Download Financial Statements Analysis of a Company: Operating Expenses and Assets and more Study notes Accounting in PDF only on Docsity!
BRITISH AIRWAYS SIX MONTH RESULTS (unaudited)
1 January 202 1 – 30 June 2021
British Airways Plc (‘BA’ or the ‘Group’) presents its consolidated results for the six month period ended 30 June 2021.
COVID-19 situation and management actions
- Passenger capacity in the first six months of 2021 was 14 per cent of the equivalent period in 2019 and continues to be severely impacted by the COVID-19 pandemic, together with government restrictions and quarantine requirements.
- 1,069 cargo-only flights operated in quarter 2, up from 1,018 in quarter 1.
- Strong liquidity, increasing to £3.1 billion at the end of the period (from total liquidity of £2.7 billion at 31 December 2020), driven by successful conclusion of financing initiatives in the period and following, together with cost actions and pension contribution deferral. These included: o Drawdown of previously committed borrowing for British Airways (£2.0 billion UK Export Finance). o New 3-year $1.3 billion (£973 million) committed, secured Revolving Credit Facility which remains undrawn; and cancellation of British Airways’ previous revolving credit facility which was scheduled to mature in June 2021 (value at 31 December 2020: $0. billion (£599 million)). o Agreement to defer monthly pension deficit contributions totalling £450 million between October 2020 and September 2021. o Sustainability-linked EETC financing executed in July for British Airways’ remaining fleet deliveries for 2021, with total financing to be drawn of $785 million.
Period results summary
- Total revenue of £924 million (2020: £2,773 million) down 66.7 per cent from last year.
- Operating loss (before exceptional items) of £1,264 million (2020: £978 million).
- Loss before tax of £1,31 1 million (2020: £2,307 million).
- Loss after tax of £1,03 1 million (2020: £1,949 million).
- Exceptional credit of £106 million on de-designated fuel and foreign exchange hedges (2020: £1,176 million charge).
- Non-operating costs of £15 3 million (2020: £153 million).
- Cash and cash equivalents increased by £408 million to £1,669 million from £1,261 million at 31 December 2020.
Performance summary For the six months ended 30 June
Financial data £ million (^2021) 2020 1 Better/(Worse) Passenger revenue 375 2,235 (83.2)% Total revenue (^) 924 2,773 (66.7)% Total expenditure on operations^2 (2,188) (3,751) 41.7% Operating loss before exceptional items (1,264) (978) nm Exceptional items 106 (1,176) nm Non-operating costs (153) (153) nm Loss before tax (1,311) (2,307) 43.2% nm = not meaningful Operating figures (^2021) 2020 1 Better/(Worse) Available seat kilometres (ASK^3 ) (m) 13,270 41,655 (68.1)% Revenue passenger kilometres (RPK^3 ) (m) 5,227^ 29,784^ (82.5)% Cargo tonne kilometres (CTK^3 ) (m) 1,409^ 1,371^ 2.8% Passenger load factor^3 (%) 39.4%^ 71.5%^ (44.9)% Passengers carried (000) 1,597 8,728 (81.7)% Passenger revenue per ASK (p) (^) 2.83 5.37 (47.3)% Passenger revenue per RPK (p) 7.17 7.50 (4.4)% Non-fuel costs per ASK (p) 13.90 7.24 (92.0)%
(^2) Total operating expenditure before exceptional items excluding fuel, oil costs and emission charges was £1,844 million (2020: £3,029 million). (^3) Defined in the Annual Report and Accounts for the year ended 31 December 2020 and should be read in conjunction with that document.
(^1) The 2020 results have been restated for the treatment of administration costs associated with the Group’s defined benefit pension schemes. Further information is given in note 1 to this report.
Management review British Airways made a loss before tax of £1,31 1 million for the first six months of the year (2020: £2,307 million). Capacity fell by 68.1 per cent compared to the equivalent period in 2020 where the first two months’ operations were largely unaffected by the COVID-19 pandemic.
Management review (continued) In 2020 and through the first six months of 2021, British Airways took tough and decisive action to rapidly reduce costs to protect the long term future of the business, which included a business restructuring programme, the early exit of the entire B747 fleet, reprioritisation of capital spend and various supplier discussions. Had these actions not been taken, BA would be facing a much tougher situation today. To ensure survival and the long-term future of the business, a number of liquidity actions have been made to strengthen the airline’s balance sheet. In February 2021, BA entered into a five-year term loan of £2.0 billion, underwritten by a syndicate of banks, partially guaranteed by UK Export Finance. In March 2021, International Airlines Group (‘IAG’) agreed a $1.8 billion multi-borrower secured three-year Revolving Credit Facility, of which BA’s share is $1.3 billion (£973 million) and cancelled the previously held revolving credit facility which was scheduled to mature in June 2021 (31 December 2020: $0.8 billion (£599 million)). In July 2021, BA entered into a sustainability-linked EETC structure, where a total of $785 million was raised to finance future aircraft deliveries.
On 27 January 2021, the UK government announced new rules for travel, where unless there was a legally permitted reason to do so, it was illegal to travel abroad for holidays and other leisure purposes. On 17 May 2021 these restrictions were replaced with the traffic light system. Travel to the United States, one of BA’s key markets, from the UK has remained suspended since March 2020 to most travellers following a presidential proclamation in March 2020. BA is a leader in the US market, flying to more airports directly out of Heathrow than any other carrier in Europe before the pandemic, serving 26 cities in the US and over 30 North American destinations. Should the US administration look to repeal the current restrictions and the UK government facilitate meaningful travel from the US, thanks to the successful vaccination programmes in both countries, the UK and US are in a strong position to lead the way in opening air travel, subject to the rise in COVID-19 variants in either country.
Sustainability update IAG became the first European airline group to commit to powering 10 per cent of its flights with sustainable aviation fuel (‘SAF’) by 2030. IAG will purchase one million tonnes of SAF each year, equating to the removal of one million cars from Europe’s roads each year. BA has invested in LanzaJet, a SAF technology provider and SAF producer, to offtake fuel from the company’s first commercial scale Freedom Pines Fuels facility in Georgia, USA from 2022 and to implement early stage planning and design for a potential commercial facility for British Airways in the UK. Along with SAF targets and partnerships, BA has also invested in ZeroAvia, a leading innovator in decarbonising commercial aviation, in a project to explore the future of hydrogen-powered aircraft. These partnerships are all part of BA’s and IAG’s commitment to net zero carbon emissions by 2050.
Financial Review Consolidated income statement
£ million 2021 (^2020 1) Better/(Worse) 2 Passenger revenue 375 2,235 (83.2)% Cargo revenue (^) 509 394 29.2% Other revenue 40 144 (72.2)% Total revenue 924 2,773 (66.7)% Employee costs 637 982 35.1% Depreciation, amortisation and impairment (^) 450 585 23.1% Fuel, oil costs and emission charges 344 722 52.4% Engineering and other aircraft costs 158 266 40.6% Landing fees and en route charges 127 257 50.6% Handling, catering and other operating costs (^) 230 533 56.8% Selling costs 41 101 59.4% Currency differences (39) 52 nm Property, IT and other costs 240 253 5.1% Total expenditure on operations^3 2,188^ 3,751^ 41.7% Operating loss before exceptional items (1,264) (978) nm Exceptional items 106 (1,176) nm Operating loss after exceptional items (1,158) (2,154) nm Non-operating costs (153) (153) nm Loss before tax (^) (1,311) (2,307) nm Tax 280 358 nm Loss after tax (1,031) (1,949) nm
(^2) Before exceptional items (^3) Total operating expenditure excluding fuel, oil costs and emission charges was £1,844 million (2020: £3,029 million).
(^1) The 2020 results have been restated for the treatment of administration costs associated with the Group’s defined benefit pension schemes. Further information is given in note 1 to this report.
Principal risks and uncertainties The Group has continued to maintain its framework and processes to identify, assess and manage risks. The principal risks and uncertainties affecting BA, detailed on pages 8 to 14 of the 2020 Annual Report and Accounts, remain relevant. The risk of pandemic impact has been considered under “Event causing significant network disruption” although the consequences of the pandemic continue to impact negatively the risk environment and a number of BA’s other principal risks. The prolonged duration of the pandemic driven by subsequent waves of variants and corresponding governmental responses require BA to carefully assess how its principal risks have evolved and how the severity or likelihood of occurrence of certain risks has increased as a result of the pandemic and its consequences, as well as identifying emerging risks related to competitive and market risk changes. Where further action has been required, BA has assessed potential mitigations and where appropriate or feasible, BA has implemented or confirmed plans that would address those risks.
The BA Board continue to meet frequently to assess the situation and review updates, including the results of modelling of potential scenarios.
From the risks identified in the 2020 Annual Report and Accounts, the main risks that continue to be impacted by the COVID-19 pandemic are highlighted below. Business responses implemented by management and that effectively mitigate or reduce the risk are reflected in BA’s latest business plan and scenarios. No new principal risks were identified through the risk management assessment discussions across the business in the six months to 30 June 2021.
- Airports, infrastructure and critical third parties. Restrictions at hubs and airports have required capacity adjustments, including fleet adjustments and new operating procedures to recommence flying. BA has pro-actively worked with suppliers across all categories to ensure that operations are maintained and the impact to their businesses understood, with mitigations implemented where necessary. Operational bottlenecks such as immigration resource at airports remains outside of the BA’s control, although management continue to liaise with the relevant providers to identify potential solutions.
- Competition, consolidation and government regulation. The scale of governmental support and aviation specific state-aid measures and the potential impact to the competitive landscape is under continuous assessment.
- Data and cyber security. BA has maintained its planned investment in cyber security. The threat of ransomware attacks on critical infrastructure and services has increased throughout 2021 and BA continues to focus its efforts on further mitigating the risk.
- IT systems and IT infrastructure. BA is reliant upon the resilience of its systems for key customer and business processes and is exposed to risks that relate to poor performance, obsolescence or failure of these systems. BA is currently engaged in a number of initiatives to modernise its IT systems, whilst also delivering an ongoing efficiency programme and upgrading its digital capability, customer propositions a nd core IT infrastructure and network where required. Some of these initiatives have been delayed or impacted by actions BA is taking to respond to the prolonged nature of the COVID-19 pandemic.
- People, culture and employee relations. The Group is focussed on staff wellbeing and people morale and motivation, which have been impacted by continued restrictions and lockdowns. Welfare support schemes are in place to support our staff and initiatives to build trust and engagement are underway. Skills and capabilities that are required to manage the BA’s transformation plans, include empowering colleagues to make the best decisions for customers and delivering on BA’s diversity and inclusion plans. Employee consultations were undertaken as required in relation to previously announced restructuring that has been necessitated by the ongoing impact of the pandemic.
- Political and economic environment. National governments continue to impose varying and complex travel and quarantine restrictions, which will continue to impact BA’s operations and dampen demand where customers choose not to fly given the uncertainty around the application of restrictions. These changes in restrictions are being actively monitored and near-term capacity plans are refreshed dynamically, according to the latest status. The economic impact of the pandemic, especially with the focus on variants and vaccine efficacy driving further uncer tainty, is expected to be significant and BA will continue to adjust its future capacity plans accordingly, retaining flexibility to adapt as required.
- Debt funding and financial risk. Financial markets have been volatile since the spread of the pandemic, although BA has been able to secure new funding and facilities as needed. The Group has an established process to monitor financial and counterparty risk on an ongoing basis. The Group has implemented new guidelines over fuel hedging to increase flexibility.
The BA Board has been appraised of regulatory, competitor and governmental responses on an ongoing basis.
By order of the Board
Sean Doyle Rebecca Napier Chief Executive Officer Chief Financial Officer 30 July 202 1 30 July 202 1
Ends
LEI: 375X9PSJLLOV7F21O 626
Forward-looking statements:
Certain statements included in this announcement are forward-looking. These statements can be identified by the fact that they do not relate only to historical or current facts. By their nature, they involve risk and uncertainties because they relate to events and depend on circumstances that will occur in the future. Actual results could differ materially from those expressed or implied by such forward-looking statements.
Forward-looking statements often use words such as “expects”, “may”, “will”, “could”, “should”, “intends”, “plans”, “predicts”, “envi sages” or “anticipates” or other words of similar meaning. They include, without limitation, any and all projections relating to the results of opera tions and financial conditions of International Consolidated Airlines Group, S.A. and its subsidiary undertakings from time to time (the ‘Group’), as well as plans and objectives for future operations, expected future revenues, financing plans, expected expenditure and divestments relating to the Group and discussions of the Group’s business plan. All forward-looking statements in this announcement are based upon information known to the Group on the date of this announcement and speak as of the date of this announcement. Other than in accordance with its legal or regulatory obligations, the Group does not undertake to update or revise any forward-looking statement to reflect any changes in events, conditions or circumstances on which any such statement is based.
Actual results may differ from those expressed or implied in the forward-looking statements in this announcement as a result of any number of known and unknown risks, uncertainties and other factors, including, but not limited to, the effects of the COVID-19 pandemic and uncertainties about its impact and duration, many of which are difficult to predict and are generally beyond the control of the Group, and it is not reasonably possible to itemise each item. Accordingly, readers of this announcement are cautioned against relying on forward-looking statements. Further information on the primary risks of the business and the Group’s risk management process is set out in the Risk management and principal risk factors section in the Annual Report and Accounts 20 20 ; these documents are available on www.iairgroup.com. All forward-looking statements made on or after the date of this announcement and attributable to IAG are expressly qualified in their entirety by the primary risks set out in that section. Many of these risks are, and will be, exacerbated by the COVID-19 pandemic and any further disruption to the global airline industry and economic environment as a result.
IAG Investor Relations – Waterside (HAA2), PO Box 365, Harmondsworth, Middlesex, UB7 0GB Tel: +44 (0)208 564 2900 Investor.relations@iairgroup.com
Consolidated income statement (unaudited)
£ million Note (^) 2021 2020 1 Passenger revenue (^) 375 2, Cargo revenue 509 394 Other revenue 40 144 Total revenue 5 924 2, Employee costs 637 982 Depreciation, amortisation and impairment 9 450 585 Fuel, oil costs and emission charges 344 722 Engineering and other aircraft costs 158 266 Landing fees and en route charges (^) 127 257 Handling, catering and other operating costs (^) 230 533 Selling costs 41 101 Currency differences (39) 52 Property, IT and other costs 240 253 Total expenditure on operations before exceptional items 2,188 3, Operating loss before exceptional items (1,264) (978) Execptional items 3 106 (1,176) Operating loss after exceptional items (1,158) (2,154) Finance costs (^6) (206) (135) Finance income (^6) 1 12 Share of post-tax losses in investments accounted for using the equity method (^13) (6) (89) Net financing credit relating to pensions (^) 1 6 Net currency retranslation credits (^) 32 47 Other non operating credits 6 25 6 Non-operating costs (153) (153) Loss before tax (1,311) (2,307) Tax 7 280 358 Loss after tax (1,031) (1,949)
For the six months ended 30 June
(^1) The 2020 results have been restated for the treatment of administration costs associated with the Group’s defined benefit pension schemes. Further information is given in note 1 to this report.
Consolidated statement of other comprehensive income (unaudited)
£ million Note (^2021) 2020 1 Loss after tax for the period (^) (1,031) (1,949) Other comprehensive income: Items that will not be reclassified to net profit Remeasurement of post-employment benefit obligations (^) 638 (901) Fair value movements on cash flow hedges that will subsequently be transferred to the balance sheet (^) (31) 153 Equity investments - fair value movements in equity - (9) 607 (757) Items that may be reclassified to net profit Currency translation differences (7) 16 Fair value movements on cash flow hedges 361 (1,289) Fair value of cash flow hedges reclassified to net profit - 668 Other movements in comprehensive income of associates 13 1 (27) 355 (632) Total other comprehensive income/(loss) 962 (1,389) Total comprehensive loss for the period, net of tax (69) (3,338)
For the six months ended 30 June
(^1) The 2020 results have been restated for the treatment of administration costs associated with the Group’s defined benefit pen sion schemes. Further information is given in note 1 to this report.
Items in the consolidated Statement of other comprehensive income above are disclosed net of tax.
Consolidated cash flow statement (unaudited)
£ million 2021 2020 1, 2 Cash flow from operating activities Operating loss from continuing operations after exceptional items (1,158) (2,154) Exceptional items (106) 1, Operating loss before exceptional items from continuing operations (1,264) (978) Depreciation, amortisation and impairment 450 585 Movement in working capital 611 98 (Increase)/decrease in trade and other receivables, prepayments, inventories and current assets (25) 994 Increase/(decrease) in trade and other payables, deferred revenue on ticket sales and current liabilities 636 (896) Payments related to restructuring (11) (18) Employer contributions to defined benefit pension schemes net of service and administration costs (18) (145) Provisions and other non-cash movements 94 55 Realised loss on discontinuance of fuel and foreign exchange hedge accounting (108) (395) Interest paid (150) (111) Interest received 1 11 Tax paid (27) (51) Net cash used in operating activities (422) (949)
Cash flow from investing activities Acquisition of PPE and intangible assets (171) (583) Sale of property, plant and equipment and intangible assets 24 126 Loan repaid by parent company 5 5 Other investing movements (7) 2 Decrease in other current interest-bearing deposits - 500 Net cash (used in)/generated from investing activities (149) 50
Cash flow from financing activities Proceeds from borrowings 2,006 1, Repayments of borrowings (395) (34) Repayment of lease liabilities (341) (409) Settlement of derivative financial instruments (242) 22 Other financing movements (11) - Net cash flow generated from financing activities 1,017 924 Increase in cash and cash equivalents 446 25 Net foreign exchange differences (38) 6 Cash and cash equivalents at 1 January 1,261 1, Cash and cash equivalents as at 30 June 1,669 1,
Interest-bearing deposits maturing after more than three months - 830
Cash, cash equivalents and other interest-bearing deposits at 30 June 1,669 2,
For the six months ended 30 June
(^1) The 2020 results have been restated for the treatment of administration costs associated with the Group’s defined benefit pension schemes. Further information is given in note 1 to this report. 2 The 2020 results include a reclassification to conform with the current period of presentation regarding settlement of deriva tive financial instruments. Further information is given in note 1 to this report.
Consolidated statement of changes in equity (unaudited)
For the six months ended 30 June 2021 Issued share Share Other Total £ million capital premium (^) reserves^1 equity At 1 January 2021 as reported 290 1,512 (235) 1, Change in accounting policy^2 - - 267 267 At 1 January 2021 restated 290 1,512 32 1, Loss for the period - - (1,031) (1,031) Other comprehensive income for the period - - (^962) 962 Total comprehensive loss for the period, net of tax - - (69) (69) Hedges reclassified and reported in property, plant and equipment - - 1 1 As at 30 June 2021 290 1,512 (36) 1,
For the six months ended 30 June 2020 Issued share Share Other Total £ million capital premium reserves 1 equity At 1 January 2020 as reported 290 1,512 4,005 5, Change in accounting policy^2 -^ -^246246 At 1 January 2020 restated 290 1,512 4,251 6, Loss for the period - - (1,949) (1,949) Other comprehensive loss for the period - - (1,389) (1,389) Total comprehensive loss for the period, net of tax - - (3,338) (3,338) Hedges reclassified and reported in property, plant and equipment - - (13) (13) As at 30 June 2020 290 1,512 900 2, (^1) The retained earnings for the Group at 30 June 2021 were £141 million (2020: £1,734 million). (^2) The 2020 results have been restated for the treatment of administration costs associated with the Group’s defined benefit pension schemes. Further information is given in note 1 to this report.
Notes to the accounts (unaudited) (continued)
For the six months ended 30 June 2021
1 Corporate information and basis of preparation (continued)
Change in accounting policy (continued)
Consolidated income statement (extract for the six months to 30 June 2020) £ million Reported
Adjustment - administration costs^1
Restated Total revenue 2,773 - 2, Employee costs 970 12 982 Total expenditure on operations before exceptional items 3,739 12 3, Operating loss after exceptional items (2,142) (12) (2,154) Net financing credit relating to pensions 2 4 6 Total non-operating costs (157) 4 (153) Loss before tax (2,299) (8) (2,307) Tax 356 2 358 Loss after tax (1,943) (6) (1,949) Consolidated statement of other comprehensive income (extract for the six months to 30 June 2020) £ million Reported
Adjustment - administration costs^1
Restated Loss after tax (1,943) (6) (1,949) Items that will not be reclassified to net profit Remeasurements of post-employment benefit obligations (865) (36) (901) Total other comprehensive loss (1,353) (36) (1,389) Total comprehensive loss for the period, net of tax (3,296) (42) (3,338)
£ million Reported 2020
Adjustment - administration costs^1
Restated 2020 Reported 2019
Adjustment - administration costs^1
Restated 2019 Non-current assets Employee benefit assets 256 47 303 266 184 450 Total non-current assets 13,984 47 14,031 13,985 184 14, Total assets 16,077 47 16,124 18,705 184 18, Other reserves (235) 267 32 4,005 246 4, Total equity 1,567 267 1,834 5,807 246 6, Non-current liabilities Employee benefit obligations 651 (220) 431 338 (62) 276 Total non-current liabilities 8,709 (220) 8,489 6,508 (62) 6, Total equity and liabilities 16,077 47 16,124 18,705 184 18,
Consolidated balance sheet (extract at 31 December 2020 and 31 December 2019)
(^1) Adjustments made to Employee benefit assets and Employee benefit obligations are presented net of the impact of withholding tax.
Going concern
The economic uncertainty of the COVID-19 pandemic and the fragmented and varied responses from governments have had a significant impact on the Group’s results and cash flows. At 30 June 2021, the Group had total liquidity of £3. 1 billion (31 December 2020: £2.7 billion), comprising cash and cash equivalents of £1.7 billion, £1.0 billion of undrawn general facilities and a further £0. 4 billion of committed and undrawn aircraft specific facilities.
The increase in liquidity during the six months ended 30 June 2021 was attributable to, amongst other actions, accessing a five year term loan of £2.0 billion from the UK Export Credit Facility and as a participant in the IAG Group’s new three year Revolving Credit Facility, of which the Group has access to £1.0 billion ($1.3 billion). In July 2021, the Group further improved liquidity by securing a £0.6 billion aircraft-specific facility achieved as part of an Enhanced Equipment Trust Certificate (EETC) financing structure. The Group’s facilities do not contain financial covenants, but there are a number of non-financial covenants to protect the position of the banks, including restrictions on the upstreaming of cash to the IAG Group or lending to other Group companies.
Notes to the accounts (unaudited) (continued)
For the six months ended 30 June 2021
1 Corporate information and basis of preparation (continued)
Going concern (continued)
In its assessment of going concern over the period to 31 December 2022 (the ‘going concern period’), the Group has modelled three scenarios, referred to below as the Base Case, the Downside Case and the Downside Lockdown Case. The Group’s three-year business plan, prepared and approved by the Board in December 2020, was subsequently refreshed with the latest available internal and external information in July 2021. This refreshed business plan forms the Base Case, which takes into account the Board’s and management’s views on the anticipated impact and recovery from the COVID-19 pandemic on the Group across the going concern period. The key inputs and assumptions underlying the Base Case include:
- As part of the recovery, the Group has assumed a gradual easing of travel restrictions, by geographical region, based on deployment of vaccines during the year. Travel corridors between countries are assumed to be introduced from quarter 3 2021, first in Europe, then North America, with other regions following in the first half of 2022;
- Capacity (forecast by geographical region (and in certain regions, by key destinations)) gradually increasing from a reductio n of 60 per cent in the third quarter of 2021 (compared to the equivalent period in 2019) to a reduction of 10 per cent in the fourth quarter of 2022 (again compared to the equivalent period in 2019), with the average over the going concern period being 26 per cent down;
- Passenger unit revenue per ASK, although forecast to continue recovering, is expected to still remain below 2019 levels by the end of the going concern period, which is based on, amongst other assumptions, a greater weighting of shorthaul versus longhaul, leisure versus business and economy versus premium compared to 2019. Specifically, the Group’s expectation is that traffic related to shorthaul will recover faster than longhaul and business;
- The Group has agreed with the Trustees of the NAPS pension scheme to defer contributions to 30 September 2021. The Group is in discussions with the Trustees to defer contributions of £113 million due in 2021 that are not yet subject to a deferral agreement, and this deferral has been assumed in the Base Case cash flows. The Base Case also assumes a further reduction in deficit contributions of £ million over the remainder of the going concern period;
- The Group has assumed that its committed and undrawn general facilities of £1.0 billion will not be drawn over the going concern period;
- The Group has assumed that of the committed and undrawn aircraft specific facilities of £1. 0 billion (including the EETC finance structure), £0.8 billion would be available to be drawn over the going concern period if required, but is not expected to be drawn; and
- Of the capital commitments detailed in note 10, £1.5 billion is due to be paid over the going concern period and the Group has forecast securing 80 per cent, or £0.7 billion, of the aircraft financing required that is currently uncommitted, to align with the timing and payments for these aircraft deliveries. This loan to value assumption is below the level of financing the Group has been able to achieve recently, including over the course of the COVID-19 pandemic to date.
The Downside Case applies stress to the Base Case to model a more prolonged downturn, with a more gradual recovery relative to the Base Case. The Downside Case is representative of a slower roll out of the vaccination programme on a regional basis, with travel restrictions remaining in place and the gradual recovery of capacity being delayed longer than in the Base Case. The Downside Case models a more acute impact on the longhaul sector, with the domestic sector and European shorthaul sectors recovering faster than longhaul. The result of which is that the levels of capacity assumed under the Base Case for the fourth quarter of 2021 are not achieved under the Downside Case until the second quarter of 2022. In the Downside Case, over the going concern period capacity would be 48 per cent down on 2019. The Group has assumed it will draw down its committed undrawn general facilities of £1.0 billion over the going concern period. The Directors consider the Downside Case to be a severe but plausible scenario.
In addition, the Group has sensitised the Downside Case to incorporate the occurrence of a two-month lockdown, and associated travel restrictions, over the Winter of 2021/2022, a scenario referred to as the Downside Lockdown Case. The Downside Lockdown Case is representative of the emergence of more virulent strains of COVID-19 and/or strains for which the efficacy of existing vaccines is reduced. Subsequent to this lockdown, capacity is expected to recover gradually through to the end of the second quarter of 2022, at which time capacity is expected to align with that of the Downside Case. In this additional scenario, over the going concern period capacity would be 62 per cent down on 2019. Consistent with the Downside Case, the Directors consider the Downside Lockdown Case to be an alternative severe but plausible scenario.
The Group has also modelled the impact of further deteriorations in capacity operated and yield, including mitigating actions to reduce operating and capital expenditure. The Group expects to be able to continue to secure financing for future aircraft deliveries and in addition has further potential mitigating actions, including asset disposals, it would pursue in the event of adverse liquidity experience.
Furthermore, to add resilience to the liquidity position of the Group, the Directors are actively pursuing a range of financing options, including securing additional long term financial facilities, but these have not been included in the Base, Downside or Downside Lockdown Cases.
Having reviewed the Base Case, Downside Case, Downside Lockdown Case and additional sensitivities, the Directors have a reasonable expectation that the Group has sufficient liquidity to continue in operational existence for the foreseeable future and hence continue to adopt the going concern basis in preparing the condensed consolidated interim financial statements for the six months to 30 June 2021.
Notes to the accounts (unaudited) (continued)
For the six months ended 30 June 2021
2 Accounting policies (continued)
Critical accounting estimates, assumptions and judgements (continued) In the six months to 30 June 2021, the Group recognised a credit of £ 106 million (six months to 30 June 2020: expense of £ 722 million) arising from a combination of the discontinuance of hedge accounting in the six months to 30 June 2021 and the fair value movement on those relationships where hedge accounting was discontinued in the year to 31 December 2020, but for which the underlying hedging instrument had not matured at 30 June 2021. This credit was represented by a credit of £ 109 million (six months to 30 June 2020: expense of £ 749 million) relating to fuel derivatives and an expense of £ 9 million (six months to 30 June 2020: credit of £ 61 million) related to the associated fuel foreign currency derivatives. The credit to Passenger revenue of £ 6 million (six months to 30 June 2020: charge of £ 34 million) relates to the discontinuation of hedge accounting of the associated fuel derivatives and the foreign currency derivatives on forecast revenue and fuel consumption. The Group’s risk management strategy has been to build up these hedges gradually over a three-year period when the level of forecast passenger revenue and fuel consumption were higher than current expectations. Accordingly, the hedge accounting for these transactions has been discontinued and the credit recognised in the Income statement. The credit relating to revenue derivatives and fuel derivatives has been recorded in the Income statement within Passenger revenue and Fuel, oil and emission charges, respectively. b Long-term fleet plans and associated impairment The Group derives long-term fleet plans from the cash flow forecasts arising from the approved business plans. In deriving the long-term fleet plans, the Group applies judgement with respect to consideration of the period of temporary and permanent grounding of fleet assets, the deferral of the delivery of certain aircraft and the assumptions around specific provisions relating to leased fleet assets. During the six months to 30 June 2021 the Group recognised no impairment charge. For the six months to 30 June 2020 the Group recognised an impairment charge of £ 416 million, relating to impairment of fleet and rotable inventory spares relating to the entire B747 fleet, spare engines and four Embraer E170 aircraft. c Impairment testing of the Group’s cash generating unit Due to the estimation uncertainty of the timing and duration of the recovery from COVID-19, the Group has adopted a weighted average multi- scenario discounted cash flow model derived from the cash flow forecasts from the approved business plans. The Group exercises judgement in determining the weighting between these scenarios in the value-in-use model. Having undertaken this impairment testing, the Group has not recognised any impairment charge (six months to 30 June 2020: £nil). While no impairment charge is arising, the headroom in the impairment test of the Group is particularly sensitive to changes in key assumptions. Further information is given in note 12. d Recoverability of deferred tax assets In determining the recoverable amounts of the Group’s deferred tax assets, the Group applied the future cash flow projections from the approved business plans. Given the estimation uncertainty of the timing and duration of the recovery from COVID-19, the Group exercises judgement in the determination of cash flows during this recovery and subsequent periods. In exercising this judgement, while there are no time restrictions on the utilisation of historic tax losses in the principal jurisdictions in which the Group operates, future cash flow projections are forecast for a period of up to ten years from the balance sheet date. As at 30 June 2021, the Group had unrecognised temporary differences of £311 million (30 June 2020: £284 million) relating to UK capital losses the Group does not reasonably expect to utilise. Critical accounting estimates, assumptions and judgements – other transactions In addition to the estimation uncertainty relating to cash flow forecasts, the Group has applied the following critical accounting estimates, assumptions and judgements that impact the Condensed consolidated interim financial statements: e Revenue recognition Historically, where a voucher has been issued to a customer in the event of a flight cancellation, the Group estimated, based on historical evidence, the level of such vouchers that would not be used prior to expiry and recognised revenue accordingly. Due to the significant level of flight cancellations arising from COVID- 19 there remains insufficient historical data by which to reliably estimate the amount of these vouchers that will not be used prior to expiry. Accordingly, consistent with the approach taken at 31 December 2020, the Group has not recognised revenue arising from those vouchers issued due to COVID- 19 related cancellations until either the voucher is redeemed or it expires.
Notes to the accounts (unaudited) (continued)
For the six months ended 30 June 2021
2 Accounting policies (continued)
Critical accounting estimates, assumptions and judgements (continued)
Significant transactions as a result of COVID- 19 The Group has recorded the following additional significant transactions as a result of management actions in response to COVID-19: f Loans and borrowings To enhance liquidity due to the impact of COVID-19, the Group has entered into a number of financing arrangements during 2021, which have been fully drawn unless otherwise stated, including: On 22 February 2021, British Airways entered into a 5 year term loan Export Development Guarantee Facility of £2.0 billion underwritten by a syndicate of banks, with 80 per cent of the principal guaranteed by UK Export Finance (UKEF); On 23 March 2021 , IAG entered into a three-year US dollar secured Revolving Credit Facility. The amount available to British Airways under the facility is $1. 3 billion. As at 30 June 2021 no amounts had been drawn under the facility. Concurrent to entering into the facility, British Airways extinguished its US dollar secured Revolving Credit Facility due to mature in June 2021 ; and In April 2021, British Airways fully repaid the Coronavirus Corporate Finance Facility of £298 million, which was entered into in April 2020. Further information is given in note 16. g Government assistance Given the significant reduction in operations that have occurred as a result of COVID-19, the Group has availed itself of the various employee support mechanisms. In the period to 30 June 2021 this has led to an amount of £144 million (six months to 30 June 2020: £122 million) being received directly from the UK government (classified as government grants). Those amounts received in the form of government assistance have been recorded net within Employee costs. Further information is given in note 20. h Defined benefit pension scheme contributions On 18 December 2020 British Airways reached agreement with the Trustee of NAPS to defer deficit contributions on an interim basis for the period between 1 October 2020 and 31 January 2021. The deferral of such contributions amounted to £ 150 million. On 19 February 2021 British Airways reached further agreement with the Trustee of NAPS to defer deficit contributions through to 30 September 2 021. The deferral of such contributions will amount to £ 300 million. Further information is given in note 17. Impact of climate change on financial reporting As detailed in the British Airways Annual report and accounts 202 0, as a result of the society-wide need to tackle climate change the Group has designed and approved its Flightpath Net Zero climate strategy, which commits the Group to achieving net zero emissions by 2050. The Group continues to develop its assessment of the potential impacts of climate change and the transition to a lower carbon economy. Where the strategy is sufficiently developed, the potential financial impacts have been considered as part of recoverability analysis of the assets and liabilities of the Group at 30 June 2021, including, but not limited to, the carrying value of the Group. With the Flightpath Net Zero climate strategy assessing the impact over a long-term horizon to 2050, the level of estimation uncertainty in the determination of cash flow forecasts increases over time. The Group has addressed this estimation uncertainty through the provision of sensitivity analysis over its long-term assumptions relating to the recoverability of the carrying value of the Group (note 12 ).
Notes to the accounts (unaudited) (continued)
For the six months ended 30 June 2021
5 Segment information (continued)
b Geographical analysis - by area of original sale For the six months ended 30 June £ million 2021 2020 UK 319 1, USA 113 500 Rest of the world 492 920 Revenue 924 2,
The total of non-current assets excluding equity investments, employee benefit assets, other non-current assets, deferred tax assets and derivative financial instruments located in the UK is £12,6 93 million (2020: £12,984 million), USA is £94 million (2020: £124 million) and the total of these non-current assets located in other countries is £17 million (2020: £23 million).
6 Finance costs and income
For the six months ended 30 June a Finance costs
£ million 2021 2020 Interest expenses on: Bank borrowings (37) (5) Asset financed liabilities (29) (10) Lease liabilities (88) (109) Other borrowings (50) (8) Provisions unwinding of discount - (1) Other finance costs (3) (8) Capitalised interest on progress payments 1 6 Total finance costs (206) (135)
b Finance income £ million 2021 2020 Interest on other investments and interest-bearing deposits 1 12 Total finance income 1 12
c Other non-operating credits £ million 2021 2020 Gain on sale of property, plant and equipment and investments 25 3 Credit relating to equity investments (^) - 3 Total other non-operating credits 25^6
7 Tax
The tax credit in the Income statement was as follows: 30 June^ 30 June (^2021) 2020 1 Current tax 2 204 Deferred tax 278 154 Total tax 280 358
£ million
(^1) The 2020 results have been restated for the treatment of administration costs associated with the Group’s defined benefit pension schemes. Further information is given in note 1 to this report.
Notes to the accounts (unaudited) (continued)
For the six months ended 30 June 2021
7 Tax (continued)
The effective rate for the period was 21.3 per cent (2020: 15.5 per cent) being higher (2020: lower) than the tax credit (2020: tax credit) at the standard UK corporation tax rate of 19.0 per cent (2020: 19.0 per cent). Finance Act 2021 set the main rate of corporation tax at 25 per cent from April 2023, which has led to the remeasurement of deferred tax balances at 30 June 2021 and will increase the Group's future current tax charge accordingly. As a result of the remeasurement of deferred tax balances, a credit of £39 million is recorded in the Income statement and a credit of £28 million is recorded in Other comprehensive income.
Reconciliation of the Total Tax Credit 30 June 30 June £ million (^) 2021 2020 1 Accounting loss before tax: 1,311 2, Corporation tax rate 19% 19% Tax at standard corporation tax rate (^) (249) (438) Non-deductible expenses (^) 7 8 Intra-group associates' profits 2 12 Effect of pension fund accounting (1) (1) Adjustments in respect of prior years (^) - (5) Movement relating to rate change (39) 65 Other non-taxable income (^) - 1 Tax credit in the income statement (^) (280) (358) (^1) The 2020 results have been restated for the treatment of administration costs associated with the Group’s defined benefit pen sion schemes. Further information is given in note 1 to this report.
Uncertain tax positions for which no amount has been recognised The Group has uncertain tax positions for which no amount has been recognised, across all taxes, which at 30 June 2021 gave rise to a total maximum exposure of £ 84 million (31 December 2020 : £87 million). No material losses are likely to arise from such uncertain tax positions. As such the Group does not consider it appropriate to recognise a provision for these amounts. Recoverability of deferred tax assets In determining the recoverable amounts of the Group’s deferred tax assets, the Group applies the future cash flow projections from the approved business plans. Given the inherent uncertainty of the timing and duration of the recovery from COVID-19, the Group exercises judgement in the determination of cash flows during this recovery and subsequent periods. In exercising this judgement, while there are no time restrictions on the utilisation of historic tax losses in the principal jurisdictions in which the Group operates, future cash flow projections are forecast for a period of up to ten years from the balance sheet date. As at 30 June 2021, the Group had unrecognised temporary differences of £311 million (3 1 December 2020: £ 318 million) relating to UK capital losses the Group does not reasonably expect to utilise.
8 Dividends
No dividends were paid during the six months to 30 June 2021 (30 June 2020: £nil). Certain debt obligations, including the Export Development Guarantee Facility, place restrictions and/or conditions on the payments of dividends to the parent company, IAG. These loans can be repaid early without penalty at the election of British Airways. In addition, under the contribution deferral agreement between British Airways and the Trustee of the New Airways Pension Scheme (NAPS), in the period up to 31 December 202 4 , no dividend payment is permitted from British Airways to IAG, and any dividends paid to IAG from 2024 will trigger a pension contribution of 50 per cent of the amount of the dividend, until the deferred pension contributions have been paid.
