note 24.

Changes in accounting policy and disclosures

a    New and amended standards adopted by the Group

The Group has adopted IAS 7 (Amendment) ‘Statement of cash flows’ for the first time in the year to December 31, 2017. The amendment requires disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including changes arising from cash flows and non-cash changes. The Group has addressed this requirement by providing a reconciliation between the opening and closing balances of assets and liabilities included in the Group’s definition of net debt (note 19). This includes a reconciliation of liabilities arising from financing activities.

Other amendments adopted for the first time in the year to December 31, 2017 have not resulted in a significant change to the financial position or performance of the Group, or to presentation and disclosures in the Group financial statements.

b    New standards, amendments and interpretations not yet effective

The IASB and IFRIC issued the following standards, amendments and interpretations with an effective date after the year end of these financial statements which management believe could impact the Group in future periods. Unless otherwise stated, the Group plans to adopt the following standards, interpretations and amendments on the date they become mandatory:

IFRS 15 ‘Revenue from contracts with customers’; effective for periods beginning on or after January 1, 2018. The standard establishes a five-step model that will apply to revenue arising from contracts with customers. Revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for goods and services and at a point when the performance obligations associated with these goods and services have been satisfied.

The Group has identified the following changes to revenue recognition on adoption of the standard:

• Passenger revenue – revenue associated with ancillary services that is currently recognised when paid, such as administration fees, will be deferred to align with the recognition of revenue associated with the related travel.
• Cargo revenue – interline cargo revenue will be presented gross rather than net of related costs as IAG is considered to be principal rather than agent in these transactions.
• Other revenue – loyalty revenue associated with the redemption of Avios points with third parties will be presented net of the related costs as IAG is considered to be agent rather than principal in these transactions. In addition, revenue associated with maintenance activities and holiday revenue with performance obligations that are fulfilled over time, will be deferred (with the related costs) and recognised over the performance obligation period.

The Group expects to apply the standard on a fully retrospective basis. On adoption of the standard, the adjustment to retained earnings at January 1, 2017 is expected to be a charge of €27 million. For the year to December 31, 2017, adjustments to reflect the new standard are expected to be: reduction to revenue €31 million, and reduction to operating costs €27 million, resulting in a reduction in operating profit of €4 million. As at December 31, 2017, assets will reduce by €29 million and liabilities increase by €1 million.

IFRS 9 ‘Financial Instruments’; effective for periods beginning on or after January 1, 2018. The standard amends the classification and measurement models for financial assets and adds new requirements to address the impairment of financial assets. It also introduces a new hedge accounting model to more closely align hedge accounting with risk management strategy and objectives. The standard will allow the Group to hedge account for specific risk components of its fuel purchases, such as crude oil price risk. It also requires movements in the time value of options (currently recognised in the Income statement) to be recognised in Other comprehensive income as they are considered to be a cost of hedging. The standard requires companies to make an election on whether gains and losses on equity instruments measured at fair value should be recognised in the Income statement or Other comprehensive income, with no recycling. On adoption of the standard, the Group expects the following changes:

Financial assets will be classified as at ‘amortised cost’, ‘fair value through profit and loss’, or ‘fair value through other comprehensive income’. The Group has reviewed its existing classifications and confirmed that most financial assets will continue to be recognised at amortised cost. Equity investments, previously classified as available-for-sale will be classified as financial assets at fair value through Other comprehensive income, with no recycling of gains and losses.

The new impairment model will be applied to trade receivables and other financial assets. Any adjustment to existing provisions on transition will not be material.

The Group will continue to undertake hedging activity in line with its financial risk management objectives and policies. The following changes to hedge accounting will be adopted:

• Non-financial components of price risk may be designated in a hedge relationship;
• Movements in the time value of options will be classified as cost of hedging; and
• Hedge effectiveness assessments will be aligned to the requirements of IFRS 9.

The amounts recognised in the Income statement in respect of derivatives not qualifying for hedge accounting will reduce.

On adoption of the standard, to reflect the change in accounting for the time value of options, there will be a reclassification of accumulated post-tax gains of €38 million from retained earnings to unrealised gains and losses in Other reserves at January 1, 2017. Comparative information in the Income statement in respect of the year to December 31, 2017 will be adjusted to reflect a reduction in unrealised losses on derivatives not qualifying for hedge accounting of €42 million, a reduction in net currency retranslation charges of €11 million and an increase in the tax charge of €12 million, with an offsetting movement in Other comprehensive income. Other changes to hedge accounting will be applied prospectively.

IFRS 16 ‘Leases’; effective from January 1, 2019. The new standard eliminates the classification of leases as either operating leases or finance leases and instead introduces a single lessee accounting model. The Group has a number of operating leases for assets including aircraft, property and other equipment. Details of the Group’s operating lease commitments are disclosed in note 23.

The Group is currently assessing the impact of the new standard and expects its implementation to have a significant impact on the financial statements from the date of adoption. The main changes will be as follows:

1. The amounts recognised as assets and liabilities on adoption of IFRS 16 will be subject to a number of judgements, estimates and assumptions. This includes:

1. Judgements when reviewing current agreements (such as agreements for terminal capacity) to determine whether they contain leases as defined under the new standard.
2. Assumptions used to calculate the discount rate to apply to lease obligations, which is likely to be based on the incremental borrowing rate for the estimated lease term.
3. Estimation of the lease term, including options to extend the lease where the Group is reasonably certain to extend.

2. Interest-bearing borrowings and non-current assets will increase on implementation of the standard as obligations to make future payments under leases currently classified as operating leases will be recognised on the Balance sheet, along with the related ‘right-of-use’ asset. It is expected that lease obligations, which are predominantly US dollar denominated, will be recognised at the exchange rate ruling on the date of adoption and the appropriate incremental borrowing rate at that date, with the related ‘right-of-use’ asset recognised at the exchange rate ruling at the commencement of the lease.
3. There will be a reduction in expenditure on operations and an increase in finance costs as operating lease costs are replaced with depreciation and lease interest expense.
4. The Group’s Alternative Performance Measures will also be impacted. These comprise Operating profit and lease adjusted operating margin; Adjusted earnings per share; EBITDAR; Return on Invested Capital; Adjusted net debt to EBITDAR; Adjusted gearing; and Equity free cash flow. The definitions of these metrics will be reviewed on adoption of IFRS 16 to ensure that they continue to measure the outcome of the Group’s strategy and monitor performance against long-term planning targets.

For future reporting periods after adoption, foreign exchange movements on lease obligations, which are predominantly denominated in US dollars, will be remeasured at each balance sheet date, however the right-of-use asset will be recognised at the historic exchange rate. This will create volatility in the Income statement.

IFRIC Interpretation 23 ‘Uncertainty over tax treatments’ (not yet endorsed by the EU); effective for periods beginning on or after January 1, 2019. The interpretation clarifies application of recognition and measurement requirements in IAS 12 ‘Income Taxes’ when there is uncertainty over income tax treatments. The Group is currently assessing the impact of the interpretation.

There are no other standards, amendments or interpretations in issue but not yet adopted that the Directors anticipate will have a material effect on the reported income or net assets of the Group.

The Group has not early adopted any standard, amendment or interpretation that has been issued but is not yet effective.

3    Segment information

a    Business segments

The chief operating decision‑maker is responsible for allocating resources and assessing performance of the operating segments, and has been identified as the IAG Management Committee (IAG MC).

The Group has a number of entities which are managed as individual operating companies including airline and platform functions. Each airline operates its network operations as a single business unit and the IAG MC assesses performance based on measures including operating profit, and makes resource allocation decisions for the airlines based on network profitability, primarily by reference to the passenger markets in which the companies operate. The objective in making resource allocation decisions is to optimise consolidated financial results.

The Group has determined its operating segments based on the way that it treats its businesses and the manner in which resource allocation decisions are made. British Airways, Iberia, Vueling and Aer Lingus have been identified for financial reporting purposes as reportable operating segments. Avios and LEVEL are also operating segments but do not exceed the quantitative thresholds to be reportable and management has concluded that there are currently no other reasons why they should be separately disclosed.

The platform functions of the business primarily support the airline operations. These activities are not considered to be reportable operating segments as they either earn revenues incidental to the activities of the Group and resource allocation decisions are made based on the passenger business, or are not reviewed by the IAG MC and are included within Other Group companies.

For the year to December 31, 2017

Includes eliminations on total assets of €13,031 million and total liabilities of €2,744 million.

For the year to December 31, 2016

Includes eliminations on total assets of €13,327 million and total liabilities of €3,725 million.

b    Geographical analysis

Revenue by area of original sale

Assets by area

December 31, 2017

December 31, 2016

4    Exceptional items

1    Restructuring costs

British Airways has embarked on a series of transformation proposals to develop a more efficient and cost effective structure. The overall costs of the programme principally comprise employee severance costs and includes other directly associated costs such as onerous lease provisions and asset write down costs. Costs incurred in the year to December 31, 2017 in respect of this programme amount to €108 million (2016: €144 million), with a related tax credit of €21 million (2016: €27 million).

In the year to December 31, 2017, €180 million of restructuring costs were recognised at Iberia, related to the announcement of a new Transformation Plan. A related tax credit of €45 million was also recognised.

In the year to December 31, 2016:

2     Employee costs

During the year to December 31, 2016 the Group made changes to the US PRMB (Post-Retirement Medical Benefits) to further bring the level of benefits in line with national trends seen in the US. This scheme is accounted for in a similar way to a defined benefit plan, so any reduction in benefit results in the recognition of a past service gain when the plan amendment occurs. This change has resulted in a one-off gain in employee costs of €51 million in the year to December 31, 2016, and a related tax charge of €9 million.

3     Pre-acquisition cash flow hedge impact

Under IFRS 3 Business combinations, gains or losses on cash flow hedges acquired should not be recycled to the income statement but recognised in equity. Following the acquisition of Aer Lingus, IAG continued to unwind the cash flow fuel hedges acquired in reported fuel expense. For the year to December 31, 2016, a credit of €42 million was recognised as an exceptional item, reversing the impact of unwinding the cash flow hedges to arrive at the total Fuel, oil costs and emissions charges. A related tax charge of €5 million was also recognised.

5    Expenses by nature

Operating profit is arrived at after charging

Depreciation, amortisation and impairment of non-current assets:

Operating leases costs:

Cost of inventories:

6    Auditors’ remuneration

The fees for audit and non-audit services provided by the auditor of the Group’s consolidated financial statements and of certain individual financial statements of the consolidated companies, Ernst & Young S.L., and by companies belonging to Ernst & Young’s network, were as follows:

The audit fees payable are approved by the Audit and Compliance Committee and have been reviewed in the context of other companies for cost effectiveness. A description of the work of the Audit and Compliance Committee is set out in the Report of the Audit and Compliance Committee and includes an explanation of how objectivity and independence is safeguarded when non-audit services are provided.

7    Employee costs and numbers

1 Other employee costs include allowances and accommodation for crew.

The number of employees during the year and at December 31 was as follows:

8    Finance costs and income

a    Finance costs

b    Finance income

c    Net financing (charge)/credit relating to pensions

9    Tax

a    Tax charges

Tax (charge)/credit in the Income statement, Other comprehensive income and Statement of changes in equity:

For the year to December 31, 2017

Current tax in Other comprehensive income all relates to employee retirement benefit plans and current tax in the Statement of changes in equity all relates to share-based payments.

For the year to December 31, 2016