Our business - British Airways · Our business Corporate governance Financial statements British Airways 2008/09 Annual Report and Accounts / 21 Increased competition Most of the

The global airline industry is fiercelycompetitive, heavily regulated andhighly exposed to changes incustomer behaviour and consumerconfidence. The current economicenvironment presents a newchallenge. We must concentrate our efforts to seize long-termopportunities for growth.

Our business

18 / British Airways 2008/09 Annual Report and Accounts

Global premium demand in key markets

North Atlantic

Source: IATA

Within Europe

Within Far East

Europe – Far East

Europe – Middle East

Total Market

+1.2%

-9.5%

-6.6%

-2.8%

+6.9%

-2.8%

-17.9%

-24.1%

-26.3%

-20.3%

-10.3%

-19.0%

12 months to December 31, 2008

3 months averaged to March 31, 2009

Overview

Our business

Corporate governance

Financial statements

British Airways 2008/09 Annual Report and Accounts / 19

The markets we operate in

Market overviewThe pace of economic slowdown duringthe year was faster than most hadpredicted. What had first been expected to be a downturn in key developedeconomies turned into a global recessionin the autumn of 2008. With record oil and commodity prices, sterling collapseand an unprecedented financial crisis allstriking at once, even those emergingeconomies that had been expected to go untouched by recession saw sharpdeclines in growth.

In the UK, growth began slowing in the firsthalf of the year, whilst the US economywent into recession in the last quarter. Inboth economies, consumer and businessconfidence plummeted due to risingunemployment, uncertainty in the capitalmarkets, a continuing squeeze on credit,the erosion of household budgets andfalling house prices. Growth also sloweddramatically in many Asian economies.

Government attempts – nationally andinternationally – to halt the financial crisis through bank bailouts and creditguarantees staved off what might havebeen an even more serious collapse.Subsequent efforts to stimulate economicactivity are expected by most economiststo take longer to take effect.

It is hoped that these steps will kick-startthe US and UK economies which willprovide some economic growth in 2010.This should, in turn, provide some basis for a recovery in our own business.

Impact on the industryThe airline industry acts as an economicbarometer. Like our competitors, we feelthe full force of falling confidence quicklyand, on this occasion, dramatically.

During the first half of the year, oil priceshit a record high of $146 a barrel, forcingup the fuel costs of all carriers tounprecedented levels and putting marginsunder enormous pressure. Although fuelprices subsequently fell to about a third of that level, the onset of recession had

already begun in earnest, forcing manyairlines into financial loss.

Even at these lower levels, fuel remains a much bigger proportion of airline costscompared to a few years ago, and theprospect of renewed volatility in pricesremains a long-term concern.

The most significant impact of thedownturn has been on premiumpassengers, with businesses looking to cut back sharply on travel to save money.IATA’s latest figures show that globalpremium traffic fell in 2008 by 2.8 percent. The rate of decline is increasing, andIATA has indicated that the year to datedecline for the first three months of 2009was around 19 per cent. The rate ofdecline varied across the world, with trans-Pacific traffic and routes within Asia mostseverely hit.

The impact on business travel is likely tocontinue for some time. A recent surveysuggested that 47 per cent of businesseswill take fewer trips in the year ahead.

Individual customers are also looking tomake savings on travel, increasingly seen asan item of discretionary spend. Consumerconfidence the world over has tumbled.Though many customers continue to see a first holiday as an essential rather than a luxury, most are cutting back on secondand third holidays and short breaks.

For both business travellers andindividuals, airline brands that are trustedto be robust and reliable are more soughtafter in tough economic times. Customersseek assurance that their journeys will gosmoothly. If they travel less, each trip theydo make is all the more important.

The downturn is also making customersmuch more price sensitive. They arelooking for value for money, demandingexcellent levels of service and high-qualitystandards at lower costs. Less loyal tobrands than in the past, they are nowwilling to try out new ones which offer realvalue. This presents agile operators with anopportunity to attract new customers, but

“The airline industry acts as an economic barometer.Like our competitors, we feel the full force of falling confidencequickly and, on thisoccasion, dramatically.”


The markets we operate in continued

makes it vital that they keep offering valuefor money, reliability and superior service.

Customers are also making more informedchoices. They have become more self-reliant, thanks to the proliferation of newinformation channels such as the internetand mobile phones. They are using pricecomparison sites and seeking out personalrecommendations on service and qualitybefore booking their trips. We expect thistrend to increase during the downturn.

Metrotwin, our new online community, isan example of how we are responding tothis social media trend. The new website‘twins’ London and New York andpublishes recommendations of the bestplaces to visit in both cities. Metrotwin issuccessfully attracting a young, affluentand influential audience.

Corporate responsibilityWhile recession is the overriding concernfor most customers, the environment and corporate responsibility remain veryimportant issues to them. It is clear fromresearch that those companies with a clear and open commitment to behaveresponsibly and to manage theirenvironmental impact have a far greaterchance of building a trusted relationshipwith their customers.

TaxationGovernments are increasingly looking ataviation for additional tax revenues underthe auspices of making airlines pay forenvironmental costs. By March 2011,APD in the UK will have increased by up to210 per cent from current levels and theEU will be looking to introduce a system of payment for carbon emissions.

CompetitionIn response to the worsening economicconditions, the airline industry is in theprocess of change in a number of areas.

ConsolidationWeaker customer demand coupled with record fuel prices, has sped upconsolidation in the airline industry. Some35 passenger and cargo carriers have eithergone out of business or been absorbed intoother airlines. In Europe, five independentairlines have been, or are in the process ofbeing, taken over by competitors.

In an effort to protect their airline industryfrom the effects of the financial crisis andglobal recession, some governments haveresorted to bailout programmes. This hasbeen particularly true in a number of majoremerging markets, most notably China,India and Russia.

“Some 35 passenger andcargo carriers have eithergone out of business or been absorbed into other airlines.”

Metrotwin, our new onlinecommunity, is an example ofhow we are responding tosocial media trends. The newwebsite ‘twins’ London andNew York and publishesrecommendations of the bestplaces to visit in both cities.Metrotwin is successfullyattracting a young, affluent and influential audience.

Overview

Our business




Increased competitionMost of the markets in which we operateare highly competitive. Levels ofcompetition vary, route by route. On a few international routes competition isrestricted to national airlines and fares areregulated. At the other extreme there is a free market for internal flights withinEurope allowing any European airline tooperate any route and set its own fares.

Shorthaul marketOn shorthaul routes, we face competitionin the air and on the ground. Trainoperators in the UK are taking a biggershare of the air/rail travel markets, nowthat infrastructure improvements have cut journey times on key lines such as theWest Coast mainline. Eurostar overcamedisruption caused by the tunnel fire andcarried 10 per cent more passengers in2008, at a time when demand for flightsfrom London to Brussels and to Paris fellby 20 and 13 per cent, respectively.

Budget airlines are continuing to grow, buthave switched their priorities to growth atcontinental airports. There has been littleorganic growth in their London operations.At the same time, full service airlines havereduced their presence in London, cuttingseat capacity by 5 per cent in 2008,although little of this reduction has beenfocused on the airports from which we operate.

Longhaul marketDeregulation has had a significant impacton our longhaul business. The first phaseof the EU-US Open Skies agreement hasaltered the competitive landscape ontransatlantic routes. While seat capacity in the summer of 2008 rose by just 3 percent, the new regime has provoked a sharptransfer of capacity from Gatwick (down39 per cent) to Heathrow (up 19 per cent).

Four new US airlines have now won slotsat Heathrow. There have also been newentrants from Africa and India. Air Francetemporarily established a US service from Heathrow, at a time when our own OpenSkies subsidiary launched direct services to the US from Paris and Amsterdam.

Three airlines have introduced the newAirbus A380 at Heathrow in 2008, with a total of 24 departures a week. Theaircraft offers them the chance to enhancetheir products.

However, the economic downturnwreaked havoc in two emerging sectors inour industry in 2008. We saw the collapseof three premium-only operators – Maxjet,Eos and Silverjet. Low cost longhauloperators, such as Oasis Hong Kong andZoom, also went out of business, althoughother operators have emerged to servethis market, in which a number of charterairlines continue to operate.

For both business travellers and individuals, airline brandsthat are trusted to be robustand reliable are more soughtafter in tough economic times.Customers seek assurance that their journeys will gosmoothly. If they travel less,each trip they do make is allthe more important.

Three airlines haveintroduced the new Airbus A380 at Heathrowin 2008, with a total of 24 departures a week. The aircraft offers themthe chance to enhancetheir products.


The markets we operate in continued

BAA is being forced by theCompetition Commission to dispose of Gatwick,Stansted and either Glasgowor Edinburgh airports. Such a move could be beneficial to Heathrow, ensuring that it has the right resources and focused management.

Regulatory controlsAlmost every aspect of running an airline is governed or influenced by a web of tightregulatory controls. These cover everythingfrom the routes we fly, to the businesspartners we cooperate with, the airportslots we use, the fares we set and theinfrastructure costs we pay. Strict rulesalso govern safety and security and themanagement of our environmental impact.

There were a number of importantregulatory developments during the year which will have a major impact on the industry in general and on our ownlong-term strategy.

LiberalisationIn April 2009 we completed our thirdapplication to EU and US competitionauthorities to operate a joint business on north Atlantic routes with our oneworld alliance partners, AmericanAirlines and Iberia.

We are seeking the same anti-trustimmunity to run this business as is alreadyenjoyed by our major competitors. Theirrespective alliances, Star and Skyteam, arealready allowed to coordinate schedulesand offer customers a range of benefits

and valuable services. Other recentregulatory changes have made theseroutes, and Heathrow in particular, farmore competitive than in the past and wehave argued that the move would bringreal benefits and choice to customers. We expect a decision in the autumn of this year.

The second phase of Open Skies is at a critical stage too. This would giveEuropean carriers reciprocal rights ofaccess to US airports of the sort that UScarriers now enjoy in Europe. The latestnegotiations are moving slower than wehad hoped. The EU retains the right torevoke phase one if satisfactory progress isnot made. European airlines are generallykeen to avoid this however, believing thatfurther liberalisation will provide a long-term boost for the industry and extendchoice for customers.

UK airportsThe UK Department of Transport isreviewing the way the CAA regulates airportcharges. There is strong pressure for areview of the way BAA is regulated and forthe introduction of cost-effective chargesthat ensure airports are managed efficiently.

“The UK Governmentannounced during the yearthat it was in favour ofdeveloping a third, shortrunway at Heathrow.”

Overview

Our business




BAA is also being forced by theCompetition Commission to dispose of Gatwick, Stansted and either Glasgowor Edinburgh airports. Such a move could be beneficial to Heathrow, ensuringthat it has the right resources and focused management.

The UK Government announced duringthe year that it was in favour of developinga third, short runway at Heathrow, subjectto tight environmental conditions beingmet in terms of noise, emissions and air quality. Capacity constraints at theairport have led Heathrow to fall behindcompeting European airports in recentyears, threatening its position as one of theworld’s leading airports. While expansionwould help Heathrow compete morestrongly, the debate over the future of theairport remains politically divisive and islikely to stay that way up to the UK generalelection and beyond.

EnvironmentAll airlines have to meet a comprehensiverange of local, national and internationalenvironmental regulations. Our approachto these is to comply with all regulations asan absolute minimum, and to exceed themin a number of key areas. For example, ourcommitment to halve our 2005 net CO2

emissions by 2050 goes much further thancurrent industry-wide commitments tostabilise emissions at 2005 levels by 2020.

Safety and securitySafety is a key priority for us. We have a formal safety management system inplace which ensures that we meet allrelevant regulations and we operate acomprehensive monitoring system toensure all incidents are reported andnecessary action taken. From the start of 2009, all IATA member airlines havebeen required to pass an InternationalOperational Safety Audit (IOSA). We have held IOSA accreditation sinceOctober 2007.

Governments across the world haveintroduced a range of security measures totry to combat the threat of terrorism andillegal immigration. Airlines continue toengage with the European Commission,the UK and other governments to makesure that these measures are effectivewhile causing the minimal inconvenienceto customers.

Our security department works within thewider international security framework toensure that any threats to our business areminimised and to protect our customers,worldwide assets, operations and staff.

Our security department workswithin the wider internationalsecurity framework to ensurethat any threats to our businessare minimised and to protectour customers, worldwideassets, operations and staff.

“Landing fees and en route charges cost us£603 million, up 14.2 percent. This was mainly dueto the fact that we had topay much higher charges to BAA for using Heathrowand Gatwick.”


In an incredibly tough tradingenvironment we have to focus hardon pulling ourselves through theimmediate crisis, while preparing thebusiness for better economic times.This year we have mapped out along-term vision for our business. It is to be the world’s leading globalpremium airline.

Our strategy and objectives

Overview

Our business




Progress against ourBusiness PlanBP11The rolling three-year business plan, BP11, set out our agenda for 2008/09.Our main aims were to build on Terminal5’s strengths to upgrade the customerexperience, continue to make the businessmore cost effective, grow our operationsand make corporate responsibility aprominent part of our business. Recordfuel prices and the global downturn meantwe needed to revise our plans and resetpriorities. Nevertheless, we have still made significant progress against ouroriginal goals, laying the foundations for future success.

An upgraded customer experienceTerminal 5 has transformed ouroperational performance and customerservice. We have exceeded punctuality and baggage targets across the network,achieving record customer satisfactionscores. Service for premium customers hasbeen upgraded with the new Club Worldproduct, now fitted to all Boeing 747aircraft and over half of our Boeing 777aircraft, and this year we will launch ournew First cabin. The Galleries lounges atTerminal 5 and Terminal 3 have had afantastic reception and we are using thesame concept at other key airports such as Milan, Johannesburg and Vancouver.

Competitive cost baseWith record fuel prices to contend withduring the year we redoubled efforts tocontrol costs. Terminal 5 has allowed us tocut the cost of our Heathrow operationsby more than expected. By the end ofMarch 2009, our overall Heathrowmanpower levels had reduced by 1,074 MPE, 14 per cent lower than

the peak resource level during the first month of Terminal 5 operations. A significant management voluntaryseverance programme also reduced thenumber of managers by a third. Capacitywas realigned to meet weaker demandand, where possible, exploit our most fuel efficient aircraft.

A plan for growthDespite the downturn, we have continuedto grow where it makes economic senseand meets the needs of our customers. We launched new routes from London to Hyderabad and St Kitts; we launchedOpenSkies, our subsidiary flying fromcontinental Europe to North America inJune 2008, and subsequently purchasedL’Avion in July 2008; and we haveannounced the launch of the first LondonCity to New York JFK service to start laterthis year.

Investing in efficient and flexible newaircraft makes sense, even in these toughtimes. With the arrival of our new Boeing787s delayed, we contracted six Boeing777-300ER aircraft (two acquired, fourleased), with options for a further four.

Corporate responsibilityOur vision is to become the world’s mostresponsible airline, and we have brought all our corporate responsibility activitiestogether under the banner ‘OneDestination’. We have set challenging goals for further reductions in our carbonemissions, reducing and recycling wasteand minimising air and noise pollution. We have continued to invest significantly in our community relations programmeand are proud of our record of raisingmoney for charities, both as a business and through the incredible energy andcommitment of our people.

The Galleries lounges atTerminal 5 and Terminal 3 have had a fantastic receptionand we are using the sameconcept at other key airportssuch as Milan, Johannesburgand Vancouver.

“We have exceededpunctuality and baggagetargets across the network,achieving record customersatisfaction scores.”


Five Key Goals – the steps we will take to achieve our vision:

Global Premium AirlineWhat we offer will appeal tocustomers across the globe.Wherever we operate, individuals and business travellers alike will want to fly with us whenever they can.

We will make sure all our customersenjoy a unique premium servicewhenever and wherever they comeinto contact with us. Our customerswill recognise that the service weoffer is worth paying that little bitmore for.

We will remain focused on aviation,moving people and cargo is ourcore business. We will develop newproducts and services tocomplement this.

Be the airline of choicefor longhaul premiumcustomers…

…so that people will want to fly with us whenever they can. We will continueto introduce great products such as the new business class seat on longhauland a restyled First cabin. To complement our Heathrow home – Terminal 5– we will redevelop premium facilities in New York JFK and continue toinvest in lounges in other key cities.

Deliver an outstandingservice for customers atevery touch point…

…by training our colleagues, on the ground and in the air, in world-classhospitality and customer service. Customers can already check-in from theirmobile or PDA, and we will continue to enhance ba.com. A new in-flightentertainment system will be launched later this year.

Grow our presence in key global cities…

…to provide the best global connectivity for our customers. In addition toour new longhaul service from London City to New York JFK, our networkdepth will be strengthened with more flights to Dubai and Johannesburg anda return to Saudi Arabia.

Build on our leadingposition in London…

…the world’s biggest aviation market. Ensuring Heathrow remains a world-class hub is vital to give us a strong London base to serve the largestinternational longhaul markets. We will acquire new slots, support plans for athird runway and work with BAA to improve baggage and terminal facilitiesat Heathrow.

Meet our customers’needs and improvemargins through newrevenue streams…

…by building profitable ancillary services that offer customers great valueand re-enforce our brand. Our aim is to grow our mileage business andboost revenues from third-party engineering, in-flight sales and a new onlineretail website. On ba.com we have now launched a range of great valuehotel and car hire options packaged with our flights.

As discussed in the Chief Executive’s review on page 10, we have set our sights on being the world’s leading globalpremium airline.

The decisions we are taking now will determine how strongly we emerge from the downturn. The airline industry is in a period of unprecedented change and we have developed a clear vision for our business.

This vision is guiding us in how we deal with current market conditions and in how we go about building a sustainablefuture for our business.

Overview

Our business




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In order to become the leading global premium airline, we need to look at the way wework as well as what we are doing as a business.

For that reason, along with our five key goals, we have launched a three-year changeprogramme – Compete 2012 – linked to our sponsorship of the London 2012 Olympics.This programme is being progressively rolled out across our business to refresh ourculture and will revolutionise the way we work.


Our strategy and objectives continued

Compete 2012Our Compete 2012 programme aims to instil the drive and competition of theOlympic spirit into the way we work andperform as a team, and it puts ourcustomers at the heart of our culture.

CustomerWe think customerOur people will set the standard andthrough them we will deliver world-leadingcustomer service.

To continue our success, we need to beclear about what sets us apart.

• We keep promises – always doing whatwe say we will do;

• We look the part – our style iscontemporary and understated;

• We do things properly – doing the right things for the right reasons and to a high standard;

• We find solutions – solving any problemsinventively and working flexibly within aframework; and

• We treat everyone as an individual –respecting differences and adding a personaltouch to make everyone feel valued.

We are using a comprehensivecommunications and training programmeto help put these principles into practice in everything we do.

ColleaguesI am proud to give moreWe expect great things of everyone whoworks for British Airways. Our colleaguesare central to our ambitions to be theworld’s leading global premium airline. Inreturn, they have the right to expect us toprovide them with a great place to work –one which they can really feel proud of.

To achieve this we are:

• Investing in new leadership training;

• Implementing clear communicationprogrammes;

• Improving the way we manageperformance in all areas of our businessthrough training and systems solutions;

• Re-enforcing the new organisationstructure with clear accountabilitieslinked to our overall Company goals; and

• Innovating and improving our ways ofworking, using e-tools.

PerformanceWe make it happenTo be the world’s leading global premiumairline, we need to sustain our improvingoperational performance and be financiallyfit. That way we can both invest in ourfuture and deliver a healthy return to our shareholders.

To achieve these goals we need to be able to measure our performance acrossthe business and to make our managersaccountable for delivery of our targets.

ExcellenceWe set standards that others aspire toWe developed a number of keyoperational processes ahead of our moveinto Terminal 5 which have helped us tobecome more efficient. Building on thesewe are now rolling out what we call the‘Lean’ Continuous Improvement approachacross our business.

PartnersWe win togetherThe modern airline business is highlyinterconnected. We rely on a network ofboth airline and non-airline partnerships todeliver a complete service to our customers.

So to be the world’s leading globalpremium airline, we also need our partnersto see us as a great company to dobusiness with. We are working hard todevelop better and more sustainablerelationships with our partners, particularlysome 500 key businesses to whom wehave given formal preferred supplier status.

Our employees are central to our ambitions to be the world’s leadingglobal premium airline.




Overview

Our business

Our performance through the yearis reflected in our Key PerformanceIndicators. We failed to meet ourfinancial target because of theunprecedented downturn in tradingconditions. However, the move toTerminal 5 saw a step-change in our operational performance and we achieved record-breakingpunctuality and customerrecommendation scores.

Our Key PerformanceIndicators


Our Key Performance Indicators continued

How is it measured?KPI What does this mean and why is it key to our strategy?

Financial

Customers

Operations

Colleagues

We must achieve a consistently strong financial performance if we areto continue investing in the future success of the business and provideadequate shareholder returns. Operating margin is the main way wemeasure our financial performance. In 2002 we set ourselves the goalof achieving a 10 per cent operating margin through the economiccycle and in 2007/08 we delivered this for the first time in our history.

Running a robust operation is key to both meeting our customers’expectations and to creating a cost-effective business. We monitor ouroperational performance via a broad range of measures at a variety oflevels. Departure punctuality is our primary operational performancemeasure, requires other operational processes to run smoothly and is a key factor in whether customers would recommend British Airways to other travellers. ‘Ready to Go’ measures how many of our flights are prepared for departure at three minutes before the scheduled orplanned departure time and focuses on the aspects of the departureprocess within our control.

Customer recommendation is a key measure of our success. Our GlobalPerformance Monitor (GPM) survey, an onboard customer survey,together with a follow-up online survey on the arrivals process, providesmonthly insights into customers’ views. The survey is carried out by anindependent market research company and involves more than 57,000customers each month. The customer recommendation measure isbased on the percentage of customers who, when surveyed, were very,or extremely likely to recommend British Airways to friends, family orcolleagues. Apart from being extremely important in its own right, webelieve that this measure indicates how the customer experience willaffect future profitability.

Progressive, high-performing organisations are increasingly recognisingthat engaged employees are more committed to organisational goalsand values and more willing to embrace change and improve customerservice. For three years we have tracked opinions via an all-employeeconfidential Speak Up! survey, conducted and hosted by theindependent research organisation, Ipsos MORI to measure ourcolleague involvement. Last year we indicated we would review ourheadline measure in this area. We have now defined an EmployeeEngagement Index, based on a basket of more detailed measures fromthe Speak Up! surveys, and have built employee responses into the way we measure and manage individual performance.

Operating margin

Punctuality –‘Ready to Go’

Customerrecommendation

Colleague involvement

Overview

Our business




Achievements in 2008/09 Performance over time

2008/09 was expected to be a tough year financially, given record fuelprices, and we expected a reduction in operating margin. The rapiddecline in the global economic situation led us to revise our forecaststhrough the year. The economic recession that has followed has beensevere, far more so than most had predicted. It has hit demand for air travel significantly, particularly premium business. That, coupled with record fuel prices in the early part of the year, has meant that we posted an operating loss of £220 million for the year, down£1,098 million from the previous year.

The move to Terminal 5 has delivered record-breaking levels ofoperational performance. Terminal 5 Ready to Go performance for2008/09 averaged 46 per cent with a record high in March 2009 of 64 per cent. As good performance at Heathrow drives goodperformance across the network, we delivered our highest evernetwork-wide Ready to Go performance of 53 per cent. This translatedinto record levels of flights departing on time and within 15 minutes, as well as record levels of customer satisfaction with punctuality, asrecorded by our GPM survey.

For 2008/09 we targeted a level of customer recommendation (theproportion of customers very or extremely likely to recommend BritishAirways) of 62 per cent. The move to Terminal 5 and the brilliantoperational performance that we have delivered across our network asa result of this, drove a recommendation score of 65 per cent. This isthe result of an increasing trend through the year and in March 2009 we achieved our highest monthly recommendation score (70 per cent)since we began tracking this in April 2002.

The autumn Speak Up! survey saw scores for pride, service and productadvocacy, and satisfaction with basic conditions all improve significantly.This is a reflection of the improved operational performance over thesummer and the impacts of moving to Terminal 5.

2008/09

2007/08**

2006/07

2005/06

2004/05*

(2.4)%

10.0%

7.1%

8.5%

7.2% * Restated for the adoption of IFRS.** Restated for the adoption of IFRIC 13 and 14.

2008/09

2007/08

2006/07

65%

59%

61%

2008/09

2007/08

2006/07

53%

34%

36%

2008/09

2007/08

2006/07

65%

Not available*

70%* Based on a basket of detailed measures, not comparable at top-level with previous years.


Principal risks and uncertainties

The operational complexities inherent in our business, together with the highlyregulated and commercially competitiveenvironment of the airline industry, leaveus exposed to a number of risks. Many of these risks – for example changes ingovernmental regulation, acts of terrorism,pandemics and the availability of fundingfrom the financial markets – can bemitigated to a certain degree but remainoutside of our control.

The directors of the Group believe thatthe risks and uncertainties describedbelow are the ones that could have themost significant impact on the long-termvalue of British Airways. The list (presentedin alphabetical order) is not intended to be exhaustive.

The Group carries out detailed riskmanagement reviews to ensure that therisks are mitigated where possible. A moredetailed summary of risk management andinternal control corporate governanceprocesses are included on pages 58 and59. Clear plans for mitigating many of ourprincipal risks and uncertainties that weface are included in the section on ‘Ourstrategy and objectives’ and ‘The way werun our business’ on pages 24 to 28 andpages 34 to 52 respectively.

Brand reputationOur brand is of significant commercialvalue. Erosion of the brand, through eithera single event, or series of events, couldadversely impact our leadership positionwith customers and ultimately affect ourfuture revenue and profitability.

CompetitionThe markets in which we operate are highlycompetitive. We face direct competitionfrom other airlines on our routes, as well asfrom indirect flights, charter services andfrom other modes of transport. Somecompetitors have cost structures that arelower than ours or have other competitiveadvantages such as being supported bygovernment intervention.

Fare discounting by competitors hashistorically had a negative effect on ourresults because we are generally requiredto respond to competitors’ fares tomaintain passenger traffic. A particularthreat in the current economicenvironment is cash rich competitorsgrowing market share and acting irrationallyto force other airlines out of the market.

Consolidation/deregulationAs noted above, the airline industry is fiercely competitive and will need to rationalise to meet current marketconditions. This will involve further airline failures and consolidation. As in all consolidations, a merger with Iberia, and the joint ATI application with Iberiaand American Airlines, would introduceintegration risks such as a failure to realiseplanned benefits, brand erosion and otherexecution risks.

Mergers and acquisitions amongstcompetitors have the potential toadversely affect our market position andrevenue. Certain markets in which weoperate remain regulated by governments,in some instances controlling capacityand/or restricting market entry. Relaxationof such restrictions, whilst creating growthopportunities for us, may have a negativeimpact on our margins.

Debt fundingWe carry substantial debt which will needto be repaid or refinanced. Our ability tofinance ongoing operations, committedaircraft orders and future fleet growthplans may be affected by various factorsincluding financial market conditions.Although most of our future capitalrequirements are currently asset-relatedand already financed, there can be noassurance that aircraft will continue toprovide attractive security for lenders in the future.

Employee relationsWe have a large unionised workforce.Collective bargaining takes place on a

“The Group carries outdetailed risk managementreviews to ensure that the risks are mitigatedwhere possible.”




Overview

Our business

regular basis and a breakdown in the bargaining process could disruptoperations and adversely affect businessperformance. Our continued effort toreduce employment costs, throughincreased productivity and competitivewage awards, increases the risk in this area.

EnvironmentFailure to adopt an integratedenvironmental strategy could lead todeterioration in our reputation and aconsequential loss of revenue. Anincreased focus on corporate responsibilityand a published emissions reduction targetwill help deliver the refocused strategy.

Fuel price and currency fluctuationWe use approximately six million tonnes of jet fuel a year. Volatility in the price ofoil and petroleum products can have amaterial impact on our operating results.This price risk is partially hedged throughthe purchase of oil and petroleumderivatives in forward markets which can generate a profit or a loss.

The Group is exposed to currency risk on revenue, purchases and borrowings inforeign currencies. The Group seeks toreduce foreign exchange exposures arisingfrom transactions in various currenciesthrough a policy of matching, as far as possible, receipts and payments in each individual currency and selling thesurplus or buying the shortfall of itscurrency obligations.

Fuel supplyThe infrastructure that provides jet fuel toHeathrow is critical to the operation. Anybreakdown in this infrastructure and/orcontamination of the fuel supply will havea significant operational impact.

Global economic slowdown/credit crunchOur revenue is highly sensitive to economicconditions in the markets in which weoperate. Further deterioration in the globaleconomy may have a material impact onour financial position. The financial servicessector is one of our key customer segmentsand continued difficulties in the bankingindustry represent a significant risk to our revenue.

Government interventionThe airline industry is becomingincreasingly regulated. The scope of such

regulation ranges from infrastructureissues relating to slot capacity and routeflying rights, through to new environmentaland security requirements. Our ability to both comply with, and influence any changes in, these regulations is key to maintaining our operational andfinancial performance.

UK Government plans to double APDfrom 2010, and the European UnionEmissions Trading Scheme, may have an adverse impact upon demand for airtravel and/or reduce the profit margin perticket. These taxes may also benefit ourcompetitors by reducing the relative costof doing business from their hubs.

Heathrow operational constraintsHeathrow has no spare runway capacityand operates on the same two runways it had when it opened 60 years ago. As a result, we are vulnerable to short-termoperational disruption and there is little we can do to mitigate this. In February2008, public consultation on the UKGovernment’s conclusion that itsenvironmental conditions could be met to allow full use of these two runways andthe construction of a third, short runway,ended. This expansion of the airport wouldcreate extra capacity and reduce delays,enabling Heathrow to compete moreeffectively against European hubs such as Paris, Amsterdam and Frankfurt.

Key supplier riskWe are dependent on suppliers for someprincipal business processes. In the currenteconomic environment our suppliers are atincreased risk of business failure. The failureof a key supplier may cause significantdisruption to our operation. We describethe supplier risk in more detail on page 46.

PensionsIf the financial markets deteriorate further, our pension deficit may increase,impacting balance sheet liabilities, whichmay in turn affect our ability to raiseadditional funds.

Safety/security incidentThe safety and security of our customersand employees are fundamental values forus. Failure to prevent or respond to amajor safety or security incident couldadversely impact our operations andfinancial performance.

Net debt£ million

2,9

22

1,6

41

99

1

1,3

10

2,3

82

20

04

/05

*

20

05

/06

20

06

/07

20

07

/08**

20

08

/09

* Restated for the adoption of IFRS.** Restated for the adoption of IFRIC 13 and 14.

To create a really high-performingbusiness we need to build aninspiring and rewarding workplacewhere talented people can work tothe best of their ability to meet ourcustomers’ needs and our widersocial responsibility.

The way we run our business





We are re-inventing the way we work atBritish Airways. We are creating a leanerorganisation with a distinctive, high-performing culture through our flagshipchange programme, Compete 2012.

Over the next three years this programme,described in detail on page 28, will help us to achieve our vision of becoming theworld’s leading global premium airline.

It will affect the way we interact with each other, how we measure individualperformance and how we promote,develop and reward talent. Coupled withour commitment to be a responsibleairline, it will also help us achieve ourambitious environmental targets, put ourrelationship with key suppliers on a newfooting and continue our tradition ofsupporting communities in useful andimaginative ways.

Restructuring managementWhile Compete 2012 is a long-termchange programme, current marketconditions have made it imperative to move fast to create a leaner, more agile structure starting at the very top of our business.

In December 2008, a third of ourmanagers left the business under avoluntary severance scheme. At the sametime we redesigned the organisation topromote greater customer focus andbetter governance and leadership.

This restructuring effort has made us moreefficient. It has also helped us identify anddraw on new talent in the business, helpedby the fact that we are now encouragingmore people to move between functionsto gain wider experience and find newoutlets for their skills. To support greater

Overview

Our business

The way we run our businessThe workplace

CustomerSilla Maizey

EngineeringGarry Copeland

Finance and performance Keith Williams

People and organisational effectiveness

Tony McCarthy

Sales and marketingAndrew Crawley

Strategy and business unitsRobert Boyle

CommunicationsJulia Simpson

CustomerSilla Maizey

EngineeringGarry Copeland

Flight operationsStephen Riley

OperationsAndy Lord

InvestmentsRoger Maynard

Legal and governmentand industry affairsMaria Da Cunha

Safety and securityTim Steeds

Chief ExecutiveWillie Walsh

Customer andOperations Executive

ManagementBoard

Reporting to the Chief Executive


The way we run our businessThe workplace continued

mobility, we have clarified individual andcollective roles and responsibilities andnow publish accountabilities for all of ourtop managers on our intranet.

Leadership developmentWe need great leaders to help us contendwith current trading conditions and achieveour long-term vision. A leading globalpremium airline must be bold and highlyeffective in developing present andpotential leaders.

This is why we introduced our HighPerformance Leadership (HPL) systemduring the year. This is an integratedsystem, linking business strategy, objectivesetting, performance assessment,development and reward. Focused initiallyon the senior leaders, HPL has rigorousassessment mechanisms to identifytalented leaders and to provide them with the right tools and support tocontinue developing.

We have also defined, communicated andbegun to measure individual performanceagainst three capabilities we think we need in our leaders, in addition tooperational excellence:

• Communicating a common vision;

• Agreeing accountabilities; and

• Motivating and inspiring others.

For each capability, specific behaviourshave been developed so that leadersunderstand exactly what is expected ofthem and we are supporting them with a range of development programmes,including executive coaching, networks,forums and external courses. We are also using new techniques to measureperformance. These will allow us tomonitor individual progress and track ourown overall success at managing talent.

Among the other leadership initiatives we launched were:

• Behaviours for Success – a leadershipdevelopment programme for the HPLcommunity, focusing on understandingand developing personal leadershipperformance;

• Leadership Matters – a scheme toidentify and develop leaders who havepivotal roles in the Customer andOperations areas of our business; and

• A Leadership Development Portfoliothat will be introduced this year with theaim of supporting current and potentialleaders at every level of the business,including emerging leaders, those on afast track to senior positions and thosewith strategic roles at the very top of our organisation.

The management of our businessChange must start at the top and duringthe year we reorganised our topmanagement team, comprising ninedirectorate heads, led by the ChiefExecutive. It is now split into two groups –the Management Board and the Customerand Operations Executive.

The Management Board, which meetsweekly, is responsible for the vision andstrategic direction of the Company.

The Customer and Operations Executiveis accountable for day-to-day customerservice, operational performance andensuring the highest standards of safety.This group also meets weekly.

Legal, director of safety and security anddirector of investments also report to theChief Executive.

“Change must start at the top and during the year we reorganised our top management team, comprising ninedirectorate heads, led by the Chief Executive.”




Overview

Our business

Our restructuring effort has made us more efficient. It has alsohelped us identify and draw on new talent in the business, helped by the fact that we are now encouraging more people to movebetween functions to gain wider experience and find new outletsfor their skills. To support greater mobility, we have clarifiedindividual and collective roles and responsibilities and now publishaccountabilities for all of our top managers on our intranet.



People and organisationaleffectivenessIn transforming the way we work, weremain focused on creating a diverse,challenging and rewarding workplacewhich people across the airline can feelproud to be a part of, despite ourexpectation that the number of peopleemployed will need to reduce as we seekto streamline our business.

HeadcountAs at March 31, 2009, we employed40,627 MPE.

Average attrition remains low at 7 percent, with the exception of managementgrades where a voluntary redundancyprogramme contributed to a significantincrease in attrition for this group.

RewardWe operate two principal funded definedbenefit pension schemes in the UK, theAirways Pension Scheme (APS) and theNew Airways Pension Scheme (NAPS).Both are closed to new members. FromApril 1, 2003, new employees wereentitled to join the British AirwaysRetirement Plan (BARP).

SmartPension arrangements, which allowour UK-based employees to make theirpension contributions in a more tax-efficient way, were introduced in early2008. Around 90 per cent of those eligibleare now benefiting from this arrangement.

Since 2005 our Employee Reward Plan(ERP) has allowed non-managementemployees to share in the success of thebusiness based on the achievement ofcorporate measures and targets. However,

due to our losses in the year, the schemedid not operate in 2008/09.

Instead we used local incentive plans tooffer rewards for improved performance,assessed against a range of operational,customer and financial measures. The first plan was introduced in Terminal 5 and has led to significant improvements inperformance, with targets being exceededfrequently. This approach is now beingconsidered in other areas to drivecontinuous improvement in ourperformance across the business.

Management bonus schemes, using a mixof financial and non-financial performancemetrics, are designed to improve overallperformance and to reward individualeffort. Given the deterioration in tradingconditions during the year, no bonuses will be paid.

However, we have replaced our grade-based reward scheme for managers with anew broad band system which links rewardsmore closely to individual performanceand capability. Separately, our Bravorecognition scheme allows us to recognisepeople across our business for their effortsand achievements.

DiversityWe are proud to be a business thatwelcomes and nurtures difference.Diversity and inclusion are a way of life for us.

Our diversity initiatives are all aboutdignity and respect. They are designed to promote good relationships betweencolleagues, irrespective of their background,religion or culture. As part of our annualdiversity week, a series of events was heldto raise awareness and promote a more

Total membersMarch 31, 2009 APS NAPS BARP

Active members 1,494 28,130 6,770Pensioners in payment 19,266 15,699Dependent pensioners 7,301 2,756Deferred pensioners 3,143 22,307 584

31,204 68,892 7,354

“Given the deterioration intrading conditions duringthe year, no bonuses will be paid.”

Airline operationsMPE reduction(average)

0.7%Employee costs(excludingrestructuring)

£2,193m




Overview

Our business

We are proud to be a business that welcomes and nurtures difference.Diversity and inclusion are a way of life for us.

Our diversity initiatives are all about dignity and respect. They are designedto promote good relationships between colleagues, irrespective of theirbackground, religion or culture. As part of our annual diversity week, a seriesof events were held to raise awareness and promote a more positive andproductive work environment.



positive and productive work environment.These included an inter-faith paneldiscussion focusing on five key religions anda presentation from a member of the Boardof the British Paralympic Association.

The focus this year has been ondeveloping our Dignity at Work strategy to reduce harassment and bullying in theworkplace. We have appointed and trainedHarassment Advisors, drawn from acrossthe business, in response to colleagues’requests for people they can approachconfidentially about any issues they mayhave. The advisors act as a listening earand provide practical advice and guidance.Our intention is to adopt a more informalapproach to resolving potential conflictsusing internal mediators.

As a responsible company, we takedisability very seriously. We welcomeapplications from people with disabilitiesas we aim to employ the most talentedpeople and we support individuals withdisabilities in reaching their full potential bymaking reasonable adjustments for themin the workplace.

We consult with our disabled employeegroup to identify disability issues and theyhelp us to ensure that we are making allour products, services and training fullyinclusive and accessible. All frontlineemployees are trained in disabilityawareness to increase their knowledgeabout disabled customers and employees.

We introduced a Building Ability strategyto identify and promote the needs ofdisabled customers and colleagues. Weconstantly look at how we can improve thejourney experience for disabled customersand for the first time we conductedspecific customer research to identifyareas for development. In July 2008, 522 members of the British ParalympicsAssociation travelled to Beijing for theParalympic Games, providing us withimportant lessons we can translate intoday-to-day practice.

Overall, our Dignity at Work strategyinvolves training, communications and

workshops across the business. Alldepartments have targets to achieve andall employees must now complete theonline ‘Expect Respect’ training course,introduced during the year.

AbsenceWe saw a modest improvement inattendance throughout the year. Theheadline annual absence level hasimproved by one day per person. AtDecember 2008 it stood at 10.8 averagedays per person per annum, with someareas of the business meeting top quartileabsence levels. While there has been amodest improvement overall this year, we still compare unfavourably with similarsized businesses in the UK. To remedy thiswe are creating a new programme to helpmanagers deal with attendance issues.

Absences – days per person per annum

December 2008 10.8

January 2008 11.7

2003 baseline 16.7

Employee relationsWe negotiate with a total of three tradeunions representing colleagues across thebusiness. We seek to work constructivelywith colleagues and their representativesto improve productivity and performance.

Despite the challenges we faced in theearly days of Terminal 5, we went onduring the year to achieve significantimprovements in our operationalperformance. This was partly down to theagreements we reached for new workingpractices at the terminal. A major featureof these agreements was direct colleagueengagement with the involvement of ourrecognised trade unions. Another keyaspect was the introduction of localincentive plans for many terminal-basedjobs as discussed above.

We continue to work hard to foster good relations with the representatives of our flying community. Theserelationships will remain key as we tackle the challenges ahead.

Total employees

Men 54%Women 46%

Senior managers

Men 74%Women 26%

Managers

Men 69%Women 31%

Overview

Our business




We carried out consultations with anumber of groups within the business tosee where we could improve efficiencyand this has led to some beneficialchanges in work practices and roles. Theareas affected by restructuring included:

• Customer relations;

• Gatwick ramp and customer services;

• British Airways World Cargo;

• Glasgow cabin crew base; and

• Manchester engineering base.

During the year we fundamentally changedthe way we organise our human resources(HR) management. We introduced HRBusiness Partners who now focus on goodpeople management and employeerelations and are responsible for day-to-day industrial relations matters. The centralindustrial relations team was consequentlyscaled back and given a more strategicrole. To support this change we ran anumber of bespoke industrial relationstraining courses to improve understandingand practice.

Engaging our colleagues We ensure that colleagues are kept wellinformed about our Company, customersand industry by using comprehensiveinternal communications. Face-to-facecommunication is our priority and we runregular briefings across the Company sothat as many people as possible can meet,question and share ideas with senior andline managers. We run workshops tosupport managers in communicating keyannouncements and also online forumsand an online Ideas Exchange toencourage wider dialogue. Othercommunication channels include apersonalised intranet, mobile SMSmessaging, video and a range ofCompany-wide and local newsletters.

In 2008/09 we saw a sea change in theway people within our business think aboutworking here. Our Speak Up! attitudesurvey in the autumn of 2008 recordedsignificant improvements in scores forpride, service and product advocacy, and satisfaction with basic conditions.

The results reflect the positive waycolleagues feel about our move toTerminal 5 and our improved performance.Encouragingly, the number of peopleresponding to the survey rose too,

indicating that more employees regard this as an important means of expressingtheir opinions.

To make the survey more effective, we wantto ensure that changes are implemented asa result. All managers are now being given aclear responsibility to plan actions basedon survey findings in an open andtransparent way. Next year we will run thesurvey more frequently during the year, so that managers get regular feedback onchanges in colleague opinion.

2009/10 will also see the launch of anEngagement Index. Building on Speak Up!results, this will help identify howmanagers can increase levels ofengagement within their teams.

Employment tribunalsDuring 2008/09, the Group was servedwith 74 new proceedings in employmenttribunals. British Airways Plc was therespondent in all but three of theproceedings. The other three are againstBA Avionic Engineering, CityFlyer and BA Maintenance Cardiff. This remains alow figure given our relative size. Of the 74 proceedings:

• We lost no tribunal claims in the year;

• We did lose a preliminary hearing,currently being appealed, concerning therights of staff employed and resident inHong Kong to pursue discriminationclaims in the UK;

• Six claims involved multiple claimants,including two, on how holiday pay shouldbe calculated under Civil Aviation(Working Time) Regulations, brought onbehalf of some 13,000 pilots and cabincrew members;

• Claims including a discrimination elementoutnumbered those for unfair dismissalfor the second year. There were 19 unfairdismissal claims, about the same as in2007/08; and

• A total of 47 claims for discrimination ordiscrimination and other matters werelodged, a 60 per cent increase on the year before. Of these, 31 are ongoing, 12 were settled and four withdrawn, won by British Airways or struck out.

“We negotiate with a total of three trade unions representingcolleagues across thebusiness. We seek to work constructively with colleagues and their representatives to improve productivity and performance.”


The way we run our businessThe marketplace

CustomersOur customers are at the heart ofeverything we do. Our overriding aim is to make sure we offer an upgraded serviceto everyone who chooses to fly with us.

We talk constantly to large numbers ofcustomers to get a real understanding of their needs, each month surveyingaround 57,000 of them through our global performance feedback survey.

By doing this we get a close and accuratereading of how our customers’ needs arechanging and we are able to constantlyimprove their travelling experience. This isvital for us to to secure our position as theworld’s leading global premium airline.

Service and trainingOur people play a crucial role in providingthe upgraded travel experience. We arecommitted to excellent service and areinvesting heavily in training customer-facing colleagues. Putting the customer at the heart of everything we do is also akey priority of our Compete 2012 changeprogramme, described in detail on page 28.

These training programmes will continue in 2009, supplemented by service styletraining for our ground team at Heathrowand coaching for people in our contactcentres in how to provide a more attentiveand personal service.

Following the introduction of new corporatevalues last year, all training programmeshave been redesigned. The behaviours are woven into all our courses to ensurecolleagues, particularly those in customer-facing roles, meet our high standards.

During the year we delivered over215,000 days of training. This includedtraining days for cabin crew to enable themto deliver the highest level of premiumservice to our customers, and for groundstaff to support the continued phasedmoves to Terminals 5 and 3 at Heathrow.

Ground experienceTerminal 5 continues to impress ourcustomers. They are enjoying improved

punctuality, shorter check-in times and analtogether smoother travelling experience.

Around 21 million customers used theterminal during the year and customersatisfaction has increased noticeably sinceopening. In direct response to customerfeedback, we have further improved theexperience since opening, for instance by introducing a dedicated premiumcheck-in zone.

The luxurious lounge complex at Terminal 5has also been exceptionally well received,with an increase of over 20 percentagepoints in customer satisfaction. The newlounges offer greatly improved facilities,including wine bars, spa treatments, deliciousfood and upgraded communication links.We are now introducing similarly themedlounges across our network.

Onboard experienceThe new Club World cabin layout wasintroduced on our Boeing 747 aircraft in2007/08 and the roll-out was completedlast year. Combining new levels of comfort,greater privacy and choice, the layout has achieved an increase in customersatisfaction, of over 20 percentage points.We are now rolling out the new cabin on our Boeing 777 aircraft.

Later this year we will introduce a new First cabin and the new aircraft we have on order will allow us to introduce furtherinnovations including new seating in WorldTraveller Plus and World Traveller. Our newLondon City to New York JFK service willuse Airbus A318 aircraft in an all-premium,32-seat layout. This service is the firstnorth Atlantic service from London Cityairport, and it will offer customers fullmobile text and data services.

The new on-demand in-flight entertainmentsystem has also been well received.Customers like the increased flexibility and the wider choice of movies, TVprogrammes, audio and interactive games.

We have improved the onboardexperience for our premium shorthaulcustomers, offering them greater space

“Later this year we willintroduce a new First cabin and the new aircraftwe have on order will allowus to introduce furtherinnovations including newseating in World TravellerPlus and World Traveller.”




Overview

Our business

Terminal 5 continues to impress our customers. They areenjoying improved punctuality, shorter check-in times and an altogether smoother travelling experience.

Around 21 million customers used the terminal during the year and customer satisfaction has increased noticeably sinceopening. In direct response to customer feedback, we havefurther improved the experience since opening, for instance by introducing a dedicated premium check-in zone.

Average paymentperformance

91%of payments were on time inthe UK.


The way we run our businessThe marketplace continued

and privacy by keeping the middle seatfree. Also, we have not forgotten ouryoungest passengers who can now enjoyan entertainment pack on longhaul flightsfeaturing that much-loved character,Paddington Bear.

ba.comba.com – our online portal – is not onlybecoming more popular with customers, it is also helping us to drive down costsand increase revenues.

Almost a third of all our bookings are nowmade on ba.com, with almost half of allEuropean leisure fares sold via the UK site.This year we introduced a new featureallowing customers to upgrade theirbooking at any time between buying aticket and checking-in online.

A large number of our passengers nowcheck-in online. They clearly enjoy theconvenience of this service. For thatreason we have now launched a popularnew service, allowing customers to check-in or access real time arrivals and departures information through their mobiles.

During a recent survey, two thirds ofrespondents rated ba.com as Excellent or Very Good – which is proof that ourcreative development of the website isproviding real value to our customers.

CargoBA World Cargo continues to focus on providing premium products. We have improved the ‘Prioritise’ (express)service through advancements in the new ‘cool chain’ technology. New services such as scanning for airmail and directairport-to-door deliveries are just some of the improved solutions we are nowoffering shippers.

BA World Cargo also continues to play aleading role in simplifying the internationalsupply chain. We are fully committed tothe IATA coordinated e-freight initiative.Not only have we played an important rolein formulating guidance for participatingairlines, we were also the first European

carrier to use e-freight between Heathrowand New York.

Overseas branchesWe fly to a number of destinations aroundthe world (see inside front cover). Inaddition to the overseas branches we haveestablished in many of these countries, we have branches in countries to which we do not fly.

Suppliers, partners andalliances

SuppliersOverall supplier costs, excluding fuel, were up nearly 7 per cent year on year,reflecting significant inflationary pressureson suppliers’ own costs. In continuing tocontrol our costs, we have decided toprioritise those projects that really addvalue to the customer proposition.

Goods and services are procured througha strategic sourcing process. We usebenchmarking principles to make sure we derive the maximum value from them,both at the point of purchase and over thelife of the supply contract.

During the year we signed major in-flightcatering agreements with three suppliers,all of which will come into effect from April1, 2010. We believe these agreements willset a new benchmark for high-qualityairline catering. Using three suppliers willalso help us to minimise our exposure tosupplier failure.

We continued to reduce our carbonfootprint with the delivery of the first of our new Boeing 777 aircraft during the year. Lower fuel burn and reducedenvironmental impact were key factors in our choice of aircraft.

In addition, we have selected the Thales in-flight entertainment system for all newaircraft delivered from 2010. With biggerscreens, the multimedia system will givecustomers access to over 100 movies,300 programmes and 400 CDs as well as a range of radio programmes and podcasts

“During a recent survey, two thirds of respondentsrated ba.com as Excellent or Very Good – proof thatour creative development ofthe website is providing realvalue to our customers.”




Overview

Our business

Almost a third of all our bookings are now made on ba.com, with almost half of all European leisure fares sold via the UK site.This year we introduced a new feature allowing customers toupgrade their booking at any time between buying a ticket andchecking-in online.

A large number of our passengers now check-in online. Theyclearly enjoy the convenience of this service. For that reason wehave now launched a new popular service, allowing customers tocheck-in or access real time arrivals and departures informationthrough their mobiles.


The way we run our businessThe marketplace continued

whenever they want. The system is lighterso will also help us reduce aircraft weightand use less fuel.

Supplier riskMitigating supplier risk is a key priority,particularly in the current economicclimate. Our procurement team recordsand measures risk across our mostimportant suppliers. We have currentlyidentified a number of suppliers who, ifthey ceased trading or experienced severedifficulties, would have a serious impact onour ability to operate. For these suppliers,risk is measured across five dimensions,updated each month and we takemitigating action when any supplier is deemed to be in trouble.

In addition to managing supplier risks, wealso routinely monitor the financial healthof critical suppliers using monthly Dun &Bradstreet company reports as an earlywarning system.

We use business continuity plans to coverthe risk of supply failures and regularlyreview their effectiveness with the suppliersthemselves. Equally, we make sure effectivecontingency plans are in place to respondto any supply interruption.

Payment performanceWe have again made good progress onpaying suppliers in accordance with ouragreed terms. On average, 91 per cent of payments were on time in the UK for the year ended March 31, 2009. This compares with 88 per cent in thepreceding year and exceeds our 90 percent target. Next year we expect toimprove further through increased use of e-invoicing and purchasing cards.

We are a signatory to the Confederation of British Industry (CBI) code of practiceon supplier payment and are committed to paying our suppliers on agreed terms.The number of days’ purchases in creditorsat March 31, 2009, is calculated inaccordance with the provisions of theCompanies Act 1985 and was 32 days(2008: 33 days).

Corporate responsibility in the supplier baseWe are committed to making responsiblepurchasing decisions, and during 2008/09started to refine our purchasing processand train our procurement team to makesure this happens. We will continue tosurvey potential suppliers to assess theircorporate responsibility credentials, usingindependently-held, self-certification datawhen deciding with which suppliers to work.

Procurement deliveryUsing preferred suppliers helps us to control costs. In December 2008, 96 per cent of our external spend was with 500 suppliers who have all been awarded formal preferred supplier status. Increasingly we are also making sure our spend goes through our approved order-basedprocess. In December 2008, 99 per cent of spend was approved this way.

Partners and alliancesWe maintain commercial arrangementswith other airlines covering scheduledpassenger and cargo services on a smallnumber of our international routes.Commercial arrangements can govern,among other things, capacity offered by each airline, how revenue is sharedbetween the airlines and how schedulesare coordinated. In very few cases, somecommercial arrangements betweenourselves and other airlines are requiredunder the relevant air services agreements.

“We are committed tomaking responsiblepurchasing decisions, andduring 2008/09 started to refine our purchasingprocess and train ourprocurement team to make sure this happens.”

Overview

Our business




We have improved the onboard experience for our premiumshorthaul customers, offering them greater space and privacy by keeping the middle seat free. And we have not forgotten our youngest passengers who can now enjoy an entertainmentpack on longhaul flights featuring that much-loved character,Paddington Bear.

2008/09

£5.4mdonated to charity.

BA Fun Run

£55,000raised for Cancer Research UK.


The way we run our businessCommunity investment

We have a long history of investing in the communities in which we operate. This work continues and in 2008/09 we supported over 120 community andconservation organisations in a variety ofways, including donating travel awards,cargo and excess baggage space.

We work closely with the communitiesaround Heathrow and the UK regions. Ourmain priorities include education and youthdevelopment, supporting volunteering byour colleagues and promoting sustainabletourism, heritage and the environment.

We continue to be a member of both the London Benchmarking Group (LBG)and the Business in the Community (BITC)15 Percent Club.

Education and youth developmentOur Community Learning Centre – close to our Waterside headquarters atHeathrow – has welcomed nearly 50,000young people and adult learners on arange of education programmes since itsopening in 1999. Programmes relevant to the school curriculum are run inpartnership with the United NationsInternational Children’s Emergency Fund(UNICEF) focusing on places we fly to,using workshops on customer service,information and communicationtechnology and the environment.

LanguagesThe British Airways language flag award,offered to schools across the UK, has been recognised by the Foreign andCommonwealth Office and in 2008 wonthe Business Language Champion Partnershipof the Year Award. We are seeking officialaccreditation for the programme which willallow the test to earn university points. Over1,500 young people have gained a flag awardin languages ranging from French to Urdu.

PartnershipsIn partnership with the Natural HistoryMuseum, we have developed programmesallowing pupils from Heathrow schools tovisit the museum, meet scientists andexperience the work of the Darwin Centre.

Overseas, we have been working with UKand South African partners on a multi-agency Safer Communities programme in South Africa to reduce crime andincrease community confidence. Since the programme began in 2003, over 40schools and more than 200 volunteeryouth coaches have been trained.

Change for GoodOur partnership with UNICEF, Change for Good, raised £3 million in the year toMarch 31, 2009. The onboard collectionprogramme, supported by over 2,400 cabincrew champions, enabled us to help fundUNICEF’s work with vulnerable children.Change for Good celebrated reaching its£25 million milestone in July 2008.

In August 2008 our Chief Executive visitedTanzania to see the work of Change forGood at first hand, particularly how fundsare being used to support and treatmothers and babies affected by HIV/AIDS.We have also invested significantly in Chinato support literacy programmes and inNigeria our donations have been used to buy malaria nets.

Employee fundraisingOver 3,500 retired and current employeesdonated over £630,000 directly from theirpayroll to their chosen charities throughour Giving Scheme during the year. Inaddition, we supported Children in Needand Red Nose Day across the airlineraising over £13,000 for charities in theUK and overseas.

Last year’s BA Fun Run raised in excess of£55,000 for Cancer Research UK. During2008/09 our World Cargo team collectedand delivered over 95 tonnes of high-quality gifts, donated by employees fromacross the airline.

Charitable donationsBITC reported our total direct and in-kinddonations for 2008/09 at £5.4 million(2008: £5.7 million). Of these, directcharitable donations amounted to£444,000 (2008: £398,000).

“Our partnership withUNICEF, Change for Good,celebrated reaching its £25 million milestone in July 2008.”

Overview

Our business




Our Community Learning Centre – close to our Watersideheadquarters at Heathrow – has welcomed nearly 50,000 youngpeople and adult learners on a range of education programmessince its opening in 1999. Programmes relevant to the schoolcurriculum are run in partnership with the United NationsInternational Children’s Emergency Fund (UNICEF) focusing on places we fly to, using workshops on customer service,information, communication technology and the environment.

Over

55,000tonnes of CO2 were offset by customers in 2008.

35%of dry waste at Heathrow and Gatwick was recycled in 2008.

The way we run our businessEnvironment


Climate changeClimate change is an issue of hugeimportance to us and we have a long-termcommitment to address it. Our climatechange programme covers four main areas:policy measures to curb emissions growth;voluntary carbon offsetting; fuel efficiency;and support for scientific research.

Our target is to reduce our net CO2

emissions by 50 per cent by 2050, relativeto 2005. Meeting this target will requireinvestment in new technology, sustainablebiojet fuels and in cost-effective emissionsreductions in other sectors of the economythrough the creation of effective globalcarbon trading markets.

Governments will come together inDecember 2009 to discuss a future globalagreement on climate change. Internationalaviation emissions were not included in the Kyoto Protocol, but we believe thatthey must be incorporated into this newagreement. We are playing a leading role in aviation groups to develop a globalpolicy approach for the sector.

In December 2008 the European Unionfinalised the conditions for includingaviation in its Emissions Trading System(ETS). With our experience of emissionstrading since 2002 we are well placed to meet the EU ETS requirements.

Our offsetting scheme allows passengersto add a carbon offset when they book aflight through ba.com. During 2008, some150,000 customers offset over 55,000tonnes of CO2 in this way and theircontributions have helped fund UN-certified carbon cutting initiatives in Chinaand Brazil. In March 2009 our schemebecame the first airline offset product to meet the requirements of the UKGovernment’s Quality Assurance Schemefor Carbon Offsetting – a guarantee thatwe are achieving genuine, additional andmeasurable carbon reductions.

We continue to look for ways to improvefuel efficiency and over 600 projects haveso far been assessed. Of these, 55 havebeen implemented, delivering over 65,000tonnes of CO2 savings, equivalent to nearly

21,000 tonnes of fuel. In addition, we have reduced CO2 emissions associatedwith our UK property portfolio by nearly11 per cent.

In 2008 our carbon efficiency, expressedin grammes of CO2 per passenger kilometre(gCO2/pkm), was just over 107 grammes.Our target is to improve that figure to 83gCO2/pkm by 2025. Our carbon footprintwas 17.6 million tonnes of CO2 in 2008.

We are also supporting a number ofscientific research projects. These includethe European Commission’s IAGOSproject which is investigating whetheraircraft can be used to collect atmosphericdata in-flight and a partnership to developnew policies on preventing deforestation.

WasteWe aim to minimise waste, reduce disposalto landfill and increase reuse and recycling.Where we cannot prevent waste disposal,we aim to manage our waste responsibly.

In 2008 we recycled 35 per cent of drywaste at Heathrow and Gatwick (up from30 per cent the year before). We have setourselves the target of recycling 50 percent by 2010. We will achieve this throughthe provision of more recycling centres,handling a wider range of materials and byencouraging better segregation of waste.

The amount of waste at Heathrow andGatwick sent to landfill fell by 7.2 per centto 3,424 tonnes, during the year. Our non-recyclable waste at Heathrow and Gatwickwill be processed through a waste toenergy plant before the end of 2009,helping us to meet our target of zero waste to landfill by 2010.

NoiseWe are investing in quieter aircraft andtechnology and aim to change the way we fly to reduce the noise of our activities.We have set a target to reduce our averagenoise per flight by 15 per cent by 2015.

Night noise is a particular concern forpeople living near Heathrow and is one ofthe key issues we want to address. During2008, we contravened the noise limits at

“In March 2009 our carbonoffset scheme became thefirst airline offset productto meet the requirements of the UK Government’sQuality Assurance Scheme.”




Overview

Our business

We are investing in quieter aircraft and technology and aim to change the way we fly to reduce the noise of our activities. We have set a target to reduce our average noise per flight by 15 per cent by 2015.

We also aim to reduce our CO2 emissions by 50 per cent by2050, relative to 2005. Meeting this target will require investmentin new technology, sustainable biojet fuels and in cost-effectiveemissions reductions in other sectors of the economy through the creation of effective global carbon trading markets.


The way we run our businessEnvironment continued

are now developing similar procedures to taxi out to the runway. These measureswill cumulatively reduce CO2 and NOX

emissions, fuel consumption and noise.

Fleet modernisationIn response to delivery delays for our new efficient Boeing 787 aircraft, we havecontracted for six Boeing 777-300ERaircraft (two acquired, four leased) due tostart arriving in 2010, with options on afurther four. We have ordered two AirbusA318 aircraft for our transatlantic servicesfrom London City Airport. Additionally, we have ordered six Embraer E190SR andfive E170 aircraft to replace the RJ85 andRJ100 aircraft currently operated fromLondon City Airport.

We are also improving our performance on the ground. At Terminal 5, we haveinvested in buses specified to the futureEuro 5 exhaust emission standard and afleet of electric baggage tugs. Remotemonitoring by telematics technology isbeing used to manage fleet efficiency andan automatic fuel management system hasbeen fitted to refuelling equipment atHeathrow. We continue to be a member ofthe Heathrow Clean Vehicles Programme.

Heathrow 36 times, a reduction of 23 percent compared with 2007. This year, thesewere principally a result of Boeing 747-400 departures being delayed.

At Heathrow, we use a ContinuousDescent Approach on landing to save fueland cut noise. During 2008, 95 per cent of all day and night flights operated thisway, compared with an airport average of82 per cent for daytime and 88 per centfor night time flights.

Air qualityWe have a number of operating initiativesto improve our air quality performance. Wehave already achieved a reduction in NOX

emissions (nitrogen oxide – a greenhousegas) through the modification of Boeing747 (RB211) engines and Boeing 777(GE90) engines. We plan to further modifyour Boeing 737 engines to deliver a20 per cent reduction in NOX.

At Terminal 5 and other airportsworldwide, we are able to use aircraftstands with fixed ground power and pre-conditioned air which means we will relyless on aircraft auxiliary power units. Wehave developed procedures for aircraft totaxi on one less engine after landing, and

Summary of environmental achievements and targetsTarget 2008 a 2007 a 2006 a

Carbon efficiency gCO2/pkm b 83 by 2025 107 110 110

CO2 emissions (million tonnes) 17.6 17.7 16.6

Heathrow departure noise violations – day 4 1 9

Heathrow departure noise violations – night 32 46 56

Continuous Descent Approach (Heathrow) % – day 95 95 95 84

Continuous Descent Approach (Heathrow) % – night 95 95 94 88

Total waste at Heathrow and Gatwick – including our catering companies (metric tonnes) 26,184 27,121c 26,920

% recycling (Heathrow and Gatwick) 50 per cent by 2010 35.1 30.1 28.9

Waste to landfill (tonnes) (Heathrow and Gatwick) Zero by 2010 3,424 3,688 4,063

Waste per passenger (kg) (Heathrow and Gatwick) reduce by 2 per cent per annum 0.78 0.79 c 0.78

Heathrow air quality/NOX emissions to 1,000ft (metric tonnes) 1,081 1,107 1,096a Calendar years.

b With effect from 2008, traffic statistics now include data related to customers who have flown on ‘frequent flyer’ mileage redemption tickets. This changebrings the Group into line with industry standards, and also into line with all major scheduled carriers.

c Increased due to revised data on catering waste.

Documents

Our business - British Airways · Our business Corporate governance Financial statements British Airways 2008/09 Annual Report and Accounts / 21 Increased competition Most of the