2.      ACCOUNTING POLICIES

 

Critical judgement and estimates

Except as described below, the accounting policies adopted in the presentation of the condensed consolidated interim financial statements for the six months to June 30, 2021 are consistent with those followed in the preparation of the Group's annual consolidated financial statements for the year to December 31, 2020.

 

In preparing the condensed consolidated interim financial statements for the six months to June 30, 2021, management has made judgements and estimates that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. The significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty are summarised below, including consideration of the impact on COVID-19 on financial reporting.

 

New and changes in accounting policies

Convertible bonds

Convertible bonds are classified as either compound financial instruments or hybrid financial instruments depending on the settlement alternatives upon redemption. Where the bondholders exercise their equity conversion option and the Group has no alternative other than to settle the convertible bonds into a fixed number of ordinary shares of the Company, then the bonds are classified as a compound financial instrument. Where the Group has an alternative settlement mechanism to the convertible bonds that permits settlement in cash, then convertible instrument is classified as a hybrid financial instrument.

 

Convertible bonds that are classified as compound financial instruments consist of a liability and an equity component. At the date of issue, the fair value of the liability component is estimated using the prevailing market interest rate for similar non-convertible debt, and is subsequently recorded at an amortised cost basis using the effective interest method until extinguished on conversion or maturity of the bonds, and is recognised within Long-term borrowings. The difference between the proceeds of issue of the convertible bond and the fair value assigned to the liability component, representing the embedded option to convert the liability into equity of the Group, is included in the equity portion of the convertible bond in Other reserves and is not subsequently remeasured. The interest expense on the liability component is calculated by applying the effective interest rate for similar non-convertible debt to the liability component of the instrument. The difference between this value and the interest paid is added to the carrying amount of the liability.

 

Convertible bonds that are classified as hybrid financial instruments consist only of a liability component recognised within Long-term borrowings. At the date of issue, the entirety of the convertible bonds are accounted for at fair value with subsequent fair value gains or losses recorded within Long-term borrowings. The fair value of such financial instruments is obtained from their respective quoted prices in active markets, with the portion of the change in fair value attributable to changes in the credit risk of the convertible bonds recognised in Other comprehensive income and the portion of the change in fair value attributable to market conditions recognised in the Income statement within Finance costs.

 

Issue costs associated with compound financial instruments are apportioned between the liability and equity components of the convertible bonds where appropriate based on their relative carrying values at the date of issue. The portion relating to the equity component is charged directly against equity. Issue costs associated with hybrid financial instruments are expensed immediately to the Income statement.

Administration costs in British Airways defined benefit obligations

During the six months to June 30, 2021, the Group has changed its accounting policy with regard to the treatment of administration costs associated with the APS and NAPS Defined benefit schemes. See note 1 for further information.

 

2.     ACCOUNTING POLICIES continued

 

New standards, interpretations and amendments adopted by the Group

The following amendments and interpretations apply for the first time in the six months to June 30, 2021, but do not have a material impact on the condensed consolidated interim financial statements of the Group:

·      Interest rate benchmark reform - Phase 2 - amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 effective for periods beginning on or after January 1, 2021.

 

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

·      Property, plant and equipment: proceeds before intended use - amendments to IAS 16 effective for periods beginning on or after January 1, 2022;

·      Reference to the Conceptual Framework - amendments to IFRS 3 effective for periods beginning on or after January 1, 2022;

·      Onerous contracts - cost of fulfilling a contract - amendments to IAS 37 effective for periods beginning on or after January 1, 2022;

·      Annual improvements to IFRS standards 2018-2020 - effective for periods beginning on or after January 1, 2022;

·      Classification of liabilities as current or non-current - amendments to IAS 1 effective for periods beginning on or after January 1, 2023.

·      Definition of accounting estimate - amendments to IAS 8 effective for periods beginning on or after January 1, 2023;

·      Disclosure of accounting policies - Amendments to IAS 1 and IFRS Practice statement 2 effective for periods beginning on or after January 1, 2023; and

·      Deferred tax related to assets and liabilities arising from a single transaction - Amendments to IAS 12 effective for periods beginning on or after January 1, 2023.

Impact of COVID-19 on financial reporting

Significant transactions and critical accounting estimates, assumptions and judgements in the determination of the impact of COVID-19

As a result of COVID-19 the Group has experienced a significant decline in the level of flight activity and does not expect to return to the level of 2019 activity until at least 2023. Accordingly, the Group has applied critical estimation and judgement in the evaluation of the impact of COVID-19 regarding the recognition and measurement of assets and liabilities within the Condensed consolidated interim financial statements.

Critical accounting estimates, assumptions and judgements - cash flow forecast estimation

The Group has applied estimation and judgement in the evaluation of the impact of COVID-19 on the estimation uncertainty of determining cash flow forecasts as part of the approved Business plans. The details regarding the inputs and assumptions used in the determination of these cash flow forecasts are given in the going concern basis of preparation.

The following critical accounting estimates, assumptions and judgements utilise these cash flow forecasts consistently, which are in some instances significantly different from judgements applied in previous years:

a      Discontinuance of hedge accounting

In determining whether hedge accounting is required to be discontinued or to remain in a hedge relationship, judgement is required as to whether a forecast transaction that was previously highly probable continues to be expected to occur or is no longer expected to occur. The Group applied the capacity output from the cash flow forecasts as part of the approved Business plans in order to determine the forecast level of revenue generation and fuel consumption over the periods in which hedge accounting has been applied.

In the six months to June 30, 2021, the Group recognised a credit of €140 million (six months to June 30, 2020: expense of €1,269 million) arising from a combination of the discontinuance of hedge accounting in the six months to June 30, 2021 and the fair value movement on those relationships where hedge accounting was discontinued in the year to December 31, 2020, but for which the underlying hedging instrument had not matured at June 30, 2021. This was represented by a credit of €146 million (six months to June 30, 2020: expense of €1,372 million) relating to fuel derivatives and an expense of €6 million (six months to June 30, 2020: credit of €103 million) related to the associated fuel foreign currency derivatives. The credit to Passenger revenue of €5 million (six months to June 30, 2020: charge of €38 million) relates to the discontinuation of hedge accounting of the associated foreign currency derivatives on forecast revenue.

The Group's risk management strategy is to build up these hedges gradually over a two-year period (previously 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.

Further information is given in the Alternative performance measures section.

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.

2.     ACCOUNTING POLICIES continued

 

During the six months to June 30, 2021 the Group recognised no impairment charge. For the six months to June 30, 2020 the Group recognised an impairment charge of €731 million, represented by an impairment of fleet assets of €729 million and an impairment of other assets of €2 million. The fleet impairment related to 55 aircraft, their associated engines and rotable inventories that have been stood down permanently and 6 further aircraft which have been impaired down to their recoverable value at June 30, 2020, which includes 32 Boeing 747 aircraft, 15 Airbus A340 aircraft, 4 Airbus A320 aircraft, 4 Airbus A330-200 aircraft, 2 Boeing 777-200 aircraft and 4 Embraer E170 aircraft. Of the fleet impairment, €635 million was recorded within Property, plant and equipment relating to owned aircraft and €94 million was recorded within Right of use assets relating to leased aircraft.

Further information is given in the Alternative performance measures section.

c      Impairment testing of the Group's cash generating units

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 June 30, 2020: €nil). While no impairment charge is arising, the headroom in the impairment test of the British Airways, Iberia and Aer Lingus cash generating units are particularly sensitive to changes in key assumptions. Further information is given in note 11.

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 June 30, 2021, the Group had unrecognised deferred tax assets of €2,332 million relating to tax losses the Group does not reasonably expect to utilise. In applying the aforementioned judgement, had the Group extended the period of future cash flow projections indefinitely, then the amount of unrecognised deferred tax assets would have reduced by €1,938 million.

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 December 31, 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.

Revenue associated with the issuance of points under customer loyalty programmes is determined using estimation techniques, with the transaction price of the points based on the value of the awards for which the points can be redeemed and is reduced to take account of the proportion of the award credits that are not expected to be redeemed by customers. The Group estimates the number of points not expected to be redeemed using statistical modelling and historical trends. Due to the significant disruption in the patterns of the redemption of points caused by COVID-19, there remains insufficient recent historical data by which to estimate the long-term proportion of the award credits that are not expected to be redeemed by customers. Accordingly, consistent with the approach taken at December 31, 2020, the Group has maintained the proportion of those award credits not expected to be redeemed to pre-COVID-19 levels.

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 February 22, 2021, British Airways entered into a 5 year term loan Export Development Guarantee Facility of €2.3 billion (£2.0 billion) underwritten by a syndicate of banks, with 80 per cent of the principal guaranteed by UKEF;

 

 

 

 

2.     ACCOUNTING POLICIES continued

 

On March 23, 2021, the Group entered into a three-year US dollar secured Revolving Credit Facility accessible by British Airways, Iberia and Aer Lingus. The amount available under the facility is $1.755 billion. As at June 30, 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;

 

On March 25, 2021, two senior unsecured bonds were issued by the Group for an aggregate principal amount of €1.2 billion; €500 million fixed rate 2.75 per cent due in 2025, and €700 million fixed rate 3.75 per cent due in 2029;

 

On December 23, 2020, Aer Lingus entered into a financing arrangement with the Ireland Strategic Investment Fund for €75 million. On March 27, 2021, Aer Lingus entered into a further financing arrangement to extend the total amount to €150 million. The facility is repayable in 2023; and

 

On May 18, 2021, the Group issued an €825 million senior unsecured convertible bond due 2028 and bearing a fixed rate of 1.125 per cent.

 

In April 2021, British Airways fully repaid the Coronavirus Corporate Finance Facility of €328 million (£298 million), which was entered into in April 2020.

 

Further information is given in note 13.

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 jurisdictions in which it operates. In the period to June 30, 2021 this has led to an amount of €200 million (six months to June 30, 2020: €155 million) being received directly from governments (classified as government grants) and savings of €144 million (six months to June 30, 2020: €127 million) (classified as government assistance) where employees have been paid directly by their respective governments. Those amounts received in the form of government assistance have been recorded net within Employee costs. Further information is given in note 19.

h      Defined benefit pension scheme contributions

On December 18, 2020 British Airways reached agreement with the Trustee of NAPS to defer deficit contributions on an interim basis for the period between October 1, 2020 and January 31, 2021. The deferral of such contributions amounted to €165 million. On February 19, 2021 British Airways reached further agreement with the Trustee of NAPS to defer deficit contributions through to September 30, 2021. The deferral of such contributions will amount to €330 million. Further information is given in note 15.

Impact of climate change on financial reporting

As detailed in the IAG Annual report and accounts 2020, 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 of the Group at June 30, 2021, including, but not limited to, the carrying value of the Groups cash generating units.

 

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 estimation uncertainty through the provision of sensitivity analysis over its long-term assumptions relating to the recoverability of the carrying value of the Groups cash generating units (note 11).

 

3.      Seasonality

 

Except for the impact of COVID-19, the Group's business is highly seasonal with demand strongest during the summer months. Accordingly higher revenues and operating profits are usually expected in the latter six months of the financial year than in the first six months.

 

4.      SEGMENT INFORMATION

 

a        Business segments

 

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

 

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

 

4.     SEGMENT INFORMATION continued

 

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

 

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

 

For the six months to June 30, 2021
	2021
€ million	British Airways	Iberia	Vueling	Aer Lingus	Other Group companies1	Total
Revenue
Passenger revenue	424	470	193	33	21	1,141
Cargo revenue	581	155	-	31	2	769
Other revenue	38	182	3	1	78	302
External revenue	1,043	807	196	65	101	2,212
Inter-segment revenue	17	122	-	-	156	295
Segment revenue	1,060	929	196	65	257	2,507
Depreciation and amortisation	(514)	(177)	(124)	(68)	(37)	(920)
Operating loss	(1,325)	(330)	(195)	(192)	7	(2,035)
Exceptional items	120	7	9	7	2	145
Operating loss before exceptional items	(1,445)	(337)	(204)	(199)	5	(2,180)
Net non-operating costs						(301)
Loss before tax						(2,336)
Total assets	20,001	6,529	2,685	1,818	2,429	33,462
Total liabilities	(17,945)	(6,858)	(3,299)	(1,649)	(2,797)	(32,548)
1Includes eliminations on total assets of €15,745 million and total liabilities of €5,645 million.

 

 

 

4.     SEGMENT INFORMATION continued   For the six months to June 30, 2020
	20201
€ million	British Airways	Iberia	Vueling	Aer Lingus	Other Group companies2	Total
Revenue
Passenger revenue	2,566	784	317	315	131	4,113
Cargo revenue	448	107	-	60	-	615
Other revenue	156	335	4	-	65	560
External revenue	3,170	1,226	321	375	196	5,288
Inter-segment revenue	53	147	(8)	2	211	405
Segment revenue	3,223	1,373	313	377	407	5,693
Depreciation and amortisation charge	(671)	(196)	(139)	(68)	(40)	(1,114)
Impairment charge	(463)	(234)	-	(25)	(9)	(731)
Operating loss	(2,469)	(867)	(386)	(316)	(14)	(4,052)
Exceptional items	(1,360)	(508)	(118)	(127)	(24)	(2,137)
Operating (loss)/profit before exceptional items	(1,109)	(359)	(268)	(189)	10	(1,915)
Net non-operating costs						(163)
Loss before tax						(4,215)
Total assets	19,200	8,178	3,658	2,026	(981)	32,081
Total liabilities	(16,243)	(7,748)	(3,692)	(1,592)	(1,795)	(31,070)
1Segment information for 2020 has 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.
2Includes eliminations on total assets of €14,159 million and total liabilities of €4,077 million.

 

b       Geographical analysis

 

Revenue by area of original sale

	Six months to June 30
€ million	2021	2020
UK	480	1,739
Spain	657	1,024
USA	175	750
Rest of world	900	1,775
	2,212	5,288

 

Assets by area

 

June 30, 2021
€ million	Property, plant and equipment	Intangible assets
UK	11,691	1,289
Spain	4,634	1,327
USA	96	15
Rest of world	1,279	581
	17,700	3,212

 

 

 

 

 

 

 

 

4.     SEGMENT INFORMATION continued

 

December 31, 2020
€ million	Property, plant and equipment	Intangible assets
UK	11,313	1,251
Spain	4,850	1,353
USA	122	15
Rest of world	1,246	589
	17,531	3,208

 

5.      FINANCE COSTS, INCOME AND OTHER NON-OPERATING CREDITS

 

	Six months to June 30
€ million	2021	20201
Finance costs
Interest expense on:
Bank borrowings	(57)	(9)
Asset financed liabilities	(40)	(18)
Lease liabilities	(195)	(236)
Provisions unwinding of discount	(5)	(6)
Other borrowings	(20)	(48)
Capitalised interest on progress payments	1	7
Other finance costs	(47)	(32)
Total finance costs	(363)	(342)
Finance income
Interest on other interest-bearing deposits	-	15
Other finance income	4	8
Total finance income	4	23
Net credit relating to pensions1
Net financing credit relating to pensions	1	9
Other non-operating credits
Gains on sale of property, plant and equipment and investments	41	4
Realised (losses)/gains on derivatives not qualifying for hedge accounting	(1)	53
Unrealised gains/(losses) on derivatives not qualifying for hedge accounting	30	(6)
Share of post-tax losses in associates accounted for using equity method	(1)	(3)
Net credit relating to other equity investments	1	2
	70	50
1The 2020 net financing credit relating to pensions has 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.

 

 

 

6.      TAX

The tax credit in the Income statement was as follows:

 

	Six months to June 301
€ million	2021	2020
Current tax	(22)	258
Deferred tax	310	144
Total tax	288	402
1The 2020 current tax has 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.

 

The effective tax rate for the six months to June 30, 2021 was 12 per cent (2020: 10 per cent). The substantial majority of the Group's activities are taxed where the main operations are based, being Spain, UK, and Ireland, with corporation tax rates during 2021 and 2020 of 25 per cent, 19 per cent and 12.5 per cent respectively. These result in an expected effective tax rate of 20 per cent.

 

The difference between the actual effective tax rate of 12 per cent and the expected effective tax rate of 20 per cent was primarily due to the €640 million increase in unrecognised deductible temporary differences and losses. The details of the unrecognised temporary differences and losses are given in the table below:

 

€ million	June 30, 2021	December 31, 2020
Income tax losses
Spanish corporate income tax losses	1,884	848
Openskies SASU trading losses	394	450
UK trading losses	54	39
	2,332	1,337
Other losses and temporary differences
UK capital losses	346	350
Spanish deductible temporary differences	884	1,287
Irish capital losses	17	25
	1,247	1,662

 

None of the unrecognised temporary differences or losses have an expiry date. Further information with regard to the sensitivity of the recoverability of deferred tax assets is given in note 2.

 

On March 3, 2021 the UK Chancellor announced that legislation would be introduced in the Finance Bill 2021 to set the main rate of corporation tax at 25 per cent from April 2023. On May 24, 2021 the increase in the rate of corporation tax in the UK was substantially enacted, which has led to the remeasurement of deferred tax balances at June 30, 2021 and will increase the Group's future current tax charge accordingly.

 

Uncertain tax positions for which no amount has been recognised

The Group has certain uncertain tax positions for which no amount has been recognised, across all taxes, which at June 30, 2021 gave rise to a total maximum exposure of €194 million (December 31, 2020: €166 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. Included in the uncertain tax positions is the following:

 

Merger gain

Following tax audits covering the period 2011 to 2014, the Spanish Tax Authorities issued a corporate income tax assessment to the Company regarding the merger in 2011 between British Airways and Iberia. The maximum exposure in this case is €94 million (December 31, 2020: €92 million), being the amount in the tax assessment with an estimate of the interest accrued on that assessment through to June 30, 2021.

 

The Company appealed the assessment to the Tribunal Económico-Administrativo Central or 'TEAC' (Central Administrative Tax Tribunal). On October 23, 2019 the TEAC ruled in favour of the Spanish Tax Authorities. The Company subsequently appealed this ruling to the Audiencia Nacional (National High Court) on December 20, 2019, and on July 24, 2020 filed submissions in support of its case. The Company does not expect a hearing at the National High Court until 2022 at the earliest.

 

The Company disputes the technical merits of the assessment and ruling of the TEAC, both in terms of whether a gain arose and in terms of the quantum of any gain. The Company believes that it has strong arguments to support its appeals. The Company does not consider it appropriate to make a provision for these amounts.

 

7.      EARNINGS PER SHARE AND SHARE CAPITAL

 

	Six months to June 30
Millions	2021	20201
Weighted average number of ordinary shares in issue	4,967	3,057
Weighted average number for diluted earnings per share	4,967	3,057
	Six months to June 30
€ cents	2021	20201
Basic loss per share	(41.2)	(124.7)
Diluted loss per share	(41.2)	(124.7)

¹ Loss per share information has been restated for the comparative period presented, by adjusting the weighted average number of shares to include the impact of the rights issue in October 2020. The discount element inherent in the rights issue has been accounted for as a bonus issue of 1,071,565 thousand shares in 2020. Earnings per share information has also been restated for the comparative period presented for the effects of the Employee benefits restatement given in note 1.

 

The effect of the assumed conversion of the IAG €500 million convertible bond 2022, the IAG €825 million convertible bond 2028 and outstanding employee share schemes is antidilutive for the six months to June 30, 2021 and 2020 due to the reported loss after tax for each period, and therefore has not been included in the diluted earnings per share calculation.

 

The number of shares in issue at June 30, 2021 was 4,971,476,000 (December 31, 2020: 4,971,476,000) ordinary shares with a par value of €0.10 each.

 

8.      Dividends

 

The Directors propose that no dividend be paid for the six months to June 30, 2021 (June 30, 2020: nil).

 

The future dividend capacity of the Group is dependent on the liquidity requirements and the distributable reserves of the Group's main operating companies and their capacity to pay dividends to the Company, together with the Company's distributable reserves and liquidity.

 

Certain debt obligations place restrictions or conditions on the payment of dividends from the Group's main operating companies to the Company, including a loan to British Airways partially guaranteed by UKEF and loans to Iberia and Vueling partially guaranteed by the Instituto de Crédito Oficial (ICO) in Spain; these loans can be repaid early without penalty at the election of each company. British Airways agreed with the Trustee of its main UK defined benefit pension scheme (NAPS) as part of an agreement to defer £450 million of contributions that no dividends will be paid to IAG before 2024 and that 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.

 

9.      property, plant and equipment, right of use assets and intaNgible assets

 

€ million	Other Property, plant and equipment	Right of use assets	Total Property, plant and equipment	Intangible assets
Net book value at January 1, 2021	7,656	9,875	17,531	3,208
Additions	213	192	405	64
Modifications	-	119	119	-
Disposals	(161)	-	(161)	(49)
Reclassifications1	126	(163)	(37)	-
Depreciation and amortisation charge	(316)	(518)	(834)	(86)
Exchange movements	323	354	677	75
Net book value at June 30, 2021	7,841	9,859	17,700	3,212
1Reclassifications include an amount of €37 million reclassified from Other property, plant and equipment into Non-current assets held for sale. Refer to note 10 for further information.

 

 

 

9.      property, plant and equipment, right of use assets and intaNgible assets continued

 

€ million	Other Property, plant and equipment	Right of use assets	Total Property, plant and equipment	Intangible assets
Net book value at January 1, 2020	8,580	10,588	19,168	3,442
Additions	1,194	285	1,479	137
Modifications	-	55	55	-
Disposals	(365)	(10)	(375)	(76)
Reclassifications	157	(155)	2	(2)
Depreciation and amortisation charge	(448)	(591)	(1,039)	(75)
Impairment charge	(635)	(94)	(729)	(2)
Exchange movements	(377)	(402)	(779)	(94)
Net book value at June 30, 2020	8,106	9,676	17,782	3,330

 

At June 30, 2021, long-term borrowings of the Group are secured on owned fleet assets with a net book value of €2,938 million (December 31, 2020: €2,794 million).

 

Capital expenditure authorised and contracted for but not provided for in the accounts amounts to €9,938 million (December 31, 2020: €10,545 million). The majority of capital expenditure commitments are denominated in US dollars, and as such are subject to changes in exchange rates.

 

10.    NON-CURRENT ASSETS HELD FOR SALE

 

The non-current assets held for sale of €37 million represent five Embraer E170 aircraft. No gain or loss was recognised on classification as non-current assets held for sale. These aircraft are presented within the British Airways segment and will exit the business within 12 months of June 30, 2021.

 

11.    IMPAIRMENT REVIEW

 

Basis for calculating recoverable amount

At each reporting date, the Group considers the existence of indicators of potential impairment. At June 30, 2021, the continued disruption caused by COVID-19 has led to a decrease in demand across each cash generating unit (CGU) and economic uncertainty over the short and medium term.

 

As a result, a full impairment test at June 30, 2021 has been conducted for each CGU.

 

The recoverable amounts of CGUs have been measured based on their value-in-use, which utilises a weighted average multi-scenario discounted cash flow model. The details of these scenarios are given in the going concern section of note 1, with a weighting of 70 per cent to the base case, 20 per cent to the downside case and 10 per cent to the downside lockdown case. Cash flow projections are based on the forecasts approved by the relevant operating companies covering a three-year period. As a result of the slower recovery than previously expected, management have extended the period of cash flows in the value-in-use model, for all CGUs, to four years. Cash flow forecasts extrapolated beyond the four-year period are projected to increase based on long-term growth rates. Cash flow projections are discounted using the CGU's pre-tax discount rate.

 

Annually the relevant operating companies prepare and approve three-year business plans, and the Board approves the Group three-year business plan in the fourth quarter of the year. The cash flows used in the value-in-use calculations reflect all restructuring of the business where relevant that has been approved by the Board and which can be executed by Management under existing agreements.

 

Key assumptions

The value-in-use calculations for each CGU reflected the increased risks arising from COVID-19, including updated projected cash flows for the decreased activity for the remaining six months of 2021 through to the end of 2024, an increase in the pre-tax discount rates to incorporate increased equity market volatility and a decrease in long-term growth rates. For each of the Group's CGUs the key assumptions utilised over the forecast period in the value-in-use calculations are as follows:

 

 

 

11.    IMPAIRMENT REVIEW continued

	June 30, 2021
Per cent	British Airways	Iberia2	Vueling	Aer Lingus	IAG Loyalty
Operating margin1	(16)-15	(7)-9	(6)-11	(42)-13	24-25
ASKs as a proportion of 20191	28-96	49-108	48-110	21-108	n/a
Long-term growth rate	2.1	1.8	1.7	1.8	1.8
Pre-tax discount rate	11.5	11.4	11.1	10.2	12.0
	December 31, 2020
Per cent	British Airways	Iberia2	Vueling	Aer Lingus	IAG Loyalty
Operating margin1	(20)-16	(12)-11	(22)-12	(14)-13	25-27
ASK as a proportion of 20191	45-95	49-98	46-107	40-100	n/a
Long-term growth rate	2.1	2.0	1.8	1.9	2.0
Pre-tax discount rate	11.2	11.6	11.5	10.4	10.3
1Operating margin and ASKs as a proportion of 2019 are the weighted average of the base case, downside case and downside lockdown case scenarios.
2The Iberia CGU includes the operations of Iberia, Iberia Express and Level Spain.

 

Jet fuel price ($ per MT)	To December 31, 2021	To December 31, 2022	To December 31, 2023	To December 31, 2024	2025 and thereafter
June 30, 2021	623	624	609	597	597
December 31, 2020	373	420	449	449	449

 

Forecast ASKs reflect the range of ASKs as a percentage of the 2019 actual ASKs over the forecast period, based on planned network growth and taking into account Management's expectation of the market.

 

The long-term growth rate is calculated for each CGU based on the forecasted weighted average exposure in each primary market using gross domestic product (GDP) (source: Oxford Economics). The airline's network plans are reviewed annually as part of the business plan and reflect Management's plans in response to specific market risk or opportunity.

 

Pre-tax discount rates represent the current market assessment of the risks specific to each CGU, taking into consideration the time value of money and underlying risks of its primary market. The discount rate calculation is based on the circumstances of the airline industry, the Group and the CGU. It is derived from the weighted average cost of capital (WACC). The WACC takes into consideration both debt and equity available to airlines. The cost of equity is derived from the expected return on investment by airline investors and the cost of debt is broadly based on the Group's interest-bearing borrowings. CGU specific risk is incorporated by applying individual beta factors which are evaluated annually based on available market data. The pre-tax discount rate reflects the timing of future tax flows.

 

Jet fuel price assumptions are derived from forward price curves at the balance sheet date and sourced externally. The cash flow forecasts reflect these price increases after taking into consideration of level of fuel derivatives and their associated prices that the Group has in place.

 

Summary of results

At June 30, 2021, Management reviewed the recoverable amount of each of the CGUs and concluded the recoverable amounts exceeded the carrying values.

 

Reasonable possible changes in key assumptions, both individually and in combination, have been considered for each CGU, where applicable, which include reducing operating margin by 2 per cent in each year, ASKs by 5 per cent in each year, long-term growth rates to zero, increasing pre-tax discount rates by 2.5 percentage points, changing the weighting of the downside lockdown case to 100 per cent, and increasing the fuel price by 40 per cent.

 

For the British Airways, Iberia, Vueling and Aer Lingus CGUs, while the recoverable amounts are estimated to exceed the carrying amounts by €6,690 million, €772 million, €1,760 and €1,059 million, respectively, the recoverable amounts would be below the carrying amounts when applying the following reasonable possible changes in assumptions:

·      British Airways: (i) if ASKs had been five per cent lower combined with a fuel price increase of 18 per cent; and (ii) if the fuel price had been 28 per cent higher;

·      Iberia: (i) if the discount rate had been 1.8 per cent higher; (ii) if ASKs had been 4.7 per cent lower; (iii) if operating margin had been 1.4 per cent lower; (iv) if the weighting to the downside lockdown case had increased to 83 per cent, with the base case lowered to 17 per cent; and (v) if the fuel price had been 9 per cent higher;

·      Vueling: (i) if ASKs had been five per cent lower combined with a fuel price increase of 29 per cent;

·      Aer Lingus: (i) if ASKs had been five per cent lower combined with a fuel price increase of 16 per cent; and (ii) if the fuel price had been 25 per cent higher.

 

11.    IMPAIRMENT REVIEW continued

 

For the remainder of the reasonable possible changes in key assumptions applied to the British Airways, Iberia, Vueling and Aer Lingus CGUs and for all the reasonable possible changes in key assumptions applied to the IAG Loyalty CGU, no impairment arises.

 

In addition, at June 30, 2021, the directors have considered the existence of indicators of impairment for individual assets, including but not limited to, landing rights and fleet assets, and concluded no impairment charge is deemed necessary.

 

12.    FINANCIAL INSTRUMENTS

 

a        Financial assets and liabilities by category

 

The detail of the Group's financial instruments at June 30, 2021 and December 31, 2020 by nature and classification for measurement purposes is as follows:

 

June 30, 2021
	Financial assets
€ million	Amortised cost	Fair value through Other comprehensive income	Fair value through Income statement	Non-financial assets	Total carrying amount by balance sheet item
Non-current assets
Other equity investments	-	29	-	-	29
Derivative financial instruments	-	-	97	-	97
Other non-current assets	151	10	-	112	273
Current assets
Trade receivables	731	-	-	-	731
Other current assets	313	-	-	479	792
Derivative financial instruments	-	-	390	-	390
Other current interest-bearing deposits	53	-	-	-	53
Cash and cash equivalents	7,611	-	-	-	7,611

 

	Financial liabilities
€ million	Amortised cost	Fair value through Other comprehensive income	Fair value through income statement	Non- financial liabilities	Total carrying amount by balance sheet item
Non-current liabilities
Lease liabilities	8,466	-	-	-	8,466
Interest-bearing long-term borrowings	8,477	-	783	-	9,260
Derivative financial instruments	-	-	139	-	139
Other long-term liabilities	80	-	-	55	135
Current liabilities
Lease liabilities	1,511	-	-	-	1,511
Current portion of long-term borrowings	525	-	9	-	534
Trade and other payables	2,346	-	-	519	2,865
Derivative financial instruments	-	-	293	-	293

 

 

 

 

 

 

 

 

 

12.    FINANCIAL INSTRUMENTS continued

 

December 31, 2020
	Financial assets
€ million	Amortised cost	Fair value through Other comprehensive income	Fair value through income statement	Non-financial assets	Total carrying amount by balance sheet item
Non-current assets
Other equity investments	-	29	-	-	29
Derivative financial instruments	-	-	42	-	42
Other non-current assets	119	10	-	99	228
Current assets
Trade receivables	557	-	-	-	557
Other current assets	350	-	-	442	792
Derivative financial instruments	-	-	122	-	122
Other current interest-bearing deposits	143	-	-	-	143
Cash and cash equivalents	5,774	-	-	-	5,774

 

	Financial liabilities
€ million	Amortised cost	Fair value through Other comprehensive income	Fair value through Income statement	Non- financial liabilities	Total carrying amount by balance sheet item
Non-current liabilities
Lease liabilities	8,464	-	-	-	8,464
Interest-bearing long-term borrowings	5,000	-	-	-	5,000
Derivative financial instruments	-	-	310	-	310
Other long-term liabilities	80	-	-	533	613
Current liabilities
Lease liabilities	1,560	-	-	-	1,560
Current portion of long-term borrowings	655	-	-	-	655
Trade and other payables	2,572	-	-	238	2,810
Derivative financial instruments	-	-	1,160	-	1,160

 

b       Fair value of financial assets and financial liabilities

 

The fair values of the Group's financial instruments are disclosed in hierarchy levels depending on the nature of the inputs used in determining the fair values and using the following methods and assumptions:

 

Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. Level 1 methodologies (market values at the balance sheet date) were used to determine the fair value of listed asset investments classified as equity investments and listed interest-bearing borrowings. The fair value of financial liabilities and financial assets incorporates own credit risk and counterparty credit risk, respectively.

 

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The fair value of financial instruments that are not traded in an active market is determined by valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates.

 

Derivative instruments are measured based on the market value of instruments with similar terms and conditions at the balance sheet date using forward pricing models, which include forward exchange rates, forward interest rates and forward fuel curves at the reporting date. The fair value of derivative financial liabilities and derivative financial assets are adjusted for own credit risk and counterparty credit risk, respectively.

 

12.    FINANCIAL INSTRUMENTS continued

 

The fair value of the Group's interest-bearing borrowings, excluding leases, is determined by discounting the remaining contractual cash flows at the relevant market interest rates at the balance sheet date. The fair value of the Group's interest-bearing borrowings are adjusted for own credit risk.

 

Level 3: Inputs for the asset or liability that are not based on observable market data. The principal method of such valuation is performed using a valuation model that considers the present value of the dividend cash flows expected to be generated by the associated assets.

 

The fair value of cash and cash equivalents, other current interest-bearing deposits, trade receivables, other current assets and trade and other payables approximate their carrying value largely due to the short-term maturities of these instruments.

 

The carrying amounts and fair values of the Group's financial assets and liabilities at June 30, 2021 are as follows:

 

	Fair value					Carrying value
€ million	Level 1	Level 2	Level 3	Total		Total
Financial assets
Other equity investments	-	-	29	29		29
Derivative financial assets1	-	487	-	487		487
Financial liabilities
Interest-bearing loans and borrowings	3,559	6,382	-	9,941		9,794
Derivative financial liabilities2	-	432	-	432		432
1Current portion of derivative financial assets is €390 million.
2Current portion of derivative financial liabilities is €293 million.

 

The carrying amounts and fair values of the Group's financial assets and liabilities at December 31, 2020 are set out below:

 

	Fair value					Carrying value
€ million	Level 1	Level 2	Level 3	Total		Total
Financial assets
Other equity investments	-	-	29	29		29
Derivative financial assets1	-	164	-	164		164
Financial liabilities
Interest-bearing loans and borrowings	1,510	4,280	-	5,790		5,655
Derivative financial liabilities2	-	1,470	-	1,470		1,470
1Current portion of derivative financial assets is €122 million.
2Current portion of derivative financial liabilities is €1,177 million.

 

There have been no transfers between levels of fair value hierarchy during the period.

 

Financial assets, other equity instruments, financial liabilities and derivative financial assets and liabilities are all measured at fair value in the consolidated financial statements. Interest-bearing borrowings, with the exception of the IAG €825 million convertible bond due 2028 which is measured at fair value, are measured at amortised cost.

 

c         Level 3 financial assets reconciliation

 

The following table summarises key movements in Level 3 financial assets:                                                                                                                           

 

€ million	June 30, 2021	December 31, 2020
Opening balance for the period	29	72
Additions	-	3
Losses recognised in other comprehensive income	-	(44)
Exchange movements	-	(2)
	29	29

 

 

 

13.           borrowings

 

€ million	June 30, 2021	December 31, 2020
Current
Bank and other loans	235	90
Bank and other loans less than 12 months	-	329
Asset financed liabilities	174	139
Other financing liabilities	125	97
Lease liabilities	1,511	1,560
	2,045	2,215
Non-current
Bank and other loans	7,205	2,950
Asset financed liabilities	2,055	2,050
Lease liabilities	8,466	8,464
	17,726	13,464

 

Banks and other loans are repayable up to the year 2029. Long-term borrowings of the Group amounting to €2,434 million (December 31, 2020: €2,412 million) are secured on owned fleet assets with a net book value of €2,938 million (December 31, 2020: €2,794 million). Asset financed liabilities are all secured on the associated aircraft or other property, plant and equipment.

 

On February 22, 2021, British Airways entered into a five-year term loan Export Development Guarantee Facility of €2.3 billion (£2.0 billion) underwritten by a syndicate of banks, with 80 per cent of the principal guaranteed by UKEF. The annual rate of interest associated with the UKEF is consistent with the prevailing market rate of interest at the time of executing the term loan.

 

On March 23, 2021, the Group entered into a three-year US dollar secured Revolving Credit Facility accessible by British Airways, Iberia and Aer Lingus. The amount available under the facility is $1.755 billion. As at June 30, 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 which had $786 million undrawn and available at December 31, 2020. While the Group does not forecast drawing down on the Revolving Credit Facility, should it do so, the resultant debt would be securitised against specific landing rights and aircraft in the respective operating companies.

 

On March 25, 2021, two senior unsecured bonds were issued by the Group for an aggregate principal amount of €1.2 billion; €500 million fixed rate 2.75 per cent due in 2025, and €700 million fixed rate 3.75 per cent due in 2029.

 

On March 27, 2021, Aer Lingus entered into a floating rate financing agreement with the Ireland Strategic Investment Fund (ISIF) for €75 million. The facility is repayable in 2023.

 

On May 11, 2021, the Group issued an €825 million senior unsecured convertible bond due May 11, 2028. The convertible bond bears a fixed rate of interest of 1.125 per cent per annum, receiving net proceeds, after transaction costs, of €818 million. The Group recognised €825 million within long-term borrowings.

 

The convertible bond provides bondholders with dividend protection and includes a total of 244,850,715 options at inception and at December 31, 2021 to convert into ordinary shares of IAG. The Group holds an option to redeem the convertible bond at its principal amount, together with accrued interest, no earlier than two years prior to the final maturity date. The Group also holds an option to redeem the convertible bond, in full or in part, in cash in the event that bondholders exercise their right to convert the bond into ordinary shares of IAG.

 

The convertible bond is recorded at its fair value, which at June 30, 2021 was €792 million, representing a decrease of €33 million since issuance. Of this decrease, the amount recorded in Other comprehensive income arising from credit risk of the convertible bonds was €5 million and a credit recorded within Finance costs in the Income statement attributable to changes in market conditions of €38 million.

 

14.           SHARE BASED PAYMENTS

 

During the period there were 27,759,914 awards made under the Group's Full Potential Incentive Plan and 15,876,659 awards under the Restricted Share Plan, to key senior executives and selected members of the wider management team. The fair value of equity-settled share awards granted is based on the share price at the date of grant. The Group settles the employees' tax obligations arising from the issue of the shares directly with the relevant tax authority in cash and an equivalent number of shares is withheld by the Group upon vesting.                     

 

 

 

 

15.    EMPLOYEE BENEFIT OBLIGATIONS

 

The principal funded defined benefit pension schemes within the Group are the Airways Pension Scheme (APS) and the New Airways Pension Scheme (NAPS), both of which are in the UK and are closed to new members. NAPS was closed to future accrual from March 31, 2018, resulting in a reduction of the defined benefit obligation. Following closure members' deferred pensions will now be increased annually by inflation up to five per cent per annum (measured using the Government's annual Pension Increase (Review) Orders, which since 2011 have been based on CPI). As part of the closure of NAPS to future accrual in 2018, British Airways agreed to make certain additional transition payments to NAPS members if the deficit had reduced more than expected at either the 2018 or 2021 valuations. No payment was triggered by the 2018 valuation and no allowance for such payments relating to the 2021 valuation, which remains subject to finalisation at the date of this report, has been made in the valuation of the defined benefit obligation at June 30, 2021. The NAPS actuarial valuation at March 31, 2018 resulted in a deficit of €2,736 million.

 

APS has been closed to new members since 1984. The benefits provided under APS are based on final average pensionable pay and, for the majority of members, are subject to inflationary increases in payment. The APS actuarial valuation at March 31, 2018 resulted in a surplus of €683 million.

 

Deficit payment plans are agreed with the Trustee of each scheme every three years based on the actuarial valuation rather than the IAS 19 accounting valuation. In October 2019, the latest deficit recovery plan was agreed as at March 31, 2018 with respect to NAPS. The actuarial valuations performed as at March 31, 2018 for APS and NAPS are different to the valuation performed at June 30, 2021 under IAS 19 'Employee benefits' mainly due to timing differences of the measurement dates and to the specific scheme assumptions in the actuarial valuation compared with IAS 19 guidance used in the accounting valuation assumptions. For example, IAS 19 requires the discount rate to be based on corporate bond yields regardless of how the assets are actually invested, which may not result in the calculations in this report being a best estimate of the cost to the Group of providing benefits under either Scheme. The investment strategy of each Scheme is likely to change over its life, so the relationship between the discount rate and the expected rate of return on each Scheme's assets may also change.

 

Following consultation during 2019 and 2020, on November 25, 2020 the UK Chancellor of the Exchequer and the UK Statistics Authority confirmed that from February 2030 onwards CPIH (a proposed variant to CPI) will replace RPI with no compensation to holders of index-linked gilts. At June 30, 2021, the Group has made no adjustment for these proposals.

 

	June 30, 2021
€ million	APS	NAPS	Other	Total
Scheme assets at fair value	8,583	23,264	465	32,312
Present value of scheme liabilities	(8,075)	(21,302)	(760)	(30,137)
Net pension asset/(liability)	508	1,962	(295)	2,175
Effect of the asset ceiling2	(166)	(1,157)	-	(1,323)
Other employee benefit obligations	-	-	(13)	(13)
June 30, 2021	342	805	(308)	839
Represented by:
Employee benefit assets				1,160
Employee benefit obligations				(321)
				839

 

	December 31, 20201
€ million	APS	NAPS	Other	Total
Scheme assets at fair value	8,537	22,240	408	31,185
Present value of scheme liabilities	(8,064)	(21,778)	(714)	(30,556)
Net pension asset/(liability)	473	462	(306)	629
Effect of the asset ceiling2	(151)	(610)	-	(761)
Other employee benefit obligations	-	-	(11)	(11)
December 31, 2020	322	(148)	(317)	(143)
Represented by:
Employee benefit assets				334
Employee benefit obligations				(477)
				(143)

¹ The 2020 results have 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 Both APS and NAPS are in an IAS 19 accounting surplus, which would be available to the Group as a refund upon wind up of the scheme. This refund is restricted due to the withholding taxes that would be payable by the Trustee arising on both the net pension asset and the future contractual minimum funding requirements.

 

At June 30, 2021, the assumptions used to determine the obligations under the APS and NAPS were reviewed and updated to reflect the market condition at that date. Principal assumptions were as follows:

 

 

 

15.    EMPLOYEE BENEFIT OBLIGATIONS continued

 

	June 30, 2021			December 31, 2020
Per cent per annum	APS	NAPS		APS	NAPS
Discount rate	1.70	1.90		1.20	1.40
Rate of increase in pensionable pay	3.25	-		2.95	-
Rate of increase of pensions in payment	3.25	2.55		2.95	2.25
RPI rate of inflation	3.25	3.10		2.95	2.80
CPI rate of inflation	2.55	2.55		2.25	2.25

 

Further information on the basis of the assumptions is included in note 30 of the Annual Report and Accounts for the year to December 31, 2020.

 

Pension contributions for APS and NAPS were determined by actuarial valuations made as at March 31, 2018, using assumptions and methodologies agreed between the Company and Trustees of each scheme. On December 18, 2020 British Airways reached agreement with the Trustee of NAPS to defer deficit contributions on an interim basis for the period between October 1, 2020 and January 31, 2021. On February 19, 2021 British Airways reached further agreement with the Trustee of NAPS to defer deficit contributions through to September 30, 2021. Under this deferral agreement, the deferred payments will be incorporated into the future deficit payment plan and associated deficit contributions arising from the triennial valuation of the NAPS scheme as at March 31, 2021. If the future deficit payment plan has not been agreed by September 30, 2021, the default position is that British Airways will return to making payments of €41 million (£38 million) per month from October 2021. At June 30, 2021 and through to the date of authorisation of these condensed consolidated interim financial statements, the March 31, 2021 triennial valuation has not been finalised.

 

16.           pROVISIONS

€ million	Restoration and handback provisions	Restructuring provisions	Employee leaving indemnities and other employee related provisions	Legal claims provisions	Other provisions	Total
Net book value January 1, 2021	1,588	432	714	84	94	2,912
Provisions recorded during the period	123	18	19	35	16	211
Utilised during the period	(58)	(77)	(15)	(18)	(36)	(204)
Release of unused amounts	(15)	(3)	-	(8)	(5)	(31)
Unwinding of discount	3	-	2	-	-	5
Exchange differences	40	4	2	2	1	49
Net book value June 30, 2021	1,681	374	722	95	70	2,942
Analysis:
Current	394	172	57	57	20	700
Non-current	1,287	202	665	38	50	2,242
	1,681	374	722	95	70	2,942

 

 

17.           FINANCIAL RISK MANAGEMENT

 

The Group is exposed to a variety of financial risks: market risk (including fuel price risk, foreign currency risk and interest rate risk), credit risk and liquidity risk. The principal impact of these on the interim financial statements are discussed below:

 

Fuel price risk

The Group is exposed to fuel price risk. In order to mitigate such risk, under the Group's fuel price risk management strategy a variety of over the counter derivative instruments are entered into. The Group strategy is to hedge a proportion of fuel consumption up to two years within the approved hedging profile.

 

During the six months to June 30, 2021, following a substantial recovery in the global price of crude oil, the fair value of such net asset derivative instruments was €167 million at June 30, 2021, representing an increase of €945 million since January 1, 2021. Since the outbreak of COVID-19, a significant proportion of the associated hedge relationships have no longer been expected to occur and subsequently fuel hedge accounting was discontinued, with subsequent mark-to-market movements recorded in the Income statement. However, as a result of the updated forecasts as detailed in note 2, a further €56 million of the gains recognised in Other comprehensive income were reclassified to the Income statement and recognised within Fuel, oil costs and emission costs in the six month period to June 30, 2021.

 

 

17.           FINANCIAL RISK MANAGEMENT continued

 

The gain arising from the derecognition of fuel hedges has been recorded as an exceptional item. Refer to the Alternative performance measures section for further details.

 

Foreign currency risk

The Group is exposed to foreign currency risk on revenue, purchases and borrowings that are denominated in a currency other than the functional currency of the Group. The currencies in which these transactions are denominated are primarily euro, US dollar and pound sterling. The Group has a number of strategies to hedge foreign currency risk. The Group strategy is to hedge a proportion of its foreign currency sales and purchases for up to three years.

 

At June 30, 2021, the fair value of foreign currency net liability derivatives instruments was €64 million, representing an increase of €403 million since January 1, 2021. These comprise both derivatives designated in hedge relationships and those derivatives that are not designated into a hedge relationship at inception. As per the fuel price risk above, a significant proportion of the derivatives designated in hedge relationships have no longer been expected to occur and subsequently hedge accounting has been discontinued, with subsequent mark-to-market movements recorded in the Income statement. However, as a result of the updated forecasts as detailed in note 2, a further €2 million of the gains were recognised in Other comprehensive income were reclassified to the Income statement and recognised within Fuel, oil costs and emission costs and within Passenger revenue. Those derivatives not designated in a hedge relationship on inception have their mark-to-market movements recorded directly in the Income statement and recognised within Net currency retranslation (charges)/credits.

 

Interest rate risk

The Group is exposed to changes in interest rates on debt and on cash deposits. Interest rate risk on floating rate debt is managed through interest rate swaps, cross currency swaps and interest rate collars.

 

Credit risk

Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk from its financing activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments. The Group has policies and procedures to monitor the risk by assigning limits to each counterparty by underlying exposure and by operating company and by only entering into transactions with counterparties with a very low credit risk.

 

At each period end, the Group assesses the effect of counterparties' and the Group's own credit risk on the fair value of derivatives and any ineffectiveness arising is immediately recycled from Other comprehensive income to the Income statement with Other non-operating expenses.

 

18.           CONTINGENT LIABILITIES

 

Details of contingent liabilities are set out below. The Group does not consider it probable that there will be an outflow of economic resources with regard to these proceedings and accordingly no provision for these proceedings has been recognised.

 

Legal and regulatory proceedings

There are a number of legal and regulatory proceedings against the Group in a number of jurisdictions which at June 30, 2021 amounted to €54 million (December 31, 2020: €56 million).

 

Voucher issuance at British Airways

On June 9, 2021, the Competition and Markets Authority (CMA) opened an enforcement case regarding British Airways' policy in relation to refunding passengers who were prevented from taking their British Airways operating flights as a result of the UK Government's lockdown restrictions. British Airways maintains that its policy was in accordance with its terms and conditions of carriage and was lawful. At June 30, 2021 and the date of this report, British Airways continues to engage with the CMA regarding its investigation.

 

Guarantees and indemnities

The Group also has guarantees and indemnities entered into as part of the normal course of business, which at June 30, 2021 are not expected to result in material losses for the Group.

 

19.           GOVERNMENT GRANTS AND ASSISTANCE

 

The Group has availed itself of government grants and assistance as follows:

 

The Coronavirus Job Retention Scheme (CJRS) - recognised net within Employee costs

The CJRS was implemented by the government of the United Kingdom from March 1, 2020 to August 30, 2020, where those employees designated as being 'furloughed workers' were eligible to have 80 per cent of their wage costs paid up to a maximum of £2,500 per month.

 

 

19.           GOVERNMENT GRANTS AND ASSISTANCE continued

 

From September 1, 2020 to September 30, 2020, the level eligibility reduced to 70 per cent of wage costs and up to a maximum of £2,197.50 per month. From October 1, 2020 to October 31, 2020, the level of eligibility reduced to 60 per cent of wage costs and up to a maximum of £1,875 per month. Following the introduction of further lockdown restrictions in the United Kingdom in November 2020, the CJRS was extended from November 1, 2020 to November 30, 2020 and then further to March 31, 2021 and then further again to September 30, 2021 with the level of eligibility increased to 80 per cent of wage costs and a maximum of £2,500 per month through to the end of June 2021, after which the eligibility decreases down each month to 60 per cent of wage costs and a maximum of £1,875 per month by September 30, 2021.

 

Such costs are paid by the government to the Group in arrears. The Group is obliged to continue to pay the associated social security costs and employer pension contributions.

 

The Temporary Wage Subsidy Scheme (TWSS) and the Employment Wage Subsidy Scheme (EWSS) - recognised net within Employee costs

The TWSS was implemented by the government of Ireland from March 1, 2020 to August 30, 2020, where those employees designated as being furloughed workers are eligible to have 85 per cent of their wage costs paid up to a maximum of €410 per week. This scheme was replaced with the EWSS from September 1, 2020 and is expected to run through to December 31, 2021. For those qualifying employees (earning less than €1,462 per week), the government will reimburse wage costs up to a maximum of €203 per week. Such costs are paid by the government to the Group in arrears.

 

The total amount of the relief received under the CJRS, the TWSS and the EWSS by the Group for the six months to June 30, 2021 amounted to €200 million (six months to June 30, 2020: €155 million).

 

Temporary Redundancy Plan (ERTE) - no recognition in the financial statements of the Group

The ERTE was implemented by the government of Spain from March 1, 2020 and is expected to run through to September 30, 2021. Under this plan, employment is temporarily suspended and those designated employees are paid directly by the government and there is no remittance made to the Group. The Group is obliged to continue to pay the associated social security costs.

 

Had those designated employees not been temporarily suspended during the six months to June 30, 2021, the Group would have incurred further employee costs of €144 million (six months to June 30, 2020: €127 million).

 

The Ireland Strategic Investment Fund (ISIF) - recognised within Long-term borrowings

On December 23, 2020, Aer Lingus entered into a financing arrangement for €75 million. On March 27, 2021, Aer Lingus entered into a further financing arrangement to extend the total amount to €150 million.

 

The UK Export Finance (UKEF) - recognised within Long-term borrowings

On February 22, 2021, British Airways entered into a 5 year term loan Export Development Guarantee Facility of €2.3 billion (£2.0 billion) underwritten by a syndicate of banks, with 80 per cent of the principal guaranteed by UKEF.

 

20.    RELATED PARTY TRANSACTIONS

 

The Group had the following transactions in the ordinary course of business with related parties.

 

Sales and purchases of goods and services:

 

	Six months to June 30
€ million	2021	2020
Sales of goods and services
Sales to associates	3	2
Sales to significant shareholders	13	7
Purchases of goods and services
Purchases from associates	18	25
Purchases from significant shareholders	30	47

 

Period end balances arising from sales and purchases of goods and services:

€ million	June 30,  2021	December 31, 2020
Receivables from related parties
Amounts owed by associates	1	1
Amounts owed by significant shareholders	1	1
Payables to related parties
Amounts owed to associates	2	2
Amounts owed to significant shareholders	-	1

 

 

20.    RELATED PARTY TRANSACTIONS continued

 

For the six months to June 30, 2021 the Group has not made any allowance on expected credit losses relating to amounts owed by related parties (2020: nil).

 

Board of Directors and Management Committee remuneration

 

Compensation received by the Group's key management personnel is as follows:

 

	Six months to June 30
€ million	2021	2020
Base salary, fees and benefits
Board of Directors' remuneration	1	2
Management Committee remuneration	4	3

 

For the six months to June 30, 2021 the remuneration for the Board of Directors includes one Executive Director (June 30, 2020: two Executive Directors). The Management Committee includes remuneration for 14 members (June 30, 2020: 11 members).

 

The Company provides life insurance for all Executive Directors and the Management Committee. For the six months to June 30, 2021 the Company's obligation was €18,000 (2020: €20,000).

 

At June 30, 2021 the transfer value of accrued pensions covered under defined benefit pension obligation schemes, relating to the current members of the Management Committee totalled €8 million (2020: €9 million).

 

No loan or credit transactions were outstanding with Directors or officers of the Group at June 30, 2021 (2020: nil).

 

21.           CHANGE IN ACCOUNTING POLICY

 

Change in accounting policy relating to employee benefits

During the six months to June 30, 2021, the Group has changed its accounting policy with regard to the treatment of administration costs associated with the APS and NAPs Defined benefit schemes. The change in policy has been adopted to better reflect the underlying management and operation of these schemes, while remaining in compliance with IAS 19. This change in accounting policy has been applied retrospectively to the Condensed consolidated interim financial statements and are detailed below.

 

Previously a discounted estimate of future administration costs was included as part of the APS and NAPS defined benefit obligations. These administration costs were recognised as a service cost in the year in which such costs arose and recorded within Other comprehensive income. Under the updated accounting policy, administration costs are now recognised as incurred and included within Employee costs in the Income statement. This change has had the effect of reducing the defined benefit obligation and increasing retained earnings at both December 31, 2020 and January 1, 2020. It has in addition increased the charge to Employee costs and the Financing charge relating to pensions in the Income statement for the six months to June 30, 2020.

 

The impact of the change in this accounting policy on the Consolidated income statement and the Consolidated statement of comprehensive income for the six months to June 30, 2020, as well as the Consolidated balance sheet at December 31, 2020 and January 1, 2020 are shown below:

 

 

21.           CHANGE IN ACCOUNTING POLICY continued

 

Consolidated income statement (extract for the six months to June 30, 2020)
€ million	Reported		Adjustment - administration costs		Restated
Total revenue	5,288		-		5,288
Employee costs	1,890		15		1,905
Other expenditure on operations	7,435		-		7,435
Total expenditure on operations	9,325		15		9,340
Operating loss	(4,037)		(15)		(4,052)
Net financing credit relating to pensions	3		6		9
Other financing items	(222)		-		(222)
Other non-operating items	50		-		50
Total net non-operating costs	(169)		6		(163)
Loss before tax	(4,206)		(9)		(4,215)
Tax	400		2		402
Loss after tax for the period	(3,806)		(7)		(3,813)

 

Consolidated statement of other comprehensive income (extract for the six months to June 30, 2020)
€ million	Reported		Adjustment - administration costs		Restated
Items that may be classified subsequently to net profit
Currency translation differences	(146)		(16)		(162)
Other items that may be classified subsequently to net profit	(1,243)		-		(1,243)
Items that will not be reclassified to net profit
Remeasurements of post-employment benefit obligations	(994)		(42)		(1,036)
Other items that will not be reclassified to net profit	182		-		182
Total other comprehensive loss for the period, net of tax	(2,201)		(58)		(2,259)
Loss after tax for the year	(3,806)		(7)		(3,813)
Total comprehensive loss for the period	(6,007)		(65)		(6,072)

 

 

 

21.           CHANGE IN ACCOUNTING POLICY continued

 

Consolidated balance sheet (extract at December 31, 2020 and December 31, 2019)
€ million	Reported 2020	Adjustment - administration costs1	Restated 2020	Reported 2019	Adjustment - administration costs1	Restated 2019
Non-current assets
Employee benefit assets	282	52	334	314	217	531
Other non-current assets	22,142	-	22,142	23,810	-	23,810
	22,424	52	22,476	24,124	217	24,341
Current assets	7,840	-	7,840	11,327	-	11,327
Total assets	30,264	52	30,316	35,451	217	35,668
Other equity	8,233	-	8,233	6,269	-	6,269
Other reserves	(6,917)	294	(6,623)	560	291	851
Total equity	1,316	294	1,610	6,829	291	7,120
Non-current liabilities
Employee benefit obligations	719	(242)	477	400	(74)	326
Other non-current liabilities	16,713	-	16,713	15,474	-	15,474
	17,432	(242)	17,190	15,874	(74)	15,800
Current liabilities	11,516	-	11,516	12,748	-	12,748
Total liabilities	28,948	(242)	28,706	28,622	(74)	28,548
Total equity and liabilities	30,264	52	30,316	35,451	217	35,668
1Adjustments made to Employee benefit assets and Employee benefit obligations are presented net of the impact of withholding tax.

 

22.           POST BALANCE SHEET EVENTS

 

On July 20, 2021, the Group entered into an asset-financing structure, under which seven aircraft are expected to be sold and leased back over the period to September 2022. This asset-financing structure matures between 2033 and 2036. This arrangement was transacted through an unconsolidated structured entity, which in turn issued the British Airways Pass Through Certificates, Series 2021-1, commonly referred to as Enhanced Equipment Trust Certificates (EETCs). The Group expects to recognise €659 million ($785 million) through these aforementioned sale and lease backs over the period to September 2022.