Edgar Filing: BRITISH AIRWAYS PLC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 20-F

(Mark One)


o	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

	or

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the fiscal year ended: March 31, 2005
	or

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-9384
BRITISH AIRWAYS Plc
(Exact name of Registrant as specified in its charter)

England and Wales
(Jurisdiction of incorporation or organization)

Waterside, PO Box 365, Harmondsworth, UB7 0GB England
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act.


Title of each class		Name of each exchange on which registered

American Depositary Shares		New York Stock Exchange
Ordinary Shares of 25p each		New York Stock Exchange*

* Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.


Ordinary Shares of 25p each	1,082,902,918

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o Item 18 x

TABLE OF CONTENTS


			Page

		Introductory Note	3
		Specialist Terms	4
Part I	Item 1.	Identity of Directors, Senior Management and Advisers	5
	Item 2.	Offer Statistics and Expected Timetable	5
	Item 3.	Key Information	5
		Selected Financial Data	5
		Exchange Rates	10
		Risk Factors	10
	Item 4.	Information on the Company	14
		Introduction	14
		Strategic Developments and Investments	14
		Segmental Information	16
		Route Network	17
		Airline Fleet	18
		Capital Expenditures	19
		Operations	19
		Marketing and Sales	20
		Cargo	22
		Ancillary Airline Activities	22
		Seasonal Variations	22
		Health Concerns: Occupational Health Service	22
		Regulation	23
		Competition	27
		Organizational Structure	28
		Property, Plant and Equipment	29
	Item 5.	Operating and Financial Review and Prospects	30
		Introduction	30
		Results of Operations	30
		Year by Year Analysis	30
		Outlook	39
		Other Matters	39
		Critical Accounting Policies and New Accounting Standards	44
	Item 6.	Directors, Senior Management and Employees	48
		Compensation of Directors and Officers	51
		Share Ownership	52
		Options to Purchase Securities from Registrant or Subsidiaries	53
		Employees	58
		Pensions	58
	Item 7.	Major Shareholders and Related Party Transactions	59
	Item 8.	Financial Information	59
		Consolidated Statements and Other Financial Information	59
		Dividends	59
		Legal Proceedings	60
		Significant Changes	60
	Item 9.	The Offer and Listing	60
	Item 10.	Additional Information	61
		Limitations on Voting and Shareholding	61
		Memorandum and Articles of Association	61
		Directors	62
		Material Contracts	66
		Exchange Controls	66
		Tax	66
		UK Income Tax	66
		UK Tax on Capital Gains	67
		UK Inheritance Tax	67
		UK Stamp Duty and Stamp Duty Reserve Tax	67
		US Federal Income Tax	67
		Documents on Display	68
	Item 11.	Quantitative and Qualitative Disclosures about Market Risk	68
	Item 12.	Description of Securities Other Than Equity Securities	74
Part II	Item 13.	Defaults, Dividend Arrearages and Delinquencies	74
	Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds	74
	Item 15.	Controls and Procedures	74
	Item 16	[Reserved]	74
	Item 16A.	Audit Committee Financial Expert	74
	Item 16B.	Code of Ethics	74
	Item 16C.	Principal Accountant Fees and Services	74
	Item 16D.	Exemptions from the Listing Standards for Audit Committees	75
	Item 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers	75
Part III	Item 17.	Financial Statements	75
	Item 18.	Financial Statements	75
	Item 19.	Exhibits	76

INTRODUCTORY NOTE

Unless the context indicates otherwise, the “Company”, “BA” or “British Airways” refers to British Airways Plc and “BA Group” or “Group” refers to British Airways, its subsidiaries and its quasi-subsidiary. “Airline” refers to British Airways Plc and British Airways CitiExpress Limited, and for historical comparatives, dba (formerly Deutsche BA Luftfahrtgesellschaft mbh) and Air Liberté. “Qantas” refers to Qantas Airways Limited and “Iberia” refers to Iberia Lineas Aéreas de Espana, S.A.

BA publishes its Financial Statements expressed in UK (“UK”) pounds Sterling. In this document references to “US Dollars”, “US $”, or “$” are to US (“US”) Dollars, references to “pounds Sterling”, “Sterling” or “£” and “pence” or “p” are to UK currency, references to “Japanese Yen”, “Yen” or “¥” are to the currency of Japan, references to “Euro” or “€” are to the currency of the European Union and references to “A$” are to Australian Dollars. For the convenience of the reader, this document contains translations of certain pounds Sterling amounts to US Dollars at $1.8888 to £1.00, the noon buying rate in New York City for cable transfers in pounds Sterling as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”) on March 31, 2005. These translations should not be construed as representations that the pounds Sterling amounts actually represent such US Dollar amounts or could be converted into US Dollars at the rate indicated. The Noon Buying Rate on June 30, 2005 was $1.793 to £1.00. For historical information regarding rates of exchange between US Dollars and pounds Sterling, see “Item 3 — Key Information — Exchange Rates”. For a discussion of the Group’s exposure to exchange rate fluctuations arising from its operations, see “Item 5 — Operating and Financial Review and Prospects —Other Matters — Foreign Currency Risk” and “Item 11 — Quantitative and Qualitative Disclosures about Market Risk – Foreign Currency Risk”.

Cash dividends, if any, paid by BA will be in pounds Sterling, and exchange rate fluctuations will affect the US Dollar amounts received by holders of American Depositary Shares (“ADS”) on conversion of such dividends. Moreover, fluctuations in the exchange rates between pounds Sterling and the US Dollar will affect the US Dollar equivalent of the pounds Sterling price of the ordinary shares of the Company (the “Ordinary Shares”) on the London Stock Exchange, and, as a result, are likely to affect the market price of the ADS traded on the New York Stock Exchange in the US.

The Company’s fiscal year ends on March 31 of each year, and references herein to “fiscal year” or “fiscal” are to the year ended March 31 of the year specified.

Certain information contained in this report, including, without limitation, in “Item 4 — Information on the Company” and “Item 8 — Financial Information — Legal Proceedings” as well as certain statements made throughout “Item 5 — Operating and Financial Review and Prospects” and “Item 11 — Quantitative and Qualitative Disclosures about Market Risk” are forward-looking and involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the forward-looking statements. Forward-looking statements included in this document and in documents incorporated herein by reference generally may be identified by the words “will”, “expects”, “plans”, “anticipates”, “intends”, and similar expressions that indicate the statement addresses the future. Forward-looking statements include, without limitation, projections relating to results of operations and financial conditions and the Company’s plans and objectives for future operations, including, without limitation, discussions of the Company’s Business and Financing Plans, expected future revenues, and expenditures and divestments. All forward-looking statements in this report are based upon information known to the Company on the date of this report. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. It is not reasonably practicable to itemize all of the many factors and specific events that could cause the Company’s forward-looking statements to be incorrect or that could otherwise have a material adverse effect on the future operations or results of an airline operating in the global economy. Some factors that could significantly affect expected capacity, load factors, yields, revenues, expenses, unit costs, capital expenditures, cash flows and margins include the airline pricing environment, customer demand, fuel and other commodity costs, capacity decisions of other carriers, cost of safety and security measures, actions of the UK and other governments, foreign currency exchange rate fluctuations, inflation, the economic environment of the airline industry, the general economic environment, the commencement or escalation of hostilities, terrorist activities, health scares, the ability to reach labor and wage agreements, industrial actions such as strikes, compensation levels in the industry, the status of the Company’s relationships with the union groups, and other factors discussed herein, including under “Item 3 — Key Information — Risk Factors”.

SPECIALIST TERMS

Available seat kilometres (ASK)
The number of seats available for sale multiplied by the distance flown.

Available tonne kilometres (ATK)
The number of tonnes of capacity available for the carriage of revenue load (passenger and cargo) multiplied by the distance flown.

Revenue passenger kilometres (RPK)
The number of revenue passengers carried multiplied by the distance flown.

Cargo tonne kilometres (CTK)
The number of revenue tonnes of cargo (freight and mail) carried multiplied by the distance flown.

Revenue tonne kilometres (RTK)
The revenue load in tonnes multiplied by the distance flown.

Load factor
The percentage relationship of revenue load carried to capacity available.

Passenger load factor
RPK expressed as a percentage of ASK.

Overall load factor
RTK expressed as a percentage of ATK.

Break-even load factor
The load factor required to equate total traffic revenue with operating costs.

Frequent flyer RPKs as a percentage of total RPKs
The amount of frequent flyer RPKs expressed as a percentage of total RPKs is indicative of the proportion of total passenger traffic that is represented by redemption of frequent flyer points in the year.

Revenue per RPK
Passenger revenue from airline operations divided by airline RPK.

Total traffic revenue per RTK
Revenue from total traffic (scheduled and non-scheduled) divided by RTK.

Total traffic revenue per ATK
Revenue from total traffic (scheduled and non-scheduled) divided by ATK.

Punctuality
The industry’s standard, measured as the percentage of flights departing within 15 minutes of schedule.

Regularity
The percentage of flights completed to flights scheduled, excluding flights cancelled for commercial reasons.

Unduplicated route kilometres
All scheduled flight stages counted once, regardless of frequency or direction.

Interest cover
The number of times profit before taxation and net interest payable covers the net interest payable.

Dividend cover
The number of times profit for the year covers the dividends paid and proposed.

Operating margin
Operating profit/(loss) as a percentage of turnover.

Net debt
Loans, finance leases and hire purchase arrangements, plus Convertible Capital Bonds, net of short-term loans and deposits and cash less overdrafts.

Net debt/total capital ratio (including operating leases)
Net debt as a ratio of total capital, adjusted to include the discounted value of future operating lease commitments.

Total capital
Capital and reserves plus net debt.

Net debt/total capital ratio
Net debt as a ratio of total capital.

Manpower equivalent
Number of employees adjusted for part-time workers, overtime and contractors.

Codesharing
Co-operation between two airlines where one airline sells tickets using its own flight code for other airline’s flight

n/a
Not applicable.

PART 1

Item 1 — Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2 — Offer Statistics and Expected Timetable

Not applicable.

Item 3 — Key Information

Selected Financial Data

The summarized financial information (expressed in pounds Sterling) set out below is derived from the audited consolidated Financial Statements of the Group presented elsewhere herein or otherwise included in BA’s annual reports and which were audited by Ernst & Young LLP, independent registered public accounting firm. The data should be read in conjunction with, and are qualified in their entirety by reference to, such Financial Statements and accompanying notes included elsewhere in this report.

Group Profit and Loss Account


	Year ended March 31

	2005			2005			2004			2003			2002			2001

							Restated			Restated			Restated

	(in millions, except per Ordinary Share amounts)

	$ (1)			£			£			£			£			£
Amounts in accordance with UK GAAP
Turnover		14,757			7,813			7,560			7,688			8,340			9,278
Cost of sales		(13,478	)		(7,136	)		(7,008	)		(7,263	)		(8,291	)		(8,757	)

Gross profit		1,279			677			552			425			49			521

Administrative expenses		(137	)		(137	)		(147	)		(130	)		(159	)		(141	)

Operating profit/(loss)		1,020			540			405			295			(110	)		380

Share of operating profit in associates		77			41			58			39			22			64

Total operating profit/(loss) including associates		1,097			581			463			334			(88	)		444

Other income and charges		6			3			—			(11	)		21			1
(Loss)/profit on sales of fixed assets and investments		(49	)		(26	)		(46	)		60			145			(69	)
Net interest payable and other finance income and related fees		(270	)		(143	)		(187	)		(248	)		(278	)		(226	)

Profit/(loss) before tax		784			415			230			135			(200	)		150

Tax		(282	)		(149	)		(85	)		(50	)		71			(69	)

Profit/(loss) after tax		502			266			145			85			(129	)		81

Equity minority interests		(2	)		(1	)		(1	)		—			(1	)		(2	)
Non-equity minority interests		(26	)		(14	)		(14	)		(13	)		(12	)		(12	)

Profit/(loss) for the year		474			251			130			72			(142	)		67
Dividends		—			—			—			—			—			(193	)

Retained profit/(loss) for the year		474			251			130			72			(142	)		(126	)


Earnings/(loss) per Ordinary Share (2)
Basic		44.2	c		23.4	p		12.1	p		6.7	p		(13.2	)p		6.2	p
Diluted		43.4	c		23.0	p		12.1	p		6.7	p		(13.2	)p		6.2	p
Basic weighted average number of shares		1,071			1,071			1,070			1,073			1,076			1,075

Diluted weighted average number of shares		1,126			1,126			1,070			1,073			1,078			1,085


Amounts in accordance with US GAAP (3):
Net income/(loss) for the year		676			358			396			(115	)		(123	)		244

Per Ordinary Share (3)
Basic
Net income/(loss) for the year		63.1	c		33.4	p		37.0	p		(10.7	)p		(11.4	)p		22.7	p

Diluted
Net income/(loss) for the year		61.4	c		32.5	p		36.1	p		(10.7	)p		(11.4	)p		22.5	p

Per American Depositary Share (4)
Basic
Net income/(loss) for the year		631	c		334	p		370	p		(107	)p		(114	)p		227	p

Diluted
Net income/(loss) for the year		614	c		325	p		361	p		(107	)p		(114	)p		225	p

Footnote on page 7

Balance Sheet


	At March 31

	2005			2005			2004			2003			2002			2001

							Restated			Restated			Restated			Restated

	(in millions, except per Ordinary Share amounts)
	$ (1)			£			£			£			£			£

Amounts in accordance with UK GAAP

Fixed assets
Intangible assets
Goodwill and landing rights		359			190			168			164			140			84

Tangible assets
Fleet, property and equipment		15,397			8,152			8,637			9,487			10,474			10,638

Investments		283			150			531			493			464			401


		16,039			8,492			9,336			10,144			11,078			11,123


Current assets		5,372			2,844			2,765			2,725			2,559			2,550

Creditors: amounts falling due within one year		(5,629	)		(2,980	)		(2,996	)		(2,904	)		(3,201	)		(3,308	)


Net current liabilities		(257	)		(136	)		(231	)		(179	)		(642	)		(758	)


Total assets less current liabilities		15,782			8,356			9,105			9,965			10,436			10,365


Creditors: amounts falling due after more than one year		(8,209	)		(4,346	)		(5,486	)		(6,553	)		(7,097	)		(6,901	)

Provisions for deferred tax		(2,347	)		(1,243	)		(1,137	)		(1,062	)		(1,031	)		(1,094	)
Provisions for liabilities and charges		(156	)		(83	)		(85	)		(107	)		(126	)		(70	)


		5,070			2,684			2,397			2,243			2,182			2,300


Capital and reserves
Called up share capital		512			271			271			271			271			271
Reserves		4,144			2,194			1,916			1,756			1,720			1,825


Total equity shareholders’ funds		4,656			2,465			2,187			2,027			1,991			2,096

Equity minority interest		23			12			10			10			9			18
Non equity minority interest		391			207			200			206			182			186


		414			219			210			216			191			204


		5,070			2,684			2,397			2,243			2,182			2,300


Amounts in accordance with US GAAP (3)

Fixed assets
Intangible assets
Goodwill and landing rights		223			118			93			91			434			395

Tangible assets
Fleet, property and equipment		15,367			8,136			8,626			9,264			10,073			10,209

Investments		277			147			570			530			505			488


		15,867			8,401			9,289			9,885			11,012			11,092


Current assets		7,463			3,951			3,681			3,370			2,983			2,687

Creditors: amounts falling due within one year		(6,190	)		(3,277	)		(3,248	)		(3,117	)		(3,378	)		(3,326	)


Net current assets/(liabilities)		1,273			674			433			253			(395	)		(639	)


Total assets less current liabilities		17,140			9,075			9,722			10,138			10,617			10,453


Creditors: amounts falling due after more than one year		(10,504	)		(5,561	)		(6,413	)		(7,058	)		(7,103	)		(6,911	)

Provision for deferred tax		(2,395	)		(1,268	)		(1,240	)		(1,120	)		(1,117	)		(937	)

Provisions for liabilities and charges		(156	)		(83	)		(85	)		(107	)		(126	)		(70	)


		4,085			2,163			1,984			1,853			2,271			2,535

Capital and reserves
Called up share capital		512			271			271			271			271			271
Reserves		3,159			1,673			1,503			1,366			1,809			2,060


Total equity shareholders funds		3,671			1,944			1,774			1,637			2,080			2,331

Equity minority interests		23			12			10			10			9			18
Non-equity minority interest		391			207			200			206			182			186

		414			219			210			216			191			204

		4,085			2,163			1,984			1,853			2,271			2,535

Footnote page 7


(1)	Translations of pounds Sterling into US Dollars have been made at the Noon Buying Rate on March 31, 2005 of £1.00 = US$1.8888.

(2)	See Note 12 to the Financial Statements for a discussion of the weighted average number of shares outstanding for basic and diluted calculations for the relevant period.

(3)	For fiscal 2005, BA prepared its Financial Statements in accordance with accounting principles generally accepted in the UK (“UK GAAP”) which differ in certain respects from US generally accepted accounting principles (“US GAAP”). A discussion of the significant differences between UK GAAP and US GAAP and reconciliations of net income and shareholders’ equity from a UK GAAP basis to a US GAAP basis are set out in Note 43 to the Financial Statements.

	Effective from April 1, 2004, the Group applied the provisions of ‘UITF Abstract 38 – Accounting for ESOP Trusts’ and, as a result, the Group’s investment in own shares held for the purpose of employee share ownership plans has been reclassified from fixed asset investments and is now recorded as a reduction in shareholders’ equity. Comparative periods have been restated to reflect the adoption of UITF Abstract 31.

	For Fiscal 2004 to Fiscal 2000, other finance income and related fees were shown with ‘other income’. For Fiscal 2005, such income is shown within net interest payable. As a result income reclassified to net interest payable was £13 million for Fiscal 2004 and £7 million for Fiscal 2003.

	Effective April 1, 2005 BA will prepare its Financial Statements in accordance with International Financial Reporting Standards (IFRS).

(4)	Each American Depositary Share represents ten Ordinary Shares.

Group Operating Statistics (1)


	Year ended March 31

	2005		2004		2003		2002			2001

			Restated		Restated		Restated			Restated

Airline Operations
*Traffic and capacity*
Revenue passenger km (RPK)(m)		107,892		103,092		100,112		106,270			123,197
Available seat km (ASK)(m)		144,189		141,273		139,172		151,046			172,524
Passenger load factor (%)		75		73		72		70			71
Cargo tonne km (CTK)(m)		4,954		4,461		4,210		4,033			4,735
Revenue tonne km (RTK)(m)		15,731		14,771		14,213		14,632			16,987
Available tonne km (ATK)(m)		22,565		21,859		21,328		22,848			25,196
Overall load factor (%)		70		68		67		64			67
Passengers carried (000)		35,717		36,103		38,019		40,004			44,462
Tonnes of cargo carried (000)		877		796		764		755			914
Frequent flyer RPKs as a percentage of total RPKs (%) (2)		3		4		4		4			3
*Financial*
Passenger yield (see definition under specialist terms) (p)		6		6		7		7			6
Cargo revenue per CTK (p)		10		10		12		12			12
Average fuel price (US cents/US gallon)		136		94		86		81			104
*Operations*
Unduplicated route km (000)		623		657		693		814			755
Punctuality (% within 15 minutes)		76		81		76		81			79
Regularity (%)		99		99		98		99			98

Total Group Operations
*Financial*
Interest cover (times)(3)		3.2		2.1		1.5		0.4			1.5
Operating margin (%)(4)		6.9		5.4		3.8		(1.3	)		4.1
Net debt/total capital ratio (%)(5)		42.7		54.1		60.9		66.2			64.7
Scheduled (passenger, freight and mail) and non scheduled services revenue per RTK (p)		44		47		50		52			50
Scheduled (passenger, freight and mail) and non scheduled services revenue per ATK (p)		31		32		33		33			33
Net operating expenditure per RTK (p)(6)		41		44		48		52			47
Net operating expenditure per ATK (p)(6)		29		30		32		34			32
Operations
Average manpower equivalent (MPE)		47,472		49,072		53,440		60,468			62,844
RTKs per MPE (000)		331.4		301.0		266.0		242.0			270.3
ATKs per MPE (000)		475.3		445.4		399.1		377.9			400.9
Aircraft in service at year end		290		291		330		360			338
Aircraft utilization (average hours per aircraft per day)		9.83		9.21		8.91		8.32			8.79


(1)	Operating statistics do not include those of associated undertakings (Qantas, Comair and Iberia) and franchisees (British Mediterranean Airways, GB Airways, Loganair, Sun-Air (Scandinavia) and Regional Air). The franchise relationship with Regional Air was terminated in April, 2005. Qantas ceased to be an associated undertaking in September, 2004.

(2)	The carriage of passengers on Frequent Flyer Programs is evaluated on a ticket by ticket basis.

(3)	The number of times profit/(loss) before tax excluding net interest payable covers the net interest payable. For the purposes of calculating the interest cover ratio, retranslation charges/(credits) and other finance income and charges are excluded from net interest payable as they are unrealized at year end. Interest cover is not a financial measure under UK GAAP or US GAAP. However, management believes this measure is useful to investors when analyzing the Company’s ability to meet its interest commitments from current earnings.

	The following table shows a reconciliation of net interest payable and the interest cover ratio for each of the five most recent financial years:


	Year ended March 31

	2005			2004			2003			2002			2001

				Restated			Restated			Restated			Restated

	(£ millions (except ratios))

Profit before tax		415			230			135			(200	)		150


Net interest payable		(143	)		(187	)		(248	)		(278	)		(226	)
Add back:
Retranslation charges/(credits)		(33	)		(16	)		8			(46	)		(71	)
Other finance income and charges		(14	)		(13	)		(7	)		—			—

		(190	)		(216	)		(247	)		(324	)		(297	)
Interest cover		3.2			2.1			1.5			0.4			1.5


(4)	Operating profit/(loss) as a percentage of turnover. Turnover comprises revenue from: passenger revenue (scheduled services and non scheduled services), cargo services and other revenue. See Note 2 to the Financial Statements with respect to turnover.


(5)	Net debt as a percentage of total capital.

	Net debt is defined as the total of loans, finance leases and hire purchase liabilities, plus Convertible Capital Bonds, net of short-term loans and deposits and cash less overdrafts. See Note 22 to the Financial Statements for details of the calculation of net debt.

	Total capital is defined as the total of capital, reserves, minority interests, net debt and deferred tax. Total capital and net debt/total capital percentage are not financial measures under UK GAAP or US GAAP. Similarly, net debt adjusted to include obligations under operating leases (as presented in “Item 5 – Operating and Financial Review and Prospects – Results of Operations”) is not a financial measure under UK GAAP or US GAAP. However, management believe these measures are useful to investors when analyzing the extent to which the Company is funded by debt compared to shareholders’ funds. Deferred tax has been added back in calculating total capital.

	The following table shows a reconciliation of total capital to total shareholders’ funds and the net debt/capital percentage for each of the five most recent financial years:


	At March 31

	2005		2004		2003		2002		2001

			Restated		Restated		Restated		Restated

	(£ millions (except ratios))


Net debt		2,922		4,158		5,149		6,294		6,223

Capital and reserves		2,465		2,187		2,027		1,991		2,096
Add minority interests		219		210		216		191		204

Total shareholders’ funds		2,684		2,397		2,243		2,182		2,300
Add back:
Net debt		2,922		4,158		5,149		6,294		6,223
Provision for deferred tax		1,243		1,137		1,062		1,031		1,094

Total capital		6,849		7,692		8,454		9,507		9,617


Net debt/capital percentage		42.7		54.1		60.9		66.2		64.7


(6)	Net operating expenditure is total operating expenditure less other revenue. Net operating expenditure, net operating expenditure per RTK and net operating expenditure per ATK are not financial measures under UK GAAP or US GAAP. However, management believe these measures are useful to investors as they provide further analysis of the performance of the Group’s main business activity i.e. airline operations. The Board of Directors reviews this measure internally on a monthly basis as an indication of management’s performance in reducing costs.

	The following table shows a reconciliation of net operating expenditure to total operating expenditure, total operating expenditure per RTK and total operating expenditure per ATK for each of the five most recent financial years:


	Year ended March 31

	2005			2004			2003			2002			2001

	(£ millions (except ratios))


Total operating expenditure		7,273			7,155			7,393			8,450			8,898
Less: other revenue		(831	)		(607	)		(614	)		(769	)		(846	)

Net operating expenditure		6,442			6,548			6,779			7,681			8,052

RTKs		15,731			14,771			14,213			14,632			16,987

ATKs		22,565			21,859			21,328			22,848			25,196


Total operating expenditure per RTK		46			48			52			58			52


Total operating expenditure per ATK		32			33			35			37			35

Exchange Rates

The Noon Buying Rate expressed in US Dollars to pounds Sterling as of June 30, 2005 was $1.793. The following table sets forth, for the periods and dates indicated, certain information concerning the Noon Buying Rate, expressed in US Dollars to £1.00. For a discussion of the impact of exchange rates on the Group’s business, see “Item 5 — Operating and Financial Review and Prospects — Other Matters — Foreign Currency Risk Exposure” and “Item 11 — Quantitative and Qualitative Disclosures about Market Risk – Foreign Currency Risk”.


	Period End		Average(1)		High		Low

	$		$		$		$
Fiscal year
2001		1.42		1.47		1.56		1.42
2002		1.43		1.43		1.48		1.37
2003		1.58		1.55		1.65		1.43
2004		1.83		1.68		1.90		1.55
2005		1.88		1.84		1.95		1.75

Month

January 2005						1.91		1.86
February 2005						1.92		1.86
March 2005						1.93		1.87
April 2005						1.92		1.87
May 2005						1.90		1.82
June 2005						1.84		1.79


(1)	The average of the Noon Buying Rates on the last day of each month during the fiscal year.

Risk Factors

This section describes some of the risks which could affect the business operations and results of the Group. There may be others (see also the cautionary statement regarding forward looking statements contained in the introductory note on page 3).

The commercial airline industry is highly competitive and the market for air travel has experienced, and will continue to experience, significant structural change. Further, the Group’s future performance is likely to continue to be subject to a variety of factors over which the Group itself has little or no control including, by way of example only, governmental regulation whether domestically within the United Kingdom, within the European Union or worldwide; fluctuations in the price of jet fuel; acts of terrorism, changes in economic conditions, the (non) availability of financing and fluctuations in currency and interest rates. The Group’s results may also be affected by information technology risks as well as by the uncertainties inherent in labor relations and the uncertainty of pension costs. There may well be other risks which emerge from time to time including war, changes in liquidity and capital resources and restrictions in the availability and scope of insurance.


•	Factors Generally Affecting Commercial Strategy & Performance

Planned Move to Terminal 5

In 2008, the Group expects to move into Terminal 5 at Heathrow. The construction of Terminal 5 is one of the largest construction projects in Europe. This project and the planned move bring with them significant risks and challenges, including completion risk, risks associated with moving and risks associated with starting operations in a new facility.

Commercial Strategy/Product Effectiveness

The Group strives to operate to its strategic and business plans. By reason of the matters listed above and discussed in this section, such plans may not always prove able to be implemented along the lines and in the timescales envisaged.

Competition

The markets in which the Group operates are highly competitive. The Group faces competition from other airlines on its routes, as well as from indirect flights, charter services and from other forms of transport. Some competitors have cost structures that are lower than the Group’s or have other competitive advantages. Fare discounting by competitors has historically had a negative effect on the Group’s results because the Group is generally required to respond to competitors’ fares to maintain passenger traffic.

Market/Economic Factors

The Group is dependent on passengers and cargo shippers to be able and willing to pay for carriage by air. This ability and willingness is influenced by economic and security conditions.

Alliances, Franchise & Subsidiary effectiveness

Controlled consolidation in the aviation industry has proven difficult to obtain. Accordingly, Alliances, Franchises and Subsidiaries are a part of the Group operation but necessarily control is or can be looser than in the case of owned operations.


•	Certain Business Disruption Risks

Loss of Systems – infrastructure/data

The Group is dependent on IT systems for delivery of its functions. It believes its IT systems and the systems provided by third parties to be reliable and well protected but they require regular updating and maintenance and are under constant threat from hackers/viruses.

Security

The Group believes its operations to be safe and secure but security matters have in the past and have the potential in the future to disrupt the business on temporary or longer term grounds.

Supplier failure

The Group is dependent on third parties, e.g. fuel suppliers, caterers, IT, for important aspects of its operation. It is essential that critical supplies should be maintained; if this were not so, operations would be disrupted and the business and results would suffer.

Fleet grounding or restriction

The Group operates a number of aircraft types. An accident or discovered defect could ground significant portions or all of the fleet.

Insurance Market failure

After the events of September 11, 2001, there was a market failure of the airline insurance market in the UK. It is possible that a further failure could occur, either wholly or in part.

Constrained operating infrastructure

Most UK airports, and Heathrow in particular, are constrained and operating beyond their build capacity. This can impair operations and adversely effect our business and results.

Medical – epidemics/pandemics/hygiene

Epidemics and pandemics (e.g. SARS) as well as other health risks may occur and would be beyond the Group’s control.

Loss of key buildings/airport infrastructure

Loss of access to or function of key infrastructure components such as terminal and hanger facilities would disrupt the business.


•	Factors that could increase operating and other Costs

Pensions shortfall

There is a substantial deficit in the Group’s pension funding and a high degree of uncertainty regarding future funding needs. The introduction of a pension regulator and a Pension Protection Fund in the UK is expected to increase costs.

Operating Costs

Operating costs increases are frequently outside of our control e.g. fuel costs and can have a significant impact on our results of operations.

Security costs

These have increased significantly since the events of September 11, 2001 and are a substantial part of the Group’s costs. It is possible that these will continue to increase at a substantial rate.

Claims against the Group that are not covered by or exceed Insurance

The Group believes its insurance cover would substantially mitigate the effect of claims likely to be brought against the Group in foreseeable circumstances but limits can always be broken or uncovered claims may emerge.

Financial commitments

The Group carries substantial debt which needs to be repaid or refinanced. The Group’s ability to finance its operations and capital needs may be affected adversely by various factors including financial market conditions. Most of the Company’s debt is asset-related, reflecting the attractiveness of aircraft as security to lenders and other financiers. However, there can be no assurance that aircraft will continue to provide attractive security for lenders.

Fleet Maintenance and Modernization

It is essential to the Group’s strategy that it maintain a high-quality fleet and this requires funds sufficient to support the upgrade and replacement of aircraft. The Group’s ability to follow this strategy would be jeopardized if the trading climate were to deteriorate substantially.

Market power and Importance of suppliers

In some areas it is difficult for the Group to spread its risk by sourcing from many alternative suppliers.

Political restrictions

Route rights and landing rights are often determined by the country of destination. If permissions are withdrawn our operations would be impaired and our business and results could be adversely affected.


•	Risks to Reputation/Public Confidence

Corporate Governance/Corporate Responsibility

The Group has detailed corporate governance and corporate responsibility programmes. Were they to fail, reputation and public confidence could be damaged.

Adverse publicity

Whether justified or not, adverse publicity can damage public confidence which in the end can damage our business and results.

Inadequate crisis management

If a crisis arises, the Group’s future business and results are likely to be substantially affected by the quality of its response to the crisis.


•	Legal & Regulatory Issues

Employment law

Worldwide and within the UK, labor activities and the balance between workers’ rights and shareholders’ interests is in flux. Increased labor activity or adverse labor market regulation could damage the operations and results of the Group.

Industry Regulation

Worldwide and particularly in the UK, airline industry is being increasingly regulated. Such regulation, including environmental regulation, does not generally enhance business or financial results and, accordingly, further increases in regulation could be damaging.

Competition law

Continued impairment of consolidation opportunities may restrict the Group’s ability to compete effectively in the marketplace.

National/International law

The Group operates under a large and complex body of national and international laws and regulations. Were these to cease to allow it to operate in any particular way or in any particular route, the Group’s business and results could be damaged.

Government Intervention and Support

State aid for the aviation industry, whilst not technically lawful in Europe, can still be provided. Also, the differing nature of the insolvency laws of different countries also distorts aviation markets. Disparate levels of government assistance between the Group and other airlines could place the Group at a competitive disadvantage and adversely affect operations and results.


•	Workforce/Heatlth and Safety Considerations

Industrial relations

The Group has a large unionized workforce. Collective bargaining takes place on a regular basis. A breakdown in the bargaining process could disrupt our operations and adversely affect our business and results.

Manpower levels/skills

The Group operates a highly technical business; if sufficient technically qualified staff from pilots to engineers and many others cease to be available, operations and results could be adversely affected.

Health & Safety at Work

The Group operates in a confined environment carrying out difficult and specialist tasks 24 hours a day 365 days a year. A major incident affecting the health and safety of staff would disrupt the operations of the Group.

Item 4 — Information on the Company

Introduction

British Airways is one of the world’s leading scheduled international passenger airlines. Its main activity is the operation of international and domestic scheduled passenger airline services. The Group’s principal place of business is London, one of the world’s premier airport locations, which serves a large geographical area and a comparatively high proportion of point-to-point business. The Group also operates a worldwide air cargo business in conjunction with its scheduled passenger services. The Group currently operates one of the world’s most extensive international scheduled airline route networks, comprising 149 destinations in 72 countries at March 31, 2005. In fiscal 2005, the Group carried more than 35 million passengers on its services.

British Airways Plc was incorporated in 1983 with Registered Number 1777777. It is domiciled in England and has its registered offices at Waterside, PO Box 365, Harmondsworth UB7 0GB, England, Telephone: +44 (0) 870 850 9 850. It is a public limited company organized and operating under the laws of England and Wales. Its agent in the US is Paul C. Jasinski, 75-80 Astoria Boulevard, Jackson Heights, NY 11370.

Strategic Developments and Investments

Background

In 2001, to mitigate the effects of the economic downturn prior to the events of September 11, 2001, the Group adopted a strategy of tight capacity management and cost control. After the events of September 11, 2001, as it became apparent that more drastic action was necessary, the Group undertook a comprehensive review of its cost structures, network operation, fleet complement and business strategies.

Future Size and Shape

In February, 2002, the results of this review were announced as part of a major package of measures designed to return the Group to profitability. This program, known as FSAS, signaled a significant change in the size of the Company and took further steps to restructure its cost base over the two years to March 31, 2004.

The FSAS program set out to simplify the business, to drive cost reduction (particularly manpower), to restructure the European shorthaul business to provide a competitive response to the no-frills carriers, to endorse and accelerate the Group’s existing fleet and network strategy unveiled in 1999 and to accelerate the strategy to ‘de-hub’ operations at Gatwick.

Cost Reduction

Cost reduction targets were exceeded for all the FSAS programs – manpower costs, distribution, procurement and information technology.

In addition to the cost programs, targets were also set and achieved for manpower, capital spend and disposals.

Restructuring of the Shorthaul Business

The FSAS program outlined further significant changes to the shorthaul business. These included changes to the shorthaul pricing structure, offering passengers lower fares and greater flexibility, which were rolled out from May, 2002. As part of the drive to reduce global distribution costs, payments to travel agents in the UK for shorthaul bookings have been reduced and BA’s lowest available fares are now available on its website. The website, www.ba.com, was significantly changed and usage has increased significantly with approximately 50% of shorthaul non-premium point-to-point bookings sold in the United Kingdom and Ireland now made online.

Fleet and Network Strategy

The fleet and network strategy aims to match capacity more closely to demand, simplify the fleet and reduce exposure to unprofitable markets whilst selectively growing capacity in profitable markets. Through increased aircraft utilization and network restructuring fleet numbers have steadily decreased. This process is nearing completion and in fiscal 2005 the number of aircraft in service was reduced by one to 290.

The Company’s overhaul of its wide-bodied aircraft is complete. Currently the Group has no further orders for wide-bodied aircraft. In shorthaul, six Airbus A321 aircraft were delivered during the year whilst three Boeing 737-400s were returned to lessors or stood down pending return to lessor and two Boeing 737-400s and one A320-200 were sub-leased. One de Havilland Canada DHC-8 turboprop was returned to its lessor.

BA has confirmed future deliveries for three Airbus A319s, three A320s and one A321.

See “Item 4 – Information on the Company – Airline Fleet”.

Gatwick Operations

In December, 2000 our plan to ‘de-hub’ Gatwick was announced. As a result of the changes and simplification introduced, the number of seats flying out of Gatwick by March, 2005 has more than halved since 1999. The Company now operates a fleet of 43 aircraft from Gatwick compared to 68 in 1999.

Simplification

Simplification of the business was a core principal of the FSAS program. It remains a key priority for the Company. While much progress has been made in the areas of fleet, IT, executive club and engineering inventory, to give a few examples, we believe more work can be done to make the business less complex for both our customers and our staff.

Business Plans

Given the challenging trading environment that the airline industry continues to face, the focus on controlling costs has not ended with the completion of FSAS. In conjunction with its annual business plan process, the Company has announced two further cost saving programs. The first measure, £450 million by March, 2005, focused on reducing external spend and further simplification, in particular giving customers and staff more online access to systems and procedures. This program was completed on schedule. The second program aims to remove £300 million of employee costs across the business by March, 2007, deferred from March, 2006.

British Airways CitiExpress

British Airways CitiExpress continued to simplify its operation during 2004/05, building on the work started in 2003/04. Since 2001 aircraft numbers have fallen by 35 and types from nine to four - - a further five aircraft (and another fleet type) will be taken out in 2005/06. The number of bases has also been reduced from 15 in 2001 to eight at the end of March, 2005. As a consequence of this simplification, operational performance is more robust, costs have fallen and financial results have improved. Further cost reductions are targeted in 2005/06.

Alliance benefits

The oneworld alliance includes eight airline members: British Airways, Aer Lingus, American Airlines, Cathay Pacific, Finnair, Iberia, LanChile and Qantas. Co-operation across the alliance in a number of areas benefits the customer and increases the airlines’ effectiveness. oneworld offers a substantial package of customer benefits, including reciprocal reward and recognition programs, common lounge access, smoother transfers, increased customer support and greater value.

Qantas

The relationship with Qantas, which is in its twelfth year, is British Airways’ longest standing and deepest alliance relationship. Under the Joint Services Agreement (JSA) there is full strategic, tactical and operational co-operation on all of British Airways’ and Qantas’ flights that serve markets between the United Kingdom/Continental Europe and Southeast Asia/Australia. This co-operation continues to strengthen and provides customers with improved flight departure times, routings and value for money, offering the very best of customer service to all passengers. In February, 2005, the Australian Competition and Consumer Commission extended permission for both carriers to co-operate in this way for a further five years. Application has also been made to the UK Office of Fair Trading and the EU competition authorities and their ruling is outstanding at this time.

British Airways and Qantas continue to co-ordinate sales and marketing activities worldwide and to share all costs and revenues on the JSA routes, giving both companies an incentive to improve the joint business.

On September 9, 2004 the Group completed the sale of its 18.25% holding in Qantas through a book build sale of the shares, thereby reducing debt and continuing to strengthen our balance sheet. The sale realized gross proceeds of £427 million. The loss on disposal of £11 million includes a write-off of goodwill of £59 million previously set off against reserves.

American Airlines

American Airlines and BA continued to roll out codesharing on points behind and beyond the US and London gateways. BA now places its code on more that 120 American routes, whilst American Airlines applies its code to more than 80 BA routes.

Iberia

In December, 2004, British Airways and Iberia signed a Joint Business Agreement (‘JBA’) to establish profit-sharing on two routes, Heathrow-Madrid and Heathrow-Barcelona. This was accompanied by joint selling and the co-ordination of schedules on these routes from Summer 2005.

British Airways and Iberia codeshare on more than 65 domestic and international routings. As well as all UK-Spain routes, this includes Iberia codesharing on services operated by British Airways franchise carriers GB Airways and Comair, and British Airways codesharing on services operated by Iberia franchise Air Nostrum. The airlines carried over 700,000 codeshare passengers during fiscal 2004/05.

As at March 31, 2005 British Airways held an 8.76% stake in Iberia. Iberia’s profit before tax for the 12 months to December 31, 2004 (included in the fiscal March 31, 2005 result) was €283.2 million, compared to a profit before tax last fiscal year of €201.7 million.

Aer Lingus

In September, 2004, BA and Aer Lingus removed all but three of the fifteen codeshares that had been in place, in order to focus efforts on selling the routes of greatest value to both partners and to reduce costs.

Swiss International Air Lines

A commercial agreement with Swiss International Air Lines was concluded in September, 2003. The proposal for Swiss to merge its frequent flyer program into the BA Executive Club and go on to join oneworld was rejected by Swiss in June, 2004 and BA agreed to release Swiss from its obligations under the commercial agreement. A new agreement was reached for Swiss to codeshare on BA’s Heathrow-Geneva services.

Segmental Information

BA’s principal activities are the operation of international and domestic scheduled air services for the carriage of passengers and cargo. BA’s main business is the provision of scheduled passenger services, which accounted for approximately 83% of Group revenue in the year ended March 31, 2005.

The Group also provides other services to outside parties, such as aircraft maintenance. In addition, the Group’s operations include certain ancillary airline activities. See “Ancillary Airline Activities” below.

The following table sets out the Group’s revenue by business activity:


	Year ended March 31

	2005		2005		2004		2003

	(in millions)
	$		£		£		£
Traffic revenue
Passenger revenue		12,277		6,500		6,490		6,590
Cargo		910		482		463		484

		13,187		6,982		6,953		7,074
Other revenue (including aircraft maintenance, package holidays and other airline services)		1,570		831		607		614

		14,757		7,813		7,560		7,688

Geographical Analysis

The following table sets out the Group’s results by geographical area.


	Year ended March 31

	2005			2005			2004			2003

	(in millions)
	$			£			£			£
Turnover by area of original sale(1)
UK		7,408			3,922			3,731			3,634
Continental Europe		2,219			1,175			1,209			1,269

Europe		9,627			5,097			4,940			4,903
The Americas		2,612			1,383			1,347			1,482
Africa, Middle East and Indian sub-continent		1,419			751			717			733
Far East and Australasia		1,099			582			556			570

		14,757			7,813			7,560			7,688

Turnover by area of destination(2)
UK		1,150			609			664			725
Continental Europe		3,515			1,861			1,975			2,113

Europe		4,665			2,470			2,639			2,838
The Americas		5,447			2,884			2,767			2,763
Africa, Middle East and Indian sub-continent		2,667			1,412			1,253			1,201
Far East and Australasia		1,978			1,047			901			886

		14,757			7,813			7,560			7,688

Operating profit/(loss) by area of destination(3)
Europe		(49	)		(26	)		(60	)		(117	)
The Americas		655			347			294			223
Africa, Middle East and Indian sub-continent		423			224			210			168
Far East and Australasia		(9	)		(5	)		(39	)		21

		1,020			540			405			295


(1)	Turnover by area of original sale is derived by allocating revenue to the area in which the sale was made.

(2)	Turnover from domestic services within the UK is attributed to the UK. Traffic revenue from inbound and outbound services between the UK and overseas points is attributed to the geographical area in which the relevant overseas point lies. Other revenue from the sale of package holidays is attributed to the geographical area in which the holiday is taken, while revenue from aircraft maintenance and other miscellaneous services is attributed on the basis of customer residence.

(3)	Operating profit resulting from turnover generated in each geographical area according to origin of sale is not disclosed as it is neither practical nor meaningful to allocate the Group’s operating expenditure on this basis.

See “Item 5 — Operating and Financial Review and Prospects — Year By Year Analysis — Year ended March 31, 2005 compared with year ended March 31, 2004 – Geographical Analysis” and “Item 5 – Operating and Financial Review and Prospects – Year By Year Analysis – Year ended March 31, 2004 compared with year ended March 31, 2003 - Geographical Analysis.”

Route Network

BA’s scheduled route network forms the basis of its business and is one of the world’s most extensive. As of March, 2005, BA (including subsidiary carrier British Airways CitiExpress) served some 149 destinations in 72 countries. Including codesharing and franchise arrangements, flights with BA codes served some 346 destinations in 104 countries. Adding the services of BA’s alliance partners, the global network served some 558 destinations in 130 countries.

During the year ended March, 2005, BA introduced services to Basle, Cagliari, Catania, Split, Thessaloniki and Vilnius. Services to Bilbao, Bogota, Caracas, Genoa, Jeddah, Knock, Riyadh, and the Seychelles were discontinued. Routes to Bennecula, Shetland and Stornoway were transferred to franchisee Loganair.

Airline Fleet

Details of the Group’s fleet at March 31, 2005 are set out below:


	Number in service with Group companies at March 31, 2005

	On balance sheet aircraft		Off balance sheet aircraft		Total		Future deliveries		Options		2004-05 revenue hours flown		Average hours per aircraft/ day		Average age (years)

Airline operations (1)
Boeing 747-400		57				57						269,468		12.95		10.8
Boeing 777		40		3		43						202,833		12.92		6.3
Boeing 767-300		21				21						74,600		9.73		12.1
Boeing 757-200		13				13						34,190		7.21		10.5
Airbus A319 (2)		21		12		33		3		47		101,234		8.4		4.4
Airbus A320 (3)		9		17		26		3				77,808		7.92		7.7
Airbus A321		6				6		1				6,505		7.67		0.5
Boeing 737-300				5		5						15,590		8.54		15.7
Boeing 737-400 (4)		18				18						59,550		8.26		12.6
Boeing 737-500				10		10						31,506		8.63		12.7
Turboprops (5)				9		9						25,338		5.2		8.4
Embraer RJ145		16		12		28				17		75,927		7.43		5.1
Avro RJ100				16		16						43,028		7.37		5.6
BAe 146 (6)		5				5						13,300		7.29		18.5
Hired aircraft												22,171

Group total		206		84		290		7		64		1,053,048		9.83		8.5


(1)	Includes those operated by British Airways Plc and British Airways CitiExpress Limited.

(2)	Certain future deliveries and options include reserved delivery positions and may be taken as any A320 family aircraft.

(3)	Excludes one Airbus A320 sub-leased to GB Airways.

(4)	Excludes two Boeing 737-400s sub-leased to Air One and one Boeing 737-400 stood down pending return to lessor.

(5)	Comprises nine de Havilland Canada DHC-8s. Excludes two British Aerospace ATPs stood down pending return to lessor, three British Aerospace ATPs sub-leased to Loganair and 12 Jetstream 41s sub-leased to Eastern Airways.

(6)	The British Aerospace 146 fleet will be retired from service during 2005/06.

In the five-year period ended March 31, 2005, 55 new (British Airways Plc, British Airways CitiExpress) aircraft were purchased or acquired under finance leases representing a total capital investment of approximately $2,311 million. 26 new aircraft with an initial purchase price to the lessors of approximately $577 million were obtained under operating leases, and a further seven used aircraft, with an approximate market value of $254 million, were obtained under short-term operating leases. In the same period, 120 aircraft were disposed of from the BA fleet.

Future Fleet Commitments

During fiscal 2005, BA made further changes through revised delivery dates to future fleet commitments, to facilitate its continuing strategy to match capacity more closely to profitable demand and in response to changes in market conditions and operational requirements.

BA has confirmed future deliveries for three Airbus A319s, three Airbus A320s and one Airbus A321. The company has agreed to sell on a further three Airbus A321 future deliveries to GB Airways. BA also has 47 option positions / purchase rights on the Airbus family aircraft.

Aircraft fleet

The number of Group aircraft in service at March 31, 2005 was 290, a reduction of one on the prior year. Aircraft returned to lessors comprised two Boeing 737-400 and one de Havilland Canada DHC-8. In addition, two Boeing 737-400s were sub-leased to Air One, as was one Airbus A320-200 to GB Airways and one Boeing 737-400 aircraft was stood-down pending return to lessors. Deliveries comprised six Airbus A321 aircraft.

Financing

A total of six new aircraft were delivered during the year ended March 31, 2005. Two of these were financed on balance sheet through US Dollar denominated mortgage loans and four were purchased for cash.

In addition the Company entered into one sale and leaseback transaction relating to owned aircraft. This was a Boeing 777-200 for a period of ten years and was carried out as part of the Company’s management of its residual exposure to this fleet type.

As at March 31, 2005, the Company had cash and deposits, which in total amounted to £1,682 million. In addition, the Company had undrawn long-term committed aircraft and general financing facilities totalling approximately US$460 million and undrawn money market lines totalling £46 million.

The Company believes that its cash and long-term deposits, together with the facilities which are available to be drawn for aircraft deliveries will be more than sufficient to cover its outstanding aircraft purchase commitments.

Capital Expenditures

See “Item 5 – Operating and Financial Review and Prospects – Year by Year Analysis – Year ended March 31, 2005 compared with year ended March 31, 2004 – Capital expenditures” and “Item 5 – Operating Financial Review and Prospects – Year by Year Analysis – Year ended March 31, 2004 compared with year ended March 31, 2003 – Capital expenditure”.

Operations

Operational Centers

Heathrow is BA’s principal base, and BA carries an estimated 39.7% of the airport’s passengers. In addition, BA has a second base of operations at Gatwick. The construction of a fifth passenger terminal (‘Terminal 5’) at Heathrow has commenced and BA expects to consolidate substantially all of its operations into Terminal 5. UK airport policy is discussed below under “Item 4 — Information on the Company — Regulation — UK and International Airport Policy”.

Offices, maintenance hangars and other support facilities used by BA at Heathrow, Gatwick and other UK airports are either owned freehold or held under long-term leases from the respective airport owners, principally BAA plc or its subsidiaries. In addition, BA occupies space and desks under lease or license in airports throughout the UK including (but not limited to) Manchester, Birmingham, Newcastle, Edinburgh and Glasgow.

BA’s most important overseas base is at New York’s John F. Kennedy International Airport (“JFK”), where it leases its terminal building. At other overseas airports, BA generally obtains premises as required on a short-term basis from the relevant authorities.

Details of BA’s principal non-aircraft properties are given under “Item 4 — Information on the Company — Property, Plant and Equipment”.

Operational Services

In the UK, BA itself provides most of the operational services it requires for the handling of passengers and cargo. At overseas airports, BA subcontracts the provision of the majority of its ground handling requirements.

Runway, ramp and terminal facilities are provided by airport operators that charge airlines for the use of these facilities, principally through landing, parking and passenger charges. Navigation services are provided to aircraft by countries through whose airspace they fly or by international bodies such as Eurocontrol. Navigation charges are generally based on distance flown and weight of aircraft.

BA’s ability to obtain slots at airports for the purpose of producing schedules attractive to passengers is very important. Allocation of slots at a significant number of airports where BA operates, including Heathrow and Gatwick, is decided by the Airport Coordinator, who acts in accordance with guidelines laid down by the International Air Transport Association (“IATA”), sometimes supported by the local Scheduling Committee or Co-ordination Committee. These committees include representatives from the carriers flying to the relevant airport who may mediate disputes over slots. The Airport Coordinator makes the initial slot allocations within IATA guidelines, which give priority to the historic rights of existing users. Pursuant to Council Regulation (EC) No. 793/2004, which is implemented in accordance with UK regulations, the UK government must ensure the Airport

Coordinator advises BA at the biannual IATA Schedule Co-ordination Conference of their slot allocations. These provide the basis for slot negotiations with the Airport Coordinator and other airlines. Most congested airports in the world apply IATA guidelines. Co-ordination of European airports is governed by the Council Regulation. Pursuant to the Council Regulation, the UK government must ensure that the Airport Coordinator acts independently and in a non-discriminatory manner. Regulations governing the allocation of slots in the US are different, but the US has stated that it is committed by its international obligations to treat all carriers in a non-discriminatory manner.

Fuel

BA obtains aviation fuel, which is priced mostly in US Dollars, from a number of sources and locations throughout its network. In most countries, aviation fuel is supplied under term contracts, generally with major oil companies. Most fuel is purchased from suppliers under contracts, which have a duration of one or two years. Prices under these contracts are determined either by formulae applicable for the duration of the contract or are subject to review by the parties in light of market conditions. If agreement on a price adjustment is not reached, the contracts can normally be terminated. BA also enters into forward contracts and other hedging arrangements in an attempt to counter fluctuations in the price of jet fuel. See “Item 11 — Quantitative and Qualitative Disclosures about Market Risk – Fuel Risk”. In the UK and US, BA is a member of a number of consortia that own or lease fuel distribution facilities at certain airports so that aviation fuel may be purchased from a wide range of suppliers. In both the UK and the US, BA also buys aviation fuel in the spot market and in the futures market. In certain countries, aviation fuel is only obtainable through government sources.

Aircraft Maintenance

The Group’s engineering and maintenance facilities are centered at Heathrow, Gatwick, Glasgow and at three facilities in South Wales: the Boeing 747 maintenance facility at Cardiff Airport, an avionics repair operation in Llantrisant and an aircraft seat and interior repair operation at Blackwood. In addition, maintenance capability exists at most airports served by BA.

Marketing and Sales

Longhaul Products

On longhaul services, BA has a portfolio of four cabins to suit the needs of different customers: First, Club World with its award-winning flat beds, World Traveller Plus, which offers more space and legroom for premium economy customers, and World Traveller, the standard economy cabin.

During fiscal 2004, BA continued to roll out its Club World flat bed, and World Traveller Plus cabin. By March, 2005 103 of the longhaul fleet were fully embodied with the new products, including all of the Heathrow Boeing 747and Boeing 777 fleets together with all ten longhaul aircraft operating out of Gatwick.

Over the course of the year BA improved meal service in the Club World cabin and introduced a new Chiva Som spa-cuisine menu in First. Improvements in World Traveller targeted at families included a new family-friendly menu and entertainment pack.

Shorthaul Products

On shorthaul services BA provides a choice of two cabins: Club Europe, its business class cabin, and Euro Traveller, its economy cabin. On UK domestic services one cabin is available.

BA’s premium shorthaul travellers have enjoyed improvements to their in-flight experience with the launch of a new onboard service and range of meals in Club Europe. The airline has also successfully increased the number of leisure travellers in the Club Europe cabin with the introduction of special upgrade fares on targeted routes.

During Fiscal 2004, BA’s shorthaul customers saw a series of new services offered on the airline’s website, ba.com. These included improved booking, the ability to change tickets online and clearer, simpler fare rules being displayed. In addition to our online check-in service, BA introduced online boarding pass at Edinburgh in February, 2004, allowing customers to print their own boarding pass at home or in the office and go straight to the gate upon arrival at the airport. By March, 2005 there were 36 European and UK locations that offered online boarding pass.

Updated and relocated Self-Service Check-in kiosks have ensured increased usage by customers and helped them move more quickly and efficiently through the airport. In March, 2005, 23% of all customers checking-in at self-service European and UK airports used such a kiosk, a notable growth on the previous year.

Executive Club

The Executive Club is BA’s worldwide customer loyalty program for recognizing, retaining and communicating with our most valuable customers. The Executive Club seeks to provide an exceptional level of service, preferential treatment, enhanced travel related benefits, as well as mileage awards on eligible fares.

Sales

British Airways has built and maintains relationships with all its key customer groups around the world (both in countries where it flies as well as selected other countries). This includes large corporations, small and medium sized enterprises, governments, tour operators, individual customers, etc. Relationships are also maintained with business and leisure travel agents and the computer reservation systems and the credit card companies. In addition, BA itself operates contactBA call centers around the world, airport ticket desks, BA Travel Shops and our on-line booking channel, ba.com.

Franchising

As at March 31, 2005, BA had six franchise partner airlines: Loganair, GB Airways, British Mediterranean Airways, Sun Air of Scandinavia, Comair of South Africa and Regional Air of Kenya. However the franchise with Regional Air of Kenya ended in April, 2005 following Regional Air’s suspension of operations.

These six carriers carried approximately 4.23 million passengers during the fiscal year to 83 destinations (65 destinations in addition to the mainline network) in the UK, continental Europe, the Middle East and Africa, using BA flight numbers. In addition to providing connecting passengers to BA’s mainline services, the franchisees pay a franchise fee and pay for any services provided to them by British Airways.

Other Alliance relationships

In addition to the above mentioned activities BA maintained alliance relationships with Cathay Pacific, America West, Lan Chile, JAL and SN Brussels Airlines. There were no events of note during the year with these relationships.

Computer Systems

High performing IT and telecommunications systems are vital to the running of the Group’s business. Most areas of British Airways’ business are facilitated by IT systems, which are closely interconnected.

Many of these systems have been developed, and most of them integrated, by BA’s Information Management (Im) department. The majority of systems are operated within BA’s two data centre facilities at Heathrow. Major exceptions to this are Reservations, Departure Control (check-in), Inventory, Flight Planning and other transaction processing facility (TPF) platform systems, which are operated by Amadeus SA in Germany.

The following major technical infrastructure elements are provided to BA by third party suppliers:


	•	The wide-area data network – provided by SITA and other telecommunications suppliers
	•	The campus network in London – provided by Affiniti Limited
	•	Desktop, provision and support – provided by Specialist Computer Centres (SCC) in the UK and SITA for overseas.

Over the last year a core element of the IT strategy has been to support simplification of the airline’s business processes through effective use of IT. We have achieved this through a number of initiatives including the customer enabled BA (ceBA) program, providing on-line selling and check in, the ability to upgrade and manage booking facilities. The Customer enabled program is about making BA so easy to do business with that our customers actively choose to serve themselves. We apply the same principles internally for our employees through our Employee Self Service programme.

For instance the ‘Manage My Booking’ feature gives our customers the ability to be more prepared for their journey before coming to the airport. They can complete their APIS (Advanced Passenger Information Service) data in advance, check-in online and print their boarding pass, exercise upgrade options and know their baggage allowance.

Another important element is the use of e-ticket and the introduction of self-service kiosks at key airports around the world. The airline has now installed over 200 kiosks in airports such as Heathrow, New York JFK and Charles De Gaulle. e-ticket continues in its growth. As at March 31, 2005 76% of all worldwide passenger journeys ticketed by BA worldwide were issued on e-tickets.

In February this year we were the second airline in the world to implement the Amadeus Altea Plan system which gives airlines control over their inventory and seat planning, providing the tools to maximise the yield on every seat, while recognising the value of each customer. This system is now fully integrated with our selling capability Altea Sell also provided by Amadeus.

As a company listed on the New York Stock Exchange, BA has to comply with the US Sarbanes-Oxley Act of 2002. As a foreign issuer, the deadline for Section 404 compliance has been extended to March 31, 2007. We have completed a full gap analysis of all the requirements for Section 404 compliance and have a number of projects underway to support compliance.

Cargo

BA’s cargo business is operated as a contribution center. The majority of its cargo is carried in the holds of passenger aircraft, the balance on leased or part-chartered freighter aircraft where market conditions allow their deployment. This allows the Group to maximize the use of its scheduled route network to provide a worldwide cargo service. In Europe, the Group utilizes trucks to feed cargo from continental Europe to BA’s Heathrow and Gatwick based intercontinental services.

Ancillary Airline Activities

Other Services

The Group provides a variety of services to other airlines. The most important of these are cargo handling at airports, airframe maintenance, computer and communications services and consultancy services.

Eurostar

In 1999, BA took a 10% equity stake in Inter-Capital & Regional Rail Limited (“ICRRL”), a consortium company jointly held with National Express Group plc along with the French and Belgian railway companies, SNCF and SNCB, which was selected by the UK government to manage Eurostar UK Ltd (“EUKL”). EUKL is responsible for operating Eurostar trains between London, Lille, Paris and Brussels. The contract expiry date is December 31, 2010.

Under the terms of the contract with EUKL, ICRRL receives an annual management fee and is subject to a mechanism allowing it to share in the upside or downside of EUKL’s performance by reference to a pre-determined forecast. In February 2005, ICRRL shareholders were required to contribute additional funding to the company to enable it to satisfy its obligations under the performance mechanism for its year ended December 31, 2004. In 2005 BA’s share of this funding requirement was £558,052. In February, 2004, BA’s share of the funding requirement was £968,000.

Seasonal Variations

Traditionally, the Group earns most of its operating profit between April and October each year, as demand is higher during this period, whilst the majority of the Group’s costs are incurred more evenly throughout the year. Accordingly, as a result of seasonality of demand, operating results have and are expected to vary significantly from period to period within the financial year. Various other factors, including those set forth in this report, can also cause operating results to vary significantly from period to period and year to year. These variations in results and other factors may cause the price of the Company’s securities to fluctuate significantly.

Health Concerns: Occupational Health Service

Health concerns are one of the factors that can adversely affect demand for air travel. For example, in the Spring of 2003, an outbreak of SARS caused concerns among many travelers about the spread of the disease and related health issues. This resulted in a decline in demand for certain of the Group’s routes, most notably in

routes involving the Far East. Future health concerns that affect the demand for air travel generally, or the demand for air travel involving a geographic area, could have an adverse affect on the Group’s operations and financial results.

BA maintains an occupational health service whose responsibilities include the analysis of health-related issues for passengers and staff and the provision of advice to the Group on appropriate measures to take in response to such issues. British Airways Health Services remains constantly vigilant to the threat of emerging diseases. Experts in communicable diseases have warned of the risk of a pandemic flu outbreak and the airline has set up a contingency planning group to address this specific risk. Members of the group are working with government and non-government organizations, including the WHO, UK Government and IATA, to ensure a co-ordinated response.

Regulation

The international airline industry is subject to a high degree of global, European and UK government regulation covering most aspects of airlines’ operations. This framework governs commercial activity (for example route flying rights, fare setting and access to airport slots) as well as operational standards (relating to areas such as safety, security, aircraft noise, immigration and passenger rights). British airlines are also affected by wider EU and UK policies, laws and regulation, particularly in relation to competition, airports and air traffic control.

The UK civil aviation industry is regulated by the Secretary of State for Transport and the Civil Aviation Authority (“CAA”), an independent statutory body. Under the UK Civil Aviation Act 1982 and various statutory instruments, the CAA has a wide range of functions in relation to British airlines, including supervision of many aspects of their financial condition, management and operations. European airlines are also subject to a number of EU regulations, drawn up under the provisions of the European Treaty (chiefly Article 71). Responsibility for enforcement is shared between the European Commission and the relevant Member States.

The present basis for international regulation of airline operations derives from the Chicago Convention of 1944, to which nearly all countries are parties. The Convention also established the International Civil Aviation Organization (“ICAO”), a specialized agency of the United Nations, to foster the planning and development of international air transport. Under the auspices of ICAO, rules establishing minimum operational standards are normally agreed on a multilateral basis. Airlines’ rights to fly over, or make stops in, foreign countries for technical reasons in operating their international scheduled services are generally derived from the International Air Services Transit Agreement of 1944, to which most countries are parties. However, rights to carry traffic between countries and the regulation of fares are normally agreed on a bilateral basis between governments. A notable exception is the multilateral single market arrangements which apply within the EU.

Route Flying Rights

BA’s traffic rights to carry scheduled passengers and cargo on particular international routes outside Europe generally derive from air services agreements between the UK government and the governments of foreign states concerned. Under these agreements, each government grants to the other the right to designate an airline or airlines of its state to operate scheduled services between specified points in their respective countries, and sometimes to or from points in third countries, although this also requires the agreement of the third country’s government.

In order to comply with EU law, all new or revised bilateral agreements should now contain a community designation clause in place of the nationality clause (which requires that designated airlines are substantially owned and effectively controlled by the government or its nationals). This will allow any EU airline, not just those with the nationality of the EU State, to apply for available traffic rights on a non-discriminatory basis. Currently, most UK agreements still reserve traffic rights to UK airlines, but this is likely to change over time as the agreements are renegotiated and updated.

Once an agreement has been reached, it is for the UK government to designate the airline or airlines which will operate the agreed services. As well as being designated, an airline must obtain the necessary operating permits from the foreign governments concerned. These are unlikely to be withheld so long as the Group meets the required international safety standards. One ground on which a contracting government usually has the right to prevent a designated airline from operating the agreed services is if it is not satisfied that the Group is substantially owned and effectively controlled by the other government or its nationals (or by EU citizens if there is a Community clause). For this reason, BA’s Memorandum and Articles of Association (the “Articles”) contain provisions that could be used to limit the rights of non-UK and non-European nationals who own shares in the Company. For more information, see “Item 10 — Additional Information — Memorandum and Articles of Association — Limitations on Voting and Shareholding”.

The Council of the EU decided in June 2003 to begin the process of transferring responsibility for third country relations in air transport to the European Commission. The Council then gave a mandate to the Commission to negotiate a liberal agreement with the US on behalf of all EU Member States. A general framework was developed covering all other third country relationships and the processes whereby Member States may continue to negotiate bilaterally whilst remaining within EU law as clarified by the Judgment of the European Court of Justice of November, 2002. This judgment made it clear that Member States could no longer negotiate bilaterally with third countries on any subject which is covered by EU law. These subjects include ownership and control of airlines, pricing on intra-community routes and rules concerning computer reservation systems.

The European Commission has been in active negotiations with the US government to agree the terms of a new multilateral agreement covering air services between the whole EU and the US. So far, it has not proved possible to conclude a balanced deal, but both sides are determined to reach such an agreement, making the prospect of doing so a high probability. However, the timing and content of the new agreement cannot be predicted. A new agreement is likely to affect BA’s position on North Atlantic markets.

In the EU, there is a single internal market for air transportation. The most significant elements of the single market legislation are a liberal pricing regime, free access to all routes within the EU for airlines and a carrier licensing procedure. Certain constraints continue to apply for infrastructure reasons. Under a separate agreement, EU single market policies have been extended to the European Economic Area (“EEA”) comprising all the countries of the EU and the countries of the European Free Trade Area (“EFTA”) except Switzerland. Agreement has been reached between Switzerland and the EU which has the effect of bringing Switzerland into the same arrangements.

Under the UK Civil Aviation Act 1982, the CAA must balance a number of objectives in making air transport or route licensing decisions where applications to operate a particular route are contested. These include encouraging British airlines to provide air services at the lowest fares consistent with safety; an economic return to efficient operators and the sound development of the UK air transport industry; furthering the reasonable interests of users; ensuring that British airlines compete as effectively as possible with other airlines on international routes; and securing the most effective use of UK airports.

The CAA will grant global route licenses for scheduled and charter air services. The absence of the necessary bilateral rights will not result in refusal to grant a license application. If scarce bilateral capacity arises, this will be addressed through a process designed to deal with such a situation.

In its June, 2002 policy review, the CAA said that the interests of users will be best served if airlines are free to operate air services in competition with one another according to their commercial judgments, subject only to the application of normal competition policy.

Specific route licenses are no longer required with respect to routes to, from and within the EU.

Charter operations are not generally covered by air services agreements. The CAA adopts a broadly liberal policy towards applications from British airlines for charter flying rights. It is then for the airline to seek the consent of the other government. Within the EEA no distinction is drawn between charter and scheduled operations.

Fare Setting

It is a provision of some bilateral air services agreements that the fares, rates and charges for scheduled services on the agreed routes must be filed with, and approved by, both governments concerned or their agencies. These requirements are increasingly being relaxed in accordance with UK Government policy. It is a condition of the air transport and route licenses granted to British airlines by the CAA that the tariffs to be charged for international carriage and the commissions to be paid by the airline to any agent shall be filed with and approved by the CAA. In practice, the CAA only regulates a limited number of fares and does not require commissions to be filed. Under some air services agreements, airlines are required to co-ordinate fares through IATA, (whose role in setting fares is described under “Item 4 — Information on the Company — Competition” below), though this is now rare. Pricing on intra-Community air routes is covered by EU Regulation.

Notwithstanding this regulatory position, it is a widespread practice among airlines to sell a substantial proportion of their seats and cargo space in many parts of the world at tariffs lower than the approved levels or on other unapproved special terms. BA is no exception. See “Item 4 — Information on the Company — Competition” below. The Group responds competitively to market conditions and a large proportion of its revenue is derived from such sales.

Safety

Safety standards are generally agreed on a multilateral basis under the auspices of ICAO. The country of registration of an aircraft is generally responsible for ensuring that the aircraft and its crew meet these guidelines, leading to variations and differences on specific requirements between States. European countries first attempted to harmonize their safety requirements through the Joint Aviation Authorities and non-binding Joint Aviation Requirements. Certification of compliance by the state of registry is normally recognized by all other members of ICAO.

In September, 2003, airworthiness and maintenance standards, based largely on ICAO and JAA standards, were adopted into EU law and a new independent European Aviation Safety Agency was set up to advise the Commission and Member States on safety matters. The new safety framework is consistent with ICAO requirements. Member States are still responsible for supervision and compliance but they can no longer unilaterally vary standards in these areas except to respond to an immediate safety problem or to facilitate a short term operational need provided that safety is not compromised. Other areas of aviation safety, starting with operations and licensing, are expected to come under the new EU framework within the next few years.

British airlines are still required, except in limited circumstances, to operate British registered aircraft. All British airlines are required to hold a CAA air operator’s certificate confirming the competence of the holder to operate and maintain its aircraft safely. Each aircraft operated under an air operator’s certificate may only be flown if it has a certificate of airworthiness confirming compliance with the EU regulations. The aircraft’s engines, equipment and all maintenance procedures must also be certificated, and flight crew and certain maintenance staff must be licensed.

To continue to improve high safety standards is a primary objective of the Group. All departments, especially engineering and flight operations, pay continual attention to operational safety and the health and safety of employees. Specific responsibility for advising on safety matters rests with a separate department under the Director of Safety, Security and Risk Management. A formal safety management system is in place, and a comprehensive monitoring system exists within BA to ensure that incidents are reported and action is taken whenever appropriate.

Security

In the UK, the Secretary of State for Transport has the power to direct the aviation industry to take measures to prevent acts of criminal violence. The measures so directed often exceed both the international standards developed by ICAO and the regulations adopted in the EU following September 11, 2001 which set minimum required standards across the EU for the first time. Responsibility for implementing the measures and meeting their costs falls on both airlines and airport authorities. A number of foreign countries have also developed aviation security programs which place an onus on BA to meet specified security standards. BA’s own security department continuously assesses the threat to its operations, develops policies for the protection of BA’s operations and assets, and directs its staff or agents to implement appropriate countermeasures while monitoring their effectiveness. There are also circumstances in which governments may seek to prevent airlines from flying to or from various destinations or otherwise hinder their operation. Similarly changes in customs, immigration or other regulation may have the same effect.

Widespread passenger disclosure requirements are being introduced by different governments as a means of helping to control terrorism and illegal immigration. This creates conflicts with EU data protection laws designed to protect personal privacy. BA has introduced passenger disclosure arrangements as required by the US. These have been approved by the European Commission and the Council, but the arrangements are still likely to be challenged in the European Court of Justice. EU airlines have asked their governments and the Commission to ensure that security arrangements avoid the industry being caught between conflicting legal requirements in different jurisdictions.

Passenger Rights

The Montreal Convention is given effect for EU registered airlines by an EU regulation. This governs the maximum compensation to be paid for loss, delay or damage to baggage and also governs liability to passengers in the event of an accident. Airlines are required to carry sufficient insurance to cover their liability.

New EU denied boarding compensation rules came into force in February, 2005, extending compensation to cancelled flights and imposing passenger care requirements for long delays and cancelled flights. The new legislation has been challenged by the International Air Transport Association (IATA) in the European Court of Justice. An opinion is expected from the Advocate General in September, 2005.

Domestic US disabled passenger legislation has been extended to foreign airlines. The EU also published legislative proposals for disabled passengers in February, 2005. There are conflicts between the EU and US approaches.

Environmental Regulation and Noise

BA’s environmental management system commits the Group to working constructively with those concerned for the environment and to observing rules and regulations aimed at protection of the environment. The Group’s activities are covered by a comprehensive network of regulations at local, national and international levels, affecting emissions to the atmosphere, disposal of solid waste and aqueous effluents, aircraft noise and other relevant parameters. The Group’s strategy takes compliance as the baseline of environmental performance and aims to exceed standards and regulations.

The BA fleet meets existing noise standards and is subject to departure noise and night flight restrictions. The current night noise restrictions expire at the end of the Summer 2005 season. The Government is currently consulting on a new regime to operate from 2005 through 2010. As with the current regime, this is expected to impose significant operating restrictions between the hours of 2300 and 0700 at BA’s main bases at Heathrow and Gatwick. Any major changes to current arrangements are subject to a consultation process and must meet the requirements of an EU operating restrictions regulation designed to ensure that noise restrictions are balanced and well targeted. The Group is proactively involved in other efforts to mitigate the effect of aircraft noise, including measures to reduce noise on approach to airports.

The Group is playing an active role in development of the understanding of the effects of aircraft emissions to the atmosphere. This has included involvement in the work of the Intergovernmental Panel on Climate Change, co-operating with research programs and promoting discussion of possible ways in which to control emissions of greenhouse gases. The Group is involved in work within ICAO aimed at developing mechanisms to control and mitigate the effect of aircraft engine exhaust emissions. BA is also a member of the UK emissions trading scheme and supports the inclusion of aviation in the EU emissions trading scheme.

Social and Environmental Report

Each year, the Group publishes an environmental report that details progress with particular reference to measurement against headline indicators. In 2000, the report was extended to include both social and economic considerations. In March 2004, the BA Board adopted a new Code of Business Conduct and Ethics, applicable to all employees and the previous Code, adopted in 2000, was replaced by a new Statement of Business Principles. The new Code of Conduct and the Statement of Business Principles are two of the British Airways Standing Instructions, which set out policies with which all employees should comply. They were communicated throughout the Company in Summer 2004 and are available, externally through the BA website.

UK and International Airport Policy

Responsibility for airport policy in the UK lies with the UK Government and is defined in “The Future of Air Transport” White Paper published in December 2003. This paper encouraged the sustainable development of commercial air transport and supported the expansion of several UK airfields over a 30 year period. In South East England, new runway developments were supported at both Stansted and Heathrow, provided they met certain environmental requirements, chiefly relating to noise and air quality limits and the provision of new public transport links. These requirements are challenging and may necessitate action by airlines to reduce noise and/or emissions if Heathrow is to get a new runway by 2014, which is likely to be the earliest date possible (subject also to securing planning permission). The costs of airport expansion must be paid for by the users of each airport through user charges, which are likely to increase over the long term to pay for growth. It was agreed that Stansted should continue to cater for its local market and should not be developed as a second hub for London.

Obtaining slots is a necessary condition for providing service to many airports. The availability of slots generally is often beyond the control of a carrier and can be subject to capacity limits, government regulation and market conditions, including the actions of competitors. BA believes that it has sufficient slots to operate its existing routes and generally has been able to obtain slots in connection with its previous route changes and expansions. However, BA can provide no assurance that it will be able to maintain its existing slots or obtain desired slots in the future.

Slots at UK airports are allocated under EU rules. Technical revisions came into effect in July, 2004 and more substantive changes are still under consideration by the European Commission, following an unsuccessful

earlier attempt at change. BA is attempting to ensure that a market oriented approach is maintained under any new rules, so that essential flexibility and the possibility of exchanges between carriers remains. Although the Commission is unsure that slot exchanges in the UK are consistent with existing EU rules, the UK Government has written to the Commission defending the UK system and pointing to a ruling from the UK High Court.

Competition

Most of the markets in which BA operates are highly competitive. BA faces competition from other airlines on the same city-pair routes, from indirect flights, from charter services and from other forms of transport. The intensity of the competition varies from route to route, depending on the number and nature of the competitors, particularly whether or not they are state-owned or state-supported, and on the regulatory environment and other factors. At one extreme, there are a few international routes on which competition is limited to the other state’s designated airline and fares are regulated. At the other extreme, there is a free market for internal flights within the whole of Europe allowing any European airline to operate on any route, setting whatever fares they wish, subject only to infrastructure constraints and competition law.

On many of the routes with multiple carriers, BA’s pricing decisions are affected by competition from other airlines, some of which have cost structures that are lower than BA’s or other competitive advantages and could therefore operate at lower fare levels.

It has been UK government policy since at least 1984 to liberalize markets progressively and to encourage fair and equal competition wherever possible. The presence of State Aid, in all its forms, and in several different markets, distorts competition and is generally incompatible with policies and regulations designed to open up markets.

The CAA from time to time issues statements of the policies it intends to carry out in pursuit of its statutory licensing role. The current statement came into force in June, 2002. This confirmed that the CAA would give greater weight to the interests of users in balancing the interests of the users on the one hand and the airlines on the other. Additionally, the CAA considered that competition, where possible, is the most effective way of ensuring that passengers’ interests are met. The new policy also removed the requirement for air carriers to be licensed on individual routes.

Since March, 2000, the UK’s Competition Act has been in force. It outlaws agreements and business practices which have a damaging effect on competition in the UK. Its provisions mirror EU competition rules and can be applied to competition cases within the UK. The Enterprise Act which came into force in June, 2003 introduced a new enforcement regime that includes disqualification of directors and criminal liability for individuals for certain serious infringements of the Competition rules.

Tariff Co-ordination

Certain air services agreements require airlines to co-ordinate fares before approval by the governments concerned. IATA, the trade association for international airlines, provides a forum for tariff co-ordination on international routes by convening traffic conferences. Many international airlines take part in these conferences although, partly reflecting the increase in competition, fewer than in the past.

BA attends traffic conferences and discusses tariffs bilaterally when it is lawful to do so and tariff co-ordination is required under the relevant air services agreement or is commercially necessary.

Commercial Arrangements

BA has commercial arrangements with other airlines covering scheduled passenger and cargo services on a small number of its international routes. Commercial arrangements can govern, among other things, capacity offered by each airline over flight approvals, the apportionment of revenues between airlines and the co-ordination of schedules. In very few cases, some commercial arrangements are necessary under the relevant air services agreement.

While the US domestic airline industry has been largely deregulated, routes between the UK and the US are still subject to regulation of market access, capacity and fares under an air service agreement known as Bermuda 2. However, both countries have adopted a relatively liberal approach to fare approval and other regulatory matters. In addition, BA faces further competition from airlines operating other routes between the US and continental Europe, including a number of carriers operating on these routes with antitrust immunity. BA has responded with both price and service initiatives and has continued to carry more passengers between the UK and the US than any other carrier.

The European Commission has been granted a mandate to negotiate with the US government a liberal set of air services arrangements to replace the bilateral agreements concluded by the EU Member States as discussed above (under “Route Flying Rights”). The outcome is expected to provide a better environment for industry consolidation, especially in Europe.

Organizational Structure

The business and operations of the BA Group are conducted within BA Plc and its subsidiaries. The following table sets forth the principal undertakings of the Group as at March 31, 2005.


Subsidiary undertakings	Principal activities	Country of incorporation and registration and principal operations

Air Miles Travel Promotions Ltd*	Airline marketing	England
BA & AA Holdings Ltd* (90 per cent of equity owned)	Holding Company	England
Britair Holdings Ltd*	Holding Company	England
British Airways 777 Leasing Ltd*	Aircraft financing	England
British Airways Capital Ltd*	Airline finance	Jersey
British Airways Holdings Ltd*	Airline finance	Jersey
British Airways Holidays Ltd*	Package holidays	England
British Airways Leasing Ltd*	Aircraft financing	England
British Airways Maintenance Cardiff Ltd*	Aircraft maintenance	England
British Airways Regional Ltd*	Air travel services	England
British Airways Travel Shops Ltd*	Travel agency	England
CityFlyer Express Ltd*	Aircraft financing	England
British Regional Air Lines Group Plc	Holding Company	England
Speedbird Insurance Company Ltd*	Insurance	Bermuda
British Airways CitiExpress Ltd	Airline operations	England
The Plimsoll Line Ltd* (Holding Company of British Regional Air Lines Group Plc)	Holding Company	England





Quasi-Subsidiary undertaking	Principal activities	Country of incorporation and registration and principal operations

The London Eye Company Ltd* (33 per cent of equity owned)	Leisure Company	England




Associated undertakings	Percentage of equity owned	Principal activities	Country of incorporation and principal operations

Iberia, Lineas Aéreas de España, S.A. (‘Iberia’)	8.76	Airline operations	Spain
Comair Ltd	18.3	Airline operations	South Africa



Trade investments	Percentage of equity owned	Principal activities	Country of incorporation and principal operations

The Airline Group*	16.7	Air traffic control holding company	England
Opodo Ltd*	5.9	Internet travel agency	England
WNS (Holdings) Ltd*	16.8	Flight Services Holding Company	Jersey

* Owned directly by British Airways Plc

Property, Plant and Equipment

The following table sets forth the principal property, plant and equipment of the Group. The table does not include the Group’s fleet of aircraft, which are described under “Item 4 — Information on the Company — Airline Fleet”.


Principal Properties	Description	Nature of Title	Approximate Gross Size

			(square feet)
Heathrow Airport, London
No. 1 Maintenance Area East	offices, hangars, workshops	Lease(1)	2,400,000
No. 1 Maintenance Area West	offices, hangars, workshops	Lease(1)	1,300,000
Ascentis New Cargo Centre	warehouse and offices	Lease	1,000,000
Perishables Warehouse	warehouse and offices	Lease	70,000
Compass Centre	offices for crew reporting and operations center	Lease	250,000

Waterside, Harmondsworth	combined business center	Freehold	570,000
Cranebank	technical training center	Freehold	440,000
Speedmarque	workshops and offices	Lease	140,000
Link	warehouse and offices	Lease	170,000

Gatwick Airport, London
Maintenance Area East	offices, hangars and workshops	Lease(2)	495,000
Jubilee House	offices	Lease	130,000
Gatwick Cargo	warehouses	Lease	200,000

UK Regions
Newcastle Business Park	offices	Lease	200,000
Pioneer House, Manchester	offices	Lease	64,000

Cardiff Airport, Wales
Maintenance Area	offices, hangars and workshops	Lease	460,000

New York
Terminal Building, John F. Kennedy International Airport	passenger terminal	Sublease	535,000



(1)	Leasehold interest held from Heathrow Airport Limited for 150 years from April 1995 without restriction on disposal and with wide use provisions.

(2)	These leasehold interests which are held from Gatwick Airport Limited contain restrictions on the disposal and use of the properties.

The BA Group also has other freehold and leasehold interests in real estate in numerous countries throughout the world, that are less significant to the Group as a whole. See Note 16 to the Financial Statements.

Item 5 — Operating and Financial Review and Prospects

Introduction

The following discussion covers the three years ended March 31, 2005 and is based on the Group’s Financial Statements prepared in accordance with UK GAAP which differ in certain respects from US GAAP.

The differences between UK GAAP and US GAAP as applicable to the Group are set out in Note 43 to the Financial Statements.

Group profits before tax for the fiscal year 2005 were £415 million, compared with a £230 million profit in the previous year. Operating profit in the year, at £540 million, was £135 million better than last year. The operating margin of 6.9% was 1.5 points better than last year. The improvement in operating profit primarily reflects improvements in turnover – up 3.3% - partially offset by increased operating costs, in particular fuel. Passenger yields (pence/RPK) for the year were down 4.4%; seat factor was up 1.8 points at 74.8% on capacity 2.1% higher in ASKs.

Cargo volumes (CTKs) for the full year were up 11.1% compared with last year, with yields down 6.3% due to the negative impact of exchange rates. Overall load factor for the full year was up 2.1 points at 69.7%.

Cash inflow before financing was £1,181 million for the twelve months. The closing cash balance of £1,682 million was up £12 million versus last year. Net debt fell by £1,236 million during the year to £2,922 million. This is the lowest level since March 31, 1993, and is down £3.7 billion from the December 2001 peak.

The number of shares issued and fully paid as at June 30, 2005 was 1,130,882,404. The increase over March 31, 2005 reflects principally the conversion of capital bonds on maturity which resulted in the issue of 46 million shares.

Results of Operations

The following table sets out the year-over-year percentage changes in Group operating revenue and selected operating statistics (volume, capacity and yield) for the three-year period ended March 31, 2005:


	Year ended March 31

	2005			2004			2003

	(Change%)
Group operating revenue		3.3			(1.7	)		(7.8	)
Group operations:
Volume (RTKs)		6.5			3.9			(2.9	)
Capacity (ATKs)		3.2			2.5			(6.7	)
Yield (Revenue/RPK) (1)		(4.4	)		(4.3	)		(1.3	)

(1) Scheduled services (passenger and cargo) and non-scheduled passenger services revenue divided by RPKs

Year by Year Analysis

Year ended March 31, 2005 compared with year ended March 31, 2004

Revenue

Group operating revenue improved in the year by 3.3% to £7,813 million. For the twelve month period, airline operations revenue improved by 0.4% to £6,982 million on a flying program 3.2% larger in ATKs.

Passenger traffic (RPKs) increased by 4.7%, whilst capacity (ASKs) was 2.1% higher; as a result passenger load factor increased by 1.8 points compared with fiscal 2004 to 74.8%. Passenger yield (pence per RPK) deteriorated by 4.4% for the full year.

Cargo volumes (CTKs) were up 11.1% compared with fiscal 2004 but yields fell by 6.3%. Cargo revenue was up 4.1% from £463 million to £482 million.

Other revenue improved by 36.9% to £831 million, primarily due to the increase in the cargo fuel surcharge and the introduction of passenger fuel surcharges.

Expenditure

Net operating expenditure (total operating expenditure less other revenue), decreased by 1.6% compared to fiscal 2004. Unit costs (net operating expenditure per ATK) were 4.7% lower than fiscal 2004.

See footnote (6) to the operating statistics in Item 3 for the calculation of total operating expenditure per RTK and per ATK.

The table below summarizes total Group operating expenditure and year on year changes in expenditure over the three financial years ended March 31, 2005:


	Year ended March 31

	2005			2004			2003			2005		2004		2003

	(% Increase / (decrease))									(£ million)
Employee costs		4			4			(13	)		2,273		2,180		2,107

Depreciation and amortization		1			(8	)		(5	)		687		679		734

Aircraft operating lease costs		(22	)		(29	)		(5	)		106		135		189

Fuel and oil costs		22			10			(18	)		1,128		922		842

Engineering and other aircraft costs		(2	)		(14	)		(12	)		502		511		592

Landing fees and en route charges		1			(5	)		(6	)		556		549		576

Handling charges, catering and other operating costs		0			(3	)		(13	)		930		934		961

Selling costs		(12	)		(22	)		(14	)		488		554		706

Accommodation, ground equipment costs and currency differences		(13	)		1			(17	)		603		691		686


Total Group operating expenditure		2			(3	)		(13	)		7,273		7,155		7,393

Employee costs increased by 4.3% compared with fiscal 2004 to £2,273 million as pension and wage increases and the cost of the Employee Reward Plan were only partially offset by manpower reductions and other efficiencies. The average number of employees in the Group, in manpower equivalents (MPE), fell by 3.3% to 47,472 and productivity (ATKs per MPE) improved by 6.7%.

Depreciation costs increased by 1.2% compared with fiscal 2004 to £687 million reflecting a £16 million charge relating to the impairment of the BAe 146 aircraft at British Airways CitiExpress, following the decision to exit the fleet in 2005. This was partially offset by the favorable impact of changes in foreign currency exchange rates due to the weaker US Dollar.

Aircraft operating lease costs reduced by 21.5% compared with fiscal 2004 to £106 million as a result of the return to lessors of two Boeing 737-400s and one de Havilland Canada DHC-8, and due to favorable exchange impacts. The previous year included an onerous lease charge of £11 million (relating to the withdrawal of the British Airways CitiExpress ATP fleet).

Fuel and oil costs increased by 22.3% compared with fiscal 2004 to £1,128 million due to a 44.4% increase in fuel price (partially offset by hedging benefits) and the impact of the increased flying schedule. These were partially offset by the favorable exchange impact of the weaker US Dollar.

Engineering and other aircraft costs reduced by 1.8% compared with fiscal 2004 to £502 million reflecting lower hull insurance costs and the favorable impact of changes in foreign currency exchange rates, partially offset by the cost of additional cargo freighter activity and additional engine sub-contract and lease costs.

Landing fees and en route charges increased by 1.3% compared with fiscal 2004 to £556 million. This principally reflects increases in price and the impact of the larger flying program, partially offset by the favorable impact of exchange rates.

Handling charges, catering and other operating costs decreased by 0.4% compared with fiscal 2004 to £930 million, primarily due to the impact of exchange, partially offset by additional freighter and trucking costs, and the full year effect of the British Airways Holidays package business costs.

Selling and marketing costs fell by 11.9% compared with fiscal 2004 to £488 million. The impact of the restructuring of travel agent commissions and the increase in online sales were partially offset by volume related costs.

Accommodation, ground equipment costs and currency differences decreased by 12.7% compared with fiscal 2004 to £603 million. This was due to reductions in information management spend, property costs, legal costs and favorable exchange impacts of £55 million, primarily due to the impact of the weaker US Dollar on the balance sheet retranslation.

Geographical analysis

See “Item 4 – Information on the Company – Segmental Information – Geographical Analysis” and Note 3 to the Financial Statements.

Operating results improved in each area. For longhaul, this reflected increased revenue partially offset by rising costs, in particular fuel. In Europe, losses continued to fall due to continued focus on cost reductions – the total loss of £26 million compared to £60 million in fiscal 2004 includes an impairment charge of £16 million due to the planned retirement of the BAe 146 fleet.

Share of operating profit in associates

British Airways’ share of operating profits from associated undertakings reduced by £17 million to £41 million during fiscal 2005, principally due to the sale of the investment in Qantas in September, 2004.

Profit/loss on disposal of fixed assets and investments

Losses on disposals of fixed assets and investments for fiscal 2005 were £26 million, compared with losses of £46 million in fiscal 2004, which included an £83 million loss on disposal of dba.

The losses on disposal in fiscal 2005 primarily reflect the disposal of the investment in Qantas in September, 2004 (£11 million).

Net interest payable

Net interest expense for fiscal 2005 was £157 million, £43 million lower than in fiscal 2004. This included a credit relating to the revaluation of Yen debts (used to fund aircraft acquisitions) of £31 million, compared to a credit the previous year of £16 million. The revaluation — a non cash item required by standard accounting practice — results from the weakening of the Yen against Sterling.

Excluding the revaluation, the improvement in interest expense reflected lower gross debt and exchange benefits offset in part by higher interest rates.

Other finance income and related fees

Other finance income and related fees were £14 million in fiscal 2005. This compares to a credit of £13 million in fiscal 2004.

Taxation

The analysis of the tax charge is set out in Note 11 to the Financial Statements.

There is no tax payable in the UK either on operating results, as adjusted for taxation, or on profits on disposals as these are covered by tax losses from current and prior periods. During the year the Group has remitted profits to the UK from subsidiaries and associates including those in Australia and Spain. The UK tax charge arising on such profits has been offset partially by credits for taxes paid overseas and by other loss surrenders. The tax payable overseas relates principally to Australian tax payable on the disposal of the shareholding in Qantas.

Earnings per share

For the twelve month period, profits attributable to shareholders were £251 million, equivalent to earnings of 23.4 pence per share, compared with earnings of 12.1 pence per share last year.

Aircraft fleet

The number of Group aircraft in service at March 31, 2005 was 290, a reduction of one on the prior year. Aircraft returns to lessors comprised two Boeing 737-400 aircraft and one de Havilland Canada DHC-8. In addition, a Boeing 737-400 aircraft was stood-down pending return to the lessor. An Airbus A320 and two Boeing 737-400’s were sub-leased during the year. Deliveries comprised six Airbus A321 aircraft.

Capital expenditure

During the three-year period ended March 31, 2005, capital expenditure and investments totaled approximately £937 million for the Group, principally related to the acquisition of aircraft and other equipment.

The following table summarizes Group capital expenditure in the three-year period ended March 31, 2005:


	2005		2004		2003

	(£ million)
Aircraft, spares, modifications and refurbishments (net of refund of progress payments)		257		154		225
Property and equipment		37		67		95
Landing rights		32		14		32

		326		235		352
Investments		6		0		18

		332		235		370

See Notes 13, 14 and 17 to the Financial Statements.

Working capital

At March 31, 2005, net current liabilities were £136 million, down £95 million on last year. This change principally reflects lower creditors (£128 million) and an increase in debtors due to higher sales volumes, and a £12 million increase in cash, short-term loans and deposits, partially offset by the Convertible Capital Bonds that matured in June, 2005.

Sales in advance of carriage increased from £859 million to £880 million.

The Company believes its working capital is sufficient for its current requirements.

Cash flow

Net cash inflow from operating activities totaled £1,192 million, an improvement of £99 million from last year primarily due to the improvement in operating profit partially offset by the impact of working capital movements.

The net cash flow before management of liquid resources and financing was £1,181 million, an increase of £307 million from last year, primarily due to the sale proceeds of £427 million from Qantas.

Leases and other financing arrangements

The following table sets out the movements in loans and capital obligations under finance leases and hire purchase arrangements for the three year period ended March 31, 2005 (see also Note 26 to the Financial Statements):


	Bank and other loans			Finance leases and hire purchase arrangements			Total

							2005			2004			2003


	(£ million)
Balance at April 1		1,225			4,491			5,716			6,689			7,401
New loans raised		116			—			116			81			13
Non-cash refinancing		—			(9	)		(9	)		(32	)		—
Loans, finance leases and hire purchase arrangements undertaken to finance the acquisition of aircraft and other assets		—			12			12			97			221
Repayment of amounts borrowed		(168	)		(1,103	)		(1,271	)		(915	)		(797	)
Effect of exchange rate changes		(5	)		(67	)		(72	)		(204	)		(149	)

Balance at March 31		1,168			3,324			4,492			5,716			6,689

Six Airbus A321 aircraft were delivered during the year. Two of the aircraft were financed through US Dollar mortgage loans; the remaining four aircraft were bought for cash. One Boeing 777-200 aircraft was sold and leased back for a period of ten years. This was the third of our Boeing 777-200 aircraft to be sold and leased back, helping to manage the Group’s residual value exposure to this aircraft fleet. Four Boeing 747-400 aircraft previously held on finance leases were purchased during the year.

For the purposes of the financial statements foreign currency debt is translated into Sterling at year-end exchange rates. Gains and losses on translation are recognized in the profit and loss account except for changes in the Sterling value of US Dollar denominated debt that finances US Dollar denominated fixed assets. These gains or losses are taken to reserves, together with the differences arising on the translation of the related assets. The debt translation gain taken to reserves amounted to £21 million (2004: £169 million gain).

Net debt/total capital ratio

Net debt at March 31, 2005 amounted to £2,922 million, a reduction of £1,236 million compared with fiscal 2004. This included convertible bonds of £112 million and is net of cash and short-term loans and deposits totaling £1,682 million.

The net debt/total capital ratio stood at 42.7%, an 11.4 point reduction versus last year mainly due to the reduction in net debt. Including operating leases, net debt/total capital ratio was 48.2%, a 10.2 point reduction from last year.

Share capital

The number of shares allotted, called up, and fully paid on March 31, 2005 was 1,082,903,000 (March 31, 2004: 1,082,845,000). On June 15, 2004, 39,000 ordinary shares were issued in exchange for 93,000 Convertible Capital Bonds 2005 on the basis of one ordinary share for every 2.34 Bonds held. During the year, 2,025,936 shares were issued on the exercise of options under Employee Share Option schemes.

Year ended March 31, 2004 compared with year ended March 31, 2003

Revenue

Group turnover fell in the year by 1.7% to £7,560 million in fiscal 2004. Passenger and cargo revenue (turnover from airline operations scheduled and non-scheduled services) accounted for approximately 92% of Group operating revenue. For the year, airline operations revenue fell by 1.7% to £6,953 million on a flying program 2.5% larger in ATKs.

Compared with fiscal 2003, in fiscal 2004 airline operations passenger traffic (RPKs) increased by 3%, while capacity (ASKs) was 1.5% higher. As a result passenger load factor increased by 1.1 points compared with fiscal 2003 to 73%. Passenger yield (scheduled and non-scheduled passenger revenue per RPK) declined by 4.3% for the year.

Cargo (i.e. freight and mail) volumes (CTKs) were up 6% compared with fiscal 2003 but yields fell by 9.7%. Cargo revenue was down 4.3% from £484 million to £463 million.

Other revenue fell 1.1% to £607 million.

Expenditure

Net operating expenditure (total operating expenditure less other revenue), decreased by 3.4% compared to fiscal 2003. Unit costs (net operating expenditure per ATK) were 5.7% lower than fiscal 2003.

The table below summarizes total Group operating expenditure and year on year changes in expenditure over the three financial years ended March 31, 2004:


	Year ended March 31

	2004			2003			2002			2004		2003		2002

	(% Increase / (decrease))									(£ million)
Employee costs		4			(13	)		1			2,180		2,107		2,409

Depreciation and amortization		(8	)		(5	)		8			679		734		770

Aircraft operating lease costs		(29	)		(5	)		(10	)		135		189		199

Fuel and oil costs		10			(18	)		(7	)		922		842		1,028

Engineering and other aircraft costs		(14	)		(12	)		2			511		592		673

Landing fees and en route charges		(5	)		(6	)		(5	)		549		576		615

Handling charges, catering and other operating costs		(3	)		(13	)		(15	)		934		961		1,110
Selling costs		(22	)		(14	)		(27	)		554		706		824

Accommodation, ground equipment costs and currency differences		1			(17	)		11			691		686		822


Total Group operating expenditure		(3	)		(13	)		(5	)		7,155		7,393		8,450

The operating expenditure for the year ended March 31, 2003 included a charge of £84 million relating to Concorde — the retirement of the Concorde fleet took place on October 24, 2003.

In fiscal 2004, employee costs increased by 3.5% to £2,180 million as pension, wage and National Insurance increases were only partially offset by manpower reductions and other efficiencies together with the disposal of dba. Total Manpower Equivalents (“MPEs”) at Group level were down by 3,798 (7.4%) compared with March, 2003.

Depreciation and amortization costs reduced by 7.5% compared with fiscal 2003 to £679 million reflecting primarily the £58 million prior year charge relating to the impairment of Concorde capitalized engineering modifications and rotable inventory. Increases in depreciation relating to the continuing embodiment of new products on the Boeing 777 fleet were offset by the favorable exchange impact of the weaker US Dollar.

Aircraft operating lease costs reduced by 28.6% to £135 million compared with fiscal 2003 as a result of the return to lessors of Boeing 737-300s, 737-400s and Boeing 757s, the disposal of dba (which reduced leased Boeing 737-300s by 16 aircraft), and exchange impacts. Onerous lease charges in the year were £15 million (relating to the withdrawal of the British Airways CitiExpress ATP fleet), £12 million lower than fiscal 2003 when the sub-lease of the J41 fleet resulted in a charge of £27 million.

Fuel and oil costs increased by 9.5% compared with fiscal 2003 to £922 million due to a 9.9% increase in fuel price, the unwinding of prior year hedging benefits and the impact of the increased flying schedule. These were partially offset by the favorable exchange impact of the weaker US Dollar and the disposal of dba.

Engineering and other aircraft costs reduced by 13.7% to £511 million compared with fiscal 2003, reflecting increased recoveries of insurance costs from franchisees, the disposal of dba and the impact of exchange together with the prior year charge of £26 million relating to the write-down of Concorde stock. This was partially offset by the costs of additional cargo freighter activity.

Landing fees and en route charges fell by 4.7% compared with fiscal 2003 to £549 million. This principally reflects increased recoveries of Passenger Service Charges (including those relating to transfer passengers) as well as efficiencies and the impact of the disposal of dba. These are partially offset by increases in price and the adverse exchange impact of the stronger Euro.

Handling charges, catering and other operating costs decreased by 2.8% compared with fiscal 2003 to £934 million, as a result of a reduction in subcontract costs, efficiencies across the operational areas and the impact of dba, partially offset by the costs of the unofficial industrial action in July, 2003 and costs associated with increased cargo freighter activity.

Selling and marketing costs fell by 21.5% compared with fiscal 2003 to £554 million. The impact of the restructuring of travel agent commissions and the increase in online sales (leading to savings in booking payments) were partially offset by increases in marketing costs.

Accommodation, ground equipment costs and currency differences increased by 0.7% compared with fiscal 2003 to £691 million. Reductions in information management spend, property costs and vehicle contract costs were more than offset by adverse exchange impacts of £29 million, primarily due to the impact of the weaker US Dollar on the balance sheet retranslation.

Geographical analysis

See “Item 4 – Information on the Company – Segmental Information – Geographical Analysis” and Note 3 to the Financial Statements.

With the exception of Asia Pacific, the operating result for the year improved in all regions despite the impact of the Iraq War, SARS and economic weakness at the start of the year. Asia Pacific was most affected by the impact of SARS and fuel price increases.

The shorthaul result improved significantly on previous years – overall losses were halved to £60 million. However, new entrant growth on regional routes reduced British Airways CitiExpress results, triggering aggressive cost reduction initiatives. The shorthaul result also included a one-off £18 million charge relating to the withdrawal of the ATP fleet.

Share of operating profit in associates

BA’s share of operating profits from associated undertakings improved by £19 million to £58 million during the year, principally due to improvement in the operating profits of Qantas.

In April, 2003, Amadeus Global Travel Distribution took a 16.67% stake in Opodo. This resulted in the dilution of the Group’s shareholding from 22.86% to 19.05%, and a profit on deemed disposal of £5 million.

Profit/loss on disposal of fixed assets and investments

Losses on disposals of fixed assets and investments for fiscal 2004 were £46 million, compared to fiscal 2003 when profits of £60 million were generated from disposals of aircraft and rationalization of our property portfolio.

The losses on disposal in this financial year primarily reflect the disposal of dba on June 30, 2003 for a loss in the period of £83 million. This was partially offset by profits on the sale and leaseback of five Airbus A320 aircraft and V2500 spare engines. Other disposals during the year included the sale of a 20% holding in China Aircraft Services, the Speedwing Mobile Communications business and the sale and leaseback of two Boeing 777-200 aircraft.

Net interest payable

Net interest expense for fiscal 2004 was £200 million, £55 million lower than fiscal 2003. This included a credit relating to the revaluation of Yen debts (used to fund aircraft acquisitions) of £15 million, compared to a charge the previous year of £10 million. The revaluation — a non-cash item required by UK GAAP — results from the weakening of the Yen against Sterling.

Excluding the revaluation, the improvement in interest expense reflected lower rates, a higher cash balance and lower gross debt, together with exchange benefits.

Other finance income and related fees

Other income of £13 million for fiscal 2004 primarily relates to lease transfer consent fees. This compares to a charge of £4 million in fiscal 2003.

Tax

The analysis of the tax charge is set out in Note 11 to the Financial Statements.

In fiscal 2004, as in fiscal 2003, there is no tax payable on operating results in the UK, as adjusted for taxation. During the fiscal year, the Group has remitted profits to the UK from subsidiaries and associates including those in Australia and Spain. The UK tax charge arising on such profits has been offset partially by credits for taxes paid overseas and by other loss surrenders. No tax arises on profits on disposals as such profits are covered by tax losses from current and prior periods.

Earnings per share

For the year ended March 31, 2004, profits attributable to shareholders were £130 million, equivalent to earnings of 12.1 pence per share, compared with earnings of 6.7 pence per share in the prior year.

Capital expenditure

During the three-year period ended March 31, 2004, capital expenditure and investments totaled approximately £1,527 million for the Group, principally related to the acquisition of aircraft and other equipment.

The following table summarizes Group capital expenditure in the three-year period ended March 31, 2004:


	2004		2003		2002

	(£ million)
Aircraft, spares, modifications and refurbishments (net of refund of progress payments)		154		225		739
Property and equipment (net of refund of progress payments)		67		95		121
Landing rights		14		32		12

		235		352		872
Investments		0		24		44

		235		376		916

See Notes 13, 14 and 17 to the Financial Statements.

Working capital

At March 31, 2004, net current liabilities were £231 million, up £52 million on the prior year. This change principally reflects higher creditors (£92 million) due to increased sales in advance of carriage and reductions in stock. These were partially offset by an increase in debtors, due to improved sales volumes and revenue and an £18 million increase in cash, short-term loans and deposits.

Sales in advance of carriage increased from £783 million to £859 million due to improved forward bookings.

Cash flow

Net cash inflow from operating activities totaled £1,093 million, £92 million less than last year as the improvement in operating profit was more than offset by the reduction in depreciation and the impact of working capital movements.

The net cash flow before management and liquid resources and financing was £874 million, a reduction of £357 million from last year, due to the decrease in operating cash flow and a reduction in disposal proceeds, partially offset by a reduction in capital expenditure.

Leases and other financing arrangements

The following table sets out the movements in loans and capital obligations under finance leases and hire purchase arrangements for the three-year period ended March 31, 2004 (see also Note 26 to the Financial Statements):


	Bank and other loans			Finance leases and hire purchase arrangements			Total

							2004			2003			2002


	(£ million)
Balance at April 1		1,332			5,357			6,689			7,401			7,043
New loans raised		81			—			81			13			495
Assumed from subsidiary acquired during the year		—			—			—			—			117
Non-cash refinancing		193			(225	)		(32	)		—			—
Loans, finance leases and hire purchase arrangements undertaken to finance the acquisition of aircraft and other assets		—			97			97			221			512
Repayment of amounts borrowed		(339	)		(576	)		(915	)		(797	)		(712	)
Effect of exchange rate changes		(42	)		(162	)		(204	)		(149	)		(54	)

Balance at March 31		1,225			4,491			5,716			6,689			7,401

Three A320 aircraft were delivered during the year ended March 31, 2004. The aircraft were financed on balance sheet through US Dollar denominated cross border finance leases. Five older A320 aircraft were sold and leased back for a period of five years. Two Boeing 777-200 aircraft were sold and leased back for a period of ten years. These were the first of our Boeing 777-200 aircraft to be taken off balance sheet, thereby starting to manage the Group’s residual value exposure to this aircraft fleet.

For the purposes of the Financial Statements foreign currency debt is translated into Sterling at year-end exchange rates. Gains and losses on translation are recognized in the profit and loss account except for changes in the Sterling value of US Dollar denominated debt that finances US Dollar denominated fixed assets. These gains or losses are taken to reserves, together with the differences arising on the translation of the related assets. The debt translation gain taken to reserves amounted to £169 million (2003: £139 million gain).

Net debt/total capital ratio

Net debt at March 31, 2004 amounted to £4,158 million, including convertible bonds of £112 million and net of cash and short-term loans and deposits totaling £1,670 million. This reduction of £991 million reflected the application of the operating cash flow to the net repayment of debt and exchange effects.

The net debt/total capital ratio stood at 53.8%, a 6.9 point reduction versus last year mainly due to the reduction in net debt. Including operating leases, net debt was 58.2%, a 6.4 point reduction from last year.

Share capital

The number of shares allotted, called up, and fully paid on March 31, 2004 was 1,082,845,000 (March 31, 2003: 1,082,784,000). On June 16, 2003, 11,000 ordinary shares were issued in exchange for 26,000 Convertible Capital Bonds 2005 on the basis of one ordinary share for every 2.34 Bonds held. During the year ended March 31, 2004, 50,000 shares were issued on the exercise of options under Employee Share Option schemes.

Outlook

For the year to March, 2006, total revenue is expected to improve by 4.5% – 5.5%, including the impact of both cargo and passenger fuel surcharges. Capacity and volumes are expected to increase by about 3% with total yield flat. Fuel costs, net of hedging, are expected to be about £450 million more than last year. As announced in our latest Business Plan, our focus is on preparing for the move to Terminal 5 in 2008, investing in products for our customers and continuing to drive simplification to deliver a competitive cost base.

See the Introductory Note regarding forward looking statements and the discussion of Risk Factors in Item 3.

Other matters

Business Plan

Against a target of £450 million of savings announced in the 2003/05 Business Plan (including the £300 million of external spend savings) £457 million was realized. The £300 million employee cost savings announced in the 2004/06 Business Plan is expected to be delivered by March, 2007.

The 2005/07 Business Plan was announced on February 22, 2005 with the key elements being to ensure we are prepared for the move to Terminal 5 in 2008 (‘Fit for 5’), targeted investment in our product and people and a continued focus on building a competitive cost base.

British Airways CitiExpress

British Airways CitiExpress continued to simplify its operation during 2004/05, building on the work started in 2003/04. Since 2001 aircraft numbers have fallen by 35 and types from nine to four - - a further five aircraft (and another fleet type) will be taken out in 2005/06. The number of bases has also been reduced from 15 in 2001 to eight at the end of March 2005. As a consequence of this simplification, operational performance is more robust, costs have fallen and financial results have improved. Further cost reductions are targeted in 2005/06.

Alliance benefits

Qantas

The relationship with Qantas, now in its twelfth year, is British Airways’ longest standing and deepest alliance relationship. Under the Joint Services Agreement (JSA) there is full strategic, tactical and operational co-operation on all of British Airways’ and Qantas’ flights that serve markets between the United Kingdom/Continental Europe and Southeast Asia/Australia. This co-operation continues to strengthen and provides customers with improved flight departure times, routings and value for money, offering the very best of customer service to all passengers. In February 2005, the Australian Competition and Consumer Commission extended permission for both carriers to co-operate in this way for a further five years. Application has also been made to the UK Office of Fair Trading and the EU competition authorities and their ruling is outstanding at this time

Iberia

In December 2004, British Airways and Iberia signed a Joint Business Agreement (‘JBA’) to establish profit-sharing on two routes, Heathrow-Madrid and Heathrow-Barcelona. This was accompanied by joint selling and the co-ordination of schedules on these routes from Summer 2005.

Franchising

As at March 31, 2005 there were six franchisees operating to 83 destinations, of which 65 are additional to the British Airways network. The franchise with Regional Airways was subsequently terminated in April 2005, leaving five British Airways franchisees — Comair, GB Airways, British Mediterranean, Loganair and Sun-Air of Scandinavia.

Pension Deficit

Under FRS 17, the pension deficit after deferred tax increased by £205 million to £1.4 billion (due mainly to lower long-term interest rates), despite the doubling of company contributions to £250 million. The deficit is not consolidated into the accounts as we continue to report under SSAP 24. Next year, under International Financial Reporting Standards (IAS 19), the pension deficit will be included in the balance sheet. This will have a significant adverse impact on reserves (in particular distributable reserves).

Liquidity and investments

The Group maintained high liquidity throughout the year. Cash generated from operations together with continued low capital expenditure and the disposal of our share in Qantas for £427 million, allowed us to make scheduled repayments of £542 million and to repay £729 million of debt early whilst maintaining the closing cash balances at last year’s level. Early debt repayment in 2004/2005 has been focused on aircraft leases where we have repaid the debt on 24 aircraft early; this increased the number of unencumbered aircraft to 70 at the year-end. The Group continually reviews liquidity requirements and will continue to repay debt early to utilize surplus liquidity.

At March 31, 2005 the Group had at its disposal short-term loans and deposits and cash at bank and in hand amounting to £1,682 million (2004: £1,670 million). In addition, the Group had undrawn long term committed aircraft and general financing facilities totaling approximately US$460 million and undrawn uncommitted overdraft and money market lines totaling £46 million.

The Group’s holdings of cash and short-term loans and deposits, together with committed general funding facilities and net cash flow, are expected to be sufficient to cover the cost of all outstanding firm aircraft deliveries.

Surplus funds are invested in high quality short-term liquid instruments, usually bank deposits and money market funds. Credit risk is managed by limiting the aggregate exposure to any individual counterparty, taking into account its credit rating. Such counterparty exposures are regularly reviewed and adjusted as necessary. Accordingly, the possibility of material loss arising in the event of non-performance by counterparties is considered to be unlikely.

Management of financial and fuel price risks

The Board of Directors sets the Treasury policies and objectives of the Group, and lays down the parameters within which the various aspects of treasury risk management are operated. The Board has approved a Treasury governance statement that outlines the Group’s policies towards management of corporate and asset financing, interest rate risk, fuel price risk, foreign exchange risk and cash and liquidity retention. The Treasury governance statement also lists the financial instruments that the Group’s treasury function is authorized to use in managing financial risks. The governance statement is under on-going review to ensure best practice in the light of prevailing conditions.

Responsibility for ensuring that treasury practices are consistent and compatible with the agreed governance statement is vested in a Finance Committee that is chaired by the Chief Financial Officer.

A monthly Treasury Committee, chaired by the Group Treasurer, approves risk management strategies and reviews major foreign exchange, fuel and interest rate exposures and actions taken during the month to manage those exposures.

Group Treasury implements the agreed policies on a day-to-day basis to meet the Treasury objectives in a risk averse though cost effective manner. These objectives include ensuring that the Group has sufficient liquidity to meet its day-to-day needs and to fund its capital investment program and other investments; deploying any surplus liquidity in a prudent and profitable manner; managing currency, fuel, interest rate and credit exposures to minimize group risk; and managing the Group’s relationship with a large number of banks and other financial institutions world-wide.

See also “Item 11 – Quantitative and Qualitative Disclosures about Market Risk”.

Financing and interest rate risk

Most of the Group’s debt is asset related, reflecting the capital-intensive nature of the airline industry and the attractiveness of aircraft as security to lenders and other financiers. These factors are also reflected in the medium to long-term maturity profiles of the Group’s loans, finance leases and hire purchase arrangements. The incidence of repayments is shown in Note 25 to the Financial Statements. Low capital expenditure has meant that the requirements for new financing have been limited. In April 2004, a Boeing 777 aircraft was sold and leased back. Other financing transactions have been met by the drawdown on existing committed facilities or from surplus liquidity.

At March 31, 2005 approximately 80% of the Group’s borrowings (after swaps), net of cash, short-term loans and deposits, were at fixed rates of interest and 20% were at floating rates. This proportion of fixed rate borrowings has increased from 66% at March 31, 2004 as the Group chose to focus its early debt repayments on floating rate debt, leaving fixed rate debt intact.

The Group’s borrowings are predominantly denominated in Sterling, US Dollars and Japanese Yen. Sterling represents the Group’s natural “home” currency, whilst a substantial proportion of the Group’s fixed assets are priced and transacted in US Dollars. The Japanese Yen liabilities arise as a result of the Group’s substantial Japanese cross-border hire purchase arrangements entered into during the period 1990 to 1999. Details of the currency mix of the Group’s gross borrowings are shown in Note 25 to the Financial Statements.

See also “Item 11 – Quantitative and Qualitative Disclosures about Market Risk”.

Foreign currency risk

The Group generates a surplus in most of the currencies in which it does business. The US Dollar can be an exception to this as capital expenditure, together with ongoing operating lease and fuel payments denominated in US Dollars, can create a deficit. In the year to March 31, 2005, the group had more US Dollar payments than US Dollar revenues, principally as a result of fuel purchased in US Dollars.

As a result, the Group can experience adverse or beneficial effects arising from exchange rate movements. For example, the Group is likely to experience beneficial effects from a strengthening of foreign currencies and an adverse effect from a strengthening in Sterling. The Group seeks to reduce its foreign exchange exposure arising from transactions in various currencies through a policy of matching, as far as possible, receipts and payments in each individual currency. Surpluses of convertible currencies are sold, either spot or forward, for US Dollars or Sterling.

The Group has substantial liabilities denominated in Yen, which consist mainly of purchase option payments falling due under various Japanese leveraged lease arrangements maturing between 2005 and 2011. The Group utilizes its stream of Yen traffic revenues as a natural hedge against these maturing Yen liabilities as they fall due. At times, the Group will also purchase and hold Yen as a partial hedge against future Yen maturities.

The Group’s forward transactions in foreign currency are detailed in Note 36 to the Financial Statements.

See also “Item 11 – Quantitative and Qualitative Disclosures about Market Risk”.

Fuel price risk

The company’s fuel risk management strategy aims to provide the airline with protection against sudden and significant increases in oil prices while ensuring that the airline is not competitively disadvantaged in a serious way in the event of a substantial fall in the price of fuel.

This strategy has moderated the impact of recent increases in the price of jet fuel and the company enters 2005/2006 with a substantial fuel hedging portfolio which was valued at $523 million at March 31, 2005.

Derivative financial instruments

The company uses derivative financial instruments (derivatives) with off-balance sheet risk selectively for treasury and fuel risk management purposes. The Group’s policy is not to trade in derivatives but to use these instruments to hedge anticipated exposures.

As part of its treasury risk management activities, the company has entered into a number of swap agreements in order to hedge its direct exposure to interest rates. The majority of these swaps are embedded in lease and loan agreements. A smaller number of interest rate swaps are not associated with specific loans and leases and are disclosed in Note 34 to the Financial Statements.

Forward foreign exchange contracts and “collars” are used to cover near term future net revenues in a variety of currencies. Forward foreign exchange contracts outstanding at March 31, 2005 are summarized in Note 36 to the Financial Statements

The company considers the purchase of interest rate, foreign exchange and fuel options as bona fide treasury exposure management activities. It would not generally contemplate the opening of new exposures by selling options, except where the risks arising from selling the option are covered by other elements of the hedging portfolio or underlying physical position, for example, as a component of a collar. Other treasury derivative instruments would be considered on their merits as valid and appropriate risk management tools and, under the treasury governance framework, require Board approval before adoption.

As derivatives are used for the purposes of risk management, they do not expose the Group to market risk because gains and losses on the derivatives offset losses and gains on the matching asset, liability, revenues or costs being hedged. Counterparty credit risk is generally restricted to any hedging gain from time to time and is controlled through mark to market based credit limits.

See also “Item 11 – Quantitative and Qualitative Disclosures about Market Risk”.

Interest cover

The Group’s interest cover for fiscal 2005 was 3.2 times. The increase in interest cover from fiscal 2004 (2.1 times) reflects the improvement in the profitability of the Group between fiscal 2005 and fiscal 2004 and a reduction in net interest payable. This reduction principally reflects the lower level of net debt of the Group.

See Item 3 -footnote (3) on page 9 for the calculation of interest cover.

Debt and other contractual obligations

The Group has amounts falling due, excluding interest payable, under various debt and other contractual obligations as follows:


			Payments due by period
	Total		Less than one year		1-3 years		3-5 years		More than 5 years
			(£ millions)
Long-term debt Obligations		1,168		63		168		203		734
Capital lease Obligations		3,324		384		767		777		1,396
Operating lease Obligations		2,119		172		272		163		1,512


Total		6,611		619		1,207		1,143		3,642

See also Notes 16 and 25 to the Financial Statements.

Capital expenditure commitments authorized and contracted for, but not provided for in the Group’s fiscal 2005 Financial Statements, amounted to £143 million for the Group (2004: £347 million), and £142 million for the Company (2004: £346 million), in each case as at March 31, 2005. The outstanding commitments include £132 million which relates to the acquisition of Airbus A320 family aircraft scheduled for delivery over the next three years. It is intended that these aircraft will be financed partially by cash holdings and internal cash flow and partially through external financing, including committed facilities arranged prior to delivery.

Off-Balance Sheet Arrangements

As part of its Treasury and fuel risk management program, the Group selectively uses derivative financial and commodity instruments in order to reduce its exposure to fluctuations in market rates and prices. The Group uses derivatives only for the purposes of hedging identified exposures, where appropriate, and does not invest in derivatives for trading or speculative purposes. The instruments used include swaps, futures and forward contracts, options, collars in the currency, interest rate and fuel markets.

The Group’s accounting policy for derivatives under UK GAAP is to defer and only recognize in the consolidated Statements of Income, gains and losses on hedges of revenues or operating payments as they are realized. Amounts payable or receivable in respect of interest rate swap agreements are recognized in the net interest payable charge over the period of the contracts on an accruals basis. Cross-currency swap agreements and forward foreign exchange contracts taken out to hedge borrowings are accounted for in establishing the carrying values of the relevant loans, leases or hire purchase arrangements in the balance sheet. Gains or losses on forward foreign exchange contracts that hedge capital expenditure commitments are recognized as part of the total Sterling carrying cost of the relevant tangible asset as the contracts mature or are closed out.

Under US GAAP the notional gains or losses derivatives are included within net income as the contracts have not been designated hedges under SFAS 133.

See also “Item 11 – Quantitative and Qualitative Disclosures about Market Risk”.

Critical Accounting Policies and New Accounting Standards

Introduction

The discussion and analysis of the Company’s financial condition and results of operations are based on the consolidated Financial Statements, which have been prepared in accordance with UK GAAP. The preparation of these Financial Statements requires the development of estimates and judgments that affect the reported amount of assets and liabilities, revenues and costs and related disclosure of contingent assets and liabilities at the date of the Financial Statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and potentially result in materially different results under different assumptions and conditions. It is believed that the Company’s critical accounting policies are limited to those described below. The Company’s management has discussed the development of the estimates and disclosures related to each of these matters with the Audit Committee.

Note 1 to the Financial Statements provides additional discussion of the application of these estimates and other accounting policies. The critical accounting policies defined below include those used in the reconciliation of the Financial Statements under UK GAAP to US GAAP where relevant; Note 43 to the Financial Statements provides additional discussion of the application of the policies under US GAAP.

Passenger revenue

Passenger revenue is initially recorded as a liability for sales in advance of carriage, with revenue from ticket sales recognized at the time that BA provides the transportation. In respect of unused ticket revenue recognized, the Group makes estimates based on historical trends regarding liability for tickets sold but not yet processed, the timing and amount of tickets used for travel on other airlines and the amount of tickets sold that will not be used. These are used to determine the timing and amount of unused ticket revenue recognized. Changes to these estimation methods could have a material effect on the presentation of the Group’s financial results.

Periodic evaluations are performed of the estimated liability for tickets sold but not yet processed; any adjustments, which can be significant, are included in results of operations for the periods in which the evaluations are completed. These adjustments relate primarily to differences between the statistical estimation of certain revenue transactions and the related sales price as well as refunds, exchanges, interline transactions and other items for which final settlement occurs in periods subsequent to the sale of the related tickets at amounts other than the original sales price. These amounts have been generally consistent from year to year.

Frequent flyer programs

The Company operates two principal frequent flyer programs. The Executive Club scheme allows travelers to accumulate BA Miles that entitle them to various awards, including free travel. The AirMiles scheme allows companies to purchase AirMiles from the Group for use in promotional incentives.

The Group utilizes various estimates in accounting for the frequent flyer schemes. The direct incremental cost of providing free redemption services, including free travel, is accrued as participants accumulate mileage, based on expected redemptions. The accrued cost is based on various estimates with respect to the incremental fuel, food and other costs incurred in providing such schemes. Additional assumptions are made, based on general customer behavior, regarding the likelihood of a customer redeeming the miles on BA, redeeming the miles for non-travel benefits, or redeeming the miles on partner carriers. Changes in cost estimates or accrual methods, among other factors, could have a significant effect on the Group’s presentation of financial results.

The total number of BA Miles outstanding at March 31, 2005 was 117,982,563,998 and the total number of AirMiles outstanding was 7,224,643,645. BA has recorded a liability for the awards relating to these mileage credits of £112 million.

The number of frequent flyer RPKs as a percentage of total RPKs for the years ended March 31, 2005, 2004 and 2003 was 3.2%, 4.0% and 4.4%.

BA believes that the displacement of revenue passengers by those traveling on frequent flyer awards is minimal based on the low percentage of frequent flyer RPKs to total RPKs and the Company’s ability to manage frequent flyer capacity.

Under UK GAAP, the Company recognizes revenue from the sale of AirMiles and BA Miles to other companies when the miles are issued to participants in the various schemes. US GAAP specifically requires a proportion of revenue relating from the sale of mileage credits to partners to be deferred and recognized over the period in which the credits are expected to be redeemed for travel. The proportion of revenue that is recognized at the time of sale represents amounts in excess of the fair value of the tickets to be redeemed.

Tangible fixed assets

The Group has a net book value of approximately £8.2 billion in aircraft, property, equipment and other tangible assets as of March 31, 2005. These assets are held at cost, subject to the property revaluations carried out on March 31, 1995, which are being retained in accordance with the transitional provisions of applicable accounting standards. The Group now, however, has a policy of not revaluing tangible assets. Depreciation is calculated to write off the cost or valuation, less the estimated residual value, on a straight-line basis. Changes to the Group’s policies relating to the revaluation of assets, estimation of useful lives, residual values or other policies could have a material effect on the presentation of the Group’s financial position and results of operations. Further information relating to the Group’s accounting for tangible assets is provided in Note 1 to the Financial Statements.

The carrying value of tangible assets is reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.

Goodwill and other intangible fixed assets

Under UK GAAP, prior to April 1, 1998, goodwill arising on the acquisition of subsidiary undertakings, and investments in associated undertakings, was set off directly against retained earnings. From April 1,1998, goodwill has been capitalized and amortized over its useful economic life.

Under US GAAP, in accordance with FAS 142 “Goodwill and Intangible Assets”, goodwill is capitalized and not amortized, but tested for impairment on an annual basis or on an interim basis when a triggering event occurs. As a result of the annual impairment test undertaken at March 31, 2003, the Group recognized at that date an impairment charge representing the outstanding balance of goodwill arising in respect of the acquisition of subsidiary undertakings.

Intangible assets with finite lives continue to be capitalized and amortized over their useful economic lives under both UK GAAP and US GAAP. The Group’s landing rights have definite useful lives and will continue to be amortized over their useful economic lives not exceeding 20 years. The carrying value of finite-lived intangible assets is reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.

Changes to the Group’s valuation methods used for the purposes of impairment reviews, or estimation of useful economic lives for finite-lived intangible assets could have a material effect on the presentation of the Group’s financial position and results of operations.

Pensions and other post-retirement benefits

Accounting for pensions and other post-retirement benefits involves judgment about uncertain events, including, but not limited to, discount rates, expected rate of return on plan assets and expected health care cost trend rates. Determination of the projected benefit obligations for the Group’s defined benefit pension scheme and post-retirement plans are important to the recorded amount of benefit expense in the profit and loss account (and also the balance sheet under US GAAP).

Under UK GAAP, actuarial valuations on the UK pension schemes are required to be carried out every three years – these determine the assumptions to be used and therefore the expense recorded in the profit and loss account. The latest actuarial valuations were made at March 31, 2003. Details of the assumptions used are included in Note 30 to the Financial Statements.

Details of the US GAAP adjustment relating to pensions and other post-retirement benefits are included in Note 43 to the Financial Statements. Under US GAAP, the cost of providing pensions is attributed to periods of service in accordance with the benefit formulae underlying the pension plans. The resultant projected benefit obligation is matched against the current value of the underlying plan assets and unrecognized actuarial gains and losses in determining the pension cost or credit for the year; determination of this obligation is therefore important to the recorded amounts for such obligations on the balance sheet and to the amount of benefit expense

in the profit and loss account. The assumptions used may vary from year to year, which may affect future results of operations. Any differences between these assumptions and the actual outcome will also affect future results of operations.

Effect of new US accounting standards required to be adopted in year to March 31, 2005

There were no new US accounting standards required to be adopted in the year.

Impact of new US accounting standards not yet adopted

In November, 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 151 ‘Inventory Costs—an amendment of ARB No. 43, Chapter 4’ (“SFAS 151”). SFAS 151 clarifies the accounting treatment for certain types of overheads incurred in the production of inventory. Previously, these overheads were required to be expensed only when they met a criterion of being “so abnormal” as to justify this. SFAS 151 requires the allocation of fixed production overheads to inventory to be based on normal productive capacity, with unallocated overheads being expensed regardless of whether they meet the “so abnormal” criterion. SFAS 151 is effective for accounting periods beginning after June 15, 2005.The FASB does not anticipate significant changes in accounting treatments as a result of SFAS 151, which is intended to reduce differences with International Accounting Standards. Adoption of SFAS 151 is not anticipated to generate a material impact to the Group.

In December, 2004, the FASB issued SFAS No. 152, ‘Accounting for Real Estate Time-Sharing Transactions—an amendment of FASB Statements No. 66 and 67’ (“SFAS 152”). The Statement references earlier guidance included in FASB Statement No. 66, ‘Accounting for Sales of Real Estate’ to AICPA Statement of Position (SOP) 04-2, ‘Accounting for Real Estate Time-Sharing Transactions’. SFAS 152 also amends Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, highlighting that guidance therein that relates to incidental operations and costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. SFAS 152 is effective for accounting periods beginning after June 15, 2005. Adoption of SFAS 152 is not anticipated to generate a material impact to the Group.

In December, 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 153 ‘Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29’ (“SFAS 153”). SFAS 153 amended one of the exceptions to the principle that exchanges be based on the fair values of the items exchanged. SFAS 153 eliminated the exception provided for the nonmonetary exchange of similar productive assets, and replaced this with an exception for the nonmonetary exchange of items that lack commercial substance. SFAS 153 is effective for accounting periods beginning after June 15, 2005, and is intended to reduce differences with International Accounting Standards. Adoption of SFAS 153 is not anticipated to generate a material impact to the Group.

In December, 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123(R) ‘Accounting for Stock-Based Compensation’ (“SFAS 123(R)”). SFAS 123(R) requires public entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). SFAS 123(R) is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. FAS 123(R) eliminates the alternative to use Opinion 25’s intrinsic value method of accounting, that was provided as an alternative option in Statement 123 as originally issued. The Group currently accounts for stock-based compensation using the intrinsic method and provides a pro forma disclosure in Note 43 of amounts that would arise under the fair value method. The effective date for implementation SFAS of 123(R) by public entities with a year end of March 31, is April 1, 2006. A program of work is underway in the Group to review the detailed provisions and implications of the Standard, and has yet to determine the impact of adopting its requirements on the financial statements.

In May, 2005, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 154 ‘Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3’(“SFAS 154”). APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, and provides guidance where this is impractical. The Statement carries forward certain other guidance from Opinion 20, including the treatment of changes in estimate and the correction of errors. SFAS 154 is effective for accounting years beginning after December 15, 2005, and is intended to reduce differences with International Accounting Standards. SFAS 154 will be adopted on a prospective basis.

Impact of new UK accounting standards

In December, 2003, the Urgent Issues Task Force (“UITF”) of the Accounting Standards Board issued Abstract 38 “Accounting for ESOP Trusts”. The effect of this UITF Abstract is to require investments held in an entity’s own shares through an ESOP trust to be treated as a deduction in equity rather than recorded as an asset. At March 31, 2005 the Group held £26 million of own shares, treated as a deduction from equity as required under the UITF Abstract.

International Financial Reporting Standards

British Airways will prepare its March 31, 2006, consolidated financial statements under International Financial Reporting Standards (IFRS).

The adoption of IFRS will result in changes to the presentation of the financial statements (including disclosures analysis) and to the amount and timing of the recognition of profits and losses, and assets and liabilities. The main impacts on BA will be as follows:

IAS 16 – Property, Plant and Equipment

Major engine overhaul will be treated as a separate component within fixed assets and depreciated over the period to the next overhaul as opposed to expensing when incurred.

IAS 18 – Revenue Recognition

The area impacted by this standard will be the two loyalty programs the Group operates – the BA Executive Club (BA Miles) and Air Miles Travel Promotions Limited (Air Miles). A portion of the revenue on the sale of BA Miles to third parties and on the sale of AirMiles will be deferred. The amount deferred will be dependent on the fair value of the miles sold.

IAS 19 – Employee Benefits (defined benefit pension schemes)

On transition to IFRS, the full value of any pension surplus or deficit will appear on the balance sheet with the corresponding charge to reserves, net of deferred tax.

IAS 32 – Financial Instruments – Disclosure and Presentation

IAS 32 was adopted on April 1, 2005 in line with the exemption under IFRS 1 to prepare the comparative period under IFRS without IAS 32. This standard does not have a material impact on British Airways.

IAS 39 – Financial Instruments, Recognition and Measurement

IAS 39 was adopted on April 1, 2005 in line with the exemption under IFRS 1 to prepare the comparative period under IFRS without IAS 39. This standard impacts the accounting for a wide range of financial instruments, including those used as part of the Group strategy, for example fuel hedging. A new fuel hedging system has been implemented to measure the effectiveness of the fuel hedges. Based on our experience to date, our fuel hedges are largely effective.

IAS 12 – Taxation

Deferred tax will be provided on temporary differences rather than timing differences as under UK GAAP. As a result, additional tax will be provided.

Item 6 — Directors, Senior Management and Employees

During fiscal 2005 the business of BA was directed by a Board of Directors which reduced in number from 12 to 11 members. All Directors are subject to retirement every three years and are eligible for re-election by the shareholders. Significant changes to the membership of the Board took place at the Annual General Meeting on July 19, 2005. The Directors of BA immediately prior to the meeting (and their respective ages) were:

CHAIRMAN

Martin Broughton (58)
Board Member since May 2000, Deputy Chairman from November, 2003 becoming non-executive Chairman in July, 2004. Safety Review Committee and Chairman of the Nominations Committee. Martin Broughton is Chairman of the British Horseracing Board.

CHIEF EXECUTIVE

Roderick Eddington (55)
Executive Board member since 2000. Rod Eddington joined the airline as Chief Executive in May, 2000. He is a non-executive director of News Corporation and of John Swire & Son Pty Limited. Rod will be retiring from British Airways on September 30, 2005.

CHIEF EXECUTIVE DESIGNATE

William Walsh (43)
Executive Board Member since May 3, 2005. Formerly Chief Executive of Aer Lingus, he is a non-executive director of Fyffes Plc.

CHIEF FINANCIAL OFFICER

John Rishton (47)
Executive Board member since September, 2001. Having originally joined the airline in 1994, John Rishton was appointed as Chief Financial Officer in September, 2001. He is a non-executive director of Allied Domecq PLC.

DIRECTOR OF CUSTOMER SERVICE AND OPERATIONS

Michael Street OBE (57)
Executive Board member since December, 2000. Mike Street has been Director of Customer Service and Operations since 1997. He sits on the Council of Buckinghamshire Chiltern University College and is a director and trustee of The ACT Foundation Limited. He is a non-executive director of WSH Group Ltd and Kempton Park Racecourse Company Limited. Mike will be retiring from British Airways on September 30, 2005.

NON-EXECUTIVE DIRECTORS

Maarten van den Bergh (63)
Independent non-executive director since 2002 and senior independent non-executive director since July, 2004. Audit, Nominations and Remuneration Committees. He is Chairman of Lloyds TSB Group Plc and a non-executive director of BT Group plc, Royal Dutch Shell PLC and a member of the Supervisory Board of Akzo Nobel, having previously been President of Royal Dutch Petroleum Company and Vice-Chairman of the Committee of Managing Directors of the Royal Dutch/Shell Group of companies.

Dr Ashok Ganguly (69)
Independent non-executive director since 1996. Audit and Safety Review Committees. A Fellow of the Royal Society of Chemistry, Ashok Ganguly is Chairman of Technology Network (India) Private Limited, ICICI OneSource Ltd and ABP Ltd Group, director of ICICI Knowledge Park Ltd, Mahindra & Mahindra Ltd, Wipro Corporation, Tata AIG Life Insurance Co. Ltd, Reserve Bank of India, Hemogenomics Pvt Ltd and New Skies Satellites.

Captain Michael Jeffery (60)
Non-executive director since October, 2001. Chairman of the Safety Review Committee. Captain Jeffery was Director of Flight Operations from 1995 until his retirement from British Airways in June, 2001. He was a member of the West Michigan University College of Aviation Advisory Board until June, 2005.

Denise Kingsmill (58)
Independent non-executive director since November, 2004. Audit and Safety Review Committees. Until December, 2003, she chaired the Department of Trade and Industry’s accounting for people task force and was deputy chairman of the Competiton Commission. She is also non-executive director with the Home Office and chairs the advisory forum for Laing O’Rourke plc.

Dr Martin Read (55)
Independent non-executive director since May, 2000. Chairman of the Remuneration Committee. Martin Read is Group Chief Executive of LogicaCMG plc and a non-executive director of the Boots Group PLC.

Alison Reed (48)
Independent non-executive director since December, 2003. Chairman of Audit Committee. Alison Reed left Marks & Spencer plc, where she was Group Finance Director, at the end of April, 2005 and became the Group Finance Director of Standard Life on June 13, 2005.

Lord Renwick of Clifton (67)
Independent non-executive director since 1996. Remuneration and Safety Review Committees. Previously British Ambassador to the United States and to South Africa. He is Vice Chairman Investment Banking of J P Morgan Europe, Chairman of Fluor Ltd, director of BHP Billiton, SABMiller Plc, Compagnie Financiere Richemont AG and a Trustee of The Economist.

Board Committees

The Audit Committee meets at least quarterly under the chairmanship of Alison Reed and consists solely of independent non-executive directors. At the beginning of the year the members were Martin Broughton, Maarten van den Bergh, Ashok Ganguly, and Alison Reed, who succeeded Martin Broughton as chairman of the Committee on July 20, 2004, the date on which Martin Broughton left the Committee on becoming Chairman of the Company. Denise Kingsmill joined the Committee on November 1, 2004. The external and internal auditors, the General Counsel and the Company Secretary normally attend meetings of the Committee and have rights of access to it. Executives attend as required. In addition, the Committee has held closed meetings and has also met privately with each of the external and internal auditors. The Committee reviews the company’s financial statements to ensure that its accounting policies are the most appropriate to the company’s circumstances and that its financial reporting presents a balanced and understandable assessment of the company’s position and prospects. It also keeps under review the company’s system of internal control, including compliance with the company’s codes of conduct and the scope and results of the work of internal audit and of external audit, together with the independence and objectivity of the auditors. The Committee is responsible for overseeing the performance, as well as the objectivity and independence, of the auditor which it does by requiring reports from the auditor, a requirement to pre-approve fees for non-audit work and by ensuring that fees for non-audit work remain lower than those for audit work. The Committee is also responsible for oversight of the company’s policy on whistleblowers and the Risk Group (see Internal Control below).

The Nominations Committee meets at least once a year, and additionally if required, to consider the balance of the Board’s membership, to identify any additional skills or experience which might enhance the Board’s performance, and to interview candidates and recommend appointments to or, where necessary, removals from, the Board. The Committee also reviews the performance of any director seeking re-election at the forthcoming annual general meeting. The Committee’s remit also includes review of corporate governance. On July 20, 2004 Lord Marshall retired as Chairman of the company and of the Nominations Committee. The process which resulted in the selection of the new chairman on November 7, 2003, was led by Maarten van den Bergh. From July 20, 2004, Martin Broughton has chaired the Committee and its other members are Maarten van den Bergh and Martin Read. No member of the Committee participates in any discussion of his or her own performance.

The Remuneration Committee of the Board meets at least twice a year and additionally if required to determine the company’s policy on remuneration for the executive directors, senior executives below Board level, the Chairman and the Company Secretary, to review that remuneration and to consider and decide grants under the company’s long term incentive plans. The Committee consists solely of independent non-executive directors and is chaired by Dr Martin Read, its other members were Martin Broughton (until July 20, 2004), Lord Renwick (from July 20, 2004) and Maarten van den Bergh. No director is involved in deciding his or her own remuneration. The fees for the non-executive directors are fixed by the executive directors on the recommendation of the Chairman.

The Safety Review Committee meets at least five times per year under the chairmanship, in the year under review, of Captain Michael Jeffery, a former Director of Flight Operations. Its other members were Martin Broughton, (until July, 2004) Baroness O’Cathain (until December, 2004), Dr. Ganguly, Lord Renwick and, from November, 2004, Denise Kingsmill. The Committee considers matters relating to the operational safety and security of the airline and subsidiary airlines as well as health and safety issues. The Committee is advised by an external expert, Sir Michael Alcock GCB KBE FREng.

Service Contracts of Executive Directors

Each of the three executive directors who served during the year under review has a rolling contract with a one-year notice period. As a matter of policy, in the event of new external appointments, the length of service contracts would be determined by the Remuneration Committee in the light of the then prevailing market practice. However, the Remuneration Committee recognises that, in some cases, it may be necessary to offer a contract with a notice period in excess of one year in order to attract a new executive director. In these circumstances, the Remuneration Committee acknowledges that the notice period should reduce to one year after the initial period in accordance with paragraph B.1.6 of the Combined Code. There is no express provision for compensation payable upon early termination. The service contract for Willie Walsh provides for an initial notice period of two years reducing month-by-month to a period of one year. The Company’s Commercial Director, Martin George, was elected a director by shareholders at the Annual General Meeting on July 19, 2005. He also has a rolling contract with a one year notice period. The service contracts include the following terms:


Executive Director	Date of contract	Unexpired term/notice period


Rod Eddington	July 7, 2000	retiring on September 30, 2005

Mike Street	July 1, 2001	retiring on September 30, 2005

John Rishton	September 1, 2001	terminable on 12 months notice

Willie Walsh	March 8, 2005	terminable on 12 months notice after the first year

Martin George	February 1, 1997	terminable on 12 months notice

Service Agreements of Non-Executive Directors

Except where appointed at a general meeting, directors stand for election by shareholders at the first annual general meeting following appointment and stand for re-election every three years thereafter under Article 87. There is no express provision for compensation payable upon early termination. None of the Chairman or the non-executive directors has any right to compensation on the early termination of their appointment. The letters of engagement for the Chairman and the non-executive directors, were reviewed after the publication of the revised Combined Code and new letters of engagement were entered into in March, 2004, copies of which have been filed as exhibits to the Company’s annual report on Form 20-F and are also available at www.bashareholders.com. As at the end of the Annual General Meeting held on July 19, 2005, the dates of the Chairman’s and current non-executive Directors’ appointments are as follows:


Non-executive	Date of appointment	Date of election/ last re-election	Expires at the Annual General Meeting in


Martin Broughton	May 12, 2000	July 15, 2003		2006
Maarten van den Bergh	July 16, 2002	July 19, 2005		2008
Denise Kingsmill	November 1, 2004	July 19, 2005		2008
Dr Martin Read	May 12, 2000	July 15, 2003		2006
Alison Reed	December 1, 2003	July 20, 2004		2007
Ken Smart	July 19, 2005	July 19, 2005		2008
Baroness Symons	July 19, 2005	July 19, 2005		2008

In addition to Rod Eddington, Willie Walsh, John Rishton, Mike Street and Martin George above, the executive officers of the BA Group listed below each have service contracts.

Robert Boyle (40), Director of Commercial Planning. Joined the airline in 1993 in Corporate Finance, becoming General Manger, Network Development in 1998, taking on responsibility for Fleet Planning in 2002.

Paul Coby, (49), Chief Information Officer. Joined the airline in 1996 as Im Systems Supply Board Manager becoming Chief Information Officer in 2000.

Lloyd Cromwell Griffiths, (60), Director of Flight Operations. Joined the airline in 1973 as a pilot becoming Director of Flight Operations in 2001.

Alan McDonald, (55), Director of Engineering. Joined the airline in 1966 as an Apprentice Engineer becoming Director of Engineering in 2001.

Roger Maynard, (62), Director of Investments and Alliances. Joined the airline in 1987 as Vice-President Commercial Affairs North America, becoming Director of Corporate Strategy in May 1991.

Neil Robertson, (52), Director for People. Joined the airline in 1976 as a graduate trainee becoming Director for People in 2002.

Robert Webb QC, (56), General Counsel. Joined the airline in 1998 and has responsibility for Legal, Government and Industry Affairs, Safety, Security, Risk Management, Community Relations and the Environmental departments of the airline.

Alan Buchanan, (47), Company Secretary. Joined the airline in 1990 as Principal Legal Adviser Finance becoming Company Secretary in April 2000.

The Company has arranged appropriate insurance cover in respect of legal action against its directors and officers. In May, 2004, the Company granted rolling indemnities to the directors and the secretary, uncapped in amount but subject to applicable law, in relation to certain losses and liabilities which they may incur in the course of acting as officers of companies within the group.

Compensation of Directors and Officers

The remuneration of the executive Directors for the year ended March 31, 2005 was:


	Rod Eddington		John Rishton		Mike Street

	2005		2005		2005

	(£’000)
Basic salary		592		340		345
Bonus		300		110		86
Taxable benefits*		25		16		22

Total		917		466		453


	*	Taxable benefits include a company car or cash equivalent, fuel, private health insurance and personal travel.

The remuneration of the three executive directors has been adjusted as reflected above from the amounts listed in the previously filed service contracts.

The remuneration (fees and taxable benefits) paid to non-executive directors for the year ended March 31, 2005 were:


	2005
	Fee		Taxable benefit*

	(£’000)

Martin Broughton		208		21
Maarten van den Bergh		38		0
Dr. Ashok Ganguly		35		0
Captain Michael Jeffery		48		15
Denise Kingsmill (1)		15		1
Dr Martin Read		37		0
Alison Reed		37		0
Lord Renwick		33		1

Total		451		38


	* Taxable benefits include a company car or cash equivalent, fuel, private health insurance and personal travel.
	(1)	Appointed to the Board of Directors in November, 2004.

The Chairman’s fee is determined by the Remuneration Committee. Fees for the non-executive directors are determined by the executive directors on the recommendation of the Chairman. At the beginning of the year in question, the fees were £27,500 per annum plus £600 for each Board Committee separately attended. The fees were subsequently reviewed in September, 2004, having last been reviewed in April, 2001. From October 1, 2004 the fees were £35,000 per annum, with the chairmen of the Audit and Remuneration Committees and the senior independent non-executive director each receiving £7,500 per annum in addition to these fees. No other fees are now paid for attendance at Board committees. The current Chairman of the Safety Review Committee receives £15,000 in addition to these fees and is provided with a company car and fuel. The Chairman and the non-executive directors are not eligible to participate in the long term incentive plans. Their fees are not pensionable.

They are also eligible for non-contractual travel concessions. Captain Jeffery, being a former executive of the company, is in receipt of a pension under the Airways Pension Scheme. As a former executive, Captain Jeffery retained conditional share options under the long term incentive plan, granted whilst he was serving as an executive of the company, however, these lapsed on April 1, 2005.

For 2005, the aggregate compensation paid or accrued (excluding pension benefits) by BA to all members of the Board of Directors and its other executive officers named above during the year for services in all capacities was £2,524,084. Also during fiscal 2005, pension contributions of £366,951 were paid for the benefit of members of the Board of Directors and BA’s other executive officers. For the year ended March 31, 2005 Rod Eddington earned an annual pension of £24,074, John Rishton earned an annual pension of £19,789, and Mike Street earned an annual pension of £13,374.

The Company has three main pension schemes. Two of these, Airways Pension Scheme (APS) and New Airways Pension Scheme (NAPS), are defined benefit schemes and are closed to new members. The new scheme, British Airways Retirement Plan (BARP) is a defined contribution scheme. Rod Eddington and John Rishton are members of both the New Airways Pension Scheme (NAPS) and an unfunded unapproved retirement scheme which, under the terms of their service contracts, will provide a total retirement benefit equivalent to 1/30th and 1/56th respectively of basic salary for each year of service. Mike Street is a member of NAPS which will provide 1/56th of pensionable pay for each year of service and Willie Walsh is a member of BARP.

Share Ownership

The interests in shares held by the Directors as of March 31, 2005 were as follows:


	British Airways Plc Ordinary Shares

	March 31, 2005		April 1, 2004		% of issued share capital

Martin Broughton		24,090		24,090		0.002
Rod Eddington		—		—		0.000
Mike Street		6,678		6,678		0.000
John Rishton		2,039		2,039		0.000
Maarten van den Bergh		2,000		2,000		0.000
Dr. Ashok Ganguly		104		104		0.000
Captain Michael Jeffery		2,624		2,624		0.000
Denise Kingsmill		—		—		0.000
Dr Martin Read		8,000		8,000		0.000
Alison Reed		10,000		—		0.000
Lord Renwick		32,014		32,014		0.002

Total		87,549		77,549		0.010

No Director has any interest in the share capital of any of the Company’s subsidiaries.

In addition to the Directors, as detailed below, the executive officers of BA held interests in 4,041,799 options as of June 30, 2005

Options to Purchase Securities from Registrant or Subsidiaries

As of June 30, 2005 employees of the Company held options to purchase 54,163,811 Ordinary Shares at exercise prices ranging between 157p and 465p per Share.

The following Directors held options to purchase ordinary shares of British Airways Plc granted under the British Airways Share Option Plan 1999, as at June 30, 2005. Options awarded under the 1999 plan are subject to a performance condition as detailed below. The interests in options held by the Directors as of June 30, 2005 were as follows:

Date of grant

Number of
options

Exercise
price

Exercisable for
seven years from

Expiry Date

Rod Eddington

May 26, 2000

138,888

360

May 26, 2003

May 26, 2010

June 26, 2001

163,551

321

June 26, 2004

June 26, 2011

July 1, 2002

290,055

181

July 1, 2005

July 1, 2012

June 25, 2003

350,318

157

June 25, 2006

June 25, 2013

June 25, 2004

216,221

262

June 25, 2007

June 25, 2014

Total

1,159,033

John Rishton

August 26, 1999

21,852

394

August 26, 2002

August 26, 2009

June 28, 2000

31,578

380

June 28, 2003

June 28, 2010

June 26, 2001

70,093

321

June 26, 2004

June 26, 2011

July 1, 2002

124,309

181

July 1, 2005

July 1, 2012

June 25, 2003

191,082

157

June 25, 2006

June 25, 2013

June 25, 2004

117,938

262

June 25, 2007

June 25, 2014

June 23 2005

126,811

276

June 23 2008

June 23 2015

Total

693,539

Mike Street

August 26, 1999

71,903

394

August 26, 2002

August 26, 2009

June 28, 2000

75,605

380

June 28, 2003

June 28, 2010

June 26, 2001

95,015

321

June 26, 2004

June 26, 2011

July 1, 2002

168,508

181

July 1, 2005

July 1, 2012

June 25, 2003

203,821

157

June 25, 2006

June 25, 2013

June 25, 2004

125,801

262

June 25, 2007

June 25, 2014

Total

740,653

Other than those options granted in June 2004, the performance condition attached to the options listed above requires the Remuneration Committee to be satisfied that there has been an increase in the earnings per share (EPS) of the company which is at least four per cent per annum more than the increase in the retail price index during any period of three consecutive financial years within the life of the grant. EPS is calculated as set out in the Statement of Investment Practice No. 1 of the Institute of Investment Management and Research (IIMR) as this is a recognised method in the market. In addition, the Remuneration Committee imposed a threshold of 17.3 pence as the minimum base year EPS before any such increase could qualify towards meeting the performance condition. The threshold was first introduced by the Remuneration Committee in 2000 because EPS in the financial year ending March 31, 2000 was negative, the Committee having determined that it would be inappropriate to attempt to measure EPS from a negative base year. The threshold was altered from 20.8 pence in the financial year 2002/03 to reflect the adoption of FRS 19 ‘Deferred Tax’.

For options granted in June 2004 and June 2005, there is a single opportunity to re-test performance over four years from the same fixed base.

No gains were made on the exercise of share options during the year under review.

The following Directors held conditional awards of options over Ordinary Shares of British Airways Plc granted under the British Airways Long Term Incentive Plan 1996:

The conditional awards of options held by the Directors as of June 30, 2005 were as follows:


	Date of award	Number of conditional awards


Rod Eddington	June 8, 2001	35,700
	June 9, 2003	294,643
	June 16, 2004	166,618

Total		496,961


Mike Street	June 8, 2001	20,740
	June 9, 2003	171,429
	June 16, 2004	96,941

Total		289,110


John Rishton	June 8, 2001	15,300
	June 9, 2003	160,714
	June 16, 2004	90,882

Total		266,896

In relation to awards made in 2000 and 2001, one third of each individual award may vest at the end of the third, fourth and fifth financial years from the year of the grant if the performance of the company, measured by TSR from the year of the grant through to the end of the year in question, places the company at or above the median percentile when compared with the TSR for each of the companies in the FTSE100 index. In relation to awards made from 2002 onwards the whole of the award may vest on the third anniversary of the start of the financial year in which the award was made. If the company’s TSR for the period to that financial year end is at or below the 50th percentile, no awards will vest. If the company’s TSR for the period is at the 50th percentile, 30 per cent of the award (or one third portion in the case of awards in 2000 and 2001) will vest. If the company’s TSR is at the 75th percentile, 65 per cent of the award (or one third portion in the case of awards in 2000 and 2001) will vest. For performance between 50th and 75th percentile, the number of options will be determined on a straight-line basis. If the company’s TSR for the period is at the 90th percentile all of the award (or one third portion in the case of awards in 2000 and 2001) will vest. For performance between 75th and 90th percentile, the number of options will be determined on a straight line basis.

No payment is due upon exercise of options. Options are exercisable for seven years from vesting. All grants of options are subject to the Remuneration Committee being satisfied that the company’s overall financial performance justifies the grant of an option.

British Airways Executive Share Option Scheme 1987

The Company adopted the Executive Share Option Scheme 1987 in 1987, and granted options under this scheme through 1995 to a selected group of key full-time executives. The maximum allocation per executive was four times the greater of the executives emoluments for the current or the preceding year of assessment.

Options were granted at an option price which was not less than the greater of the market value of the shares and the nominal value thereof. Grants were made within 42 days of the preliminary announcement of the Company’s final results and/or the preliminary announcement of the Company’s half-yearly results in respect of any financial period. Options are exercisable between the third and tenth anniversary of the date of grant, conditional on the executive remaining in employment.

British Airways Long Term Incentive Plan 1996

Set out below is a summary of the principal features of the British Airways Long Term Incentive Plan 1996 (“Incentive Plan”), which was adopted at the Annual General Meeting on July 16, 1996. At the time it was intended to operate the Incentive Plan annually. All executive directors and employees of the Company and any subsidiaries (designated by the Directors) who were not within two years of compulsory retirement were eligible to participate in the Incentive Plan.

In relation to grants made in 1996, 1997 and 1998, all executive directors and employees of the Company and any subsidiaries (designated by the Directors) who were not within two years of compulsory retirement were eligible to participate in the Incentive Plan. Individual participation was linked to seniority and the maximum participation was limited to 75% of salary.

As a result of the introduction of the British Airways Share Option Plan 1999 (see below), grants made in 1999 and subsequent years are restricted to Executive Directors and the most senior group of executives who are not within two years of compulsory retirement. Maximum participation continues to be limited to 75% of salary.

Awards of shares are made to selected executives under the Incentive Plan at the discretion of the Remuneration Committee (which consists wholly of non-executive Directors). Awards will vest at the end of a performance period. In relation to the awards made in 1999, 2000 and 2001, achievement against the performance condition is tested for a one third tranche of each award on the third, fourth and fifth anniversary of the start of the financial year in which the award was made. In relation to awards made under the Incentive Plan from 2002 onwards, the performance condition will be tested in relation to the whole award on the third anniversary of the start of the financial year in which the award was made.

On the vesting of an award, the executive will be entitled to be granted an option to acquire some or all of the shares awarded depending on the extent to which the performance conditions, set at the time the award was made, have been satisfied.

An option granted in respect of an award is exercisable immediately and will lapse if not exercised within seven years of grant. No consideration is payable for the shares on the exercise of the option granted on the vesting of an award. No shares will be issued under the Incentive Plan. Entitlements will be satisfied from shares held in an employee benefit trust.

The performance condition set by the Remuneration Committee for the operation of the Incentive Plan in 1996 through 2004 was based on total shareholder return (‘TSR’) over that relevant performance period. In addition, the Remuneration Committee will consider whether or not the Company’s overall financial performance (for example growth in earnings per share) justifies the vesting of an award and the grant of an option. TSR will be measured by reference to the movement in the price of a share and the value of gross dividends paid in respect of the Company’s Ordinary Shares.

Grants made in 1996, 1997, 1998, 1999, 2000 and 2002 failed to achieve the required TSR performance condition and have now lapsed.

In relation to grants made in 1999 and subsequent years, in order for an award to vest in full the TSR in respect of an Ordinary Share of the Company over the performance period must be such as to place it at or above the 90th percentile when compared with the TSR for each of the Comparator Companies over the same period. Where the TSR for the Company over the performance period is at or below the 50th percentile, no shares will be acquired. Where the TSR for the Company over the performance period is between the 50th and 90th percentiles, the number of shares over which an option will be granted will be calculated in accordance with a pre-determined formula.

No awards may be made under the Incentive Plan after the tenth anniversary of the date of the approval of Plan rules by the Company. The Remuneration Committee has determined that no further awards will be made under the Plan – see “Item 6 Directors, Senior Management and Employees – New long term incentive arrangements”.

British Airways Share Option Plan 1999

The Plan enables the Remuneration Committee to grant options to acquire ordinary shares in the company or British Airways’ ADS at an option price in Sterling or (in the case of ADS) in US dollars which is not less than the market value of the shares on the date of grant and, where shares are to be subscribed, their nominal value (if greater). No payment is due upon the initial grant of options. An individual’s participation is limited so that the aggregrate value of the shares over which options are granted in any one year will not exceed basic salary. Exercise of options is subject to a performance condition, the aim of which is to link the exercise of options to sustained improvements in the underlying financial performance of the Company. The performance condition used in the year under review and preceding years required the Remuneration Committee to be satisfied that there has been an increase in the earnings per share (EPS) of the Company which is at least four per cent 4% per annum more than the increase in the retail price index during any period of three consecutive financial years within the life of the grant. EPS is calculated as set out in the Statement of Investment Practice No. 1 of the Institute of Investment Management and Research as this is a recognizsed method in the market. In addition, the Remuneration Committee has imposed a threshold of 17.3 pence as the minimum base year EPS before any such increase could qualify towards meeting the performance condition. The Remuneration Committee selected the performance condition because it is challenging and aligned to shareholders interests. Performance against the condition is assessed by calculating EPS growth of the Company to see if it exceeds the minimum performance required. The threshold was first introduced by the Remuneration Committee in 2000 because EPS in the financial year ended March 31, 2000 was negative, the Committee having determined that it would be inappropriate to attempt to measure EPS from a negative base year. The threshold was altered from 20.8 pence in the financial year 2002/03 to reflect the adoption of FRS 19 ‘Deferred Tax’. No gains were made on the exercise of share options during the year under review. In relation to grants to be awarded under the plan during 2004/05, the Remuneration Committee has determined that the performance condition and the EPS threshold should remain unchanged. If the performance condition is not satisfied over the initial three- year period, there will be a single retest after a further year which will measure performance of the Company over the four- year period commencing with the year in which the grant was made. This retest wasretained, after consultation with major shareholders, in order to recognize the highly cyclical nature of the Company’s EPS and the continued use of 17.3 pence as the minimum base year EPS, which represents a challenging performance hurdle.

British Airways Savings-Related Share Option Scheme 1996

Set out below is a summary of the principal features of the British Airways Savings-Related Share Option Scheme 1996 (“Savings-Related Scheme”). The plan was last operated in the year ended March 31, 2000 and the resultant options became exercisable in June 2003 and remained exercisable for six months. The Company expects to launch a new operation of the plan when the commercial environment is appropriate, however, there are no options outstanding under the scheme at present.

All full-time executive directors and all employees (full-time or part-time) who have worked for the Company or a participating company for a qualifying period as determined by the Directors (but not to exceed five years) and any other employees nominated by the Directors are eligible to participate in the Savings-Related Scheme.

Employees granted an option under the Savings-Related Scheme must enter into a savings contract with a designated savings carrier under which they make monthly savings for a period of three years or, if the Directors determine, any other period permitted under the relevant legislation. The monthly savings must not exceed the limit imposed by the relevant legislation (currently £250 per month). A bonus determined by the Inland Revenue will be payable after three years. An option is granted to the employee which is normally exercisable within six months after the bonus is payable under the savings contract using the amount saved plus the bonus.

Options will be granted at an option price which is not less than 80% of the average of the market value of the shares for the three days following the 14th day after invitations are sent out (or some other date agreed with the Inland Revenue) or, where shares are to be subscribed their nominal value (if greater). Market value means on any day the average of the middle market quotation derived from the UK Financial Services Authority Daily Official List over the three preceding business days.

Options are normally exercisable for a six- month period following the bonus date under the relevant savings contract. If the option is not exercised within this six- month period, the option will lapse. Options may also, however, be exercised early in certain circumstances, for example on the option holder ceasing to be an employee due to death, injury, disability, redundancy, retirement or following change of control of the employing company and in the event of a takeover or winding-up of the Company. Exercise is also allowed where the employee leaves, if the option has been held for more than three years. If any option is exercised early, the option holder may only use the savings made under the savings contract (together with any interest) at that time to exercise the option.

An overall limit is set on the number of shares which may be issued under the Savings-Related Scheme. In any ten-year period, not more than 10% of the issued Ordinary Share capital of the Company may, in aggregate, be issued or be issuable under the Savings-Related Scheme and any other employees’ share scheme operated by the Company.

No options may be granted under the Savings-Related Scheme after the tenth anniversary of the date of the approval of the scheme rules by the Company.

British Airways All Employee Share Ownership Plans

In July, 2000, the Company obtained shareholders’ approval to implement any aspect of the new all employee share plans now known as share incentive plans. The approval permits the Company to operate a partnership share plan which would allow employees in the UK to buy shares from their pre-tax salary and would allow the Company to give matching or free shares to those participants in the share plan. Financial limitations would apply to any new plan. The Company intends to launch the new plans when the commercial environment is appropriate.

For further information regarding the Company’s employee share schemes, see Note 29 to the Financial Statements.

New long term incentive arrangements

No further grants will be made under the Long Term Incentive Plan, which has operated since 1996. It provided for conditional awards of shares worth up to 75% of salary each year, subject to a Total Shareholder Return condition measured against the companies comprising the FTSE100. In its place, the company proposes to introduce a Performance Share Plan, which was approved by shareholders at the annual general meeting on July 19, 2005, it is intended that awards will be made following the annual general meeting. The Committee considers that Performance Shares are more appropriate than share options since they should provide a more effective link between performance and reward and they are less volatile.

For awards in 2005, performance conditions applying to 50% of the award will be subject to Total Shareholder Return (“TSR”) and the remaining 50% of the award will be subject to operating margin performance.

The Committee considers that TSR is an appropriate measure of performance and will determine a significant part of the long-term incentive programme. Under the current Long Term Incentive Plan British Airways’ TSR performance is measured against the FTSE100. Generally there is a poor correlation between the performance of the airline industry and the FTSE100. The Remuneration Committee considers that measuring TSR performance against other airlines would be a more effective incentive and should provide a better link between pay and performance. Accordingly, the Company’s TSR performance will be compared against that of Air Canada, Air France, Air New Zealand, Alitalia, All Nippon Airlines, Iberia, Lufthansa, Northwest Airlines, Qantas Airways, Ryanair, American Airlines, Cathay Pacific, Continental Airlines, Delta Airlines, EasyJet, SAS, Singapore Airlines, South West, United Airlines and US Airways. The Leadership Team of British Airways is increasingly comparing British Airways’ performance to that of competitor airlines in order to establish a clear picture of their relative performance within the aviation industry. This will remain a key aspect of performance benchmarking for the foreseeable future, particularly in the light of anticipated industry consolidation, along with the advent of “open skies” arrangements.

The vesting of the other 50% of the Performance Shares will be determined by British Airways’ operating margin performance. This will measure average annual operating margin over the three-year performance period. Averaging the annual operating margin over the three years is considered appropriate, since this means that all years are included in the calculation, thus rewarding sustained performance throughout the performance period.

Operating margin is defined as Operating Profit/(Loss) divided by Turnover and is the key measure of financial performance in British Airways. The central corporate financial target, which was first approved by the Board under the “Future Size and Shape” review, is a long-term operating margin of 10%. The initial target range proposed represents a challenging performance condition which is aligned to British Airways’ objective of delivering a 10% operating margin across the business cycle.

Details of the comparator group for TSR performance (and vesting schedule) together with the range of operating margin targets are contained in the Notice of Annual General Meeting.

Employees

In fiscal 2005, the Group employed an average of 49,490 employees and employee costs represented approximately 31% of total Group operating expenses. Employee ownership in the Company is encouraged. As at June 16, 2005, some 50% of employees owned 1.67% of the Company’s shares.

The following table sets forth information regarding the Company’s employees:


Fiscal Year	Average Number of Employees		Employee costs as a percentage of total Group operating expenditure


2005		49,490		31	%
2004		51,939		30	%
2003		57,014		28	%
2002		61,460		28	%
2001		62,175		27	%

In 2005, approximately 86% of the Company’s employees were based in the UK with the remainder based abroad, principally in Continental Europe and North America.

BA recognizes four trade unions in the UK with whom negotiations on pay and other terms and conditions of employment are conducted. With the exception of senior management, all BA staff in the UK are covered by collective bargaining agreements. The majority of overseas staff are covered by such agreements. As in most labor intensive industries, strikes, work stoppages and other organized labor activities can have significant adverse effects on operating and financial results.

Pensions

The actuarial valuation of Airways Pension Scheme (APS) and New Airways Pension Scheme (NAPS) as at March, 2003 showed that the £820 million surplus in APS at the last valuation at March, 2000 has fallen to a surplus of £45 million and the NAPS deficit at March, 2000 has risen from £221 million to £928 million at March, 2003.

Prior to the 2003 valuation, the Company paid around £118 million a year into NAPS. As a result of the valuation, contributions to NAPS have increased by £107 million to about £225 million a year. Contributions to APS were previously nil, and have increased to about £26 million per year. This effectively increased the Company’s UK labor costs by some 9%.

APS has been closed to new members since March 31, 1984 and NAPS closed to new members on March 31, 2003. The defined contribution plan for UK employees, the British Airways Retirement Plan (BARP), commenced on April 1, 2003. The number of employees who have joined BARP as at March 31, 2005 was 2,701.

Item 7 — Major Shareholders and Related Party Transactions

No material transactions between BA and its Directors and officers have been entered into in the year ended March 31, 2005 See “Item 6 — Directors, Senior Management and Employees – Service Contracts of Executive Directors” for a description of certain service contracts.

There were no loans or credit transactions with Directors or officers of the Company during the year which would be required to be disclosed in accordance with the requirements of the Companies Act or the requirements of SEC Form 20-F.

As far as is known to the Company, the Company is not directly or indirectly owned or controlled by another corporation, any foreign government or any other entity or person.

As at June 30, 2005 the following companies held 5% or more of the issued share capital of the Company, these shareholders having the same voting rights as all shareholders:


	2005				2004				2003

Shareholder	Percentage of issued capital held		Number of shares held		Percentage of issued capital held		Number of shares held		Percentage of issued capital held		Number of shares held


Franklin Resources Inc		5.94		64,276,358		5.91		64,098,448		7.03		76,108,893

Barclays PLC		5.01		65,532,098		5.07		54,997,945		N/A		N/A

As of June 30, 2005 the Directors and the Officers of the Company, listed on pages 48, 49, 50 and 51 as a group had a beneficial interest in 117,792 Ordinary Shares, which represents approximately 0.10% of the total issued share capital of the Company. See “Item 6 — Directors, Senior Management and Employees – Share Ownership”.

As far as is known to the Company, no arrangements exist, the operation of which may at a subsequent date result in a change in control of the Company.

On June 30, 2005, 7,121,987 ADS (equivalent to 71,219,870 Ordinary Shares or 6.30% of the total Ordinary Shares outstanding) were held by 2,966 holders in the United States.

Item 8 — Financial Information

Consolidated Statements and Other Financial Information.

See “Item 18 — Financial Statements”.

Dividends(1)


	Year ended March 31
	2005			2004			2003			2002			2001


Pounds Sterling
Interim		0.00	p		0.00	p		0.00	p		0.00	p		5.10	p
Final		0.00	p		0.00	p		0.00	p		0.00	p		12.80	p

Total		0.00	p		0.00	p		0.00	p		0.00	p		17.90	p


US Dollars(1)
Interim	$	0.00		$	0.00		$	0.00		$	0.00		$	0.07
Final	$	0.00		$	0.00		$	0.00		$	0.00		$	0.18

Total	$	0.00		$	0.00		$	0.00		$	0.00		$	0.25


(1)	Dollar amounts are translated at the Noon Buying Rate for pounds Sterling at each of the respective payment dates.

Dividends are set forth in the above table under the year to which they relate rather than the year in which they were paid. Dividends shown have not been increased by certain tax credits relating to dividend payments as discussed under “Item 10 — Additional Information — Tax”.

In fiscal year 2005, no interim dividend was paid and the Board of Directors has recommended that no final dividend be paid, due to the financial conditions faced by the Company. Future dividends will be dependent upon the Company’s cash flow, earnings, financial condition and other factors. The compulsory adoption of International Accounting Standards from April 1, 2005 will also impact the Company’s ability to pay a dividend in the foreseeable future due to the material reduction of distributable reserves from applying the new accounting policies.

When financial and legal conditions allow, the Directors expect, in respect of subsequent years, to declare an interim dividend and to recommend a final dividend which will normally be payable in January and July, respectively. Final dividends are subject to approval by the shareholders of the Company at its annual general meeting.

Dividends paid by the Company will be in pounds Sterling and exchange rate fluctuations will affect the US Dollar amounts received by holders of the ADS on conversion by the Depositary of such cash dividends paid. See “Item 3 – Key Information - Exchange Rates”.

Legal Proceedings

Although BA usually has a number of lawsuits and regulatory investigations pending at any one time (currently including deep venous thrombosis claims, investigations by the Office of Fair Trading and the European Commission), BA is not engaged in any litigation or regulatory proceedings the outcome of which in the aggregate is expected to have a material effect on the Group’s financial position or results of operations.

Significant Changes

There have been no significant changes since, March 31, 2005, the date of the Financial Statements included in Item 18 of this report, other than the Convertible Capital Bond maturity which gave rise to approximately a 4.4% increase in the issued share capital.

Item 9 — The Offer and Listing

The principal trading market for the Company’s Ordinary Shares is the London Stock Exchange.

ADS, each representing ten of the Company’s Ordinary Shares, are listed on the New York Stock Exchange. Morgan Guaranty Trust Company of New York is the depositary of the Ordinary Shares underlying the ADS.

The following table sets forth for the periods indicated the highest and lowest middle market quotations for the Ordinary Shares as derived from the Daily Official List of the UK Financial Services Authority and the highest and lowest sales prices of the ADS as reported on the New York Stock Exchange composite tape.


	Ordinary Shares				ADS
	High		Low		High		Low

	(Pence)				(US Dollars)
Five-year data on an annual basis

Year Ended March 31

2001		463		265		67.87		39.25
2002		387		139		54.94		20.3
2003		244.75		86		35.5		14.4
2004		332.25		105.5		61.49		16.63
2005		305.25		199.5		55.75		36.10

Two-year data on a quarterly basis
2004

First Quarter		169.25		105.5		28.31		16.63
Second Quarter		206		147.75		33.10		25.07
Third Quarter		249		171.5		42.45		28.22
Fourth Quarter		332.25		229.5		61.49		41.37
2005
First Quarter		305.25		243.25		55.75		43.08
Second Quarter		278.75		205.5		51.00		37.35
Third Quarter		235		199.5		45.61		36.10
Fourth Quarter		286.5		231		54.11		43.39
Six-month data on a monthly basis
January		265.75		231		50.25		43.39
February		286.5		267.5		54.11		50.25
March		281		263.25		54.01		49.13
April		273.75		236.25		51.55		44.84
May		277		243.5		50.82		45.73
June		280.75		260.75		50.91		46.80

Item 10 — Additional Information

Limitations on Voting and Shareholding

The Company’s Articles of Association provide the board of directors of the Company the authority to limit the right of non-UK persons and of non-EEA nationals to hold or exercise votes in relation to Ordinary Shares of the Company (or ADS in respect thereof) in circumstances where not limiting such holdings or voting rights would adversely affect the Group’s current or future operating rights.

At the Annual General Meeting in 2002, shareholders approved the introduction of a new special voting share (the “Special Share”) into the capital of the Company. The Special Share has no economic value and is held by a special purpose subsidiary of the Law Debenture Trust p.l.c. The sole function of this arrangement is to protect the Company’s operating rights by ensuring that the votes cast by the UK shareholders of the Company, taken as a whole, represent a majority of the votes cast.

Non-UK and non-EEA persons who hold Ordinary Shares (or ADS in respect thereof) are subject to the risk that their rights in respect of the Ordinary Shares may be limited. For more information, see “Item 10 — Additional Information — Memorandum and Articles of Association — Limitations on Voting and Shareholding”.

Memorandum and Articles of Association

The following summarizes certain material rights of holders of the Company’s Ordinary Shares under the provisions of the Company’s Memorandum and Articles of Association and English law. This summary is qualified in its entirety by reference to the Companies Act and the Company’s Memorandum and Articles of Association. Copies of the Company’s Memorandum and Articles of Association have been filed as exhibits to the Company’s annual report on Form 20-F and are also available at www.bashareholders.com. At the Annual General Meeting on July 19, 2005, shareholders approved changes to the Articles of Association relating to the

Company’s adoption of IFRS and to new regulations and legislation regarding treasury shares and directors’ indemnities, respectively, as well as other clarificatory changes. (A copy of the amended Articles of Association is attached to this Form 20-F as Exhibit 1.1.)

The Company’s ordinary shares may be held in certificated or uncertificated form. Holders of the Company’s ordinary shares may be required to make additional contributions of capital in respect of any amounts unpaid on their respective ordinary shares, subject to the terms of issue of such Ordinary Shares.

In the following description, a “member” is the person registered in the Company’s register of members as the holder of the relevant share.

The Company is incorporated under the name “British Airways Plc” and is registered in England and Wales with registered number 1777777. The fourth clause of the Company’s Memorandum provides that its objectives include: (i) to succeed to the undertaking of the British Airways Board (a corporation established by the Civil Aviation Act 1971 and constituted in accordance with the British Airways Board Act 1977), (ii) to carry on business as an airline and to provide air transport services and related businesses, (iii) to provide technical advice or assistance, including research services, as regards any matter in which the British Airways Board had or the Company has skill or experience, (iv) to act as an investment holding company and to acquire, dispose, manage and coordinate the business of any companies in which it has an interest, and (v) to carry on any other business or activity which in the opinion of the directors of the Company is or may be conveniently done in connection with the Company’s activities or is likely directly or indirectly, to enhance the value of or render more profitable all or any part of the Company’s undertaking, property or assets or otherwise to advance the interests of the Company or of its members. The Memorandum grants the Company a broad range of corporate capabilities to effect
these objects.

Directors

Under the Company’s Articles of Association, a director shall not vote in respect of any proposal in which the director or a person connected with the director has an interest which to the director’s knowledge is a material interest other than by virtue of the director’s interests in securities of, or otherwise in or through, the Company. This is subject to certain exceptions relating to: (i) a security, guarantee or indemnity to the director (or a third party) by the Company or any of its subsidiary undertakings in connection with any debts or obligations of the Company assumed by the director, (ii) an offer of securities of or by the Company or any of its subsidiary undertakings in which the director will be interested as an investor, participant or underwriter, (iii) a proposal concerning any other company in which the director is an interested party if the director does not have an interest in 1% or more of the issued Ordinary Shares or the voting rights available to members of the relevant company, (iv) certain benefits plans under which the director may benefit and which do not award any privileges or benefits not generally awarded to the other employees to which the agreement relates, provided that the director shall not vote with respect to the director’s own participation in such plan and (v) liability insurance that the Company is empowered to purchase for the benefit of directors of the Company in respect of actions undertaken as directors (or officers) of the Company.

The quorum necessary for the transaction of business may be fixed from time to time by the directors and, unless so fixed at any other number, shall be two. A meeting of the directors at which a quorum is present shall be competent to exercise all powers and discretions for the time being exercisable by the directors.

The directors are empowered to borrow money, subject to the limitation that the aggregate outstanding amount of funds borrowed by the Company and its subsidiaries from persons outside the Group shall not exceed the aggregate of the principal amount of the 9.75% Convertible Bonds issued by British Airways Capital Limited and an amount equal to two and one half times the “Adjusted Capital and Reserves,” as defined in the Company’s Articles of Association.

Directors are not required to hold any Ordinary Shares of the Company by way of qualification. Each director shall retire from office at the third annual meeting after the annual meeting at which the director was last elected, but shall be eligible for re-election. If the office is not so filled, the retiring director shall be deemed to have been re-elected except in any of the following cases:


	•	where at such meeting it is expressly resolved not to fill such office or a resolution for the re-election of such directors is put to the meeting and lost,

	•	where such director has given notice in writing to the Company that he is unwilling to be re-elected,

	•	where the failure to fill the office is due to the moving of a resolution in contravention of the Articles of Association, and

	•	where such director has attained any retiring age applicable to him as a director.

At any meeting where a director retires, the office being vacated may, by ordinary resolution, be filled by the retiring director or some other person eligible for appointment.

The ordinary remuneration of the directors shall not exceed a maximum determined from time to time by an ordinary resolution of the shareholders of the Company and shall (unless such resolution otherwise provides) be divisible among the directors as they may agree, or, failing agreement, equally, except that any director who holds office for only part of the period for which such remuneration is payable shall be entitled only to a pro-rated proportion of such remuneration. At the Annual General Meeting on July 15, 2003 shareholders approved a Special Resolution which replaces this provision with a new Article 78 reflecting a change in UK law requiring an annual shareholder vote on the Directors’ Remuneration Report.

A director who holds an executive office (including the office of chairman or deputy chairman whether or not such office is held in an executive capacity), or who serves on any committee of the directors or who otherwise performs services which in the opinion of the directors are outside the scope of the ordinary duties of a director, may be paid such extra remuneration by way of salary, commission or otherwise as the directors may determine. Directors may be reimbursed for reasonable expenses incurred in connection with their services to the Company, including expenses of attending meetings.

Dividends

Under English law, dividends are payable on the Company’s Ordinary Shares only out of profits available for distribution, as determined in accordance with accounting principles generally accepted in the UK and by the Companies Act. Holders of the Company’s Ordinary Shares are entitled to receive such dividends as may be declared by ordinary resolution provided that the dividend does not exceed the amount recommended by the directors. The articles of association give the directors authority (should they deem it appropriate) to declare or pay dividends in any currency. The directors would decide the basis of any currency conversions and how any costs involved are met.

If and so far as in the opinion of the directors the profits of the Company justify such payments, the directors may declare interim dividends, and may also declare fixed dividends on any class of Ordinary Shares that carry dividend rights. The board of directors may also direct dividend payments in whole or in part by the distribution of specific assets, if authorized by an ordinary resolution of the shareholders.

All dividends shall be apportioned and paid pro rata according to the amounts paid on the ordinary shares during the portion of the period in which the dividend is paid, unless the rights attached to any ordinary shares provide otherwise. No amount paid on a share in advance of calls shall be treated as paid on the share.

Any dividend unclaimed may be invested or otherwise made use of by the directors for the benefit of the Company, and after 12 years from the date the dividend was declared, or became due for payment, will revert to the Company.

The directors did not recommend that any dividend should be paid in relation to the year ended March 31, 2005. No dividends were paid in relation to the year ended March 31, 2004.

Voting Rights/Meetings

At any general meeting of members, a resolution shall be decided on a show of hands unless a poll, which is a written vote, is duly demanded. On a show of hands, every member who is present in person or by proxy shall have one vote. On a written vote, every member who is present in person or by proxy shall have one vote for every share held by the member. A written vote may be demanded by any of the following:


	•	the chairman of the meeting;

	•	not less than five members present in person or by proxy and entitled to vote;

	•	a member or members present in person or by proxy and representing not less than one-tenth of the total voting rights of all the members having the right to vote at the meeting; and

	•	a member or members present in person or by proxy and holding Ordinary Shares in the Company conferring a right to vote at the meeting being ordinary shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all the ordinary shares conferring that right.

All resolutions put to the annual general meeting since 2001 have been put to a poll. In relation to subsequent general meetings, the Chairman has indicated his intention to demand a poll. An instrument appointing a proxy shall be deemed to include the right to demand or join in demanding a poll and to speak at the meeting. Two members present in person or by proxy and entitled to vote shall be a quorum for all purposes.

In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of the meeting is entitled to cast the deciding vote.

An annual general meeting shall be held once in every year, at such time (within a period of not more than fifteen months after the holding of the last preceding annual general meeting) and place as may be determined by the directors. All other general meetings shall be called extraordinary general meetings. An annual general meeting shall be convened by advanced written notice of at least 21 days, or a shorter notice period if agreed upon by all of the members of the Company entitled to vote on the matter. An extraordinary general meeting shall be convened upon advanced written notice of at least 14 days, or a shorter notice period if agreed upon by a majority in number of the members having a right to attend holding not less than 95% in nominal value of the Ordinary Shares giving that right. The dates of the meeting, delivery and receipt of notice are not included in determining whether notice is adequate.

Every notice calling a general meeting shall specify the date, time and place of the meeting. The notice shall also state with reasonable prominence in every such notice a statement that a member entitled to attend and vote is entitled to appoint a proxy or proxies to attend and, on a poll, vote instead of him and that a proxy need not be a member of the Company. Notice for any meeting shall state the business to be transacted at the meeting, except for certain routine business set forth in the Company’s Articles of Association such as declaring dividends. Notice for an annual general meeting shall specify the meeting as such.

Variation of Rights

If, at any time and from time to time, the share capital of the Company is divided into different classes, the rights attached to any class may, subject to the provisions of the Companies Act, may be varied or abrogated either with the consent in writing of the holders of three-quarters of the issued Ordinary Shares of the class or with the sanction of an extraordinary resolution passed at a separate general meeting of the holders of the Ordinary Shares of the class and may be so varied or abrogated either while the Company is a going concern or during or in contemplation of a winding-up. At every such separate meeting all the provisions of the Articles of Association relating to general meetings of the Company shall apply, except that the necessary quorum shall be at least two persons holding or representing by proxy at least one-third in nominal value of the issued Ordinary Shares of the class and that any holder of Ordinary Shares of the class present in person or by proxy may demand a poll and that every such holder shall on a poll have one vote for every share of the class held by him. These provisions apply to the variation or abrogation of the special rights attached to some only of the Ordinary Shares of any class as if each group of Ordinary Shares of the class differently treated formed a separate class the special rights of which are to be varied.

The Government is consulting on proposed changes which would vary the law relating to annual general meetings.

Rights in a Winding-Up

In the event of a winding-up, after the payment of all creditors, including certain preferential creditors, whether statutorily preferred creditors or normal creditors, a liquidator may, with the authority of an extraordinary resolution:


	•	set such value as the liquidator deems fair upon the property of the Company and may determine how such division shall be carried out as between the members or different classes of members;

	•	vest any part of the assets in trustees upon such trusts for the benefit of members; and

	•	divide among the members in specific or in kind the whole or any part of the assets of the Company and whether or not the assets shall consist of property of one kind or shall consist of properties of different kinds.

Limitations on Voting and Shareholding

Rights of BA to operate, in particular on international routes, could be withdrawn if the Company ceased to be substantially owned and effectively controlled by UK nationals or, in some cases, non-EEA nationals. Accordingly, the Articles of Association of the Company contain powers which may be used to limit the number of voting rights of Ordinary Shares in which non-UK or non-EEA nationals own interests or, if necessary, to require their compulsory disposal, or to restrict the transferability of Ordinary Shares. Holders of ADS will generally be considered to be interested in the Ordinary Shares underlying their ADS.

These powers include the power to impose an overall limit of not less than 25% on the number of Ordinary Shares (“Relevant Shares”) in which non-UK or non-EEA nationals have any direct or indirect interest, as broadly defined in the Articles. However, these powers are only exercisable if the Directors determine that it is necessary to use such powers to protect BA’s operating rights because action affecting such rights has occurred or is contemplated, threatened or intended or may occur because of the ownership or control of the Company by non-UK or non-EEA nationals or because of the aggregate number of Relevant Shares.

There is no accepted international agreement as to what level of ownership or control must be retained by UK or EEA nationals but, in the absence of intervention from a foreign government or large interests of single or associated non-UK or Non-EEA nationals, the Directors would not generally expect to have to apply any restriction unless the proportion of Relevant Shares threatens to exceed 50% or to have to set a limit on Relevant Shares below that level, although no assurance can be given that this would be the case. All Ordinary Shares represented by ADS will generally be deemed by the Directors to be Relevant Shares unless the contrary is established to the satisfaction of the Directors. The Directors will publish the level of Relevant Shares from time to time. As of July 1, 2005, the proportion of Ordinary Shares held by non-UK nationals was 36.05%; and by non-EEA nationals, 22.77%. Having regard to all relevant factors, including the fact that there are no large interests of single or associated non-UK or non-EEA nationals, and in the absence of unforeseen developments, BA does not at present expect (but without limiting its freedom to act) to seek to exercise its power to restrict non-UK or non-EEA Ordinary Share ownership.

If an overall limit on Relevant Shares is set and were or would be exceeded, the Directors would be entitled to refuse to register transfers of Ordinary Shares which would become Relevant Shares, holders of Ordinary Shares in excess of the limit could lose the right to attend and vote at general meetings and, as a last resort, the Directors could require disposals to reduce the number of Relevant Shares to the limit. The Directors could also, if they make a determination, exercise all or any of such powers in respect of certain Relevant Shares either without setting an overall limit or when the proportion of Relevant Shares is less than 25%. In selecting Relevant Shares to be affected, the Directors would have regard to those which in their opinion caused their determination but would otherwise have regard to those last registered as Relevant Shares except where they consider that would be inequitable. A person interested in such Ordinary Shares could make representations as to why his Ordinary Shares should not have been selected.

To enable the Directors to identify Relevant Shares, each transferee of Ordinary Shares (but not ADS) will generally have to provide a declaration as to the nationality of persons having interests in those Ordinary Shares and each shareholder will be obliged to notify the Company if any of his Ordinary Shares become Relevant Shares.

At the Company’s 2002 Annual General Meeting, on July 16, 2002, the Special Share was introduced into the capital of the Company. This Special Share has no economic value and is held by a special purpose subsidiary of The Law Debenture Trust p.l.c.

The sole function of this arrangement is to ensure that the votes capable of being cast by the UK shareholders of the Company, taken as a whole, never falls below a majority. The voting rights of the special share would only be triggered by a notice given by the Board of Directors. Following such a notice, the Special Share would provide its holder with a variable number of votes at any general meeting. That number of votes would depend on the number of shares owned solely by UK shareholders at any time, since the Special Share will always have attached to it sufficient votes to ensure that, when aggregated with the votes attaching to such solely UK owned shares, the total is 50% + 1 vote. The votes of the Special Share would be made by the holder in a wholly mechanical manner and will simply depend on the proportion of UK owned shares being voted for or against a particular resolution and the proportion of UK owned shares not being voted on such resolution. No third party would have any discretion to change these proportions. The Board of Directors would publicize any use of the Special Share’s voting rights in accordance with the rules of each exchange on which it is listed.

The UK government is currently considering the extent to which the EU Takeover Directive will be introduced into UK law, the operation of which could have an adverse impact on the operation of the Special Share. The Company has made representations to the government in this regard and a favorable decision is hoped for.

Other Restrictions

There are no other limitations on holding or voting applicable to foreign owners of Ordinary Shares in the Company, other than those restrictions which apply equally to UK and European owners of such shares. Below is a summary of certain significant restrictions on holding or voting which apply to all holders of Ordinary Shares.

Disclosure of Interests and Restrictions on Voting

The Directors may by a disclosure notice require any member or other person appearing to be or to have been interested in Ordinary Shares to disclose such information as the Directors shall require relating to the ownership of or interests in the Shares in question. If any member or person appearing to have an interest in any Shares fails to give to the Company, within 28 days of the service on him of a disclosure notice, the information required, the registered holder of those Shares shall not be entitled to attend or vote at any general meeting of the Company or any meeting of holders of any class of shares of the Company. The 28-day period is reduced to 14 days in the case of a member holding not less than 0.25% of the issued Shares of any class and, in addition, the payment of any

dividend to such a member will be withheld and his Shares will not be transferred except pursuant to a take-over offer, a sale at arm’s length or a sale through a recognized investment exchange. A shareholder shall also not be entitled to attend or vote in the circumstances described under “Limitations of Voting and Shareholding” above. In addition, a shareholder shall not be entitled, in respect of any Shares, to vote at any general meeting or separate class meeting unless all amounts presently payable by him in respect of his Shares have been paid.

Under the Companies Act 1985 (as amended) of Great Britain (the “Companies Act”), any person who acquires (alone or, in certain circumstances, with others) a material interest in the voting share capital of the Company in excess of 3% or a non-material interest in excess of 10% comes under an obligation to disclose prescribed particulars to the Company in respect of those shares. An obligation of disclosure also arises where such person’s notifiable interests subsequently fall below the notifiable percentage, or where, above that level, the percentage of the Company’s voting share capital in which he is interested (expressed in whole numbers) increases or decreases. In addition, the Company may require persons who it believes to be, or to have been within the previous three years, interested in its voting shares to disclose prescribed particulars of those interests. Failure to supply the information required may lead to disenfranchisement of the relevant shares and a prohibition on their transfer and on dividend and other payments in respect of them.

Material Contracts

See “Item 6 — Directors, Senior Management and Employees — Compensation of Directors and Officers”.

Exchange Controls

There are currently no UK foreign exchange control restrictions on the payment of dividends on BA’s Ordinary Shares or on the conduct of the BA Group’s operations.

Tax

The Company did not pay a dividend to shareholders during fiscal 2005 on either its Ordinary Shares or ADS.

The following discussion is intended only as a descriptive summary of the material UK and US federal income tax consequences of owning Ordinary Shares or ADS and it does not purport to be a complete technical analysis or listing of all potential tax effects relevant to the Ordinary Shares or ADS. The statements of UK and US tax law set forth below are based (i) on the laws and the UK Inland Revenue practice and published Statements of Practice in force as of the date of this report, (ii) on existing US federal income tax law, including legislation, regulations, administrative rulings and court decisions as of the date of this report and (iii) on representations of the Depositary and the assumption that each obligation in the deposit agreement among BA, the Depositary and the holders from time to time of ADS and any related agreement will be performed in accordance with its terms. The statements herein are subject to any changes occurring after the date of this report in UK or US law, or in the double tax conventions between the US and the UK with respect to income and capital gains taxes (the “Income Tax Convention”) and with respect to estates and gifts taxes (the “Estate Tax Convention”).

UK Income Tax

Beneficial owners of ADS who are resident in the US are treated as the owners of the underlying Ordinary Shares for purposes of the Income Tax Convention and US federal income tax.

Under the current Income Tax Convention, a US resident individual or corporate holder of an Ordinary Share or ADS who or which satisfies the following conditions (an “Eligible US Holder”):


	(i)	is resident in the US for the purposes of the Income Tax Convention (and, in the case of a corporation, not also resident in the UK for UK tax purposes);

	(ii)	is not a corporation which, alone or together with one or more associated corporations, controls, directly or indirectly, 10% or more of the voting stock of BA;

	(iii)	whose holding of the Ordinary Shares or ADS is not effectively connected with a permanent establishment in the UK through which such holder carries on a business or with a fixed base in the UK from which such holder performs independent personal services; and


	(iv)	under certain circumstances, is not an investment or holding company 25% or more of the capital of which is owned, directly or indirectly, by persons that are neither individual residents nor citizens of the US will generally be entitled under the current Income Tax Convention to receive, in addition to any dividend paid by BA, an amount equal to the tax credit available to UK resident shareholders in respect of such dividend (currently equal to one –ninth of the dividend paid), but subject to a notional withholding tax equal to 15% of the sum of the dividend paid and the tax credit. The withholding tax will exceed the tax credit and therefore no additional payment will result.

The amount of withholding tax is restricted to the amount of the tax credit and no additional withholding tax is due in situations where the withholding tax is more than the tax credit.

For example a dividend of 80 will entitle the holder to receive a tax credit of 8.89 (i.e. one-ninth of 80) and the amount of withholding tax will be limited to 8.89 (even though 15% of the gross dividend would be 13.33). The result is that no refund entitlement exists and there is no withholding tax due. As a consequence the payment will equal 80.

It is anticipated that almost all ADS holders will be subject to the above arrangements.

US shareholders who own less than 10% of the voting stock as portfolio investors, and who are entitled to a tax credit under the Income Tax Convention may elect to be treated as receiving an amount equal to the credit without affirmatively making a claim to the UK or obtaining a receipt therefrom. This election is made on Line 5 of Form 8833, which is to be filed with the portfolio investor’s income tax return. Such an investor making this election will be treated as having received an additional dividend equal to the gross tax credit payment and as having paid the UK withholding tax on such tax credit payment.

UK Tax on Capital Gains

Under the current Income Tax Convention, the US and the UK each may, in general, tax capital gains in accordance with the provisions of its domestic law. Under current UK law, residents of the US who are not resident or ordinarily resident in the UK will not be subject to UK tax on capital gains made on the disposal of their ADS or Ordinary Shares unless those ADS or Ordinary Shares are held in connection with a trade carried on through a permanent UK establishment. A US holder of an ADS or Ordinary Share will be liable for US federal income tax on such gains in the same manner and to the same extent as on any other gains from the sale or exchange of stock.

UK Inheritance Tax

Under the current Estate Tax Convention, ADS or Ordinary Shares held by an individual who for the purpose of the convention is domiciled in the US and is not a national of the UK will not, provided any tax chargeable in the US is paid, be subject to UK inheritance tax on the disposal of ADS or Ordinary Shares by way of gift or upon the individual’s death unless the ADS or Ordinary Shares are part of the business property of a permanent UK establishment of the individual or, in the case of a holder who performs independent personal services, pertain to a fixed base situated in the UK. In the exceptional case where the ADS or Ordinary Shares are subject both to UK inheritance tax and to US federal gift or estate tax, the Estate Tax Convention generally provides for double tax to be relieved by means of credit relief.

UK Stamp Duty and Stamp Duty Reserve Tax

Transfer of ADS will not be subject to UK stamp duty provided that the transfer instrument is not executed in, and at all times remains outside the UK.

Under the Finance Act 1986, a stamp duty reserve tax (“SDRT”) of 1 ½% is payable on all transfers to the Depositary, or its nominee, of Ordinary Shares for inclusion in ADS. Such SDRT is calculated on the purchase price or market value of the Ordinary Shares so transferred.

US Federal Income Tax

For purposes of this discussion, a US holder is a beneficial owner of Ordinary Shares or ADS that is (a) a citizen or resident of the US, (b) a domestic corporation, (c) an estate whose income is subject to US federal income tax regardless of its source, or (d) a trust if a US court can exercise primary supervision over the trust’s administration and one or more US persons are authorized to control all substantial decisions of the trust. This section does not apply to US holders if members of a special class of holders subject to special rules, including a dealer in securities, a trader in securities that elects to use a mark-to-market method of account for securities holdings, a tax-exempt organization, a life insurance company, a person liable for alternative minimum tax, a person that actually or constructively owns 10% or more of the Company’s voting stock, a person that holds

Ordinary Shares or ADS as part of a straddle or a hedging or conversion transaction, or a US holder whose functional currency is not the US dollar.

Dividends

Under the US federal income tax laws, the gross amount of any dividend paid by the Company out of its current or accumulated earnings and profits (as determined for US federal income tax purposes) to a US holder is subject to US federal income taxation. Dividends paid to a non-corporate US holder in taxable years beginning before January 1, 2009 that constitute qualified dividend income will be taxable to the US holder at a maximum tax rate of 15% provided that the Ordinary Shares or ADS are held by such US holder for more than 60 days during the 121-day period beginning 60 days before ex-dividend date and the US holder meets other holding period requirements. Dividends paid by the Company with respect to Ordinary Shares or ADS generally will be qualified dividend income.

The US holder must include any UK tax withheld from the dividend payment in this gross amount even though the amount withheld is not in fact received by the US holder. The dividend is taxable to the US holder when the holder, in the case of Ordinary Shares, or the Depositary, in the case of ADS, receives the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to US corporations in respect of dividends received from other US corporations. The amount that the US holder must include in income will be the US Dollar value of the dividend received (plus, if the holder is an electing US holder, the dividend that it is deemed to receive) in pounds Sterling, determined at the spot pounds Sterling/US Dollar rate on the date the dividend distribution is includible in the holder’s income, regardless of whether the payment is in fact converted into US Dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the holder includes the dividend payment in income to the date the holder converts the payment into US Dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the US for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for US federal income tax purposes, will be treated as a non-taxable return of capital to the extent of the holder’s basis in the Ordinary Shares or ADS and thereafter as capital gain.

Subject to certain limitations, UK tax withheld will be creditable against the holder’s US federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% rate.

Dividends will be income from sources outside the US. Dividends paid in taxable years beginning before January 1, 2009 generally will be “passive” or “financial services” income, and dividends paid in taxable years beginning after December 31, 2006 will, depending on circumstances, be “passive” or “general”. Income which, in either case is treated separately from other types of income for purposes of computing the foreign tax credit allowable to a US holder.

Capital Gains

A US holder that sells or otherwise disposes of Ordinary Shares or ADS will recognize capital gain or loss for US federal income tax purposes equal to the difference between the US Dollar value of the amount realized and the holder’s tax basis, determined in US Dollars, in the Ordinary Shares or ADS. Capital gain of a non-corporate US holder that is recognized before January 1, 2009, is generally taxed at a maximum rate of 15% where the holder has a holding period greater than one year. The gain or loss will generally be income or loss from sources within the US for foreign tax credit limitation purposes.

Documents on Display

It is possible to read and copy documents referred to in this annual report on Form 20-F that have been filed with the SEC at the SEC’s public reference room located at 450 Fifth Street, NW, Washington DC. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. In addition, some of the Company’s SEC filings, including all those filed on or after November 4, 2002, are available on the SEC’s website at www.sec.gov.

Item 11 — Quantitative and Qualitative Disclosures about Market Risk

The Board of Directors sets the Treasury policies and objectives of the Group, and lays down the parameters within which the various aspects of Treasury risk management are operated. The Board has approved a Treasury governance statement that outlines the Group’s policies towards management of corporate and asset financing, interest rate risk, fuel price risk, foreign exchange risk and cash and liquidity retention. The Treasury governance statement also lists the financial instruments that the Group’s Treasury function is authorized to use in managing financial risks. The governance statement is under on-going review to ensure best practice in the light of prevailing conditions.

Responsibility for ensuring that Treasury practices are consistent and compatible with the agreed governance statement is vested in a Finance Committee that is chaired by the Chief Financial Officer.

Group Treasury implements the agreed policies on a day-to-day basis to meet the Treasury objectives in a risk averse though cost effective manner. These objectives include ensuring that the Group has sufficient liquidity to meet its day-to-day needs and to fund its capital investment program and other investments; deploying any surplus liquidity in a prudent and profitable manner; managing currency, fuel, interest rate and credit exposures to minimize Group risk; and managing the Group’s relationship with a large number of banks and other financial institutions world-wide.

Foreign Currency Risk

The Group generates a surplus in most of the currencies in which it does business. The US Dollar can be an exception to this as capital expenditure, together with ongoing operating lease and fuel payments denominated in US Dollars, can create a deficit. In the year to March 31, 2005, the Group had more US Dollar payments than US Dollar revenues, principally as a result of fuel purchased in US Dollars.

Forward foreign exchange contracts are used to cover to a limited extent near-term future revenues and operating payments in a variety of currencies. The Group had outstanding forward transactions to hedge foreign currencies as follows:


	Expected to mature

	Before March 31				After March 31				2005			2004

	2006		2007		2007		Total		Notional gain/(loss)			Notional gain/(loss)


			(millions)						(£ millions)

to hedge future operating payments against Sterling
— Pound Sterling equivalents		—		—		—		—		—			—
to hedge future currency revenues against Sterling
— Pound Sterling equivalents		57		—		—		57		1			—
to hedge future operating payments against US Dollars
— US Dollars		255		—		—		255		—			—
to hedge future currency revenues against US Dollars
— US Dollars		87		—		—		87		(2	)		(5	)
to hedge debt against Japanese Yen
— Japanese Yen		9,719		—		—		9,719		—			4
— Pound Sterling equivalents		49		—		—		49		—			—

The unrealized gain/(loss) on forward currency transactions has been calculated as the change in the marked to market value between inception and the reporting date.

The notional loss on forward foreign exchange contracts represents a decrease in the hedges of future currency revenues and costs outstanding at the end of fiscal 2004 compared to fiscal 2003, and movements in the pounds Sterling, US Dollar and South African Rand exchange rates at the end of fiscal 2005 compared to the date the contracts were entered into.

Under US GAAP the notional gains or losses on forward foreign exchange contracts are included within net income as the contracts have not been designated hedges under SFAS 133. Under UK GAAP none of such notional gains and losses are recognized within net income.

Financing and Interest Rate Risk

Most of the Group’s debt is asset related, reflecting the capital-intensive nature of the airline industry and the attractiveness of aircraft as security to lenders and other financiers. These factors are also reflected in the medium to long-term maturity profiles of the Group’s loans, finance leases and hire purchase arrangements. Low capital expenditure has meant that the requirements for new financing have been limited. In April 2004, a Boeing 777 aircraft was sold and leased back. Other financing transactions have been met by the drawdown on existing committed facilities or from surplus liquidity.

At March 31, 2005 approximately 80% of the Group’s borrowings (after swaps), net of cash, short term loans and deposits, were at fixed rates of interest and 20% were at floating rates. This proportion of fixed rate borrowings has increased from 66% at March 31, 2004 as the Group chose to focus its early debt repayments on floating rate debt, leaving fixed rate debt intact.

The currency and interest rate mix of the Group’s gross borrowings, including the Convertible Capital Bonds 2005, is as follows:


	Expected final maturity date before March 31																		2005					2004

																After
																March 31,						Fair					Fair
	2006			2007			2008			2009			2010			2010			Total			value		Total			value

	(£ million, except percentages)
Fixed rate principal (Pounds Sterling)		170			52			31			68			15			963			1,299			1,363		1,373			1,474
Weighted average fixed rate		8.3	%		9.9	%		6.8	%		10.5	%		6.9	%		6.6	%		7.2	%				7.0	%
Floating rate principal (Pounds Sterling)		(45	)		106			70			219			575			779			1,704			1,704		2,448			2,448
Weighted average floating rate		4.8	%		5.2	%		5.8	%		5.2	%		5.3	%		5.1	%		5.2	%				4.4	%
Fixed rate principal (US Dollars)		—			—			128			—			—			147			275			269		286			311
Weighted average fixed rate		—			—			3.5	%		—			—			5.4	%		4.5	%				6.4	%
Floating rate principal (US Dollars)		32			—			(128	)		—			17			650			571			571		767			767
Weighted average floating rate		3.4	%		—			—			—			3.1			3.5	%		4.3	%				1.9	%
Fixed rate principal (Japanese Yen)		30			73			110			62			258			223			756			756		954			954
Weighted average fixed rate		2.4	%		1.3	%		1.2	%		1.3	%		1.3	%		1.3	%		1.3	%				1.4	%
Floating rate principal (Euro)		—			—			—			—			—			207			207			190		954			954
Weighted average fixed rate		—			—			—			—			—			6.8	%		6.8	%				1.4	%

Floating rates of interest are based on LIBOR (London Interbank Offered Rate) and fixed rates of interest are based on the contract rates. Fair values of bank and other loans, finance leases and the non Japanese Yen denominated portions of hire purchase arrangements carrying fixed rates of interest have been calculated by discounting the repayments which the Group is committed to make at the relevant interest rates applicable at March 31, 2005. Fair values of the Euro-Sterling notes, Convertible Capital Bonds 2005 and Euro-Sterling Bond 2016 are based on the quoted market values at March 31, 2005. The fair values of floating rate borrowings are deemed to be equal to their carrying values.

The Japanese Yen denominated portions of hire purchase arrangements carrying fixed rates of interest relate to the tax equity portions of Japanese leveraged leases which are personal to the Group, cannot be assigned and could not be refinanced or replaced in the same cross border market on a marked-to-market basis and accordingly, a fair value cannot be determined. The carrying value has therefore been included as the fair value above.

As part of its Treasury risk management activities, the company has entered into a number of swap agreements in order to hedge its direct exposure to interest rates. The majority of these swaps are embedded in lease and loan agreements. A smaller number of interest rate swaps are not associated with specific loans and leases and are disclosed below.


	Expected to mature before
	March 31

																		2005		2004

													After
													March 31,					Unrealized		Unrealized
	2006			2007		2008			2009		2010		2010		Total			profit		loss

	(millions, except percentages)																	(£millions)
Single currency interest rate swap agreements

Notional principal balance	£	53			—		—			—		—		—	£	53			—		(1	)
— weighted average fixed rate payable		5.3	%		—		—			—		—		—		5.3	%		—		—
— weighted average variable rate receivable		4.9	%		—		—			—		—		—		4.9	%		—		—
Notional principal balance		—			—	$	240			—		—		—	$	240			2		(4	)
— weighted average fixed rate payable		—			—		3.5	%		—		—		—		3.5	%		—		—
— weighted average variable rate receivable		—			—		2.7	%		—		—		—		2.7	%		—		—

The unrealized profit on the interest rate swaps was calculated using discounted cash flow analysis, to determine the amount the Group would receive or pay to terminate the agreements.

Fuel Price Risk

The Group’s fuel risk management strategy aims to provide the airline with protection against sudden and significant increases in oil prices while ensuring that the airline is not competitively disadvantaged in a serious way in the event of a substantial fall in the price of fuel. In meeting these objectives, the fuel risk management program allows for the judicious use of a number of derivatives traded on regulated exchanges in London (the International Petroleum Exchange) and New York (the New York Mercantile Exchange) as well as on the Over The Counter (OTC) markets, with approved counterparties and within approved limits.

Set out below are the outstanding fuel contracts at March 31, 2005, which all mature on or before March 31, 2008.


	2005								2004

			Expected to mature before
	2006		2007		2008		Total


Swaps
volume (barrels millions)		4.1		2.1		0.9		7.1	3.7

- open acquisition value ($ millions)		169		85		28		282	96

- unrealized gain ($ millions)		323		39		2		364	19

Collars
volume (barrels millions)		17.6		3.6		0.2		21.4	12.3

- open acquisition value ($ millions)		800		177		10		987	365

- unrealized gain ($ millions)		104		41		14		159	34

Total
volume (barrels millions)		21.7		5.7		1.1		28.5	16.0

- open acquisition value ($ millions)		969		262		38		1,269	461

- unrealized gain ($ millions)		427		80		16		523	53

- unrealized gain (Sterling equivalent millions)		227		43		8		278	29

The unrealized gains on off-balance sheet fuel derivatives have been calculated using the marked to market value of the instruments quoted.

Under UK GAAP the unrealized value of swaps, calls and puts is not reported on the Group balance sheet. All gains/losses arising on any of these transactions are recognized in the Group income statement in the period for which the instrument was taken out. Under SFAS 133 the fair value of outstanding fuel contracts are reported as part of shareholders’ equity with any changes in the fair value reported through income in the period in which it arises as none of the contracts have been designated as hedges.

The movement in the unrealized gain between the two periods reflects the movements in the oil price at the end of fiscal 2005 against when the contracts were entered into.

Accounting Policy

Item 12 — Description of Securities Other Than Equity Securities

Not applicable.

PART II

Item 13 — Defaults, Dividend Arrearages and Delinquencies

None

Item 14 — Material Modifications to the Rights of Security Holders and Use of Proceeds

None

Item 15 — Controls and Procedures

Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of March 31, 2005. Based on that evaluation, the Company’s management, including the Chief Executive and Chief Financial Officer, have concluded that these disclosure controls and procedures were effective as of March 31, 2005.

In designing and evaluating our disclosure controls and procedures, our management, including the Chief Executive and Chief Financial Officer, recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. No reasonable system of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

There were no changes in the Company’s internal control over financial reporting during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 16 — [Reserved]

Item 16A — Audit Committee Financial Expert

Pursuant to Section 407 of the Sarbanes-Oxley Act of 2002, the Board of Directors has determined that one member of its Audit Committee, Alison Reed, is an “audit committee financial expert”. She is an independent non-executive director for the purposes of Section 303A.02 of the New York Stock Exchange’s Listed Company Manual.

Item 16B — Code of Ethics

Available on the Company website, www.bashares.com, corporate governance section.

Item 16C — Principal Accountant Fees and Services

Auditors’ remuneration

Fees for professional services provided by Ernst & Young LLP, the Group’s independent auditors, in each of the last two fiscal years are set out in the table below:

£’000


		2005		2004
Group Auditors
	- Audit fees		2,342		1,650
	- Further assurance services		519		243
	- Tax services		94		265
	- Other services		82		—

			3,037		2158

Audit fees are defined as the remuneration for professional services rendered for the audit of the Group consolidated financial statements, and the audit of local statutory financial statements. This category also includes services that can only be provided by the Group auditor, such as auditing the application of new accounting policies, audits of consent and comfort letters and any other audit services required for US Securities and Exchange Commission regulatory filings.

Further assurance services include other assurance services that are related to the performance of the audit of the financial statements. It comprises amounts for due diligence services and assurance services on corporate reporting systems.

Tax services include tax compliance, tax advice and tax planning services.

Other services comprises advisory services in relation to the disposal of the investment in Qantas.

All fees payable to the auditor, Ernst & Young, require the approval of the Audit Committee. This expressly includes any fees for non-audit work carried out by the auditor. This policy covered all fees in each of the last two fiscal years as set out above. Finance Standing Instruction No 17 regulates the services which the auditor may and may not provide to the Group. The contracting of permitted services from the auditor must be approved in advance by the Chief Financial Officer up to a limit of £100,000 for an individual service. The Chief Financial Officer reports the level, cost and nature of such services to the Audit Committee quarterly. For projects in excess of £100,000 (or which do not fall within the list of audit and audit related services specified in the Finance Standing Instruction), the prior approval of the Audit Committee is required.

Item 16D — Exemptions from the Listing Standards for Audit Committees.

Available on the Company website, www.bashares.com, corporate governance section.

Item 16E — Purchases of Equity Securities by the Issuer and Affiliated Purchaser

Neither the Company nor any affiliated purchaser purchased any of the Company’s equity securities during the year ended March 31, 2005.

PART III

Item 17 — Financial Statements

Not Applicable

Item 18 — Financial Statements

The following Financial Statements and schedule, together with the report of Ernst & Young LLP thereon, are filed as part of this Annual Report:


		Page

Report of Independent Registered Public Accounting Firm		F-1
Consent of Independent Registered Public Accounting Firm		F-2
Consolidated Financial Statements
Consolidated Profit and Loss Accounts for the years ended March 31, 2005, 2004 and 2003		F-3
Consolidated Statements of Total Recognized Gains and Losses for the years ended March 31, 2005, 2004 and 2003		F-4
Consolidated Balance Sheets as at March 31, 2005 and 2004		F-5
Consolidated Statements of Cash Flows for the years ended March 31, 2005, 2004 and 2003		F-6
Consolidated Statements of Changes in Shareholders’ Funds for the years ended March 31, 2005, 2004 and 2003		F-7
Notes to Financial Statements		F-8
Schedule
Schedule II — Valuation and Qualifying Accounts for the years ended March 31, 2005, 2004 and 2003		S-1

BRITISH AIRWAYS Plc AND SUBSIDIARIES

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS
BRITISH AIRWAYS Plc

We have audited the accompanying consolidated balance sheets of British Airways Plc as of March 31, 2005 and 2004, and the related consolidated profit and loss accounts and statements of total recognized gains and losses, changes in shareholders’ funds and cash flows for each of the three years in the period ended March 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 18. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with United Kingdom auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the Financial Statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of British Airways Plc at March 31, 2005 and 2004, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended March 31, 2005, in conformity with accounting principles generally accepted in the United Kingdom which differ in certain respects from those generally accepted in the United States (see Note 43 of Notes to the Financial Statements). Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

ERNST & YOUNG LLP

London, England

July 26, 2005

F-1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-15663, 33-67242 and 33-10716 pertaining to the employee share plans of British Airways Plc listed on the facing sheets thereof and in the related Prospectuses of the reference to our firm under ‘Item 3 — Key Information — Selected Financial Data’ and of our report dated May 12, 2005, with respect to the consolidated financial statements and schedule of British Airways Plc both included in the Annual Report (Form 20-F) for the year ended March 31, 2005.

ERNST & YOUNG LLP

London, England
July 26, 2005

F-2

BRITISH AIRWAYS Plc AND SUBSIDIARIES

CONSOLIDATED PROFIT AND LOSS ACCOUNTS

	Year ended March 31
	2005			2004			2003
				Restated			Restated
	(£ millions, except per Ordinary Share amounts)
Turnover — (Note 2)		7,813			7,560			7,688
Cost of sales — (Note 4)		(7,136	)		(7,008	)		(7,263	)
Gross profit		677			552			425
Administrative expenses — (Note 4)		(137	)		(147	)		(130	)
Operating profit		540			405			295
Share of operating profit in associates — (Note 7)		41			58			39
Total operating profit including associates		581			463			334
Income and charges relating to fixed asset investments — (Note 8)		3			—			(11	)
(Loss)/profit on sale of fixed assets and investments — (Note 9)		(26	)		(46	)		60
Net interest payable — (Note 10)		(143	)		(187	)		(248	)
Profit before tax		415			230			135
Tax — (Note 11a)		(149	)		(85	)		(50	)
Profit after tax		266			145			85
Equity minority interest		(1	)		(1	)		—
Non-equity minority interest — (Note 33)		(14	)		(14	)		(13	)
Profit for the year (1)		251			130			72
Retained profit for the year		251			130			72
Earnings per share — (Note 12)
Basic earnings per share		23.4p			12.1p			6.7p
Diluted earnings per share		23.0p			12.1p			6.7p

(1)

A summary of the significant adjustments to profit for the year which would be required if United States generally accepted accounting principles had been applied instead of those generally accepted in the United Kingdom is given in Note 43 of Notes to Financial Statements.

The Notes to Financial Statements are an integral part of these Financial Statements.

F-3

BRITISH AIRWAYS Plc AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES

	Year ended March 31
	2005			2004		2003
	(£ millions)
Profit for the year		251			130		72
Other recognized gains and losses relating to the year:
Exchange and other movements		(37	)		16		(38	)
Total recognized gains and losses relating to the year		214			146		34

The difference between reported and historical cost income and losses is not material.

(1)

The statement of comprehensive income required by United States generally accepted accounting principles is given in Note 43 of Notes to Financial Statements.

The Notes to Financial Statements are an integral part of these Financial Statements.

F-4

BRITISH AIRWAYS Plc AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	March 31
	2005			2004
				Restated
	(£ millions)
Fixed assets
Intangible assets — (Note 13)
Goodwill		88			93
Landing rights		102			75
		190			168
Tangible assets — (Note 14)
Fleet		6,748			7,104
Property		959			1,042
Equipment		445			491
		8,152			8,637
Investments — (Note 17)
Associated companies		120			501
Trade investments		30			30
		150			531
		8,492			9,336
Current assets
Stocks — (Note 20)		84			76
Debtors — (Note 21)		1,078			1,019
Short-term loans and deposits		1,604			1,606
Cash at bank and in hand		78			64
		2,844			2,765
Creditors: amounts falling due within one year — (Note 23)		(2,868	)		(2,996	)
Convertible Capital Bonds 2005 — (Note 31)		(112	)		—
		(2,980	)		(2,996	)
Net current liabilities		(136	)		(231	)
Total assets less current liabilities		8,356			9,105
Creditors: amounts falling due after more than one year
Borrowings and other creditors — (Note 24)		(4,346	)		(5,374	)
Convertible Capital Bonds 2005 — (Note 31)		—			(112	)
		(4,346	)		(5,486	)
Provision for deferred tax — (Note 27)		(1,243	)		(1,137	)
Provisions for liabilities and charges — (Note 28)		(83	)		(85	)
		2,684			2,397
Called up share capital		271			271
Reserves
Share premium account		788			788
Investment in own shares		(26	)		(31	)
Revaluation reserve		255			262
Profit and loss account		1,177			897
Total equity shareholders’ funds (1)		2,465			2,187
Minority interest
Equity minority interest		12			10
Non-equity minority interest — (Note 33) .		207			200
		219			210
		2,684			2,397

(1)

A summary of the significant adjustments to total equity shareholders’ funds which would be required if United States generally accepted accounting principles had been applied instead of those generally accepted in the United Kingdom is given in Note 43 of Notes to Financial Statements.

The Notes to Financial Statements are an integral part of these Financial Statements.

F-5

BRITISH AIRWAYS Plc AND SUBSIDIARIES

CONSOLIDATED CASH FLOW STATEMENTS

	Year ended March 31
	2005			2004			2003
	(£ millions)
Cash inflow from operating activities — (Note 5a)		1,192			1,093			1,185
Dividends from associates		20			25			23
Returns on investments and servicing of finance
Interest received		78			62			72
Interest paid on bank and other loans		(101	)		(83	)		(86	)
Interest paid on finance leases and hire purchase arrangements		(141	)		(182	)		(222	)
Other finance income and related fees		5			7			—
Dividends received from trade investments		3			1			—
Non equity minority interest		(14	)		(14	)		(13	)
Net cash outflow from returns on investments and servicing of finance		(170	)		(209	)		(249	)
Tax
Overseas taxation		—			(4	)		(7	)
Net cash outflow from tax		0			(4	)		(7	)
Capital expenditure and financial investment
Intangible assets purchased for cash		(32	)		(14	)		(32	)
Tangible fixed assets purchased for cash — (Note 14e)		(301	)		(198	)		(293	)
Refund of progress payments		—			42			230
Sale of tangible fixed assets and investments		57			212			351
Investment in own shares		—			—			(6	)
Net cash (outflow)/inflow for capital expenditure and financial investment		(276	)		42			250
Acquisitions and disposals
Sale of interests in subsidiary undertakings		(12	)		(80	)		30
Sale of interests in associated undertakings		427			7			12
Purchase of interests in associated undertakings		—			—			(13	)
Net cash inflow/(outflow) for acquisitions and disposals		415			(73	)		29
Equity dividends paid		—			—			—
Net cash inflow before management of liquid resources and financing		1,181			874			1,231
Management of liquid resources		(16	)		(198	)		(289	)
Financing
Changes in borrowings — (Note 26)
Bank and other loans raised		116			81			13
Bank and other loans repaid		(168	)		(339	)		(189	)
Capital elements of finance leases and hire purchase arrangements repaid		(1,103	)		(576	)		(608	)
		(1,155	)		(834	)		(784	)
Exercise of share options		4			—			—
Increase/(decrease) in cash — (Note 22)		14			(158	)		158

(1)

The significant differences between the cash flow statements presented above and those required under United States generally accepted accounting principles are described in Note 43 of Notes to Financial Statements.

The Notes to Financial Statements are an integral part of these Financial Statements.

F-6

BRITISH AIRWAYS Plc AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY SHAREHOLDERS’ FUNDS

	Share Capital Ordinary Shares of 25 pence each								Reserves
	Authorized				Issued
	Shares		Amount		Shares		Amount		Share Premium Account		Investment in own shares			Revaluation Reserve			Profit and Loss Account			Total Equity Shareholders’ Funds
											Restated (1)(d)									Restated (1)(d)
	(£ millions, except number of shares)
April 1, 2002 (1)		1,508,000,000		377		1,082,757,107		271		788		(25	)		270			687			1,991
Retained profit for the year		—		—		—		—		—		—			—			72			72
Transfer relating to revalued assets		—		—		—		—		—		—			7			(7	)		—
Exchange and other movements		—		—		—		—		—		—			(7	)		(31	)		(38	)
Exercise of share options through investment in own shares		—		—		—		—		—		(6	)		—			—			(6	)
Goodwill written back on disposal		—		—		—		—		—		—			—			8			8
Conversion of Convertible Capital Bonds		—		—		24,014		—		—		—			—			—			—
Employee Share Option Schemes		—		—		3,197		—		—		—			—			—			—
March 31, 2003 (1)		1,508,000,000		377		1,082,784,318		271		788		(31	)		270			729			2,027
Retained profit for the year		—		—		—		—		—		—			—			130			130
Transfer relating to revalued assets		—		—		—		—		—		—			(8	)		8			—
Exchange and other movements		—		—		—		—		—		—			—			16			16
Exercise of share options through investment in own shares		—		—		—		—		—		—			—			—			0
Goodwill written back on disposal		—		—		—		—		—		—			—			14			14
Conversion of Convertible Capital Bonds		—		—		10,949		—		—		—			—			—			—
Employee Share Option Schemes		—		—		49,945		—		—		—			—			—			—
March 31, 2004 (1)		1,508,000,000		377		1,082,845,212		271		788		(31	)		262			897			2,187
Retained profit for the year		—		—		—		—		—		—			—			251			251
Transfer relating to revalued assets		—		—		—		—		—		—			(7	)		7			—
Exchange and other movements		—		—		—		—		—		—			—			(37	)		(37	)
Exercise of share options through investment in own shares		—		—		—		—		—		5			—			—			5
Goodwill written back on disposal		—		—		—		—		—		—			—			59			59
Conversion of Convertible Capital Bonds		—		—		39,460		—		—		—			—			—			—
Employee Share Option Schemes		—		—		18,246		—		—		—			—			—			—
March 31, 2005 (1)		1,508,000,000		377		1,082,902,918		271		788		(26	)		255			1,177			2,465

(1) (a)

The profit and loss account at March 31, 2005 was decreased by cumulative exchange and other adjustments of £181 million (2004: decreased by £144 million; 2003: £160 million).

(b)

Cumulative goodwill set off against reserves at March 31, 2005 in respect of subsidiaries was £421 million (2004: £421 million; 2003: £433 million).

(c)

Cumulative goodwill set off against reserves at March 31, 2005 in respect of associated companies was £nil million (2004: £59 million; 2003: £61 million).

(d)

Effective from April 1, 2004 the Group applied the provisions of ‘UITF Abstract 38 — Accounting for ESOP Trusts’ and, as a result, the Group’s investment in own shareholders’ equity. Comparative periods have been restated by the amounts included above under “Investment in own Shares” to reflect the adoption of UITF Abstract 38.

The Notes to Financial Statements are an integral part of these Financial Statements.

F-7

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

Accounting policies

Accounting convention

The Financial Statements have been prepared under the historical cost convention modified by the inclusion of certain assets at valuation, as stated below, and in accordance with all applicable UK accounting standards and the Companies Act 1985. The principal accounting policies have been applied consistently with those applied in the previous years with the exceptions noted below.

Effective from April 1, 2004 the Group applied the provisions of ‘UITF Abstract 38 — Accounting for ESOP Trusts’ and, as a result, the Group’s investment in own shares held for the purpose of employee share ownership plans has been reclassified from fixed asset investments and is now recorded as a reduction in shareholders’ equity. Comparative periods have been restated to reflect the adoption of UITF Abstract 38 and as a result £31 million for the period ending March 31, 2004 and March 31, 2003 have been reclassified.

For the year ending March 31, 2004 and March 31, 2003, other finance income and related fees were shown within ‘other income’. For the year ended March 31, 2005 such income is shown within net interest payable. As a result £13 million of income for the year ended March 31, 2004 and £7 million of income for the year ended March 31, 2003, has been reclassified to net interest payable.

Basis of consolidation

The consolidated Financial Statements include the accounts of the Company and its subsidiary undertakings (together, the “Group”), each made up to March 31, together with the attributable share of results and reserves of associated undertakings, adjusted where appropriate to conform with British Airways’ accounting policies. The Group’s share of the profits less losses of associated undertakings is included in the Group profit and loss account and its share of the post-acquisition results of these companies is included in interests in associated undertakings in the Group balance sheet. Certain associated undertakings make up their annual audited accounts to dates other than March 31. In the case of Iberia, published results up to the year ended December 31 are included. In other cases, results disclosed by subsequent unaudited management accounts are included. The attributable results of those companies acquired or disposed of during the year are included for the periods of ownership. In the case of the Group’s investment in Qantas, results up to the year ended June 30, 2004 are included. Where an entity, though not fulfilling the legal definition of a subsidiary or subsidiary undertaking, gives rise to benefits for the Group that are, in substance, no different than those that would arise were that entity a subsidiary or subsidiary undertaking, that entity is classified as a quasi-subsidiary. In determining whether the Group has the ability to enjoy the benefits arising from such entities’ net assets, regard is given as to which party is exposed to the risks inherent in the benefits and which party, in practice, carries substantially all the risks and rewards of ownership. The Group currently accounts for its investment in The London Eye Company Limited as a quasi-subsidiary, and therefore consolidates its results within the Group accounts as if it were a subsidiary undertaking. In accordance with section 230 of the Companies Act 1985, a separate profit and loss account dealing with the results of the company only is not presented.

Turnover

Passenger ticket and cargo waybill sales, net of discounts, are recorded as current liabilities in the ‘sales in advance of carriage’ account until recognized as revenue when the transportation service is provided. Commission costs are recognized at the same time as the revenue to which they relate and are charged to cost of sales. Unused tickets are recognized as revenue using estimates regarding the timing of recognition based on the terms and conditions of the ticket and historical trends. Other revenue is recognized at the time the service is provided.

Segmental reporting

Business segments

The Directors regard all material Group activities as relating to the airline business.

F-8

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Accounting policies (Continued)

Geographical segments

Turnover by destination: The analysis of turnover by destination is based on the following criteria:

Scheduled and non-scheduled services: Turnover from domestic services within the United Kingdom is attributed to the United Kingdom. Turnover from inbound and outbound services between the United Kingdom and overseas points is attributed to the geographical area in which the relevant overseas point lies.

Other revenue: Revenue from the sale of package holidays is attributed to the geographical area in which the holiday is taken, while revenue from aircraft maintenance and other miscellaneous services is attributed on the basis of where the customer resides.

ii)

Turnover by origin: The analysis of turnover by origin is derived by allocating revenue to the area in which the sale was made. Operating profit resulting from turnover generated in each geographical area according to origin of sale is not disclosed as it is neither practical nor meaningful to allocate the Group’s operating expenditure on this basis.

iii)

Geographical analysis of net assets: The major revenue-earning asset of the Group is the aircraft fleet, the majority of which are registered in the United Kingdom. Since the Group’s aircraft fleets are employed flexibly across its worldwide route network, there is no suitable basis of allocating such assets and related liabilities to geographical segments.

iv)

The geographical analysis of turnover and operating profit for associates has not been disclosed as it would be prejudicial to the businesses of the associates.

Intangible fixed assets

Goodwill

Prior to March 31, 1998, goodwill was set off against reserves on the acquisition of a business, including an equity interest in an associated undertaking. Goodwill will be released to the profit and loss account on disposal of the business to which it relates. From April 1, 1998, where the cost of acquisition exceeds the values attributed to such net assets, the resulting goodwill is capitalized and amortized over a period not exceeding 20 years.

Landing Rights

Landing rights acquired from other airlines are capitalized at cost and amortized over a period not exceeding 20 years. The carrying values of goodwill and other intangible assets are reviewed for impairment at the end of the first full year following acquisition and in the other periods if events or changes in circumstances indicate the carrying value may not be recoverable.

Tangible fixed assets

Tangible fixed assets are held at cost, subject to the property revaluations carried out at March 31, 1995 which are being retained in accordance with the transitional provisions of FRS 15 ‘Tangible Fixed Assets’. The Group has a policy of not revaluing tangible fixed assets. Depreciation is calculated to write off the cost or valuation, less estimated residual value, on a straight line basis.

The carrying value of tangible assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.

Capitalization of interest on progress payments

Interest attributed to progress payments made on account of aircraft and other significant assets under construction is capitalized and added to the cost of the asset concerned. Interest capitalized in respect of progress payments on those aircraft which subsequently become subject to extendible operating lease arrangements is carried forward and written off over the initial lease period.

F-9

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Accounting policies (Continued)

Fleet

Cost: All aircraft are stated at cost, net of manufacturers’ credits.

ii)

Depreciation: Fleet assets owned, or held on finance leases or hire purchase arrangements, are depreciated at rates calculated to write down the cost or valuation to the estimated residual value at the end of their planned operational lives. Cabin interior modifications, including those required for brand changes and re-launches, are depreciated over the lower of five years and the remaining life of the aircraft. Residual values and operational lives are reviewed annually.

Property and equipment

Freehold properties and certain leasehold properties, professionally valued at March 31, 1995, are included in these Financial Statements on the basis of that valuation. Subsequent additions are included at cost. Provision is made for the depreciation of all property and equipment, apart from freehold land, based upon expected useful lives or in the case of leasehold properties, over the duration of the leases if shorter.

Leased and hire purchase assets

Where assets are financed through finance leases or hire purchase arrangements, under which substantially all the risks and rewards of ownership are transferred to the Group, the assets are treated as if they had been purchased outright. The amount included in the cost of tangible fixed assets represents the aggregate of the capital elements payable during the lease or hire purchase term. The corresponding obligation, reduced by the appropriate proportion of lease or hire purchase payments made, is included in creditors. The amount included in the cost of tangible fixed assets is depreciated on the basis described in the preceding paragraphs and the interest element of lease or hire purchase payments made is included in interest payable in the profit and loss account. Payments under all other lease arrangements, known as operating leases, are charged to the profit and loss account in equal annual amounts over the period of the lease. In respect of aircraft, operating lease arrangements allow the Group to terminate the leases after a limited initial period, normally 5 to 7 years, without further material financial obligations. In certain cases the Group is entitled to extend the initial lease period on pre-determined terms; such leases are described as extendible operating leases.

Aircraft and engine overhaul expenditure

Aircraft and engine spares acquired on the introduction or expansion of a fleet, as well as rotable spares purchased separately, are carried as tangible fixed assets and generally depreciated in line with the fleet to which they relate. Replacement spares and all other costs relating to the maintenance and overhaul of aircraft and engines are charged to the profit and loss account on consumption and as incurred respectively.

Stocks

Stocks, including aircraft expendables, are valued at the lower of cost and net realizable value.

Cash and liquid resources

Cash includes cash in hand and deposits repayable on demand with any qualifying financial institution, less overdrafts from any qualifying financial institution repayable on demand. Liquid resources includes current asset investments held as readily disposable stores of value.

Pension and other post-retirement benefits

Retirement benefits are payable through separately funded United Kingdom pension schemes with equivalent arrangements for overseas territories. Contributions to pension funds are made on the basis of independent actuarial advice and charged to the profit and loss account so as to spread the cost over the remaining service lives of the employees. Provision is made based on actuarial advice for post-retirement medical benefits of employees in the United States.

Frequent flyer programs

The Group operates two principal frequent flyer programs. The Airline scheme, ‘Executive Club’, allows frequent travelers to accumulate ‘BA Miles’ mileage credits which entitle them to a choice of various awards, including

F-10

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Accounting policies (Continued)

free travel, and are sold to participating partners to use in promotional activities. The AirMiles scheme, operated by the Company’s wholly-owned subsidiary AirMiles Travel Promotions Limited allows companies to purchase miles for use in promotional incentives.

Revenue from the sale of BA Miles and AirMiles to third parties is recognized when miles are issued to participants. The estimated direct incremental cost of providing free redemption services, including British Airways flights, in exchange for redemption of miles earned by members of the Group’s Executive Club and Airmiles schemes is accrued as members of these schemes accumulate mileage. Costs accrued include incremental fuel, catering servicing costs and cost of redemptions on air and non-air partners; these costs are charged to cost of sales.

Deferred tax

Full provision is made for deferred tax on all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more, or a right to pay less, tax in the future have occurred at the balance sheet date. Deferred tax assets are recognized where the Directors consider it more likely than not that there will be suitable taxable profits from which the future reversal of underlying timing differences can be deducted.

Deferred tax is measured on a non-discounted basis at the tax rates that are expected to apply in the periods in which timing differences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date.

Provisions

Provisions are made when an obligation exists for a future liability in respect of a past event and where the amount of the obligation can be reliably estimated. Restructuring provisions are made for direct expenditures of a business reorganization where the plans are sufficiently detailed and well advanced, and where appropriate communication to those affected has been undertaken at the balance sheet date.

Foreign currency translation

Foreign currency balances are translated into Sterling at the rates ruling at the balance sheet date, except for certain loan repayment installments which are translated at the forward contract rates where installments have been covered forward at the balance sheet date. Aircraft which are financed in US Dollars, either by loans, finance leases or hire purchase arrangements, are regarded together with the related assets and liabilities as a separate Group of assets and liabilities and accounted for in US Dollars. The amounts in US Dollars are translated into Sterling at rates ruling at the balance sheet date and the net differences arising from the translation of aircraft costs and related US Dollars loans are taken to reserves. Exchange differences arising on the translation of net assets of overseas subsidiary undertakings and associated undertakings are taken to reserves. Profits and losses of such undertakings are translated into Sterling at average rates of exchange during the year. All other profits or losses arising on translation are dealt with through the profit and loss account.

Derivatives and financial instruments

The Group’s accounting policy for derivatives is to defer and only recognize in the Group profit and loss account gains and losses on hedges of revenues or operating payments as they crystallize. Amounts payable or receivable in respect of interest rate swap agreements are recognized in the net interest payable charge over the period of the contracts on an accruals basis. Cross currency swap agreements and forward foreign exchange contracts taken out to hedge borrowings are brought into account in establishing the carrying values of the relevant loans, leases or hire purchase arrangements in the balance sheet. Gains or losses on forward foreign exchange contracts to hedge capital expenditure commitments are recognized as part of the total Sterling carrying cost of the relevant tangible asset as the contracts mature or are closed out.

Short term debtors and creditors are held at fair value and have therefore been excluded from the financial instrument disclosures except note 35 on currency exposures.

F-11

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Turnover

	Year ended March 31
	2005		2004		2003
	(£ millions)
Traffic revenue
Passenger Revenue
Scheduled		6,484		6,460		6,545
Non-scheduled		16		30		45
		6,500		6,490		6,590
Cargo		482		463		484
		6,982		6,953		7,074
Other revenue (including aircraft maintenance, package holidays and other airline services)		831		607		614
		7,813		7,560		7,688

Geographical analysis of turnover and operating profit

(a)

Turnover

By area of original sale:

	Year ended March 31
	2005		2004		2003
	(£ millions)
United Kingdom		3,922		3,731		3,634
Continental Europe		1,175		1,209		1,269
Europe		5,097		4,940		4,903
The Americas		1,383		1,347		1,482
Africa, Middle East and Indian sub-continent		751		717		733
Far East and Australasia		582		556		570
		7,813		7,560		7,688

By area of destination:

	Year ended March 31
	2005		2004		2003
	(£ millions)
United Kingdom		609		664		725
Continental Europe		1,861		1,975		2,113
Europe		2,470		2,639		2,838
The Americas		2,884		2,767		2,763
Africa, Middle East and Indian sub-continent		1,412		1,253		1,201
Far East and Australasia		1,047		901		886
		7,813		7,560		7,688

F-12

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Geographical analysis of turnover and operating profit (Continued)

(b)

Operating profit

By area of destination

	Year ended March 31
	2005			2004			2003
	(£ millions)
Europe		(26	)		(60	)		(117	)
The Americas		347			294			223
Africa, Middle East and Indian sub-continent		224			210			168
Far East and Australasia		(5	)		(39	)		21
		540			405			295

It is impractical to separate United Kingdom and Continental Europe operating loss on a meaningful basis since the day to day operations are fully integrated. The operating profit of these services is therefore combined under the heading ‘Europe’.

Analysis of operating expenditure

	Year ended March 31
	2005		2004		2003
	(£ millions)
Employee costs		2,273		2,180		2,107
Depreciation and amortization		687		679		734
Aircraft operating lease costs		106		135		189
Fuel and oil costs		1,128		922		842
Engineering and other aircraft costs		502		511		592
Landing fees and en route charges		556		549		576
Handling charges, catering and other operating costs		930		934		961
Selling costs		488		554		706
Accommodation, ground equipment costs and currency differences		603		691		686
Total operating expenditure		7,273		7,155		7,393
Total operating expenditure comprises:
Cost of sales		7,136		7,008		7,263
Administrative expenses		137		147		130
		7,273		7,155		7,393

F-13

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Operating profit

(a)

Reconciliation of operating profit to net cash inflow from operating activities

	Year ended March 31
	2005			2004			2003
	(£ millions)
Group operating profit		540			405			295
Depreciation and amortization		687			679			734
Other items not involving the movement of cash		—			11			—
(Increase)/decrease in stocks		(5	)		8			27
(Increase)/decrease in debtors		(68	)		(31	)		211
Increase/(decrease) in creditors		40			43			(62	)
(Decrease)/increase in provisions for liabilities and charges		(2	)		(22	)		(20	)
Cash inflow from operating activities		1,192			1,093			1,185

(b)

Operating income has been determined after charging:

	Year ended March 31
	2005		2004		2003
	(£ millions)
Depreciation of tangible fixed assets
Owned assets		286		262		275
Finance leased aircraft		141		159		145
Hire purchased aircraft		168		187		191
Other leasehold interests		66		61		57
Impairment		16		—		58
		677		669		726
Operating lease costs
Lease rentals — aircraft		106		120		162
— property		139		133		146
Hire of equipment and charter of aircraft and crews		122		98		92
Onerous lease costs		—		15		27
		367		366		427

F-14

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

5 Operating profit (Continued)

	Year ended March 31
	2005		2004		2003
	(£ thousands)
Auditors’ remuneration
Group auditors
Audit fees		1,792		1,650		1,561
Other professional fees
United Kingdom
— Other assurance services		1,151		156		377
— Taxation		33		26		183
		1,184		182		560
Overseas
— Due diligence		—		87		—
— Taxation		61		239		372
		3,037		2,158		2,493

The audit fees payable to Ernst & Young LLP are reviewed by the Audit Committee in the context of other companies for cost effectiveness. The committee also reviews the nature and extent of non-audit services to ensure that independence is maintained.

	Year ended March 31
	2005		2004		2003
	(£ thousands)
Directors’ emoluments
Fees		597		532		516
Salary and benefits		1,340		1,250		1,137
Bonus		496		—		—
		2,433		1,782		1,653

Included in the amounts above are emoluments of £917,000 (2004: £584,000; 2003: £553,000) in respect of the highest paid director.

Other items

Fiscal 2004 includes the release of revenue provisions totaling £35 million as a result of system enhancements that have enabled a more accurate assessment to be made of certain balances.

F-15

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Employee costs and numbers

The average number of persons employed in the Group and their aggregate payroll costs were as follows:

	Year ended March 31
	2005		2004		2003
	(Number)
United Kingdom		42,360		43,942		47,162
Overseas		7,130		7,997		9,852
		49,490		51,939		57,014


Wages and salaries	1,517	1,463	1,472
Social security costs	165	158	148
Contributions to pension schemes	239	214	149
	1,921	1,835	1,769
By location:
United Kingdom	1,720	1,623	1,514
Overseas	201	212	255
	1,921	1,835	1,769

Share of operating profit in associates

	Year ended March 31
	2005		2004		2003
	(£ millions)
Operating profits less losses		41		58		39

Income and charges relating to fixed asset investments

	Year ended March 31
	2005		2004			2003
	(£ millions)
Income from fixed asset investments		3		1			—
Amounts written off investments.		—		(1	)		(11	)
		3		0			(11	)
Income and charges relating to fixed asset investments represented by:
Group		3		0			(11	)

F-16

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

(Loss)/profit on sale of fixed assets and investments (also see Note 18)

	Year ended March 31
	2005			2004			2003
	(£ millions)
Net loss on disposal of investment in Qantas		(11	)		—			—
Net (loss)/profit on sale of other fixed assets and investments		(15	)		37			50
Net loss on disposal of dba		—			(83	)		—
Net profit on sale of investment in go		—			—			10
		(26	)		(46	)		60
(Loss)/profit on sale of fixed assets and investments represented by:
Group		(32	)		(47	)		58
Associates		6			1			2
		(26	)		(46	)		60

(i)

Year ended March 31, 2005

On September 9, 2004, the Group completed the sale of its 18.25% holding in Qantas Airways Limited through a book build sale of the shares.

The sale realized gross proceeds of A$1.1 billion before tax.

(ii)

Year ended March 31, 2004

On April 9, 2003 and October 1, 2003, Qantas Airways issued new shares by way of shareholder placings. British Airways did not take up its allocation which resulted in the dilution of the Group’s shareholding from 18.93% to 18.25%. There was no profit on disposal resulting from the deemed disposal.

On July 3, 2003, British Airways sold its 20% shareholding in China Aviation Services Limited. The profit on disposal from this sale was £2 million.

On April 2, 2003 Amadeus Global Travel Distribution, a technology provider to the travel industry, took a 16.67% stake in Opodo. This resulted in the dilution of the Group’s shareholding from 22.86% to 19.05%. The profit on disposal resulting from the deemed disposal was £5 million.

(iii)

Year ended March 31, 2003

On September 5, 2002 and October 10, 2002, Qantas Airways issued new shares by way of an institutional placement and shareholder placing respectively. British Airways did not take up its allocation which resulted in the dilution of the Group’s shareholding from 21.4% to 18.9%. The profit on disposal resulting from the deemed disposal was £10 million.

With effect from November 1, 2002, British Airways sold its 50% shareholding of Accoladia Ltd to Thomas Cook (UK) Ltd. As a result, Thomas Cook (UK) Ltd was the sole shareholder of Accoladia Ltd. The profit on disposal from this sale was £2.9 million.

	Qantas
	(£ millions)
Deemed disposal of 2.50% shareholding		10	—	10
Sale proceeds		—	15	15
		10	15	25

F-17

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Net interest payable

	Year ended March 31
	2005			2004			2003
				Restated			Restated
	(£ millions)
Interest payable
On bank loans		49			50			46
On finance leases		86			95			116
On hire purchase arrangements		71			84			108
On other loans, including interest of £11 million (2004: £11 million and 2003: £11 million) on Convertible Capital Bonds 2005		67			51			50
		273			280			320
Interest capitalized		—			(1	)		(10	)
		273			279			310
Interest receivable		(83	)		(63	)		(63	)
Retranslation (credits)/charges on currency borrowings		(33	)		(16	)		8
Other finance income and related fees		(14	)		(13	)		(7	)
		143			187			248
Net interest payable represented by:
Group		135			179			246
Associates		8			8			2
		143			187			248

In respect of all loans, including finance lease and hire purchase arrangements repayable in whole or in part after five years, the latest repayment date is December 2032.

Interest costs on progress payments are capitalized at a rate based on LIBOR (London Interbank Offered Rate) plus 0.5% to reflect the average cost of borrowing to the Group unless specific borrowings are used to meet the payments, in which case the actual rate is used.

F-18

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Tax

(a)

Analysis of charge for the year

	Year ended March 31
	2005			2004			2003
	(£ millions)
Current tax
UK corporation tax		1			5			5
Less: relief for overseas tax		(1	)		(5	)		(5	)
UK tax		—			—			—
Overseas tax		29			1			8
Prior year adjustments		1			(10	)		(10	)
		30			(9	)		(2	)
Share of tax of associated undertakings		13			19			21
		43			10			19
Deferred tax
Depreciation (in excess of)/below capital allowances		—			(62	)		2
Other timing differences		24			12			19
Losses utilized		89			118			8
Prior year adjustments		(7	)		7			2
Total deferred tax charge		106			75			31
Tax charge on profit on ordinary activities.		149			85			50

There is no UK tax payable on the operating result for the year (2004: £nil; 2003: £nil).

F-19

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

11 Tax (Continued)

(b)

Factors affecting the tax charge for the year

The current tax charge for the year is less than the profit at the standard rate of UK corporation tax (30%). The differences are explained below:

	Year ended March 31
	2005			2004			2003
	(£ millions)
Profit on ordinary activities before tax		415			230			135
Profit on ordinary activities multiplied by standard rate of UK corporation tax		125			69			41
Effects of:
Expenses not deductible for tax purposes		8			17			26
Profit/(loss) on disposals not taxable		—			12			(21	)
Other differences		21			(4	)		7
Timing differences
Depreciation in excess of/(less than) capital allowances for the year		—			62			(2	)
Other differences		(24	)		(12	)		(19	)
Unrelieved UK losses		(89	)		(118	)		(8	)
Unrecognized timing differences		—			(5	)		—
Higher /(lower) tax rates on overseas earnings		10			—			(2	)
Unrelieved overseas and associates’ losses		2			5			13
Non-taxable overseas income		(11	)		(6	)		(6	)
Adjustment to current tax charge in respect of previous periods		1			(10	)		(10	)
Total tax charge for the year		43			10			19

The total tax charge for the year is less than the profit at the standard rate of UK corporation tax (30%). The differences are explained below:

	Year ended March 31
	2005			2004			2003
	(£ millions)
Profit on ordinary activities before tax		415			230			135
Profit on ordinary activities multiplied by standard rate of UK corporation tax		125			69			41
Effects of:
Expenses not deductible for tax purposes		8			17			26
Profit/(loss) on disposals not taxable		—			12			(21	)
Other differences		21			(4	)		7
Higher/(lower) tax rates on overseas earnings		10			—			(2	)
Unrelieved overseas and associates’ losses		2			5			13
Non-taxable overseas income		(11	)		(6	)		(6	)
Unrecognized timing differences		—			(5	)		—
Adjustment to total tax charge in respect of previous periods		(6	)		(3	)		(8	)
Total tax charge for the year		149			85			50

F-20

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Tax (Continued)

(c)

Factors that may affect future tax charges

The Group has brought forward tax losses that are available to reduce tax payments on future taxable profits and such losses are expected to be utilized in the foreseeable future.

The Group has £94 million advanced corporation tax previously written off which may be utilized against future taxable profits. This may reduce future tax payments and the tax charge in future years.

In accordance with FRS 19, no provision has been made for deferred tax on gains arising on the revaluation of fixed assets or where potentially taxable gains have been rolled over into replacement assets since such gains would become taxable only if the assets were sold without it becoming possible to claim further rollover relief. The total amount unprovided for is approximately £30 million before the deduction of UK capital losses currently available. No deferred tax has been provided on the unremitted earnings of overseas subsidiaries and associates because there is no current intention to remit. Additionally, no deferred tax asset has been recognized in respect of £4 million of overseas tax losses or £82 million of UK capital losses as the utilization of such losses is uncertain.

Earnings per share

	Profit						Earnings per share
	2005		2004		2003		2005		2004		2003
	(£ millions)						(pence)
Profit for the year and basic earnings per share		251		130		72		23.4		12.1		6.7
Interest on Convertible Capital Bonds		8		—		—
Diluted profit for the year and earnings per share		259		130		72		23.0		12.1		6.7
Weighted average number of shares for basic earnings per share (’000)								1,071,126		1,070,077		1,073,054
Dilutive potential ordinary shares:
Convertible Capital Bonds (’000)								48,007		—		—
Outstanding share options (’000)								7,352		—		—
Weighted average number of shares for diluted earnings per share (’000)								1,126,485		1,070,077		1,073,054

Basic earnings per share is calculated on a weighted average number of ordinary shares in issue after deducting for shares held for the purposes of employee share ownership plans including the Long Term Incentive Plan.

F-21

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Intangible Assets

	Goodwill
	(£ millions)
Year ended March 31, 2005
Cost
Balance at April 1		114	86	200
Additions		—	32	32
Balance at March 31		114	118	232
Amortization
Balance at April 1		21	11	32
Charge for the year		5	5	10
Balance at March 31		26	16	42
Net book amount at March 31, 2005		88	102	190
Year ended March 31, 2004
Cost
Balance at April 1		114	72	186
Additions		—	14	14
Balance at March 31		114	86	200
Amortization
Balance at April 1		15	7	22
Charge for the year		6	4	10
Balance at March 31		21	11	32
Net book amount at March 31, 2004		93	75	168

F-22

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Tangible Assets

	Fleet
	(£ millions)
Year ended March 31, 2005
Cost or valuation
Balance at April 1, 2004		10,732		1,396		1,067		13,195
Exchange movements		(31	)	(5	)	—		(36	)
Additions — net of refund of progress payments (Note 14e)		257		13		24		294
Disposals		(138	)	(41	)	(112	)	(291	)
Reclassifications		(20	)	(13	)	10		(23	)
Balance at March 31, 2005		10,800		1,350		989		13,139
Depreciation
Balance at April 1, 2004		3,628		354		576		4,558
Exchange movements		(8	)	—		—		(8	)
Charge for the year		507		76		78		661
Disposals		(71	)	(38	)	(110	)	(219	)
Impairment		16		—		—		16
Reclassifications		(20	)	(1	)	—		(21	)
Balance at March 31, 2005		4,052		391		544		4,987
Net book amount at March 31, 2005		6,748		959		445		8,152
Year ended March 31, 2004
Cost or valuation
Balance at April 1, 2003		11,455		1,550		1,032		14,037
Exchange movements		(275	)	(25	)	—		(300	)
Additions — net of refund of progress payments (Note 14e)		154		24		43		221
Disposals		(593	)	(43	)	(108	)	(744	)
Reclassifications		(9	)	(110	)	100		(19	)
Balance at March 31, 2004		10,732		1,396		1,067		13,195
Depreciation
Balance at April 1, 2003		3,627		331		592		4,550
Exchange movements		(95	)	(2	)	—		(97	)
Charge for the year		517		71		81		669
Disposals		(407	)	(37	)	(105	)	(549	)
Reclassifications		(14	)	(9	)	8		(15	)
Balance at March 31, 2004		3,628		354		576		4,558
Net book amount at March 31, 2004		7,104		1,042		491		8,637
Analysis at March 31, 2005
Owned		2,739		918		432		4,089
Finance leased		1,742		—		—		1,742
Hire purchase arrangements		2,234		—		—		2,234
Progress payments		10		41		13		64
Assets not in current use		23		—		—		23
		6,748		959		445		8,152
Analysis at March 31, 2004
Owned		1,855		1,005		421		3,281
Finance leased		2,247		—		1		2,248
Hire purchase arrangements		2,914		—		—		2,914
Progress payments		32		37		69		138
Assets held for resale		49		—		—		49
Assets not in current use		7		—		—		7
		7,104		1,042		491		8,637

F-23

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Tangible Assets (Continued)

Included in the cost of tangible assets for the Group is £339 million (2004: £344 million) of capitalized interest.

The net book amount of property comprises:

	March 31
	2005		2004
	(£ millions)
Freehold		303		313
Long leasehold		335		340
Short leasehold		321		389
		959		1,042

(a)

The amounts shown under ‘fleet’ above include the following amounts for aircraft acquired under finance lease obligations and hire purchase arrangements:

	March 31
	2005			2004
	(£ millions)
Cost		5,857			7,346
Less: accumulated depreciation		(1,881	)		(2,184	)
Net book amount		3,976			5,162

(b)

Revalued fleet and properties are included in the financial statements at the following amounts:

	March 31
	2005						2004
	Valuation/ cost		Depreciation		Net book amount		Valuation/ cost		Depreciation		Net book amount
	(£ millions)
Property
Valuation		383		60		323		393		55		338
Subsequent additions at cost		72		34		38		47		18		29
		455		94		361		440		73		367

If these assets had not been revalued they would have been included at the following amounts:

March 31
2005						2004
Valuation/ cost		Depreciation		Net book amount		Valuation/ cost		Depreciation		Net book amount
(£ millions)
	142		37		105		129		24		105

Included in fleet assets as at March 31, 2005 are assets with a cost of £527 million (2004: £578 million) held as security for the Group’s bank and other loans.

(c)

Revaluation

All freehold properties of the Group, and certain leasehold properties, where leases give long-term security of tenure and rights to development, disposal and sub-letting were revalued at open market value for existing use at March 31, 1995.

F-24

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Tangible Assets (Continued)

(d)

Depreciation

Fleets are generally depreciated over periods ranging from 15 to 25 years after making allowance for estimated residual values. Effective annual depreciation rates resulting from those methods are shown in the following table:

	Year ended March 31
	2005		2004		2003
	(%)
Boeing 747–400 and 777–200		3.7		3.7		3.7
Boeing 767–300 and 757–200		4.7		4.7		4.7
Airbus A321, A320, A319 and Boeing 737–400		4.9		4.9		4.9
Embraer RJ145, British Aerospace 146		4.8		4.5		4.5

Property, apart from freehold land, is depreciated over its expected useful life subject to a maximum of 50 years. Equipment is depreciated over periods ranging from 3 to 25 years, according to the type of equipment.

(e)

Analysis of tangible asset additions

	Year ended March 31
	2005
	Fleet		Property			Equipment			Total
	(£ millions)
Cash paid		257		16			28			301
Accrual movements		—		(3	)		(4	)		(7	)
		257		13			24			294

	Year ended March 31
	2004
	Fleet			Property			Equipment			Total
	(£ millions)
Cash paid		131			23			44			198
Acquisitions under loans, finance leases and hire purchase arrangements		76			7			—			83
Capitalized interest		—			1			—			1
Accrual movements		(11	)		(7	)		(1	)		(19	)
		196			24			43			263
Refund of progress payments		(42	)		—			—			(42	)
		154			24			43			221

(f)

Impairment

In March 2005, the Group announced its intention to retire the BAe 146 aircraft currently operated by British Airways CitiExpress Limited. The aircraft will exit from service during the year ending March 2006. This decision resulted in an impairment charge of £16 million to reflect the estimated realizable value of the aircraft.

Capital expenditure commitments

Capital expenditure authorized and contracted for but not provided in the Financial Statements amounts to £143 million (2004: £347 million). The outstanding commitments include £132 million which relates to the acquisition of Airbus A320 family of aircraft scheduled for delivery over the next three years. It is intended that these aircraft will be financed partially by cash holdings and internal cash flow and partially through external financing, including committed facilities arranged prior to delivery.

F-25

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Operating lease commitments

(a)

The aggregate payments, for which there are commitments under operating leases as at the end of the year, fall due as follows:

	Fleet
	(£ millions)
Within one year		107	65	172
Between one and two years		92	55	147
Between two and three years		73	52	125
Between three and four years		49	42	91
Between four and five years		36	36	72
Over five years (property and equipment, ranging up to the year 2145)		83	1,429	1,512
		440	1,679	2,119

(b)

Amounts payable within one year relate to commitments expiring as follows:

	Fleet
	(£ millions)
Within one year		8	10	18
Between one and two years		15	2	17
Between two and three years		28	7	35
Between three and four years		19	7	26
Between four and five years		10	6	16
Over five years		27	33	60
		107	65	172

Property and equipment commitments above relate largely to property leases.

F-26

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Investments

(a)

Associated undertakings

	Equity
	(£ millions)
Year ended March 31, 2005
Balance at April 1, 2004		501		501
Exchange movements		(21	)	(21	)
Additions		6		6
Goodwill on amortization		(1	)	(1	)
Share of attributable results		14		14
Share of movements on other reserves		—		—
Disposals		(379	)	(379	)
Balance at March 31, 2005		120		120
Year ended March 31, 2004
Balance at April 1, 2003		461		461
Exchange movements		27		27
Additions		—		—
Goodwill on amortization		(1	)	(1	)
Share of attributable results		1		1
Share of movements on other reserves		8		8
Disposals		5		5
Balance at March 31, 2004		501		501

	March 31
	2005		2004
	(£ millions)
Equity comprises:
Cost of shares		76		383
Goodwill (less amortization)		15		16
Goodwill set off		—		(59	)
Share of post-acquisition profits		27		65
Share of other reserves		2		96
		120		501

(b)

Trade investments:

	Cost				Provisions
	Shares		Loans		Shares			Loans			Total
	(£ millions)
Year ended March 31, 2005
Balance at April 1, 2004		29		21		(17	)		(3	)		30
Reclassification from associated undertakings		30		—		(30	)		—			0
Balance at March 31, 2005		59		21		(47	)		(3	)		30
Year ended March 31, 2004
Balance at April 1, 2003		29		21		(16	)		(2	)		32
Provision		—		—		(1	)		(1	)		(2	)
Balance at March 31, 2004		29		21		(17	)		(3	)		30

F-27

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Investments (Continued)

(c)

Net book value of total investments

	March 31, 2005
	Associated companies		Trade investments		Total
	(£ millions)
Listed		120		1		121
Unlisted		—		29		29
		120		30		150

	March 31, 2004
	Associated companies		Trade investments		Total
	(£ millions)				Restated
Listed		498		1		499
Unlisted		3		29		32
		501		30		531

(d)

Market value of listed investments

	March 31
	2005		2004
			Restated
	(£ millions)
Associated undertakings		171		638
Trade investments		4		5

Disposal of associated undertakings

On September 9, 2004, the Group completed the sale of its 18.25% holding in Qantas Airways Limited through a book build sale of the shares. The sale realized gross proceeds of A$1.1 billion before tax.

	March 31, 2005
	(£ millions)
Proceeds, net of costs of disposal		427
Carrying value of investment at date of disposal		(379	)
Goodwill written back on disposal		(59	)
Loss on disposal		(11	)
Tax		(14	)
Loss on disposal after tax		(25	)

F-28

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Quasi-Subsidiary

Summarized financial information of The London Eye Company Limited, prepared in accordance with British Airways’ accounting policies, is set out below:

	March 31
	2005			2004			2003
	(£ millions)
Profit and Loss account
Turnover		39			37			38
Operating profit		9			10			13
Loss before tax and loss for the period		(26	)		(19	)		(11	)
Balance Sheet
Fixed assets		69			72			76
Current assets		12			13			9
Creditors: Amounts falling due within one year		(10	)		(11	)		(15	)
Net current assets/(liabilities)		2			2			(6	)
Total assets less current liabilities		71			74			70
Creditors: Amounts falling due after more than one year		(155	)		(132	)		(109	)
Capital and reserves deficit		(84	)		(58	)		(39	)
Cash Flow Statement
Cash inflow from operating activities		15			17			24
Returns on investments and servicing of finance		(12	)		(6	)		(5	)
Capital expenditure and financial investment		(4	)		(2	)		(8	)
Net cash (outflow)/inflow before management of liquid resources and financing		(1	)		9			11
Financing		—			(5	)		(15	)
(Decrease)/increase in cash		(1	)		4			(4	)

There are no recognized gains and losses other than the loss for the period. The loss for the period includes interest payable to British Airways of £35 million (2004: £29 million, 2003: £24 million)

Stocks

	March 31
	2005		2004
	(£ millions)
Expendables and consumables		84		76

The replacement cost of stocks is considered not to be materially different from their balance sheet values.

F-29

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Debtors

	March 31
	2005		2004
	(£ millions)
Trade debtors		701		704
Less: provisions		16		28
		685		676
Amounts owed by associated undertakings		—		42
Other debtors		35		54
Prepayments and accrued income		304		247
Pension prepayments		54		—
		1,078		1,019

Amounts due after more than one year included above are not significant except for amounts shown above as pension prepayment.

Cash

(a)

Reconciliation of net cash flow to movement in net debt

	Year ended March 31
	2005			2004			2003
	(£ millions)
Increase/(decrease) in cash during the year		14			(158	)		158
Net cash outflow from decrease in debt and lease financing		1,155			834			784
Cash outflow from liquid resources		16			198			289
Changes in net debt resulting from cash flows		1,185			874			1,231
New loans and finance leases taken out and hire purchase arrangements made		(12	)		(97	)		(221	)
Non cash refinancing		9			32			—
Exchange movements		54			182			135
Movement in net debt during the year		1,236			991			1,145
Net debt at April 1		(4,158	)		(5,149	)		(6,294	)
Net debt at March 31		(2,922	)		(4,158	)		(5,149	)

F-30

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Cash (Continued)

(b)

Analysis of net debt

	Balance at April 1
	(£ millions)
Year ended March 31, 2005
Cash		64		14		—		—		78
Short-term loans and deposits		1,606		16		—		(18	)	1,604
Bank and other loans		(1,225	)	52		—		5		(1,168	)
Finance leases and hire purchase arrangements		(4,491	)	1,103		(3	)	67		(3,324	)
Convertible Capital Bonds 2005		(112	)	—		—		—		(112	)
		(4,158	)	1,185		(3	)	54		(2,922	)
Year ended March 31, 2004
Cash		222		(158	)	—		—		64
Short-term loans and deposits		1,430		198		—		(22	)	1,606
Bank and other loans		(1,332	)	258		(193	)	42		(1,225	)
Finance leases and hire purchase arrangements		(5,357	)	576		128		162		(4,491	)
Convertible Capital Bonds 2005		(112	)	—		—		—		(112	)
		(5,149	)	874		(65	)	182		(4,158	)
Year ended March 31, 2003
Cash		64		158		—		—		222
Short-term loans and deposits		1,155		289		—		(14	)	1,430
Bank and other loans		(1,545	)	176		—		37		(1,332	)
Finance leases and hire purchase arrangements		(5,856	)	608		(221	)	112		(5,357	)
Convertible Capital Bonds 2005		(112	)	—		—		—		(112	)
		(6,294	)	1,231		(221	)	135		(5,149	)

F-31

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Borrowings and other creditors: amounts falling due within one year

	March 31
	2005		2004
	(£ millions)
Loans, finance leases and hire purchase arrangements
Bank and other loans		63		102
Finance leases		96		119
Hire purchase arrangements		288		461
		447		682
Trade creditors		897		840
Unredeemed frequent flyer liabilities		112		120
Amounts owed to associated undertakings		—		32
Other creditors
Other creditors		301		291
Corporate taxation		36		6
Other taxation and social security		43		38
		380		335
Accruals and deferred income
Sales in advance of carriage		880		859
Accruals and deferred income		152		128
		1,032		987
		2,868		2,996

Borrowings and other creditors: amounts falling due after more than one year

	March 31
	2005		2004
	(£ millions)
Loans, finance leases and hire purchase arrangements
Bank and other loans		1,105		1,123
Finance leases		1,493		1,978
Hire purchase arrangements		1,447		1,933
		4,045		5,034
Other creditors		8		14
Accruals and deferred income		293		326
		4,346		5,374

F-32

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Loans, Finance Lease Obligations and Hire Purchase Arrangements

	March 31
	2005		2004		2005		2004
	(Currency millions)				(£ millions)
Loans
Bank
US Dollar	$	297	$	374		158		204
Sterling		£699		£700		699		700
						857		904
Euro-Sterling notes
Sterling		£308		£318		308		318
Other
Sterling		£3		£3		3		3
Finance leases
US Dollar	$	1,089	$	1,190		579		649
Sterling		£1,010		£1,448		1,010		1,448
						1,589		2,097
Hire purchase arrangements
Japanese Yen		¥152,070		¥181,738		756		954
US Dollar	$	205	$	367		109		200
Sterling		£870		£1,240		870		1,240
						1,735		2,394
						4,492		5,716

Bank and other loans are repayable up to the year 2019. Bank and other loans of the Group amounting to US$194 million (2004: US$254 million) and £592 million (2004: £526 million) are secured on aircraft. Euro-Sterling notes, other loans and loans from subsidiary undertakings are not secured. Finance leases and hire purchase arrangements are all secured on aircraft or property assets.

Loans, the capital elements of finance lease obligations and hire purchase arrangements are repayable as follows:

	March 31
									2005		2004
	Bank loans		Other loans		Finance leases		Hire purchase arrangements		Total		Total
	(£ millions)
Within one year		63		—		96		288		447		682
Between one and two years		85		—		108		289		482		500
Between two and three years		83		—		85		285		453		532
Between three and four years		65		61		64		257		447		504
Between four and five years		74		3		66		390		533		511
Over five years		487		247		1,170		226		2,130		2,987
		857		311		1,589		1,735		4,492		5,716

F-33

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

25 Loans, Finance Lease Obligations and Hire Purchase Arrangements (Continued)

Of which:

	March 31
	2005		2004
	(£ millions)
Bank loans
Repayable wholly within five years		370		391
Repayable in whole or in part after five years		487		513
Other loans, finance lease obligations and hire purchase arrangements
Repayable wholly within five years		1,992		2,338
Repayable in whole or in part after five years		1,643		2,474
		4,492		5,716

Future minimum lease payments under finance lease obligations and hire purchase arrangements as at March 31, 2005 together with the present value of the net minimum lease and hire purchase payments were:

				(£ millions)
Within one year					527
Between one and two years					513
Between two and three years					465
Between three and four years					398
Between four and five years					516
Over five years					1,669
Total net minimum lease and hire purchase payments					4,088
Less: amount representing interest					764
Present value of net minimum lease and hire purchase payments					3,324

F-34

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Analysis of Changes in Borrowings During the Year

	Year ended March 31, 2005									Year ended March 31, 2004									Year ended March 31, 2003
	Bank and other loans			Finance leases and hire purchase arrangements			Total			Bank and other loans			Finance leases and hire purchase arrangements			Total			Bank and other loans			Finance leases and hire purchase arrangements			Total
	(£ millions)									(£ millions)									(£ millions)
Balance at April 1		1,225			4,491			5,716			1,332			5,357			6,689			1,545			5,856			7,401
New loans raised		116			—			116			81			—			81			13			—			13
Non cash refinancing		—			(9	)		(9	)		193			(225	)		(32	)		—			—			—
Loans, finance leases and hire purchase arrangements undertaken to finance acquisition of aircraft and other assets		—			12			12			—			97			97			—			221			221
Repayment of amounts borrowed		(168	)		(1,103	)		(1,271	)		(339	)		(576	)		(915	)		(189	)		(608	)		(797	)
Exchange movements		(5	)		(67	)		(72	)		(42	)		(162	)		(204	)		(37	)		(112	)		(149	)
Balance at March 31		1,168			3,324			4,492			1,225			4,491			5,716			1,332			5,357			6,689

Included within exchange movements above are £21 million offset in reserves (2004: £169 million; 2003: £135 million).

Provision for deferred taxation

Deferred taxation has been provided at 30% (2004: 30%; 2003: 30%).

	March 31
	2005			2004			2003
	(£ millions)
Accelerated capital allowances less unrelieved losses		1,287			1,251			1,259
Other timing differences		48			28			18
Tax losses carried forward		(92	)		(142	)		(215	)
		1,243			1,137			1,062

Movement in provision:

	March 31
	2005		2004		2003
	(£ millions)
Balance at April 1		1,137		1,062		1,031
Deferred tax charge in profit and loss (note 11)		106		75		31
Balance at March 31		1,243		1,137		1,062

F-35

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Provisions for liabilities and charges

	Balance at April 1
	(£ millions)
Year ended March 31, 2005
Pensions and similar obligations		17	(1	)	—		16
Post-retirement medical benefits		36	6		—		42
Severance		5	8		(5	)	8
Onerous lease contracts		27	—		(10	)	17
		85	13		(15	)	83
Year ended March 31, 2004
Pensions and similar obligations		17	—		—		17
Post-retirement medical benefits		33	3		—		36
Severance		30	5		(30	)	5
Onerous lease contracts		27	11		(11	)	27
		107	19		(41	)	85

The severance provision at March 31, 2005 covers pension augmentation costs relating to individuals who left the Group in February and March 2005, and committed early retirement and voluntary severance costs to be paid during the next financial year.

The onerous lease provision relates to the sub-lease of 12 Jetstream 41 aircraft to Eastern Airways and the grounding of the ATP fleet, which included the sub-lease of 3 aircraft to Loganair. This provision will be fully utilized by October 2009.

Employee Share Schemes

British Airways has adopted a number of employee share schemes in the United Kingdom. These include the British Airways Sharesave Scheme 1996, Executive Share Option Scheme 1987, Share Option Plan 1999 and the British Airways Long Term Incentive Plan 1996. British Airways has also adopted an Employee Share Purchase Plan for its non-executive US employees and an Executive Share Option Plan for its executive US employees.

British Airways Sharesave Scheme 1996

All full-time Executive Directors and all employees (full-time or part-time) who have worked for the Company or a participating company for a qualifying period as determined by the Directors (but not to exceed five years) and any other employees nominated by the Directors are eligible to participate in the Savings-Related Scheme.

Employees granted an option under the Sharesave Scheme must enter into a savings contract with a designated savings carrier under which they make monthly savings for a period of three years or, if the Directors determine, any other period permitted under the relevant legislation. The monthly savings must not exceed the limit imposed by the relevant legislation (currently £250 per month). A bonus determined by the Inland Revenue will be payable after three years. An option is granted to the employee which is normally exercisable within six months after the bonus is payable under the savings contract using the amount saved plus the bonus.

Options will be granted at an options price which is not less than 80% of the average of the market value of the shares for the three days following the 14th day after invitations are sent out (or some other date agreed with the Inland Revenue) and, where shares are to be subscribed, at their nominal value (if greater). Market value means on any day the average of the middle market quotation derived from the Daily Official List of the Financial Services Authority over the three preceding business days.

Options are normally exercisable for a six month period following the bonus date under the relevant savings contract. If the option is not exercised within this six month period, the option will lapse. Options may also, however, be exercised early in certain circumstances, for example on the option holder ceasing to be an employee due to

F-36

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

29 Employee Share Schemes (Continued)

death, injury, disability, redundancy, retirement or following change of control of the employing Company and in the event of a takeover or winding-up of the Company. Exercise is also allowed where the employee leaves and the option has been held for more than three years. If any option is exercised early, the option holder may only use the savings made under the savings contract (together with any interest) at that time to exercise the option.

British Airways Executive Share Option Scheme 1987

The British Airways Executive Share Option Scheme 1987 was introduced at the flotation of the Company in 1987 and was operated each summer (except in 1991 when the Share Appreciation Rights Plan 1991 was operated instead) as the long-term incentive plan for executives. The scheme ceased to operate in 1995. A summary of the principal features of the scheme is set out below.

A selected Group of key full-time executives were eligible. The maximum allocation per executive was four times the relevant emoluments for the current or preceding year of assessment (which ever of those years gives the greater amount).

Options were granted at an option price which was not less than the greater of the market value of the shares and the nominal value thereof. Market value meant on any day the average of the middle market quotation derived from the Daily Official List of the UK Financial Services Authority for the three preceding business days. Grants were made within 42 days of the preliminary announcement of the Company’s final results and/or the preliminary announcement of the Company’s half-yearly results in respect of any financial period.

Options are exercisable between the third and tenth anniversary of the date of grant, conditional on the executive remaining in employment.

British Airways Share Option Plan 1999

The British Airways Share Option Plan 1999 was approved at the Annual General Meeting on July 31, 1999 and has operated each year since August 1999 as the incentive plan for executives.

The plan is intended to operate for mainly senior managers. An individual’s participation is limited so that the aggregate exercise price of options granted will not exceed the individual’s basic salary in any one year.

Options are granted at an option price which is not less than the market value of the shares on the date of grant and, where the shares are to be subscribed, at their nominal value (if greater). Market value means on any day, the average of the middle market quotation derived from the Daily Official List of the Financial Services Authority, for the three proceeding business days.

Grants are made within 42 days of the preliminary announcement of the Company’s final results and/or the preliminary announcement of the Company’s half-yearly results in respect of any financial period.

Options are exercisable between the third and tenth anniversary date of the grant, subject to a performance condition.

The performance condition used in the year under review and preceding years require the Remuneration Committee to be satisfied that there has been an increase in the earnings per share (“EPS”) of the Company which is at least four per cent per annum more than the increase in the retail price index during any period of three consecutive financial years within the life of the grant. EPS is calculated as set out in the Statement of Investment Practice No. 1 of the Institute of Investment Management and Research as this is a recognized method in the market. In addition, the Remuneration Committee has imposed a threshold of 17.3 pence as the minimum base year EPS before any such increase could qualify towards meeting the performance condition. The threshold was altered from 20.8 pence in the financial year 2002/03 to reflect the adoption of FRS 19 ‘Deferred Tax’. In relation to grants to be awarded under the plan during 2004/05, the Remuneration Committee has determined that the performance condition and the EPS threshold should remain unchanged. If the performance condition is not satisfied over the initial three year period, there will be a single retest after a further year which will measure performance of the Company over the four year period commencing with the year in which the grant was made.

F-37

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

29 Employee Share Schemes (Continued)

The scheme also provides for early exercise under certain circumstances where a executive leaves BA prior to the vesting date.

British Airways Long Term Incentive Plan 1996

The British Airways Long Term Incentive Plan 1996 (‘LTIP’) was approved at the annual general meeting on July 16, 1996.

Grants were made in 1996, 1997 and 1998. As a result of the introduction of the British Airways Share Option Plan 1999, grants made in 1999 and subsequent years are restricted to executive directors and the most senior Group of executives.

The current performance criteria were adopted at the annual general meeting on July 13, 1999. The Plan permits the Remuneration Committee to make awards of options over shares up to a maximum of 75 per cent of basic salary to senior executives conditional upon the Company’s achievement of a stretching performance condition, which requires the Company’s ranking by total shareholder return (“TSR”) to be placed at the median percentile or above relative to the companies in the FTSE100 index before any options are granted and which produces the maximum option grant only if the Company attains the 90th percentile or above. In relation to awards made in recent years, achievement against the performance condition will be tested in relation to the whole award on the third anniversary of the start of the financial year in which the award was made. If granted, all options are immediately exercisable for seven years. No payment is due upon exercise of options. All awards are subject to the Remuneration Committee being satisfied that the Company’s overall financial performance justifies the grant of the option. The Remuneration Committee selected the performance condition because it is challenging, aligned to shareholders’ interests and ensures awards only give benefit to executives if they outperform their peers. Performance against the condition is assessed using data on the TSR performance of the Company and the FTSE100 index as supplied by Towers Perrin.

Pension and other post retirement benefits

British Airways operates two funded principal defined benefit pension schemes in the United Kingdom, the Airways Pension Scheme (APS) and the New Airways Pension Scheme (NAPS) both of which are closed to new members. APS has been closed to new members since March 31, 1984 and NAPS closed to new members on March 31, 2003. From April 1, 2003 British Airways commenced a new defined contribution scheme, the British Airways Retirement Plan (BARP), of which all new permanent employees over the age of 18 employed by the company and certain subsidiary undertakings in the United Kingdom may become members. The assets of these schemes are held in separate trustee-administered funds. Benefits provided under APS are based on final average pensionable pay and, for the majority of members, are subject to increases in payment in line with the Retail Price Index. Those provided under NAPS are based on final average pensionable pay reduced by an amount (the “abatement”) not exceeding one and a half times the Government’s lower earnings limit. NAPS benefits are subject to Retail Price Index increases in payment up to a maximum of 5 per cent in any one year. Most employees engaged outside the United Kingdom are covered by appropriate local arrangements.

Standard employees’ contributions range from 5.75 per cent to 8.5 per cent of full pensionable pay in APS, and from 3.75 per cent to 6.5 per cent of full pensionable pay less the abatement in NAPS.

The latest actuarial valuations of APS and NAPS were made as at March 31, 2003 by an independent firm of qualified actuaries, Watson Wyatt LLP, using the attained age method for APS and the projected unit method for NAPS. At the date of the actuarial valuation the market values of the assets of APS and NAPS amounted to £5,421 million and £3,184 million respectively. The value of the assets represented 101% (APS) and 78% (NAPS) of the value of the benefits that had accrued to members after allowing for assumed increases in earnings. These valuations showed that an employers’ contribution equal to an average of 3.75 times the standard employees’ contributions from November 1, 2003 (nil prior to November 1, 2003) was appropriate for APS. For NAPS the corresponding regular employers’ contribution was 2.8 times the standard employees’ contributions from January 1, 2004 (3.0 times from April 1, 2003 to December 31, 2003 including a multiple of 0.5 to cover the

F-38

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

30 Pension and other post retirement benefits (Continued)

deficit contributions) in addition to deficit contributions of £9.56 million per month increasing each April in line with inflation for a period of 10 years.

The pension costs for the Schemes are assessed in accordance with the advice of an independent qualified actuary. For these purposes valuations of the Schemes were carried out as at March 31, 2003 using the attained age method for APS and the projected unit method for NAPS. The principal assumptions adopted were that investments would return 3.1% per annum in real terms (ahead of price inflation assumed to be 2.5% per annum) for APS and 4.6% per annum in real terms for NAPS. Annual increases in earnings were assumed to remain level with price inflation for the five years following March 31, 2003 and thereafter increase at 1.5% ahead of price inflation. Limited Price Indexation increases awarded to pensions in payment are assumed on average to follow the rate of inflation. On this basis the regular cost is 25.41% of pensionable pay for APS and 14.16% of pensionable pay for NAPS. Any SSAP 24 surplus or deficit has been amortized over the remaining service lives of members of the Scheme and this leads to a variation in cost of (20.21)% of pensionable pay for APS and 10.06% of pensionable pay for NAPS.

The total pension costs (calculated as set out above for APS and NAPS), including pension augmentation payments, charged in the accounts were:

	Year ended March 31
	2005		2004		2003
	(£ millions)
Airways Pension Scheme		5		9		5
New Airways Pension Scheme		182		183		127
British Airways Retirement Plan		2		—		—
Other pension schemes and provident funds — mainly outside the United Kingdom		56		36		29
		245		228		161

Employer contributions in respect of overseas employees have been determined in accordance with best local practice.

There was a pension prepayment of £54 million as at March 31, 2005 (March 31, 2004: provision of £20 million). The pension prepayment arises due to the difference between the amounts recognized as cost and the amounts paid directly.

FRS 17 DISCLOSURES

The Group has continued to account for pensions in accordance with SSAP 24. The following additional disclosures are required in accordance with FRS 17 ‘Retirement benefits’:

	Year ended March
	2005						2004						2003
	APS and NAPS			Other Schemes			APS and NAPS			Other Schemes			APS and NAPS		Other Schemes
	(% p.a.)
Inflation		2.8			3.0 – 4.0			2.5			3.0 – 4.0			2.3		2.5 – 4.0
Rate of increase in salaries		2.8	*		1.5 – 6.0			2.5	*		1.5 – 6.0			3.8		1.5 – 6.0
Rate of increase of pensions in payment		2.7			1.7 – 5.0	**		2.5			2.0 – 5.0	**		2.3		2.0 – 8.0
Rate of increase in deferred pension		2.8			3.0 – 5.5			2.5			3.0 – 5.5			2.3		2.5 – 5.5
Discount rate		5.4			2.0 – 7.0			5.6			2.0 – 9.0			5.7		2.0 – 8.0

Rate of increase in salaries is 2.8 per cent per annum for 3 years and 4.3 per cent per annum thereafter (2004: Rate of increase in salaries is 2.5 per cent per annum for 4 years and 4.0 per cent per annum thereafter).

Excludes rate of increase on post-retirement medical benefit liabilities provided in the United States.

F-39

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

30 Pension and other post retirement benefits (Continued)

Market Values of the schemes’ assets were:

	Year ended March
	2005						2004						2003
	APS and NAPS		Other Schemes		Total		APS and NAPS		Other Schemes		Total		APS and NAPS		Other Schemes		Total
	(£ millions)
Equities		5,054		186		5,240		4,669		170		4,839		3,571		123		3,694
Bonds		4,627		104		4,731		4,456		64		4,520		4,472		67		4,539
Others		914		1		915		642		59		701		567		58		625
		10,595		291		10,886		9,767		293		10,060		8,610		248		8,858

Expected rate of return % per annum:

	Year ended March
	2005						2004						2003
	APS		NAPS		Other Schemes		APS		NAPS		Other Schemes		APS		NAPS		Other Schemes
	(% per annum)
Equities		8.5		8.5		6.0 – 9.5		8.4		8.4		6.0 – 9.5		8.5		8.5		6.0 – 9.5
Bonds		4.7		4.8		3.0 – 7.0		4.4		4.7		3.0 – 9.0		4.5		4.5		3.0 – 9.0
Others		5.6		5.3		3.0 – 8.0		5.9		5.6		3.0		6.4		6.1		2.6 – 5.0
		6.0		7.4		5.0 – 8.25		5.8		7.3		3.0 – 9.0		5.8		7.2		5.0 – 9.0

If the requirement of FRS 17 had been recognized in the financial statements, the defined benefit costs would be as follows:

	Year ended March
	2005									2004
	APS and NAPS			Other Schemes			Total			APS and NAPS			Other Schemes			Total
	(£ millions)
Current service cost		178			13			191			162			11			173
Past service costs		5			—			5			15			—			15
Total charged to operating profit		183			13			196			177			11			188

Amounts charged to other finance income:
Interest on pension scheme liabilities		603			26			629			545			24			569
Expected return on assets in the pension scheme		(599	)		(20	)		(619	)		(522	)		(13	)		(535	)
Net charge/(income) to other finance income		4			6			10			23			11			34
Total profit and loss charge before deduction for tax		187			19			206			200			22			222

F-40

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

30 Pension and other post retirement benefits (Continued)

If the requirements of FRS 17 had been recognized in the Financial Statements, the Group’s statement of total recognized gains and losses would have been:

	Year ended March
	2005									2004
	APS and NAPS			Other Schemes			Total			APS and NAPS			Other Schemes			Total
	(£ millions)
Differences between actual and expected returns on assets		(389	)		(1	)		(390	)		(885	)		(28	)		(913	)
Experience loss/(gain) on liabilities		108			(2	)		106			625			4			629
Loss on change of assumptions (financial and demographic)		746			21			767			310			7			317
Total loss/(gain) recognized in statement of total recognized gains and losses before adjustment for tax		465			18			483			50			(17	)		33

The following amounts were measured in accordance with the requirements of FRS 17:

	Year ended March
	2005									2004
	APS and NAPS			Other Schemes			Total			APS and NAPS			Other Schemes			Total
	(£ million)
(Gain)/loss on scheme assets:
Amount (£ millions)		(389	)		(1	)		(390	)		(885	)		(28	)		(913	)
Percentage of scheme assets at year end		(3.7	)%		(0.3	)%		(3.6	)%		(9.1	)%		(9.6	)%		(9.1	)%
Experience loss/(gain) on scheme liabilities:
Amount (£ millions)		108			(2	)		106			625			4			629
Percentage of scheme liabilities at year end		0.9	%		(0.5	)%		0.8	%		5.7	%		0.9	%		5.5	%
Total actuarial loss/(gain) recognized in statement of total recognized gains and losses:
Amount (£ millions)		465			18			483			50			(17	)		33
Percentage of scheme liabilities at year end		3.8	%		4.1	%		3.8	%		0.5	%		(3.7	)%		0.3	%

The following amounts were measured in accordance with the requirements of FRS 17.

	At March 31
	2005									2004									2003
	APS and NAPS			Other Schemes			Total			APS and NAPS			Other Schemes			Total			APS and NAPS			Other Schemes			Total
	(£ million)
Total market value of assets		10,595			291			10,886			9,767			293			10,060			8,610			248			8,858
Present value of liabilities		12,126			442			12,568			10,907			459			11,366			9,674			445			10,119
Deficit		(1,531	)		(151	)		(1,682	)		(1,140	)		(166	)		(1,306	)		(1,064	)		(197	)		(1,261	)
APS irrecoverable surplus		(301	)					(301	)		(385	)					(385	)		(418	)					(418	)
Pension liability (before allowance for deferred tax)		(1,832	)		(151	)		(1,983	)		(1,525	)		(166	)		(1,691	)		(1,482	)		(197	)		(1,679	)
Related deferred tax		550			45			595			458			50			508			445			59			504
Net pension liability		(1,282	)		(106	)		(1,388	)		(1,067	)		(116	)		(1,183	)		(1,037	)		(138	)		(1,175	)

F-41

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

30 Pension and other post retirement benefits (Continued)

If the above amounts had been recognized in the financial statements, the Group’s net assets and profit and loss reserve would be as follows:

	At March 31
	2005			2004			2003
	(£ millions)
Net assets excluding pension liability		2,684			2,428			2,274
Pension liability, net of related deferred tax, and SSAP 24 provisions and prepayments		(1,442	)		(1,163	)		(1,175	)
Net assets including pension liability		1,242			1,265			1,099
Profit and loss reserve excluding pension liability		1,177			897			729
Pension liability		(1,442	)		(1,163	)		(1,175	)
Profit and loss reserve		(265	)		(266	)		(446	)

The amounts above have been calculated after taking account of pensions prepayments and provisions for pension and other post-retirement benefits, net of related deferred tax.

Analysis of the movement in deficit in the schemes during the year:

	At March 31
	2005									2004
	APS and NAPS			Other Schemes			Total			APS and NAPS			Other Schemes			Total
	(£ millions)
(Deficit)/surplus before irrecoverable surplus and impact of deferred tax at April 1		(1,140	)		(166	)		(1,306	)		(1,064	)		(197	)		(1,261	)
Contributions paid		261			52			313			174			36			210
Current service cost		(178	)		(13	)		(191	)		(162	)		(11	)		(173	)
Past service cost		(5	)		—			(5	)		(15	)		—			(15	)
Other finance (charge)/income		(4	)		(6	)		(10	)		(23	)		(11	)		(34	)
Actuarial (loss)/gain		(465	)		(18	)		(483	)		(50	)		17			(33	)
Deficit before irrecoverable surplus and impact of deferred tax at March 31		(1,531	)		(151	)		(1,682	)		(1,140	)		(166	)		(1,306	)

Interest rate risk profile of financial liabilities

Analysis by type of borrowing:

									2005		2004
	Fixed rate borrowings						Floating rate borrowings		Total		Total
	Weighted average years		Weighted average rate (%)		(£ millions)
Sterling		9.9		6.11		1,298		1,704		3,002		3,821
US Dollar		12.9		4.50		275		571		846		1,053
Japanese Yen		4.0		1.34		756		—		756		954
Total 2005		8.3		4.37		2,329		2,275		4,604
Total 2004		8.9		4.84		2,744		3,084				5,828

The borrowings are stated after taking into account the various interest rate swaps entered into by the Group. Floating rates of interest are based on LIBOR (London Interbank Offered Rate).

Fixed rate borrowings include £112 million (2004: £112 million) relating to the Convertible Capital Bonds 2005.

F-42

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

31 Interest rate risk profile of financial liabilities (Continued)

The terms of the 9.75 per cent Convertible Capital Bonds allow the holders to convert into British Airways Plc ordinary shares during the period June 1993 to June 2005 on the basis of one ordinary share for every 2.34 (adjusted for the effect of the 1993 rights issue) Bonds held. On June 15, 2004, 39,000 ordinary shares were issued in exchange for 93,000 Bonds (June 16, 2003, 11,000 ordinary shares were issued in exchange for 26,000 Bonds). The terms also provide that on maturity in 2005, the Company may require remaining bondholders to convert their Bonds into ordinary shares of the Company which would be sold on their behalf. If the proceeds of such a sale are less than the issue price of the Bonds, the Company has to fund any deficit from its own resources. Full conversion of the remaining Bonds would require the issue of 47,999,000 ordinary shares.

The mid market closing prices of the Bonds and the ordinary shares at March 31, 2005 as quoted in the London Stock Exchange Daily Official List were 117.0p and 264.0p each respectively.

Subsequent to the balance sheet date, in June 2005, the Bonds matured and were all converted into ordinary shares of the Company. There was no deficit for the Company to fund.

Excluded from the above table are long term creditors and provisions for liabilities and charges amounting to £384 million (2004: £425 million) on which no interest is payable.

Interest Rate Arrangements

To reduce interest rate risk, the Group has entered into single currency interest rate swap arrangements so as to change the interest payable elements of certain loans and lease obligations from variable to fixed rates and, accordingly, accounts for such swaps as hedges.

Outstanding single currency interest rate swap arrangements are summarized as follows:

				Interest Rates
	Notional principal balance		Termination dates	Fixed payable	Variable receivable
	(currency millions)
At March 31, 2005
US Dollar		$240	2008	2.95% – 3.57%	2.56% – 2.95%
Sterling		£53	2006	5.27% – 5.36%	4.87%
At March 31, 2004
US Dollar		$240	2008	2.95% – 3.57%	1.12% – 1.16%
Sterling		£58	2006	5.27% – 5.36%	4.02%

Non-equity minority interest

The non-equity minority interest represents E300 million of 6.75 per cent fixed coupon Euro perpetual preferred securities issued by British Airways Finance (Jersey) L.P. in which the general partner is British Airways Holdings Limited, a wholly owned subsidiary of British Airways Plc. The holders of these securities have no rights against Group undertakings other than the issuing entity and, to the extent prescribed by the subordinated guarantee, the Company. The effect of the securities on British Airways Group as a whole, taking into account the subordinate guarantee and other surrounding arrangements, is that the obligations to transfer economic benefits in connection with the securities do not go beyond those that would normally attach to preference shares issued by a UK company.

F-43

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Interest rate risk profile of financial assets

The interest rate profile of the financial assets of the Group as at March 31, is as follows:

	At March 31
	2005		2004
	(£ millions)
Sterling		1,407		1,334
US Dollar		18		105
Japanese Yen		199		207
Other		58		24
		1,682		1,670

Floating rate financial assets above comprise cash and cash deposits on money market deposit at call and at short term rates for periods typically with maturity of less than 12 months.

In addition, the Group has fixed asset investments (excluding associates and investments in own shares) amounting to £30 million (2004: £30 million).

Currency exposures

Functional Currency	Net foreign currency assets/(liabilities)
	(£ millions)
	US Dollar		Euro			Japanese Yen			Other		Total
Sterling		154		(13	)		(566	)		198		(227	)
		154		(13	)		(566	)		198		(227	)
March 31, 2004
Sterling		96		49			(751	)		192		(414	)
		96		49			(751	)		192		(414	)

The table above shows the monetary assets and liabilities of the Group that are not denominated in the functional (or ‘operating’) currency of the operating unit involved other than certain non-Sterling borrowings treated as hedges of aircraft accounted for as foreign currency assets, and of net investments in overseas subsidiaries. Amounts also take into account the effect of derivatives entered into to manage these currency exposures.

Forward Transactions

The Group had outstanding forward transactions to hedge foreign currencies and fuel purchases as follows:

	At March 31				At March 31
	2005		2004		2005		2004
	(Currency millions)				(£ millions)
Maturing within one year
to hedge future currency revenues against US Dollars	$	87	$	80		—		—
to hedge future currency revenues against Sterling		—		—		£57		£35
to hedge future operating payments against US Dollars	$	255	$	2		—		—
to hedge future fuel costs in US Dollars	$	1,333	$	665		£709		£363
to hedge debt		¥9,719		¥27,238		£49		£140
Maturing after one year
to hedge future fuel costs in US Dollars	$	418		—		£222		—

F-44

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Borrowing facilities

At March 31, 2005 British Airways had undrawn committed aircraft financing facilities of $228 million (expires May 1, 2008), a further $232 million general facility (expires November 19, 2013) together with unused overdraft facilities of £21 million. An undrawn uncommitted money market line of £25 million was held as at March 31, 2005.

Fair values of financial instruments

Primary financial instruments held or issued to finance the Group’s operations

	At March 31
	2005						2004
	Carrying amount			Fair value			Carrying amount			Fair value
	(£ millions)
Cash at bank and in hand and overdrafts		78			78			64			64
Short-term loans and deposits		1,604			1,604			1,606			1,606
Fixed asset investments (excluding associates and investments in own shares)		30			33			30			34
Bank and other borrowings		(860	)		(888	)		(907	)		(967	)
Finance leases		(1,589	)		(1,585	)		(2,097	)		(2,106	)
Hire purchase arrangements		(1,735	)		(1,737	)		(2,394	)		(2,399	)
Euro-Sterling notes		(61	)		(70	)		(71	)		(79	)
Convertible Capital Bonds 2005		(112	)		(132	)		(112	)		(155	)
Euro-Sterling Bond 2016		(247	)		(270	)		(247	)		(248	)

Derivative financial instruments held to manage the interest rate and currency profile

	At March 31
	2005			2004
	Fair Value
	(£ millions)
Interest rate swaps		2			(5	)
Forward currency transactions		(1	)		(1	)
Fuel derivatives		278			29

No carrying amounts are shown as all items are held off balance sheet.

Included within forward currency transactions are derivative financial instruments held to hedge the currency exposure on expected future sales.

The following methods and assumptions were used by the Group in estimating its fair value disclosures for financial instruments:

Fixed asset investments

–

listed fixed asset investments are stated at market value as at March 31, 2005. All other fixed asset investments ate stated at carrying value less any provisions for permanent diminution in value.
Bank and other loans, finance leases, hire purchase arrangements and the non Japanese Yen denominated portions of hire purchase arrangements carrying fixed rates of interest

–

the repayments which the Group is committed to make have been discounted at the relevant interest rates applicable at March 31, 2005. Japanese Yen denominated portions of hire purchase arrangements carrying fixed rates of interest

–

these amounts relate to the tax equity portions of Japanese leveraged leases which are personal to the Group, cannot be assigned and could not be refinanced or replaced in the same cross border market on a marked

F-45

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

38 Fair values of financial instruments (Continued)

to market basis and accordingly, a fair value cannot be determined. The carrying value of £756 million has therefore been included as the fair value above. Euro Sterling notes, Convertible Capital Bonds 2005 and Euro-Sterling Bond 2016

–

quoted market value.

Off balance sheet interest rate swaps

–

discounted cash flow analysis, to determine the estimated amount the Group would receive or pay to terminate the agreements.

Off balance sheet forward currency transactions

–

the marked-to-market value of the instruments.

Off balance sheet over the counter (OTC) fuel derivatives

–

the marked-to-market value of the instruments.

The fair value of all other assets and liabilities is deemed to be equal to their carrying value unless stated otherwise in the relevant note to the accounts.

Hedges

The instruments used to hedge future exposures are interest rate swaps, forward currency contracts and fuel derivatives.

At March 31, 2005 there were unrecognized gains of £281 million and unrecognized losses of £2 million relating to hedges of future exposure. Of the unrecognized gains £228 million are expected to occur within one year and £53 million after one year, and of the unrecognized losses £2 million are expected to occur within one year.

At March 31, 2004 there were unrecognized gains of £33 million and unrecognized losses of £10 million relating to hedges of future exposure. All of the unrecognized gains related to the period to March 31, 2004 and of the unrecognized losses £7 million related to the period to March 31, 2005 and £3 million related to periods in excess of one year.

Contingencies

There were contingent liabilities at March 31, 2005 in respect of guarantees and indemnities entered into as part of, and claims arising from, the ordinary course of business, upon which no material losses are likely to arise.

The Group has guaranteed certain borrowings, liabilities and commitments which at March 31, 2005 amounted to £259 million (2004: £383 million) and £577 million (2004: £633 million) respectively. For the company these included guarantees given in respect of the Convertible Capital Bonds and the fixed perpetual preferred securities issued by subsidiary undertakings.

Related Party Transactions

The Group has had transactions during the year under review with related parties as defined in FRS 8, ‘Related Party Disclosures’. As is common practice in the airline industry, British Airways, Qantas, Iberia and Comair from time to time carry each other’s passengers traveling on the other airlines’ tickets. The settlement between related carriers is actioned through the IATA Clearing House, of which the airlines below are members.

QANTAS AIRWAYS LIMITED

The Group has a ‘Joint Services Agreement’ with the airline which started in November 1995. The agreement allows the two airlines to co-operate in developing schedules and fares and to share revenues and costs on the core ‘Kangaroo’ routes between Europe and Australia.

F-46

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

40 Related Party Transactions (Continued)

The Group disposed of its equity investment in Qantas in September 2004.

IBERIA, LINEAS AÉREAS DE ESPAÑA, S.A. (‘IBERIA’)

The Group has a 8.76 per cent investment in Iberia, which was completed in March 2000. Areas of opportunity for co-operation have been identified, and work continues to pursue and implement these.

As at March 31, 2005, the net trading balance owed by British Airways to Iberia amounted to £0.3 million (2004: £0.1 million).

COMAIR LIMITED

The Group has an 18.3 per cent investment in Comair and has a franchise agreement with the company that commenced in October 1996.

As at March 31, 2005, the net trading balance due to Comair amounted to £8 million (2004: £8 million)

OPODO LIMITED

In the current year the Group reduced its investment in Opodo from 19.05 per cent to 5.94 per cent. The settlement between British Airways and Opodo is actioned through the Bank Settlement Plan of which both companies are members.

DIRECTORS’ AND OFFICERS’ LOANS AND TRANSACTIONS

No loans or credit transactions were outstanding with directors or officers of the company at the end of the year that need to be disclosed in accordance with the requirements of Schedule 6 to the Companies Act 1985.

In addition to the above, the Group also has transactions with related parties which are conducted in the normal course of airline business. These include the provision of airline and related services.

Companies Act 1985

These financial statements are not the Company’s statutory accounts within the meaning of Section 240 of the Companies Act 1985 of Great Britain. Statutory accounts for each of the three years ended March 31, 2005, 2004 and 2003 have been prepared and the auditors have given unqualified audit reports thereon. Such accounts for March 31, 2005 have been delivered to the Registrar of Companies for England and Wales.

Foreign Currency Translation Rates

	Closing rates at March 31						Annual average rates for the year ended March 31
	2005		2004		2003		2005		2004		2003
US Dollar		1.88		1.83		1.58		1.84		1.68		1.54
Japanese Yen		201		191		188		197		191		188
Australian Dollar		2.43		2.41		2.62		2.50		2.46		2.76
Euro		1.45		1.50		1.45		1.47		1.44		1.57

F-47

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

Differences between United Kingdom and United States Generally Accepted Accounting Principles

The Financial Statements are prepared in accordance with accounting principles generally accepted in the United Kingdom (‘UK GAAP’) which differ in certain respects from those generally accepted in the United States (‘US GAAP’). The significant differences are described below.

(a)

Deferred frequent flyer revenue

Under UK GAAP, revenue from the sale of frequent flyer airmiles is recognised when the miles are issued to participants.

Under US GAAP, a portion of frequent flyer revenue is deferred, and not recognized as revenue until the airmiles are redeemed by the customer. The remaining portion of frequent flyer proceeds is immediately recognized as revenue upon sale of the miles as the related services have been deemed to have been provided.

(b)

Pension costs

Under UK GAAP, the Group accounts for all of its significant defined benefit pension plans under SSAP 24. Under US GAAP such plans are accounted for in accordance with SFAS 87 “Employers’ Accounting for Pensions”. SSAP 24 and SFAS 87 differ in certain material respects, the most significant being:

–

UK GAAP allows measurements of plan assets and liabilities to be based on the result of the latest actuarial valuation which can be up to three years prior to the most recent balance sheet date. US GAAP requires measurement of plan assets and liabilities to be made at the date of the financial statements or up to three months prior to that date.

–

Under UK GAAP, the effect of variations in cost can be accumulated at successive valuations and amortized on an aggregate basis.

–

Under US GAAP, actuarial gains and losses as of the beginning of each annual period are amortized over the remaining service lives of scheme members.

–

Where an additional minimum liability exists under US GAAP, (ie where the amount provided for any scheme does not cover the unfunded accumulated benefit obligation for that scheme), this must be recognized in the balance sheet under SFAS 87. The adjustment resulting from the recognition of any such minimum liability is reported as an intangible asset to the extent of unrecognized prior service cost, with the remaining amounts reported in Other Comprehensive Income net of related deferred tax.

(c)

Goodwill

Under US GAAP, in accordance with SFAS 142, goodwill is capitalized and not amortized, but tested for impairment on an annual basis or on an interim basis when a triggering event occurs. As a result of the annual impairment test undertaken at March 31, 2003, the Group recognized at that date an impairment charge representing the outstanding balance of goodwill arising in respect of the acquisition of subsidiary undertakings.

The carrying value of goodwill arising in connection with subsidiary undertakings under UK GAAP and the related amortization expense are therefore reversed under US GAAP. Amortization of goodwill arising in connection with associated undertakings under UK GAAP is reversed, and carried in the balance sheet subject to any impairment charge.

(d)

Foreign currency translation

Under UK GAAP, certain aircraft and other significant assets which are financed in whole or in part in foreign currency, either by loans, finance lease obligations or hire purchase arrangements, are regarded, together with related liabilities, as a separate group of assets and liabilities and accounted for in foreign currency. The amounts in foreign currency are translated into Sterling at rates ruling at the balance sheet date and the net differences arising from the translation of assets and related foreign currency loans are taken to retained earnings.

F-48

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

43 Differences between United Kingdom and United States Generally Accepted Accounting Principles (Continued)

Under US GAAP, the cost of the assets are fixed in Sterling at the rate of exchange ruling at the date of the original acquisition, lease or hire purchase, and the exchange gain or loss on the related foreign currency loans is reflected in Net Income.

The adjustment to revalue assets and deferred income and recognize the effect in retained reserves under UK GAAP is therefore reversed under US GAAP. Similarly, depreciation charged on the revaluation adjustment under UK GAAP is reversed under US GAAP. The amount recognized in retained reserves in respect of the revaluation of loans under UK GAAP is transferred to Net Income under US GAAP.

(e)

Other finance income and related fees

Under UK GAAP, lease fees received on the transfer of an asset between lessors are recognized immediately in certain circumstances as part of Net Income. Under US GAAP, these amounts are deferred and amortized to Net Income over the minimum lease term.

(f)

Property revaluation

Under UK GAAP, tangible assets may be carried either at cost less depreciation, or at a subsequent valuation less depreciation. Under US GAAP, tangible assets must be carried at historical cost less depreciation. The revaluation of properties, recognized at March 31, 1995 under UK GAAP, is therefore reversed under US GAAP. Similarly, depreciation charged on the revaluation adjustment under UK GAAP is reversed under US GAAP.

(g)

Associated undertakings

The Group’s investments in associated undertakings are accounted for using the equity method under both UK GAAP and US GAAP. Applicable US accounting principles have been applied to the Group’s share of associated undertakings’ results.

Under UK GAAP, exceptional items and interest expense and tax of associated undertakings are shown separately within Net Income. Under US GAAP, the after-tax profits or losses are included in Net Income as a single line item. The reclassification has no overall effect on Net Income or on Shareholders’ Equity.

(h)

Disposals of investments in associated and subsidiary undertakings

Gains or losses on sales of investments in associates and subsidiaries can differ between US GAAP and UK GAAP, due to differences in carrying values. UK GAAP requires goodwill previously written off to reserves to be included in the calculation to derive the gain or loss on disposal. Under US GAAP, goodwill previously amortized or written-off as a result of impairments is not included in the calculation to derive such gain or loss. Under US GAAP, in accordance with SFAS 52 “Foreign Currency Translation”, amounts previously recognized as cumulative foreign exchange translation adjustments in Accumulated Other Comprehensive Income are included in the calculation to derive the gain or loss on disposal. Under UK GAAP such amounts are not included in the calculation.

(i)

Derivative instruments

Under UK GAAP, derivative instruments entered into for hedging purposes are generally not recorded as assets and liabilities on the balance sheet. Under US GAAP, SFAS 133 “Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS 137 and 138, requires that an entity recognize all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. Changes in fair value over the period are recorded in current earnings unless hedge accounting is achieved. The Group does not currently designate any of its derivatives as qualifying hedge instruments under SFAS 133. As such, gains and losses related to the fair value adjustments of all derivative instruments are classified in the consolidated statement of income and cash flows in accordance with the nature of the derivative.

(j)

Gains on sale and leaseback transactions

Under UK GAAP, gains arising on sale and leaseback transactions are recognized as part of Net Income to the extent that the sale proceeds do not exceed the fair value of the assets concerned. Gains arising on the portion of the sale proceeds which exceed the fair value are deferred and amortized over the minimum lease term. Under

F-49

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

43 Differences between United Kingdom and United States Generally Accepted Accounting Principles (Continued)

US GAAP, the total gains, arising on qualifying sale and leaseback transactions, including any realized revaluation gains, are deferred in full and amortized to income over the minimum lease term.

(k)

Trade investments

Under UK GAAP, trade investments are stated at cost less provision for permanent diminution in value. Under US GAAP, trade investments classified as available for sale per SFAS 115 are stated at market value and the unrealized gains/losses are accounted for as Other Comprehensive Income.

(l)

Deferred tax

For UK reporting, the Group provides for deferred tax in accordance with FRS 19 on all timing differences with the exception of gains on revaluations of fixed assets, or where potentially taxable gains have been rolled over, where there is no commitment to dispose of the relevant asset. Deferred tax assets are recognized where it is considered to be more likely than not that there will be suitable taxable profits from which to offset the timing differences.

Under US GAAP, deferred tax is generally provided on a full liability basis on all temporary differences arising between the accounting and tax bases of the Group’s assets and liabilities, in accordance with SFAS 109.

Deferred tax recognized under US GAAP therefore includes the effect of methodology differences between US GAAP and FRS 19, plus the effect of other relevant reconciling adjustments between UK and US GAAP, provided for at 30%.

(m)

Asset acquisition

From time to time the Group acquires aircraft previously held under finance lease arrangements. Under UK GAAP, the inherent gain or loss arising from the difference between the carrying value of the lease obligation and the proceeds paid by the Group to settle the obligation is either recognized as other income on completion of the transaction; deferred and recognized over the remaining economic useful life of the acquired asset; or recognized as an adjustment to the related lease obligation depending on the facts and circumstances. Under US GAAP, the above difference is recognized as an adjustment to the carrying value of the acquired asset on completion of the transaction. In addition, US GAAP requires that any difference between the adjusted carrying value and the tax written down value at completion of the transaction be recognized as a deferred tax asset or liability with a corresponding further adjustment to the carrying value of the acquired asset.

(n)

Impairment

Both UK GAAP and US GAAP require that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. US GAAP requires the entity, in performing the review for recoverability, to estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized, equal to the difference in the fair value of the asset and its carrying amount. Otherwise, no impairment loss is recognized.

Under UK GAAP, to the extent that the carrying amount exceeds the recoverable amount, that is the higher of net realizable value and value in use (fair value), the fixed asset is written down to its recoverable amount.

(o)

Compensated absences

US GAAP requires a liability to be recorded for employees’ compensation associated with future absences, if the right to compensation is attributable to employees’ services already rendered, and if certain other conditions are met. No specific requirement to record a liability exists under UK GAAP.

F-50

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

43 Differences between United Kingdom and United States Generally Accepted Accounting Principles (Continued)

The following statements provide a reconciliation between earnings available for shareholders under UK GAAP and net income under US GAAP, statements of Other Comprehensive Income and movements in accumulated Other Comprehensive Income under US GAAP and a reconciliation between shareholders’ funds under UK GAAP and shareholders’ equity under US GAAP.

NET INCOME/(LOSS)

		Year ended March 31
	Notes	2005			2004			2003
		(£ million, except per Ordinary Share and ADS amounts)
Profit for the year as reported under UK GAAP			251			130			72
Adjustments:
Other revenue
Deferred frequent flyer revenue	(a)		(31	)		(34	)		(32	)
Depreciation and amortization
Goodwill in respect of subsidiary companies	(c)		6			6			6
Impairment of goodwill in respect of subsidiary undertakings	(c)		—			—			(399	)
Goodwill in respect of associated companies	(c)		1			1			1
Fleet — exchange differences	(d)		(13	)		(11	)		3
Fleet — asset acquisition	(m)		(2	)		—			—
Property — valuation uplift	(f)		7			4			4
Equity accounting of associated companies
Share of results of associated companies	(g)		(16	)		3			(12	)
Share of tax of associated companies	(g)		5			(1	)		4
Employment costs
Pension costs	(b)		(65	)		252			269
Compensated absences	(o)		(13	)		—			—
Other gains/(losses)
Arising on translation of aircraft and property related loans	(d)		4			173			149
Change in fair value of derivatives	(i)		256			19			(38	)
Net interest expense
Other finance income and related fees	(e)		(2	)		(11	)		(7	)
Asset acquisition	(m)		3			—			—
Gain/(loss) on disposal of tangible fixed assets
Arising on disposal of revalued property	(f)		—			4			(11	)
Arising on sale and leaseback transactions	(j)		13			(20	)		(20	)
(Loss)/gain on disposal of investments
Disposal of interests in associated companies	(h)		(29	)		—			3
Disposal of interests in subsidiary companies	(h)		—			12			—
Deferred taxation
Effect of the above adjustments	(l)		(9	)		(121	)		(107	)
Effect of differences in methodology	(l)		(8	)		(10	)		—
			107			266			(187	)
Net income/(loss) as reported under US GAAP			358			396			(115	)
			Pence			Pence			Pence
Basic net income/(loss) per ordinary share			33.4			37.0			(10.7	)
Basic net income/(loss) per American depositary share			334.0			370.0			(107.0	)
Diluted net income/(loss) per ordinary share			32.5			36.1			(10.7	)
Diluted net income/(loss) per American depositary share			325.0			361.0			(107.0	)

F-51

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

43 Differences between United Kingdom and United States Generally Accepted Accounting Principles (Continued)

The numerators and denominators used in computing basic and diluted net income per share are reconciled as follows:

	Year ended March 31
	2005		2004		2003
	(£ million)
Net income/(loss) and numerator for basic earnings per share		358		396		(115	)
Interest expense avoided on assumed conversion of Convertible Capital Bonds		8		8		—
Net income/(loss) and numerator for diluted earnings per share		366		404		(115	)

	Year ended March 31
	2005		2004		2003
	(Number of shares ‘000)
Denominator for basic earnings per share — weighted average shares		1,071,126		1,070,077		1,073,054
Effect of dilutive securities:
Employee stock options		7,352		—		—
Convertible Capital Bonds		48,007		48,040		—
		55,359		48,040		0
Denominator for diluted earnings per share weighted-average shares		1,126,485		1,118,117		1,073,054

Anti-dilutive shares:

For the year ended March 31, 2005, approximately 23 million shares related to employee stock options (2004: 42 million; 2003: 49 million) were not included in the calculation of diluted earnings per average common share. The effect of including these shares would be anti-dilutive, as the exercise price of the stock options exceeded the average common stock market price during the respective period.

For the year ended March 31, 2005, approximately 48 million shares related to Convertible Capital Bonds (2004: 48 million) were included in the calculation of diluted earnings per average common share. For the year ended March 31, 2003, approximately 48 million shares related to Convertible Capital Bonds were excluded from the calculation. Including the bond conversion would have resulted in a reduction in the loss per share in that year.

F-52

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

43 Differences between United Kingdom and United States Generally Accepted Accounting Principles (Continued)

COMPREHENSIVE INCOME

Comprehensive Income/(Loss) under US GAAP is as follows:

	Year ended March 31
	2005			2004			2003
	(£ million)
Net income/(loss) as reported under US GAAP		358			396			(115	)
Foreign currency translation adjustments		(22	)		43			(14	)
Reclassification of foreign currency translations on adjustment to net income on disposal of investment in associate		57			—			—
Unrealized (losses)/gains on available-for-sale securities		(1	)		1			—
Minimum pension liability — net of tax of £95 million (2004: £130 million, 2003: £135 million)		(222	)		(303	)		(315	)
Other comprehensive income/(loss) under US GAAP		170			137			(444	)

Movements in the components of accumulated Other Comprehensive Loss are as follows:

						Unrealized gains/(losses) on available- for-sale securities
						(£ million)
At March 31, 2002	—		(148	)	—		2		(146	)
Arising in the year	(315	)	(14	)	—		—		(329	)
At March 31, 2003	(315	)	(162	)	—		2		(475	)
Arising in the year	(303	)	43		—		1		(259	)
At March 31, 2004	(618	)	(119	)	—		3		(734	)
Arising in the year	(222	)	(22	)	57		(1	)	(188	)
At March 31, 2005	(840	)	(141	)	57		2		(922	)

F-53

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

43 Differences between United Kingdom and United States Generally Accepted Accounting Principles (Continued)

		March 31
	Notes	2005			2004
					Restated (1)
		(£ million)
Shareholders’ funds as reported under UK GAAP			2,465			2,187
Adjustments:
Intangible assets
Goodwill set off in respect of subsidiary companies
Cost	(c)		(114	)		(114	)
Amortization	(c)		27			21
Other — cost	(b)		15			18
Tangible assets
Fleet
Cost
Exchange differences	(d)		300			282
Asset acquisition	(m)		4			15
Depreciation
Exchange differences	(d)		(106	)		(85	)
Asset acquisition	(m)		(2	)		—
Property and equipment
Cost
Valuation uplift	(f)		(301	)		(301	)
Exchange differences	(d)		42			38
Depreciation
Valuation uplift	(f)		47			40
Associated companies
Net equity	(g)		(8	)		(6	)
Goodwill set off in respect of associated companies
Cost	(c)		—			54
Amortization	(c)		2			(13	)
Trade Investments
Uplift to market value	(k)		3			4
Current assets
Fair value of financial derivatives	(i)		279			23
Pension costs prepayments	(b)		828			893
Current liabilities
Accruals and deferred income
Other finance income and related fees	(e)		(3	)		—
Gain on sale and leaseback transactions	(j)		(11	)		(13	)
Compensated absences	(o)		(13	)		—
Deferred frequent flyer revenue	(a)		(270	)		(239	)
Long-term liabilities
Accruals and deferred income
Other finance income and related fees	(e)		(3	)		(18	)
Gain on sale and leaseback transactions	(j)		(26	)		(37	)
Asset acquisition	(m)		29			29
Pension liability	(b)		(1,215	)		(901	)
Provisions for liabilities and charges
Deferred tax
Effect of the above adjustments	(l)		64			(22	)
Effect of differences in methodology	(l)		(89	)		(81	)
			(521	)		(413	)
Shareholders’ equity as reported under US GAAP			1,944			1,774

(1)

Under UK GAAP, effective from April 1, 2004 the Group applied the provisions of ‘UITF Abstract 38—Accounting for ESOP Trusts’. As a result, the Group’s investment in own shares held for the purpose of employee share ownership plans has been reclassified from fixed asset investments and is now recorded as a reduction in shareholders’ equity. Shareholders’ funds as reported under UK GAAP at March 31, 2004 have therefore been restated, and reduced by £31m. The adjustment previously required to remove the investment in own shares in translating from UK to US GAAP is consequently no longer required.

F-54

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

43 Differences between United Kingdom and United States Generally Accepted Accounting Principles (Continued)

CONSOLIDATED STATEMENT OF CASH FLOWS

The Consolidated Statements of Cash Flows prepared in accordance with UK GAAP present substantially the same information as that required under US GAAP. These statements differ, however, with regard to classification of items within them and as regards the definition of cash under UK GAAP and cash and cash equivalents under US GAAP.

Under UK GAAP, cash flows are presented separately for operating activities, dividends from associates, returns on investments and servicing of finance, taxation, capital expenditure and financial investment, acquisitions and disposals, dividends paid, management of liquid resources and financing activities. US GAAP, however, requires only three categories of cash flow activity to be reported: operating, investing and financing.

Cash flows from and returns on investments and servicing of finance shown under UK GAAP would be included as operating activities under US GAAP. The payment of dividends would be included as a financing activity under US GAAP.

Under US GAAP, capitalized interest is treated as part of the cost of the asset to which it relates and thus included as part of investing cash flows; under UK GAAP all interest is treated as part of returns on investments and servicing of finance.

All short-term investments are regarded as liquid resources for UK GAAP. Under US GAAP short-term investments with original maturity of three months or less are classified as cash equivalents and aggregated with cash in the cash flow statement. Cash flow in respect of short-term investments with original maturities exceeding three months are included in investing activities.

The categories of cash flow activity under US GAAP can be summarized as follows:

	Year ended March 31
	2005			2004			2003
	(£ million)
Cash inflow from operating activities		1,042			906			962
Cash (outflow)/inflow on investing activities		(369	)		(564	)		300
Cash outflow from financing activities		(1,151	)		(834	)		(784	)
(Decrease)/increase in cash and cash equivalents		(478	)		(492	)		478
Cash and cash equivalents at April 1		1,027			1,519			1,041
Cash and cash equivalents at March 31		549			1,027			1,519

CONCENTRATIONS OF CREDIT RISK

British Airways only deposits short-term cash surpluses with banks and institutions which it regards to be of high credit quality and, by policy, limits the amount of credit exposure to any one bank or institution. Accounts receivable comprise a large, widespread debtor base. British Airways did not consider there to be any significant concentration of credit risk at March 31, 2005.

FINANCIAL INSTRUMENTS

During the year to March 31, 2005, the Group recognized a net unrealized gain of £256 million (2004: net gain of £19 million; 2003: net loss of £38 million) in Net Income as a result of changes in the fair value of derivatives, comprising an unrealized gain of £249 million on fuel derivatives (2004: gain of £11 million; 2003: loss of £25 million), an unrealized gain of £nil on forward exchange contracts (2004: gain of £8 million; 2003: loss of £10 million), and an unrealized gain of £7 million on interest rate swaps (2004: £nil; 2003: loss of £3 million).

F-55

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

43 Differences between United Kingdom and United States Generally Accepted Accounting Principles (Continued)

Additional information required by US GAAP in respect of financial instruments:

(a)

Fair values of financial instruments

The carrying values and fair values of the material financial instruments of the Group are as follows:

		March 31
		2005						2004
		Carrying value			Fair value			Carrying value			Fair value
		(£ million)						(£ million)
Assets	Cash		78			78			64			64
	Short-term loans and deposits		1,604			1,604			1,606			1,606
	Listed securities		1			4			1			5
	Unlisted securities		29			29			29			29
	Interest rate swaps		2			2			(5	)		(5	)
	Fuel derivatives		278			278			29			29
			1,992			1,995			1,724			1,728
Liabilities	Bank and other loans		(860	)		(888	)		(907	)		(967	)
	Euro-Sterling notes		(61	)		(70	)		(71	)		(79	)
	Finance leases		(1,589	)		(1,585	)		(2,097	)		(2,106	)
	Forward currency transactions		(1	)		(1	)		(1	)		(1	)
	Hire purchase arrangements		(1,735	)		(1,737	)		(2,394	)		(2,399	)
	Convertible Capital Bonds 2005		(112	)		(132	)		(112	)		(155	)
	Euro Sterling Bond 2016		(247	)		(270	)		(247	)		(248	)
			(4,605	)		(4,683	)		(5,829	)		(5,955	)

The following methods and assumptions were used by the Group in estimating the fair value of financial instruments:

Assets:

Cash, short-term loans and deposits and unlisted securities:

–

the carrying amount reported in the balance sheet for cash, short-term loans and deposits and unlisted securities approximates their fair value.

Listed securities:

–

these securities are valued based on their quoted market prices.

Interest rate swaps:

–

discounted cash flow analysis, to determine the estimated amount the Group would receive or pay to terminate the agreements. Discounted cash flow analyses are based on estimated future interest rates.

Fuel derivatives:

–

the marked-to-market value of the instrument.

F-56

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

43 Differences between United Kingdom and United States Generally Accepted Accounting Principles (Continued)

Liabilities:

Bank and other loans, finance leases and the non Japanese Yen denominated portions of hire purchase arrangements carrying fixed rates of interest:

–

the repayments which the Group is committed to make have been discounted at the relevant interest rates applicable at March 31.

Forward currency transactions:

–

the marked-to-market value of the instrument.

Japanese Yen denominated portions of hire purchase arrangements carrying fixed rates of interest:

–

these amounts relate to the tax equity portions of Japanese leveraged leases which are specific to the Group, cannot be assigned and could not be refinanced or replaced in the same cross-border market on a marked-to-market basis and accordingly, a fair value cannot be determined. The carrying value of £756 million has therefore been included as the fair value above.

Euro-Sterling notes, Convertible Capital Bonds 2005 and Euro Sterling Bond 2016.

–

quoted market price.

(b)

Terms of certain financial instruments

The risk management strategy for both treasury and fuel operations is implemented within the guidelines and parameters laid down by the Board of Directors and is designed to limit risk. The Company’s policy is not to trade in derivatives but to use these instruments to hedge anticipated exposures.

While British Airways considers the purchase of interest rate and foreign exchange options as bona fide treasury exposure management activities, it would not generally contemplate the opening of new exposures by selling options except where the risks arising from selling the option are covered by other elements of the hedging portfolio or underlying exposure, for example, as a component of a collar. Other treasury derivative instruments would be considered on their merits as valid and appropriate risk management tools and under the treasury governance framework require Board approval before adoption.

British Airways has entered into financial instruments such as futures contracts, swaps and options to reduce its exposure to sudden significant fluctuations in oil prices. As at March 31, 2005, the actual commitment associated with these instruments was US$1,269 million (equivalent to £674 million) and the unrealized gain on these transactions was £278 million (all relating to the off-balance sheet instruments). The Group’s fuel risk management strategy aims to provide the airline with protection against sudden and significant increases in oil prices while ensuring that the airline is not competitively disadvantaged in a serious way in the event of a substantial fall in the price of fuel.

The strategy operates within limits set by the Board and agreed in detail by the Treasury Committee, which is made up of representatives from relevant internal departments.

In addition, British Airways also uses three other forms of derivative: interest rate swaps, currency options and forward foreign exchange contracts.

As part of its treasury risk management activities the Company has entered into a number of swap arrangements in order to hedge its direct exposure to interest rates. The majority of these swaps are embedded in lease and loan agreements. A smaller number of interest rate swaps are not associated with specific loans and leases and are disclosed in Note 32. To reduce interest rate risk, the Group has entered into single currency interest rate swap arrangements so as to change the interest payable elements of certain loans and lease obligations from variable to fixed rates. There were no new standalone interest rate swaps during the year ended March 31, 2005.

F-57

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

43 Differences between United Kingdom and United States Generally Accepted Accounting Principles (Continued)

British Airways uses foreign exchange contracts in three ways. First, to hedge firm capital commitments usually in US Dollars. Capital expenditure on aircraft is hedged up to three years ahead. The objective is to smooth the cost of the aircraft in Sterling terms. There were no hedges of firm capital commitments during the year.

The second use of forward foreign exchange contracts is to hedge current or future year’s net operating revenues and costs. Once again, a risk averse approach is taken with forecast foreign currency exposures being reviewed on a regular basis and cover being taken progressively and selectively. Principal forward foreign exchange transactions as at March 31, 2005 were US$87m to hedge future currency revenues against US dollars (2004: US$80m); £57m to hedge future currency revenues against sterling (2004: £35m); and US$255m to hedge future operating payments against US dollars (2004: US$2m).

The third use is to hedge debt exposure.

Derivatives involve, to varying degrees, credit and market risk. With regard to credit risk, the Group may be exposed to credit losses in the event of non-performance by counter parties to these financial instruments, but it does not expect any of the counter parties to fail to meet its obligations. To manage credit risks, the Group only selects counter parties which it regards to be high credit quality and, by policy, limits the amount of credit exposure to a single counterpart.

Market risk is the possibility that a change in interest rates, currency exchange rates or oil prices will cause the value of a financial instruments to decrease or its obligations to become more costly to settle. When derivatives are used for the purpose of risk management, they do not expose the Group to market risk because gains and losses on the derivatives offset losses and gains on the asset, liability or transaction being hedged.

GUARANTEES

The Group has guaranteed certain borrowings, liabilities and commitments which at March 31, 2005 amounted to £259 million (2004: £383 million).

ADVERTISING COSTS

Advertising costs are expensed when incurred as other operating expenses. Advertising expense for 2005, 2004 and 2003 was £84 million, £87 million and £40 million respectively.

F-58

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

43 Differences between United Kingdom and United States Generally Accepted Accounting Principles (Continued)

ADDITIONAL INFORMATION REQUIRED BY US GAAP IN RESPECT OF THE GROUP’S TWO PRINCIPAL PENSION PLANS

The Group uses a December 31 measurement date for its two principal pension plans. The components of the net periodic pension cost under SFAS 87 for the three years ended December 31, 2004 are estimated to be as follows:

	Year ended December 31
	2004			2003			2002
	(£ million)
Service cost		187			168			165
Interest cost		595			539			515
Expected return on plan assets		(664	)		(718	)		(710	)
Net amortization
Prior service cost		3			8			7
Experience loss/(gain)		143			(31	)		(89	)
Unrecognized transition asset		(10	)		(38	)		(37	)
Total net periodic pension cost		254			(72	)		(149	)

The funded status of the principal pension plans under SFAS 87 is as follows:

	Year ended December 31
	2004						2003
	APS			NAPS			APS			NAPS
	(£ million)
Actuarial present value of accumulated benefit obligation (ABO) and vested benefit obligation (VBO) December 31		5,625			6,027			5,354			5,164
Change in plan assets
Plan assets at fair value January 1		5,789			3,865			5,480			3,264
Actual return on plan assets		561			428			631			528
Employer contributions		26			234			14			161
Plan participants’ contributions		10			58			12			56
Benefits paid		(339	)		(150	)		(348	)		(144	)
Plan assets at fair value December 31		6,047			4,435			5,789			3,865
Change in benefit obligation
Projected benefit obligation January 1		5,382			5,691			4,846			4,765
Service cost		19			168			20			148
Interest cost		287			308			269			270
Plan participants’ contributions		10			58			12			56
Actuarial loss		325			597			583			596
Benefits paid		(339	)		(150	)		(348	)		(144	)
Projected benefit obligation December 31		5,684			6,672			5,382			5,691
Funded status		363			(2,237	)		407			(1,826	)
Unrecognized prior service cost		—			15			—			18
Unrecognized portion of net asset from initial application of SFAS 87		—			—			(8	)		(2	)
Unrecognized actuarial net loss		948			1,808			890			1,412
Prepaid/(accrued) pension cost December 31		1,311			(414	)		1,289			(398	)
Intangible asset		—			(15	)		—			(18	)
Accumulated other comprehensive income		—			(1,163	)		—			(883	)
Net amount recognized December 31		1,311			(1,592	)		1,289			(1,299	)
Increase in minimum liability included in other comprehensive income (before the impact of deferred taxation)		—			280			—			433

F-59

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

43 Differences between United Kingdom and United States Generally Accepted Accounting Principles (Continued)

Under SFAS 87, the excess of plan assets over the projected benefit obligation at the transition date (April 1, 1989) is recognized as a reduction of pension expense on a prospective basis over 15 years. Unrecognized prior service costs and actuarial gains and losses (zero corridor) are amortized over the memberships’ average future working lifetimes of 10.7 years (NAPS) and 6.6 years (APS).

The calculation of the projected benefit obligation at December 31, 2004 and December 31, 2003 incorporated the following assumptions:

	Year ended December 31
	2004				2003
	APS		NAPS		APS		NAPS
	(%)
Discount rate		5.3		5.3		5.5		5.5
Price inflation		2.8		2.8		2.5		2.5
Long term rate of return on assets		6.0		7.0		6.0		7.0
Increase in compensation levels to December 31, 2007		2.8		2.8		2.5		2.5
Increase in compensation levels after December 31, 2007		4.3		4.3		4.0		4.0

The weighted-average asset allocations for the Schemes as at December 31, 2004 and December 31, 2003 by asset category are as follows:

	Plan assets at year ended December 31
	2004				2003
	APS		NAPS		APS		NAPS
	(%)
Asset category
Equity securities		33		69		34		68
Debt securities		61		22		61		23
Property		5		6		4		6
Cash		1		3		1		3
		100		100		100		100

No securities of British Airways or its subsidiary companies were held by either Scheme as at December 31, 2004 or 2003.

The Trustees of the Schemes have determined the following asset allocation guidelines which they believe provide an adequate balance between maximizing the return on the assets and minimizing the risk of failing to meet the liabilities over the long term:

	APS				NAPS
	Range		Benchmark		Range		Benchmark
	(%)
Equities		23 – 33		28		60 – 70		65
Bonds (including cash)		62 – 72		67		23 – 33		28
Property		2.5 – 7.5		5		4.5 – 9.5		7

A Statement of Investment Principles prepared by the Trustee describes in more detail the Trustees’ objectives and risk management considerations.

The overall expected return on assets assumption is derived by considering the expected long-term returns from each of the main asset classes separately, and combining these in the proportions likely to be held by the Schemes in the future. The expected return for each asset class reflects a combination of historical performance analysis, the forward-looking views of the financial markets (as suggested by the yields available) and the views of investment organizations. Consideration is also given to the rate of return expected to be available for reinvestment.

F-60

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

43 Differences between United Kingdom and United States Generally Accepted Accounting Principles (Continued)

The Company expects to contribute around £22 million into APS and £237 million into NAPS over the year ending March 31, 2006.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

	APS
	(£ million)
Year ending March 31:
2006		372	168
2007		389	182
2008		405	195
2009		422	209
2010		436	223
2011 – 2015		2,390	1,310

ADDITIONAL INFORMATION REQUIRED BY US GAAP IN RESPECT OF DEFERRED TAXATION

Net deferred tax liabilities as at March 31, 2005 and 2004 are comprised of the following:

	March 31
	2005					2004
	(£ million)
Deferred tax liabilities
Excess of book value over tax value of fixed assets		1,376					1,332
Other temporary differences		479					401
				1,855					1,733
Deferred tax assets
Tax effect of losses carried forward		(92	)				(142	)
Less: valuation allowance		—					—
		(92	)				(142	)
Other temporary differences		(495	)				(351	)
				(587	)				(493	)
Net deferred tax				1,268					1,240
Of which:
Current				247					315
Non-current				1,021					925
				1,268					1,240

As at March 31, 2005 British Airways had £308 million (2004: £472 million) of tax losses carried forward of which £308 million (2004: £472 million) can be offset against future trading profits of the Group. There is no expiration date in respect of such losses.

ACCOUNTING AND DISCLOSURE OF STOCK-BASED COMPENSATION

Stock compensation

FIN 44 ‘Accounting for Certain Transactions involving Stock Compensation’ has been effective from July 1, 2000, and provides interpretative guidance on accounting for stock-based compensation. The Company has not entered into any transactions involving share capital that would be accounted for under FIN 44, since its implementation, and hence there is no impact on the financial statements for US GAAP purposes.

F-61

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

43 Differences between United Kingdom and United States Generally Accepted Accounting Principles (Continued)

SFAS 123 ‘Accounting for Stock-Based Compensation’, established accounting disclosure standards for stock-based employee compensation plans. The statement gives companies the option of continuing to account for such costs under the intrinsic value accounting provisions set out in Accounting Principles Board Opinion 25, ‘Accounting for Stock Issued to Employees’ (APB 25) and related interpretations.

The Group has elected to continue under APB 25 ‘Accounting for Stock Issued to Employees’. In accordance with this accounting statement the Company does not recognize compensation expense on the grant of options.

Because options vest over several years and additional options grants are expected, the effects of these fair value calculations are not likely to be representative of similar future calculations.

	Year ended March 31
	2005			2004			2003
	(£ million, except per Ordinary Share amounts)
Net income/(loss) as reported		358			396			(115	)
Deducted: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(11	)		(7	)		(7	)
Pro forma net income for the year		347			389			(122	)
Basic earnings/(loss) per share as reported		33.4	p		37.0	p		(10.7	)p
Basic earnings/(loss) per share pro forma		32.4	p		36.4	p		(11.4	)p
Diluted earnings/(loss) per share as reported		32.5	p		36.1	p		(10.7	)p
Diluted earnings/(loss) per share pro forma		31.5	p		34.8	p		(11.4	)p
Basic earnings/(loss) per American Depositary share as reported		334	p		370	p		(107	)p
Basic earnings/(loss) per American Depositary share pro forma		324	p		364	p		(114	)p
Diluted earnings/(loss) American Depositary share as reported		325	p		361	p		(107	)p
Diluted earnings/(loss) American Depositary share pro forma		315	p		348	p		(114	)p

Share option transactions for all the schemes are summarized as follows:

			Weighted-average exercise price				Weighted-average exercise price				Weighted-average exercise price
			(£)				(£)				(£)
Outstanding — April 1	42,273,681			2.41	48,625,068			2.69	43,311,940			2.99
Granted	8,942,396			2.62	14,617,721			1.57	12,484,381			1.81
Exercised (1)	(2,025,936	)		1.70	(225,855	)		1.92	(3,323	)		2.38
Cancelled in year	(2,076,157	)		3.44	(20,743,253	)		2.49	(7,167,930	)		2.99
Outstanding — March 31	47,113,984			2.43	42,273,681			2.41	48,625,068			2.69
Exercisable — March 31	14,075,849			3.61	9,845,591			3.86	5,973,694			3.92
Available for grant — March 31	115,321,454				120,153,101				112,761,547

(1)

Part of the exercise of shares during the year ending March 31, 2005 was met through shares previously held by British Airways Plc Employees Benefits Trustees (Jersey) Limited.

Options outstanding at March 31, 2005 can be exercised between 2005 and 2014.

The weighted-average fair value of options granted in the year ended March 31, 2005 was £1.21 and was estimated using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield 3%, expected volatility of 56.6%, risk-free interest of 4.5% and expected life of seven years.

The weighted-average fair value of options granted in the year ended March 31, 2004 was £0.51 and was estimated using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield 6%, expected volatility of 57.5%, risk-free interest of 4.5% and expected life of seven years.

F-62

BRITISH AIRWAYS Plc AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (Continued)

43 Differences between United Kingdom and United States Generally Accepted Accounting Principles (Continued)

The weighted-average fair value of options granted in the year ended March 31, 2003 was £0.59 and was estimated using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield 6%, expected volatility of 57.7%, risk-free interest of 3.75% and expected life of seven years.

Summarized information regarding options outstanding at March 31, 2005:

Options outstanding							Options exercisable
Range of exercise price	Number outstanding		Weighted-average remaining contractual life		Weighted-average exercise price		Number exercisable		Weighted-average exercise price
1.57 – 2.51		24,138,868		1.54		1.68		0		0.00
2.52 – 3.22		14,492,484		3.04		1.24		5,593,217		3.21
3.23 – 3.93		4,501,842		3.69		3.79		4,501,842		3.79
3.94 – 4.65		3,980,790		3.99		3.95		3,980,790		3.95
1.57 – 4.65		47,113,984						14,075,849

F-63

BRITISH AIRWAYS Plc AND SUBSIDIARIES

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

			Additions
Description	Balance at beginning of year		Charged to costs and expenses		Charged to other accounts		Deductions			Balance at end of year
	(£ million)
Year ended March 31, 2005
Allowances for bad and doubtful accounts		28		8		—		(20	)		16
Allowances against cash and bank balances which are not remittable or are slow moving		4		—		—		—			4

Year ended March 31, 2004
Allowances for bad and doubtful accounts		28		13		—		(13	)		28
Allowances against cash and bank balances which are not remittable or are slow moving		8		—		—		(4	)		4

Year ended March 31, 2003
Allowances for bad and doubtful accounts		40		20		—		(32	)		28
Allowances against cash and bank balances which are not remittable or are slow moving		11		—		—		(3	)		8

S-1


Item 19 — Exhibits

Index to Exhibits

	1.1	Memorandum and Articles of Association dated July 19, 2005.

	2.1	The total amount of long-term debt securities of the registrant and its subsidiaries under any one instrument does not exceed 10% of the total assets of BA and its subsidiaries on a consolidated basis. BA agrees to furnish copies of any or all such instruments to the Securities and Exchange Commission on request.

	4.1	Service Agreement between Roderick Eddington and British Airways Plc dated July 7, 2000.*

	4.2	Service Agreement between Michael Street and British Airways Plc dated July 1, 2001.*

	4.3	Service Agreement between John Rishton and British Airways Plc dated September 1, 2001.**

	4.4	Service Agreement between William Walsh and British Airways Plc dated March 8, 2005

	4.5	Service Agreement between Martin George and British Airways Plc dated February 1, 1997

	4.6	Letter Agreement between Roderick Eddington and British Airways Plc dated March 15, 2001, relating to pension compensation.**

	4.7	Letter Agreement between John Rishton and British Airways Plc dated June 19, 2002, relating to pension compensation.**

	4.8	Letter of Engagement between Martin Broughton and British Airways Plc dated March 11, 2004

	4.9	Letter of Engagement between Maarten van den Bergh and British Airways Plc dated March 11, 2004

	4.10	Letter of Engagement between Denise Kingsmill and British Airways Plc dated November 1, 2004

	4.11	Letter of Engagement between Dr Martin Read and British Airways Plc dated March 11, 2004

	4.12	Letter of Engagement between Alison Reed and British Airways Plc dated March 11, 2004

	4.13	Letter of Engagement between Ken Smart and British Airways Plc dated July 19, 2005

	4.14	Letter of Engagement between Baroness Symons and British Airways Plc dated May 13, 2005

	8.1	Subsidiaries.

	12.1	Certification by the Chief Executive of British Airways Plc in accordance with Section 302 of the Sarbanes-Oxley Act of 2002, dated July 26, 2005.

	12.2	Certification by the Chief Financial Officer of British Airways Plc in accordance with Section 302 of the Sarbanes-Oxley Act of 2002, dated July 26, 2005.

	13.1	Certification by the Chief Executive and the Chief Financial Officer of British Airways Plc is furnished in accordance with Section 906 of the Sarbanes-Oxley Act 2002, dated July 26, 2005.

	14.1	Consent of the Independent Registered Public Accounting Firm, included on page F-1.

	*	Incorporated by reference to the Company’s annual report on Form 20-F for the financial year ended March 31, 2001.

	**	Incorporated by reference to the Company’s annual report on Form 20-F for the financial year ended March 31, 2002.

SIGNATURES

The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

BRITISH AIRWAYS Plc
(Registrant)

By /s/ ALAN BUCHANAN

Name: Alan Buchanan
Title: Company Secretary

Dated: July 26, 2005