18th Jul 2006 11:30
British Airways PLC18 July 2006 British Airways' Annual General meeting QE11 Conference Centre Tuesday, July 18 Chairman's Address Good morning, ladies and gentlemen, and welcome to our 2006 Annual GeneralMeeting. I hope you enjoyed the film which highlights some of the UNICEF Change For Goodprojects our staff and customers support around the world in Nigeria, MexicoIndia and Southeast Asia. Together we have raised over £22 million for somevery worthy causes. It is encouraging to see so many of you here again this year. Thank you foryour continued support. It has been another eventful year for British Airways. The transition from one Chief Executive to another is always a testing momentfor any company. Especially so, when the outgoing Chief Executive has been suchan unquestionable success as Rod Eddington. Truly a hard act to follow. So it gives me great pleasure to report to you today that Willie Walsh hassettled into the role remarkably swiftly and easily. Willie used the handovermonths very wisely and effectively so that even though he was a newcomer toBritish Airways the transition, when it came, was seamless. It reflects greatcredit on not just Willie but the whole Leadership Team around him that this waspossible. This morning, I will take you through our financial performance and progress onstrategic matters and Willie will then update you on the exciting new productsand services we are developing for our customers. But first let me address youon a serious issue which you will have read and heard about in recent weeks. British Airways recently announced it is assisting the Office of Fair Tradingand the US Department of Justice with an investigation into alleged cartelactivity including fuel surcharges. Two members of staff have been asked and have agreed to take leave of absenceincluding Martin George who is a board member. You will have noted his absencehere today for this reason. The company, the industry and the individuals have been subjected to intensepublic scrutiny and speculation - none of which can be commented on because thisis a criminal as well as a civil investigation. Since then we ourselves have made no further public comment because it would beinappropriate to do so. Nevertheless in the light of press speculation it mayassist shareholders if I put the allegation in context. Whilst the document requests are widely cast, the recent investigations havefocused on longhaul passenger fuel surcharges and follow an earlierinvestigation into cargo surcharges. There is no suggestion of any breach ofcompetition law in relation to shorthaul passenger fuel surcharges. Indeed mostof our direct shorthaul competitors do not show fuel surcharges separately. Our longhaul passenger surcharges first commenced in May 2004 and have grown inresponse to ever increasing fuel costs albeit that they do not recover the fullcost of those increases. For the record, longhaul passenger surcharges for theyear just ended amount to around 3 per cent of total turnover and in theprevious year under 1 per cent of turnover. Needless to say, we very much hope there will be a swift outcome to theinvestigation. In the meantime your company is fortunate to have the quality ofmanagement with the skills to ensure it is very much business as usual. Turning to our financial performance I am pleased to report operating profits of£705 million, re-enforcing British Airways' position once again at the top ofthe airline league table for profitability. The result gives us an operating margin of 8.3 per cent which triggered a welldeserved bonus for all our staff. We remain committed to our goal of achievinga10 per cent margin by 2008. Our top line growth was strong at 9.6 per cent - driven by our highest ever seatfactors and positive yields - both going in the same direction for the firsttime in five years. Total costs were up however by 8.2 per cent to £7.8 billion, driven primarily byfuel costs - up nearly 45 per cent - and employee costs up 5.0 per cent mainlydue to increased pension costs. Over the last two years we have seen our fuelbill rise by around 80 per cent to £1.6 billion and this year it is expected tobe £2.2 billion. A particular highlight was the return of our shorthaul business to the black -albeit only just - for the first time in ten years. Willie will outline howthis was achieved - a performance that silenced those critics who said it was animpossible task. Good though these results were in the context of the aviation market - IATAforecast industry losses of $2.2 billion for 2006 - I'm afraid they give a falsesense of prosperity. They lead to reasonable questions on the part of shareholders, for example, "Where's my dividend?" And on the part of employees in our New Airways Pension Scheme for example, "Whydo I have to work longer to get my pension?" The truth is, we as a Board are responsible for balancing all reasonablestakeholder expectations, be they customers, employees, shareholders or businesspartners such as suppliers. And, in our estimation, that needs an average 10per cent operating margin to achieve. For example, when we come to re-equip the long haul fleet - and we expect tocomplete the decision-making process for that sometime towards the end of nextyear - that will demand annual capital expenditure outlay of close to £1billiona year for a decade or more. Set this cost against our after-tax profit of a little short of £500 million -and you can see that balancing stakeholder expectations is a real challenge. So, are we recommending a dividend this year? No, but as the share priceappreciation made British Airways one of the best performing stocks in the FTSE100 we believe we have met shareholders' reasonable expectations. And therecognition that we should aim to restore the dividend is accepted by the Board. Likewise with pensions. We have put forward a proposal for sharing the painbetween the company and staff and if accepted the Company will make a one offpayment of £500 million into NAPS. We have also extended the normal retirement date in accordance with the AgeDiscrimination Act which will allow employees to build up pension entitlementsto match their earlier expectations. The pension deficit has to be tackled and although understandably no-one wantstheir pension expectation reduced, employees would find it extremely difficultto match our proposed terms if they left the airline and went elsewhere. Consultation continues with the trade unions. In the meantime, the trusteeshave been looking at the NAPS funding position. They have now written to thecompany and are writing to the NAPS members to indicate that they accept thaton-going contributions much in excess of current levels may not be sustainableand that a reduction in future benefits is likely to be required. In the comingmonths the company will be working with the trustees to reach agreement on thisimportant issue. We cannot ignore the fact that despite doubling our contributions and strongequity markets, the accounting deficit in the New Airways Pension Scheme hasgone up and the actuarial deficit, expected later this year, is also likely tobe worse. Turning to broader strategic issues, aviation's equivalent of the Mousetrapcontinues its long run. By this I mean the negotiations towards a new aviation treaty between the EU andthe US. Seasoned industry observers amongst you know that airlines are governedby bilateral agreements which restrict them to flights in and out of their owncountry, preventing the globalisation of the very industry which facilitates theglobalisation of others. The result is that airlines can't expand beyond their national boundaries,competition is stifled, and passengers pay more than they need. Since liberalization in Europe a decade ago, the EU single market in aviationhas stood out as a beacon for international liberalisation. Within Europe newproducts and services have been introduced, fares have come down and consumershave benefited. This is why we supported the European Commission when it was granted a mandateby the member states in 2003 to negotiate an Open Aviation Area between andwithin the EU and the US. We saw this as a way of extending the benefits of the EU single market acrossthe Atlantic and providing a template for the rest of the world. But progressover the last 12 months has again been disappointing. Unfortunately, the Commission set itself a much less ambitious target but eventhat was frustrated by the US government which responded by tinkering around theedges on foreign ownership and bypassing Congress. Our view now is that no real progress can be made until the US government takesa proper legislative proposal to Congress, as Congress itself has suggested. Inthe meantime the Commission will just have to hold its nerve, and not be temptedto use up all its considerable negotiating leverage on an unambitious andimbalanced first stage deal that we could be stuck with for decades. Unlike airlines, airports are not subject to the same constraints, as we haveseen with the recent takeover of British Airports Authority by Spain'sconstruction and road tolls' group Ferrovial. While some quipped that the Spanish armada had docked at Heathrow thusre-writing four centuries of history, we look forward to working with our newlandlords. They share our commitment to delivering excellent service at cost effectiveprices for consumers and airlines and we are optimistic that plans for a thirdrunway at Heathrow will become a similar priority for them. Encouragingly, the regulator - the Civil Aviation Authority - has reassured usthat the costs and risks associated with the recent BAA takeover including anywindfall payment to shareholders, will not be passed on to customers or airportusers. The CAA is currently in the middle of its review of charges at the LondonAirports from 2008 onwards, which will also involve the Competition Commissionnext year. In the five years to 2008, charges at our major Heathrow base willhave risen by over 50%. We do not believe that continued increases of this order are necessary to fundcontinued infrastructure investment at Heathrow, and will be submitting evidenceon the cost of capital and the scope for efficiency improvements to the CAA insupport of this view. British Airways and other airlines have made great stridesin reducing cost and increasing efficiency in recent years, and we wish to seepressure exerted on the airport sector to deliver similar improvements. We will also be contributing to the OFT's study into the UK airports marketannounced recently. Now, before I hand over to Willie I would like to acknowledge the tremendouscontribution our staff have made in delivering what is our best financialperformance in nearly a decade. From the low point of summer last year theyhave done a fantastic job restoring confidence in our brand and rebuilding thetrust of our customers. Attracting and retaining customers is after all, whatkeeps us in business. ENDS Certain statements included in this statement may be forward-looking and mayinvolve risks and uncertainties that could cause actual results to differmaterially from those expressed or implied by the forward-looking statements. Forward-looking statements include, without limitation, projections relating toresults of operations and financial conditions and the company's plans andobjectives for future operations, including, without limitation, discussions ofthe company's business and financing plans, expected future revenues andexpenditures and divestments. All forward-looking statements in this report arebased upon information known to the company on the date of this report. Thecompany undertakes no obligation to publicly update or revise anyforward-looking statement, whether as a result of new information, future eventsor otherwise. It is not reasonably possible to itemise all of the many factors and specificevents that could cause the company's forward-looking statements to be incorrector that could otherwise have a material adverse effect on the future operationsor results of an airline operating in the global economy. 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