annual financial report as at 31 october 2012 · 2013-08-29 · meridiana fly - annual financial...
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Meridiana fly - Annual Financial Report at 31 October 2012 - 1
ANNUAL FINANCIAL REPORT
AS AT 31 October 2012
Meridiana fly S.p.A Company subject to management and coordination by Meridiana S.p.A pursuant to Article 2497-bis of the Italian Civil Code - Registered
Office in Olbia (OT), Costa Smeralda Airport Headquarters Share Capital € 46,101,233.59 fully paid-up
VAT No. 03184630964 Tax Code no. and Sassari Companies Register no.05763070017
www.meridianafly.com
Meridiana fly - Annual Financial Report at 31 October 2012 - 2
FINANCIAL HIGHLIGHTS
The following are the main results of the consolidated and separate financial statements for the financial year ended 31 October
2012 (10 month FY, i.e. from 1 January to 31 October 2012) compared to the previous two years (12 month FY coinciding with the
calendar year).
Given the acquisition of Air Italy occurred in 2011 (finalized on 14 October 2011), the consolidated income statements at 31 October
2012 are not strictly comparable. In particular, in order to provide more complete information of consolidated results for comparative
purposes, these financial statements also include the pro-forma consolidated data for the first 10 months of 2011 (i.e. taking into
account the economic data of Air Italy as if the acquisition had been made at the beginning of 2011). These pro-forma figures have
not been subject to specific audit activities.
With regard to the net consolidated financial and equity position, the figures at 31 October 2012 are compared with data taken from
the consolidated financial statements at 31 December 2011, without the comparability limitations mentioned for the income
statement data as at 31 December 2011 the figures already reflected Air Italy consolidation.
Unless otherwise specified, € / 000 Consolidated data Separate data Consolidated data Separate data Consolidated data
Key performance indicators Financial year 2012 Financial year 2012 Financial year 2011 Financial year 2011Financial Year
2011 pro-forma
Commercial fleet at end of period 38 26 40 28 45
Total flight hours 76,989 56,261 88,452 84,082 100,766
Passengers boarded 3,677,470 2,951,577 4,369,617 4,225,573 4,529,055
ASK (/000) (5) 8,613,517 6,143,992 9,863,388 8,701,017 12,286,013
Summary income statement Financial year 2012 Financial year 2012 Financial year 2011 Financial year 2011Financial Year
2011 pro-forma
Sales revenue 556,556 408,655 621,744 599,390 716,054
Total revenue 579,522 433,271 646,818 624,357 742,907
EBITDAR (1) (3,436) (17,185) (27,651) (26,402) 18,069
EBITDA (2) (60,067) (59,993) (84,947) (81,050) (38,575)
EBIT (3) (174,140) (101,257) (103,708) (95,976) (60,367)
Net Profit (loss) for the year (190,235) (190,434) (110,664) (104,831) (66,996)
Summary statement of financial position 31.10.2012 31.10.2012 31.12.2011 31.12.201131.10.2011
pro-forma
Total non-current assets 199,815 97,617 319,517 214,688 n.a.
Total current assets 158,994 146,746 149,092 123,434 n.a.
Total assets 358,809 244,364 463,571 338,122 n.a.
Shareholders' Equity (111,791) (104,474) 61,888 69,390 n.a.
Total non-current liabilities 104,545 88,448 65,993 42,005 n.a.
Total current liabilities 366,055 260,390 340,728 226,727 n.a.
Total equity and liabilities 358,809 244,364 463,571 338,122 n.a.
Capital expenditure Financial year 2012 Financial year 2012 Financial year 2011 Financial year 2011Financial Year
2011 pro-forma
Capital Expenditure in non-current tangible and
intangible assets 9,454 6,719 7,727 4,486 n.a.
Other data 31.10.2012 31.10.2012 31.12.2011 31.12.201131.10.2011
pro-forma
Net financial position (4) (136,078) (79,423) (94,400) (31,649) n.a.
Number of FTE employees 1,475 994 1,662 1,551 2,108
(1) EBITDAR: Earnings Before Interest, Taxes, Depreciation, Amortization and Aircraft Rentals (i.e. EBIT before costs of aircraft operating leases - excluding wet leases - depreciation, write-downs of non-current assets as well as the item "Other adjusting provisions"; the latter does not include "Provision for liabilities and charges").(2) EBITDA: Earnings Before Interest, Taxes, Depreciation, Amortization. With reference to the EBITDA indicator and its comparative measurements, "Provision for liabilities and charges" was treated as mentioned above with regard to EBITDAR. (3) EBIT: Earnings Before Interest and Taxes (4) With regard to the item “Net cash and cash equivalents”, the net financial position includes the items described in section "Net Financial Position" (5) ASK: Available Seat Kilometres, i.e. seats available per kilometre of travel
Meridiana fly - Annual Financial Report at 31 October 2012 - 3
� Total revenues of Meridiana fly Group in the first ten months of 2012 (inclusive of the Air Italy contribution) came to Euro
579.5 million, decreasing 22% from the first pro-forma ten months of 2011 (Euro 742.9 million); this result was achieved
with reduced capacity (ASK) by approximately 30%, as planned, and an increase in the overall load factor from about 61%
to about 63%. The reduction results from network optimization and the tailoring of activities on the basis of market demand,
partially offset by some additional activities (ACMI and ad-hoc charter) and the launch of new routes in the domestic
market.
� Consolidated EBITDA in the first ten months of 2012 was a loss of Euro 60.1 million compared to a negative EBITDA of
Euro 38.6 million in the first pro-forma ten months of 2011; the deterioration in performance partly reflected the highly
negative market outlook and the adverse performance of exogenous variables (Dollar/Fuel) and was also partly due to non-
recurring charges, such as transactions and provisions for litigation, reorganization costs, charges for early aircraft delivery
and various contingencies.
� EBIT in the first ten months of 2012 amounted to a loss of Euro 174.1 million compared to an EBIT loss of Euro 60.4 million
in the first pro-forma ten months of 2011. This result includes the extraordinary write-downs of the fleet (approximately Euro
32.9 million) due to the expected disposal of owned aircraft according to the New Business Plan and the write-down of
Goodwill (Euro 57.8 million) as a result of the impairment test .
� The net consolidated result was a loss of Euro 190.2 million, against a loss of Euro 67 million in the first pro-forma ten
months of 2011, partly due to impairment of equity investments and other financial assets (Euro 3.8 million overall). In the
separate financial statements Meridiana fly posted an operating loss of Euro 190.4 million (Euro 104.8 million in 2011).
� At 31 October 2012, the Group had a negative consolidated net equity of Euro 111.8 million, while the Parent Company
Meridiana fly had a negative equity of Euro 104.5 million (at the end of 2011 the consolidated equity was Euro 61 9 million
and Euro 69.4 million in the separate financial statements). The Company therefore falls within the situation provided for in
article 2447 of the Italian Civil Code. In this regard, the Board of Directors on 26 February 2013 decided to authorize the
President of the Board of Directors and the Chief Executive Officer, acting severally, to convene the extraordinary
Shareholders' Meeting on 29 April 2013 for the adoption of the measures referred to in the mentioned article 2447 of the
Italian Civil Code. Please refer to the comments in paragraph 2.24.14 of the Management Report for the commitments
made by AKFED and Meridiana with regard to the this recapitalization and in order to ensure that the Company and the
Group continue operating as a going concern.
� The net consolidated financial debt at the end of October 2012 was Euro 136.1 million compared to net consolidated
financial debt of Euro 94.4 million at 31 December 2011.
� The average number of FTE employees of the Group in the first ten months of 2012 (excluding staff under the temporary
redundancy fund -CIGS) was 1,475 (994 for the parent Meridiana fly), significantly decreasing from the 2,108 employees in
the first pro-forma 10 months of 2011 due to the significant use of the temporary redundancy fund - CIGS.
Meridiana fly - Annual Financial Report at 31 October 2012 - 4
TABLE OF CONTENTS
ANNUAL FINANCIAL REPORT ................................................................................................................................................. 1 AS AT 31 October 2012 ............................................................................................................................................................. 1 FINANCIAL HIGHLIGHTS .......................................................................................................................................................... 2 1. CORPORATE BODIES ...................................................................................................................................................... 6 2. MANAGEMENT REPORT ................................................................................................................................................. 7
2.1. Macroeconomic data ................................................................................................................................................ 8 2.2. Key financial performance indicators for FY2012 ..................................................................................................... 9 2.3. The fleet .................................................................................................................................................................. 16 2.4. Services and operating performance ..................................................................................................................... 18 2.5. Network and commercial business ......................................................................................................................... 18 2.6. Statistical data ........................................................................................................................................................ 22 2.7. Human Resources .................................................................................................................................................. 23 2.8. Environment ............................................................................................................................................................ 25 2.9. Performance of the Parent Company and its subsidiaries ...................................................................................... 26 2.10. Corporate Offices .................................................................................................................................................... 30 2.11. Research and development activities ..................................................................................................................... 30 2.12. Capital expenditure ................................................................................................................................................. 30 2.13. Significant events in FY2012 .................................................................................................................................. 31 2.13.1. Shareholders' meeting of 15 February 2012 ........................................................................................................... 31 2.13.2. Termination of business relationship with O.R.P. ................................................................................................... 31 2.13.3. Termination of LHT maintenance contracts ............................................................................................................ 32 2.13.4. Capital increase with rights issues and reconstitution of free float .......................................................................... 32 2.13.5. Call for tenders for territorial continuity - Sardinia ................................................................................................... 34 2.13.6. Closing of the subsidiary Sameitaly ........................................................................................................................ 34 2.13.7. Debt renegotiation with banks ................................................................................................................................. 35 2.13.8. 2012 Budget and updated Integrated Business Plan .............................................................................................. 36 2.13.9. Meridiana/AKFED commitments in support of the going concern assumption for FY 2012 ................................... 36 2.13.10. Shareholders' meeting of 28 June 2012 ................................................................................................................. 37 2.13.11. General Tax Audit for the years 2006-2011 ............................................................................................................ 38 2.13.12. Cessation of Wind Jet activity ................................................................................................................................. 38 2.13.13. Agreement for the restitution of A330 Airbus .......................................................................................................... 39 2.14. Management and coordination activities and transactions with related parties....................................................... 39 2.15. Significant litigation ................................................................................................................................................. 41 2.16. Security Policy Document ....................................................................................................................................... 53 2.17. Model of organisation, management and control pursuant to Legislative Decree 231/2001 ................................... 53 2.18. Legal and regulatory framework ............................................................................................................................. 53 2.19. Share Capital .......................................................................................................................................................... 53 2.20. Certification pursuant to Art. 37 of Consob Regulation ........................................................................................... 55 2.21. Corporate Governance Report ................................................................................................................................ 55 2.22. Shareholdings owned by directors, statutory auditors and managers with strategic functions ............................... 55 2.23. Main risks and uncertainties for the current year .................................................................................................... 56 2.24. Significant events subsequent to year end ............................................................................................................. 62 2.24.1. New maintenance agreements ............................................................................................................................... 62 2.24.2. Litigation with Lufthansa Technik ............................................................................................................................ 63 2.24.3. Update on Sameitaly liquidation ............................................................................................................................. 63 2.24.4. Debt renegotiation with banks ................................................................................................................................. 63 2.24.5. Dispute with the lessor ILFC ................................................................................................................................... 63 2.24.6. Board of Directors' meeting of 12 December 2012 ................................................................................................. 64 2.24.7. Agreements for extending the temporary redundancy procedure (CIGS) ............................................................... 64 2.24.8. Early surrender of aircraft ....................................................................................................................................... 65 2.24.9. ENAC measures on licenses .................................................................................................................................. 65 2.24.10. Agreement with former Air Italy Holding shareholders and appointment of a new CEO ......................................... 66 2.24.11. Notice of Shareholders' meeting on 27 February 2013 ........................................................................................... 67 2.24.12. Notice of meeting of the holders of Warrants on 23 March 2013 ............................................................................ 68 2.24.13. Approval of the Business Plan ................................................................................................................................ 68 2.24.14. New Meridiana/AKFED commitments for the going concern ................................................................................. 69 2.25. Other information .................................................................................................................................................... 70 2.26. Business Outlook .................................................................................................................................................... 70 Proposals by the Board of Directors to the Shareholders' meeting ........................................................................................ 72
3. CONSOLIDATED FINANCIAL STATEMENTS - 10 MONTH PERIOD ENDED 31 October 2012 ................................. 74 3.1. Consolidated statement of financial position ........................................................................................................... 74 3.2. Consolidated Statement of Comprehensive Income ............................................................................................... 75 3.3. Statement of changes in consolidated equity.......................................................................................................... 76 3.4. Consolidated Statement of Cash Flow .................................................................................................................... 77
4. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS .................................................................................... 78
Meridiana fly - Annual Financial Report at 31 October 2012 - 5
4.1. Accounting standards and measurement criteria .................................................................................................... 78 4.1.1. General Considerations .......................................................................................................................................... 78 4.1.2. Accounting standards, measurement criteria and use of estimates in preparing the consolidated financial statements 78 4.1.3. Going concern assumption ..................................................................................................................................... 92 4.2. Comparability of accounting data ............................................................................................................................ 93 4.3. Seasonality of the business .................................................................................................................................... 94 4.4. Consolidation scope and criteria ............................................................................................................................. 95 4.5. Significant Non-recurring Events and Transactions. ............................................................................................... 95 4.6. Analysis of the consolidated statement of financial position ................................................................................... 97 4.7. Analysis of the consolidated income statement results for the year ...................................................................... 112 4.8. Analysis of changes in consolidated equity .......................................................................................................... 117 4.9. Financial and capital management ....................................................................................................................... 118 4.10. Net financial position ............................................................................................................................................. 118 4.11. Guarantees, commitments and other contingent liabilities .................................................................................... 120 4.12. Segment reporting ................................................................................................................................................ 120 4.13. Related party transactions .................................................................................................................................... 121 4.14. List of equity investments...................................................................................................................................... 124 4.15. Remuneration paid to Directors and Statutory Auditors ........................................................................................ 124 4.16. Fees paid to the Independent Auditors ................................................................................................................. 125 4.17. Disclosure on financial risks .................................................................................................................................. 125 4.18. Other information .................................................................................................................................................. 129
5. CERTIFICATION OF ANNUAL REPORT PURSUANT TO ART. 154-bis of Legislative Decree. 58/98. .................... 130 6. INDEPENDENT AUDITORS' REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 OCTOBER 2012132 7. STATUTORY AUDITORS' REPORT ON THE FINANCIAL STATEMENTS AT 31 OCTOBER 2012........................... 137 8. MERIDIANA FLY SPA - DRAFT SEPARATE FINANCIAL STATEMENTS FOR THE 10 MONTH FINANCIAL YEAR ENDED 31 OCTOBER 201 2 ..................................................................................................................................................................... 154
8.1. Statement of financial position of Meridiana fly S.p.A. .......................................................................................... 154 8.2. Statement of comprehensive income of Meridiana fly S.p.A ................................................................................. 155 8.3. Statement of changes in shareholders' equity of Meridiana fly S.p.A ................................................................... 156 8.4. Statement of Cash Flows of Meridiana fly S.p.A. ................................................................................................. 157
9. NOTES THE SEPARATE FINANCIAL STATEMENTS OF MERIDIAN FLY S.P.A. ..................................................... 158 9.1. Accounting standards and measurement criteria ................................................................................................. 158 9.1.1. General Considerations ........................................................................................................................................ 158 9.1.2. Accounting standards, measurement criteria and use of estimates in preparing the financial statements ........... 158 9.1.3. Going concern assumption ................................................................................................................................... 171 9.2. Comparability of accounting data .......................................................................................................................... 171 9.3. Seasonality of the business .................................................................................................................................. 172 9.4. Significant Non-recurring Events and Transactions. ............................................................................................. 172 9.5. Analysis of the statement of financial position, income statement and cashflow ................................................. 174 9.6. Analysis of changes in shareholders' equity ......................................................................................................... 195 9.7. Financial and capital management ....................................................................................................................... 196 9.8. Net financial position ............................................................................................................................................. 197 9.9. Guarantees, commitments and other contingent liabilities .................................................................................... 198 9.10. Segment reporting ................................................................................................................................................ 199 9.11. Related party transactions .................................................................................................................................... 199 9.12. List of equity investments...................................................................................................................................... 205 9.13. Remuneration paid to Directors, Statutory Auditors and key management personnel .......................................... 205 9.14. Fees paid to the Independent Auditors ................................................................................................................. 206 9.15. Disclosure concerning financial risks .................................................................................................................... 206 9.16. Other information .................................................................................................................................................. 210
10. CERTIFICATION OF THE FINANCIAL STATEMENTS PURSUANT TO ART. 154-bis of Legislative Decree. 58/98.212 11. INDEPENDENT AUDITORS'REPORT ON THE SEPARATE FINANCIAL STATEMENTS AT 31 OCTOBER 2012 ... 213
Meridiana fly - Annual Financial Report at 31 October 2012 - 6
1. CORPORATE BODIES
BOARD OF DIRECTORS
(in office until the shareholders' approval of the financial statements for the year ended 31 October 2012)
President Marco RIGOTTI
Chief Executive Officer Roberto SCARAMELLA (1)
Vice President Franco TRIVI
Directors Silvio PIPPOBELLO
Romolo PERSIANI
Salvatore VICARI (2) (3) (4) (5)
Vincenzo DE BUSTIS FIGAROLA (2) (3) (4) (5)
Giuseppe LOMONACO (2) (3) (4) (5)
DIRECTORS WHO RESIGNED FOLLOWING THE SHAREHOLDERS' AGREEMENT OF 15 JANUARY 2013
Giuseppe GENTILE (6)
Alessandro NOTARI (7)
Mario PORCARO
Carlo Stefano ROTA
BOARD OF STATUTORY AUDITORS
(in office until the shareholders' approval of financial statements for the year ended 31 October 2014)
President Luigi GUERRA
Standing Auditors Antonio MELE
Luciano RAI(8)
STATUTORY AUDITORS WHO RESIGNED FOLLOWING THE SHAREHOLDERS' AGREEMENT OF 15 JANUARY 2013
Giovanni REBECCHINI
Alternate Auditors Luigi MORANDUZZO
INDEPENDENT AUDITOR DELOITTE & TOUCHE S.p.A.
(Appointed by the shareholders' meeting on 08 May 2007 for the period 2008-13.)
(1) Executive Director with powers from 15 January 2013
(2) Independent Director
(3) Member of the Audit and Risk Committee
(4) Member of the Remuneration and Appointments Committee
(5) Member of the Related Party Transactions Committee
(6) Chief Executive Officer until 15 January 2013
(7) Executive Director until 15 January 2013
(8) Succeeded in the office as standing Auditor on 15 February 2013
Meridiana fly - Annual Financial Report at 31 October 2012 - 7
2. MANAGEMENT REPORT
Dear Shareholders,
Despite the various measures put in place to deal with the economic and financial crisis, the macroeconomic trend in Italy was still
very negative in the past year as evidenced by the various macroeconomic indicators, such as GDP performance, the
unemployment rate, the use of subsidized measures for redundancy and the level of spending for consumption and investment,
albeit the spread on interest rate debt showed an improvement.
The economic downturn led to a significant reduction in households' and firms' spending capacity with respect to business and
leisure trips, which in turn negatively affected the revenues and margins of Meridiana fly Group.
Given this context of declining total demand, the air transport sector is still characterized by difficult market conditions - as evidenced
by the crisis situation of some national and international carriers - with increased price competition.
With respect to external factors, the oil price remained at high level, with significant negative impact on airlines bottom line, as this
cost is a significant component in airlines income statements (about 32% of the Group sales revenue); in addition, the appreciation
of the U.S. dollar (about +8.5% in 10 months) had a negative impact on the Group's accounts as a significant portion of operating
expenses is denominated in U.S. dollars and is only partially recovered through the sales to Tour Operators.
In addition, in 2012 the Group was involved in events and transactions that had a significant negative impact on costs, of which first
in terms of amounts was the write-down of goodwill as a result of the impairment test and of other assets (including 2 long-haul
aircraft), as well as charges in particular relating to disputes with third parties, costs for personnel reorganization, capital losses,
write-downs and non-recurring losses, also linked to the new strategy adopted by the Board of Directors as commented on hereafter.
After the business combination with Air Italy, in consideration of an already difficult and competitive market, the Group implemented
a number of turnaround measures envisaged in the original Integrated Business Plan Meridiana fly-Air Italy, such as, among others,
the network rationalization, the reduction in fleet costs through the sale of aircraft, the optimization of human resources also making
use of available subsidized measures for redundancies, the application of the new company labour contract, the renegotiation of
aircraft lease and maintenance contracts, the review of the operational structure and processes.
However, the reorganization initiated was not yet sufficient to achieve a structural turnaround; therefore the Group initiated
immediate and urgent restructuring actions, such as a further reduction in capacity due to continued low market demand, the
extension of the temporary redundancy procedure (CIGS) to also include Air Italy, and the early surrender of 8 aircraft in January
2013 with one-off costs incurred for this purpose.
Despite this extremely difficult and uncertain environment, the Aga Khan Fund for Economic Development ("AKFED") - a financial
institution controlled by Meridiana S.p.A. major shareholder (H.H.Karim Aga Khan) - continued to provide significant and concrete
support to Meridiana fly, both through significant funding via the direct parent Meridiana and the shareholders' agreement of 15
January 2013 which saw the sale of the 38.71% stake held by former Air Italy Holding shareholders to Meridiana S.p.A, which
currently has a controlling stake in the Group of about 89.9% of the share capital.
Also as a result of the consequent management change with the appointment of the new Managing Director, Mr Roberto Scaramella,
the Board of Directors approved a new Strategic Plan (the "Business Plan"), which marks a significant break from the previous plan
due to the reduction in capacity in order to address the significant fall in demand, particularly evident in the second half of 2012. The
new Plan envisages further reviews and optimization of the operating network both nationally and internationally, while maintaining a
specific focus on Sardinia, a gradual fleet modernization, the reduction and optimization of overheads, a review of the organization
and operational processes, as well as more efficient and flexible management procedures in operations, maintenance and
commercial activities.
As a result of the new Business Plan the company incurred non-recurring charges, and ,also as a result of the impairment test, the
goodwill, deferred tax assets, fleet and investments were written-down with a particularly negative effect on goodwill (e.g. a goodwill
Meridiana fly - Annual Financial Report at 31 October 2012 - 8
impairment charge of Euro 57.8 million was recognized in the consolidated financial statements). In particular the outcome of the
impairment test, carried out on the basis of discounted expected cash flows derived from the above mentioned Plan reflects the
effect of the significant reduction in capacity to cope with falling demand particularly evident in the second quarter.
It is believed, however, that, thanks to the new significant financial and equity commitments from AKFED in view of supporting the
Company and the Group ability to continue operating as a going concern and the implementation of the new strategy, there are solid
foundations for the structural improvement of the Group in the medium term and greater confidence in a brighter outlook.
Single Management Report for the Consolidated and Separate Financial Statements
In accordance with Article 40 of Legislative Decree no. 127 of 9 April 1991, paragraph 2 - bis, for the purposes of the preparation of
this Annual Report, the management report accompanying the financial statements and the separate financial statements of the
parent company Meridiana fly SpA are presented together; in Chapter 2 herein, where appropriate, we provide adequate disclosure
on issues that are relevant for all the consolidated companies, as required by the above mentioned provision.
2.1. Macroeconomic data
In the first 10 months of 2012 the price of fuel on European markets (Platts) posted a significant increase in Euro terms (average
+10.66%), primarily due to the appreciation of the U.S. dollar, reaching a value of around 1,000 Dollars per Metric Ton.
Jet Fuel
Amounts expressed in metric ton
10 months
2012
10 months
2011 Oct-12 Oct-11
% change 10
months
% change
October
FOB MED Cargo in USD 1,007.00 994.89 1,025.58 985.11 1.22% 4.11%
FOB MED Cargo in EUR 784.43 708.88 790.48 718.74 10.66% 9.98%
In the same period, the U.S. dollar appreciated against the Euro on average 8.48%, standing at 1.2993 at the end of October 2012.
Exchange rate
10 months
2012
10 months
2011 31-Oct-12 31-Oct-11
% change 10
months
% change
October
EUR / USD 1.2837 1.4027 1.2993 1.4001 -8.48% -7.20%
Interest rates showed a significant reduction in terms of average values in comparison to the previous year, as a result of monetary
policies put in place at EU level in order to tackle the economic crisis.
Interest rates in %
10 months
2012
10 months
2011 Oct-12 Oct-11
3M EURIBOR 0.650 1.378 0.208 1.576
Meridiana fly - Annual Financial Report at 31 October 2012 - 9
2.2. Key financial performance indicators for FY2012
Group Consolidated Data
The Reclassified Consolidated Income Statement is presented below in accordance with management criteria, with comparisons
with data from the previous year for 10 months only (pro-forma data), subject to the limitations on comparability outlined in the
introduction and as described more in detail in section 4.2 - Comparability of accounting data.
Financial Year % revenues Financial Year % revenues
2012 from sales 2011 from sales
Proforma Data %
Sales revenue 556,556 100.0% 716,054 100.0% (159,498) -22.3%
Other Revenue 22,966 4.1% 26,852 3.8% (3,886) -14.5%
Total revenues 579,522 104.1% 742,907 103.8% (163,385) -22.0%
Fuel (179,003) -32.2% (218,582) -30.5% 39,579 18.1%
Materials and maintenance services (87,119) -15.7% (108,623) -15.2% 21,504 19.8%
Selling expenses (20,819) -3.7% (25,487) -3.6% 4,668 18.3%
Other operating costs and wet leases (169,469) -30.4% (211,306) -29.5% 41,837 19.8%
Sundry costs and other services (37,911) -6.8% (34,907) -4.9% (3,004) -8.6%
Staff costs (80,726) -14.5% (111,763) -15.6% 31,037 27.8%
Provision for liabilities and charges (7,911) -1.4% (14,170) -2.0% 6,259 44.2%
EBITDAR (3,436) -0.6% 18,069 2.5% (21,505) -119.0%
Operating leases (56,631) -10.2% (56,644) -7.9% 13 0.0%
EBITDA (60,067) -10.8% (38,575) -5.4% (21,492) -55.7%
Amortisation, depreciation and write-downs (107,340) -19.3% (19,043) -2.7% (88,297) -463.7%
Other adjustment provisions (6,733) -1.2% (2,749) -0.4% (3,984) -144.9%
EBIT (174,140) -31.3% (60,367) -8.4% (113,773) -188.5%
Net financial income (expenses) (11,391) -2.0% (7,619) -1.1% (3,772) -49.5%
Impairment of financial assets (3,822) -0.7% (0) 0.0% (3,822) ns
Profit (loss) before tax (189,353) -34.0% (67,986) -9.5% (121,367) -178.5%
Taxes for the period (882) -0.2% (1,489) -0.2% 607 n.s.
Net Profit (loss) from continuing operations (190,235) -34.2% (69,474) -9.7% (120,761) -174%
Net profit (loss) from discontinued operations or held
for sale, net of tax effects - 2,478 (2,478) -100%
Net profit (loss) for the year (190,235) -34.2% (66,996) -9.4% (123,239) -183.9%
€/000
Change
The economic performance of 2012 was particularly negative for the Meridiana fly Group, with a recorded loss of Euro 190.2 million,
resulting in a negative consolidated equity of Euro 111.8 million (shareholders' equity of the parent company Meridiana fly S.p.A. as at 31
October 2012 was negative for approximately Euro 104.5 million, resulting in the circumstances referred to in article 2447 of the Italian Civil
Code).
The significant loss recorded in the first 10 months of 2012 was influenced in particular by a number of negative factors and events, of a
predominantly exogenous and/or non-recurring nature, such as:
� significant write-down of goodwill for Euro 57.8 million, which was recognized as a result of the impairment test carried out with
the support of an independent expert, appointed for the purpose; The impairment test carried out on the basis of the Business
Plan through the Discounted Cash Flow (DCF) methodology already used in the previous year, also showed a high sensitivity of
the value in use, consisting largely of the discounted cashflows that make up the terminal value, to changes in the main
Meridiana fly - Annual Financial Report at 31 October 2012 - 10
assumptions made by the expert concerning the estimated operating cash flows of the CGU during the period used for the
calculation, the weighted average cost of capital and the rate of growth;
� the write-down of other corporate assets including:
- n. 2 long-haul aircraft (Boeing 767-200) owned by the subsidiary Air Italy, including the engine held as a spare part (total
write-down of Euro 23.8 million), recognized as a result of the company's decision to dispose of those assets in
accordance with the Plan's strategy and calculated on the basis of the best estimate available on the net realizable value
attributable to the mentioned assets;
- the advance already recognized in the previous year by the subsidiary Air Italy - in the form of an option to take over a
finance lease contract - relating to the possible purchase of a long-haul aircraft no longer considered as cost-effective
(write-down of Euro 9 million) as part of the Plan's strategy;
� the costs incurred as a result of the decision to reduce the fleet implemented through negotiation with the lessor of the conditions
for early surrender of a number of aircraft. More specifically:
- the extraordinary charge by way of early surrender of an Airbus A330 ( Early termination fee) agreed with a lessor for
Euro 1.5 million (USD 1.95 million);
- higher amortization of capitalized charges related to the aircraft phase-in due to the early surrender of aircraft
(approximately Euro 1 million);
- value adjustment of financial assets (Euro 2.5 million) for the write-off of security deposits as a result of the agreed early
surrender of aircraft in January 2013;
- the allocation of costs for contract losses ("onerous" aircraft lease contracts pursuant to IAS 37) for approximately Euro
3.1 million recognized to take into account the loss from the use of the aircraft before being returned in January 2013,
partially offset by the use of phase-out provisions for Euro 1.6 million;
� the persistent strongly negative economic situation which led to extreme weakness in demand, both in the charter and scheduled
segment, with insufficient traffic volumes on the routes operated by the Group;
� the competitive pressure on the national scheduled market which led to pricing discounts/promotions to defend volumes and
market share, with consequent loss of revenues and margins;
� the increase in fuel prices (approximately +10.66% in euro), only partially recovered through the fuel surcharge (scheduled
segment) applied on selling prices and the adjustment of contract prices with Tour Operators (charter segment);
� the appreciation of the U.S. dollar compared to the Euro (+8.48%), with significant negative impact on operating costs (largely
denominated in U.S. dollars), only partially recovered through contractual price adjustments with Tour Operators (charter
segment);
� the significant increase (approximately +400%) of "terminal navigation fees" with regard to national traffic with effect from 1 July
2012, with a negative impact on the Group income statement for approximately Euro 3.7 million;
� non-recurring cost for the settlement of the dispute with the maintenance provider SR Technics Switzerland Ltd for Euro 2.5
million;
� other non-recurring charges related to the corporate reorganization (e.g. settlement of labour disputes) for approximately Euro 1.3
million;
� non-recurring capital loss of about Euro 2.5 million on the sale of an engine which was no longer functional to the Group as a
result of the operations rationalization and streamlining process and the related activities ;
� the non-recurring loss of Euro 0.7 million for the final settlement of receivables in relation to solidarity contracts applied to the
crew and expired on September 2010;
� additional provisions for disputes with various parties (Euro 6.4 million);
Meridiana fly - Annual Financial Report at 31 October 2012 - 11
� write-down of the carrying value of the investment in Meridiana Maintenance for Euro 1.2 million (based on the last available
appraisal);
� value adjustment of deferred tax assets/liabilities (net negative impact on the income statement of Euro 5.1 million) due to the
revised forecasts on future taxable income resulting from the Business Plan approved by the Board of Directors on 25 February
2013.
These significant non-recurring material events are discussed more in detail in the section "Significant Non-recurring Events and
Transactions" of the Notes to the separate and consolidated financial statements.
The negative result was therefore heavily influenced by the above factors, despite the effort put in place to curb losses, such as the
optimization of the scheduled network and charter rotations, new ad hoc ACMI and charter contracts, the cost savings resulting from the
renegotiation of operating contracts and the crew labour agreement (8% savings on fixed salaries and more efficient employment terms),
together with the use of subsidized redundancy measures (CIGS "zero hour" and "on rotation" temporary redundancy fund) .
Total revenues in 2012 amounted to Euro 579,522 thousand compared to Euro 742,907 thousand in pro-forma 2011, down by Euro
163,385 thousand or 22%.
Sales revenue, including revenue from scheduled and charter air traffic, along with other ancillary revenue amounted to Euro 556,556
thousand compared to Euro 716,054 thousand in pro-forma 2011, down by Euro 159,498 thousand or 22.3%.
This change reflects the decision to compress operational activities in order to optimize the network by cutting unprofitable routes/rotations
and adjusting capacity given the extremely weak market demand.
This item includes (see Section 4.2 - Comparability of accounting data) revenues resulting from the recognition according to the accrual
basis of "prepaid" income based on an estimate of scheduled flight tickets already sold which will not be used or refunded to customers
pursuant to contract terms.
The other revenues amounting to Euro 22,966 thousand compared to Euro 26,852 thousand in pro-forma 2011 mainly include operating
grants (related to the territorial continuity for Sardinia, Sicily and the smaller islands), and other minor revenues for services performed.
Due to the reduction in operating activities, the cost of fuel showed a decrease of Euro 39,579 thousand (-18.1%), lower than the actual
decrease in activity due to the effect of rising jet fuel prices (+10.7%). The impact of this component on revenues increased to 32.2% from
30.5% in pro-forma 2011.
The costs for the purchase of materials and maintenance services also decreased by Euro 21,504 thousand (-19.8%), with a
percentage impact on sales revenue of 15.7% against 15.2% in pro forma 2011.
Selling expenses, made up of the commissions and costs of the various commercial brokerage channels (direct/indirect sales)
posted a decrease of Euro 4,668 thousands, with an impact on revenues of 3.7% (3.6% in the first ten months of pro-forma 2011).
The other operating costs and wet leases were down Euro 41,837 thousand (-19.8%), in line with the network optimization and the
reduction in activity. It should be noted, as already mentioned, that significantly higher costs for terminal navigation fees were
incurred for the control of the national airspace estimated at about Euro 3.7 million. The impact of this component on revenues was
30.4% against 29.5% in pro-forma 2011.
The other operating expenses and other services increased by Euro 3,004 thousand, but include the extraordinary loss on the
disposal of an engine of Euro 2.5 million and the non-recurring charge for the settlement of the dispute with the maintenance provider
SRT amounting to Euro 2.5 million. The impact of this component on revenues was 6.8% against 4.9% in pro-forma 2011.
Significant savings were achieved on Personnel costs (-Euro 31,037 thousand, equal to -27.8%), with a decreased impact on
revenues standing at 14.5% compared to 15.6% in the first ten months of pro-forma 2011. These savings were achieved thanks to
the positive effects of the use of the temporary redundancy fund (CIGS) during the period (average of 617 FTE employees), along
with more efficient use of human resources thanks to the new Meridiana fly labour contract (signed in November 2011). This item,
however, includes non-recurring reorganization costs (settlement of labour disputes) for approximately Euro 1.3 million and Euro 0.7
million of non-recurring losses for the amount of receivables finally defined in relation to solidarity contracts.
Meridiana fly - Annual Financial Report at 31 October 2012 - 12
The provisions for liabilities and charges amounted to Euro 7,911 thousand compared to Euro 14,170 thousand in pro-forma 2011
in relation to litigation pending with passengers, employees, suppliers and other parties. In addition to the provisions for various
disputes, this item includes the allocation of costs for approximately Euro 3.1 million for "onerous" lease contracts of aircraft disposed
of in January 2013 and with negative contribution margins, net of the use of surplus phase-out provisions for Euro 1.6 million, given
the "As is" return terms, therefore without actual maintenance costs included in the contracts.
EBITDAR (determined considering the "allocation to provisions for liabilities and charges") was a negative Euro 3,436 thousand
compared to a positive balance of Euro 18,069 thousand in the pro-forma 2011, therefore posting a reduction of Euro 21,505
thousand. The EBITDA margin was -0.6% compared to +2.5% in the first ten months of pro-forma 2011.
Operating leases, amounting to Euro 56,631 thousand compared to Euro 56,644 thousand in pro-forma 2011, decreased by only
Euro 13 thousands, despite the smaller number of machines under operating lease and favourable renegotiation of some lease
contracts, due to the appreciation of the U.S. Dollar against the Euro (+8.48%), the delay in the actual delivery of an Airbus A330
being phased-out for contractually planned maintenance and for the extraordinary charge on the early surrender of an aircraft Airbus
A330 in agreement with the lessor (penalty of Euro 1.5 million). The impact of this component on revenues was 10.2% against 7.9%
in pro-forma 2011.
EBITDA (in this case too calculated taking into account the "Provision for liabilities and charges") was a negative Euro 60,067
thousand compared to Euro 38,575 thousand in pro-forma 2011. The indicator showed a decrease of Euro 21,492 thousand, with the
EBITDA margin declining from -5.4% in pro-forma 2011 to -10.8% in 2012.
The impact of cost components consisting of depreciation and amortization was 19.3% compared with 2.7% in pro-forma 2011, an
increase mainly due to the goodwill impairment loss resulting from the impairment test (Euro 57.8 million) made in accordance with
IAS 36 (commented in more detail in section 4.5 - Ref. 1 Intangible assets), the write-down of the option to take over the finance
lease contract of an aircraft (Euro 9 million), the write-down of the value of owned aircraft (Boeing 767-200) for Euro 23.8 million
based on fair value, in line with the new Business Plan which provides for the sale of aircraft, as well as higher depreciation due to
the early surrender of some aircraft (effect of approximately Euro 1 million).
The other adjustment provisions, related to the write-downs of doubtful receivables, amounted to Euro 6,733 thousand compared
to Euro 2,749 thousand in pro-forma 2011 due to the deterioration in the credit rating of some trade counterparties (including T.O.).
As a result of the above, the operating result - EBIT - was negative for Euro 174,140 thousand compared to a negative balance of
Euro 60,367 thousand in pro-forma 2011; EBIT margin was -31.3% compared to 8.4% in pro-forma 2011.
Net financial expenses showed a balance of Euro 11,391 thousand compared to Euro 7,619 thousand in pro-forma 2011, increasing
mainly as a result of the higher average level of net financial debt and higher costs for deferred trade payables.
The impairment of financial assets amounting to Euro 3,822 thousand, were related to the write-down of security deposits (Euro
2,576 thousand) resulting from the agreements for the early surrender of eight aircraft in January 2013 that involve a substantial
setoff of the said deposits with payables and surrender charges as well as the write-down of the investment in Meridiana
Maintenance for Euro 1,246 thousand (based on the last available appraisal).
Taxes for the period posted a net balance of Euro 882 thousand, mainly consisting of income from the group tax consolidation (Euro
3,453 thousand) recognized after the payment of taxes for the year 2011, resulting from the sale of the loss of Meridiana fly and the
reversal of net deferred tax liabilities/assets on IAS / IFRS differences, net of current taxes (Euro 550 thousand) and the impairment
write-down of deferred tax assets and deferred tax liabilities (net effect of Euro 5,057 thousand) of the parent company Meridiana fly.
Therefore FY 2012, of 10 months, closed with a net loss attributable to owners of the parent of Euro 190,235 thousand compared
to a loss of Euro 66,996 thousand in the pro-forma 2011.
Taking account of the 106,374,003 ordinary shares at 31 October 2012, the net loss per share on a consolidated basis was Euro
1.79.
At 31 October 2012 equity attributable to owners of the parent was negative for Euro 111,791 thousand (Euro 61,888 thousand at
the end of 2011), as discussed in detail in Section 4.7.
Meridiana fly - Annual Financial Report at 31 October 2012 - 13
Net financial debt at 31 October 2012 amounted to Euro 136,078 thousand compared to Euro 94,400 thousand at the end of 2011.
The following is a reconciliation between shareholders' equity and net profit/loss of the parent company and the same data for the
Group consolidated financial statements.
Shareholders' equity
Profit (loss) for the
period
€/000 31.10.2012
Parent Company Meridiana fly (104,474) (190,434)
Losses of consolidated companies (47,250) (47,250)
Elimination of the carrying value of consolidated investments 39,933 47,449
Consolidated Meridiana fly (111,791) (190,235)
The losses of consolidated companies mainly relate to the loss incurred by Air Italy in the 10 month period.
Separate financial statements
Meridiana fly - Annual Financial Report at 31 October 2012 - 14
The Reclassified Separate Income Statement of Meridiana fly is presented below in accordance with management criteria, with
comparisons with the 10 month pro-forma data from the previous year, subject to the limitations on comparability outlined in the
introduction and as described more in detail in section 9.2 - Comparability of accounting data.
Financial Year % revenues 10 months % revenues
2012 from sales 2011 from sales
Proforma Data %
Sales revenue 408,655 100.0% 540,282 100.0% (131,627) -24.4%
Other Revenue 24,616 6.0% 20,854 3.9% 3,762 18.0%
Total revenues 433,271 106.0% 561,136 103.9% (127,865) -22.8%
Fuel (119,114) -29.1% (169,009) -31.3% 49,895 29.5%
Materials and maintenance services (62,998) -15.4% (81,662) -15.1% 18,664 22.9%
Selling expenses (19,364) -4.7% (23,243) -4.3% 3,879 16.7%
Other operating costs and wet leases (158,283) -38.7% (171,407) -31.7% 13,124 7.7%
Sundry costs and other services (25,526) -6.2% (21,602) -4.0% (3,924) -18.2%
Staff costs (57,739) -14.1% (90,041) -16.7% 32,302 35.9%
Provision for liabilities and charges (7,432) -1.8% (12,180) -2.3% 4,748 39.0%
EBITDAR (17,185) -4.2% (8,008) -1.5% (9,177) -114.6%
Operating leases (42,808) -10.5% (45,796) -8.5% 2,988 6.5%
EBITDA (59,993) -14.7% (53,804) -10.0% (6,189) -11.5%
Amortisation, depreciation and write-downs (37,464) -9.2% (10,384) -1.9% (27,080) -260.8%
Other adjustment provisions (3,800) -0.9% (1,984) -0.4% (1,816) -91.5%
EBIT (101,257) -24.8% (66,172) -12.2% (35,085) -53.0%
Net financial income (expenses) (6,397) -1.6% (3,205) -0.6% (3,192) -99.6%
Impairment of financial assets (80,840) -19.8% - 0.0% (80,840) -
Profit (loss) before tax (188,494) -46.1% (69,377) -12.8% (119,117) -171.7%
Taxes for the period (1,940) -0.5% (689) -0.1% (1,251) -
Net profit (loss) for the year (190,434) -46.6% (70,066) -13.0% (120,368) -171.8%
€/000
Change
Meridiana fly total revenues in 2012 amounted to Euro 433,271 thousand compared to Euro 561,136 thousand in pro-forma 2011,
down by Euro 127,865 thousand or 22.8%.
Sales revenue, including revenue from scheduled and charter air traffic, along with other ancillary revenue amounted to Euro
408,655 thousand compared to Euro 540,282 thousand in pro-forma 2011, down by 24.4%.
As mentioned, this change reflects the decision to compress operational activities in order to optimize the network by cutting
unprofitable routes/rotations and adjusting capacity given the extremely weak market demand.
Other revenues amounted to Euro 24,616 thousand compared to Euro 20,854 thousand in pro forma 2011. They mainly include
operating grants (relating to territorial continuity in Sardinia, Sicily and the smaller islands), and other minor revenues for services
performed.
Due to the reduction in operating activities, the cost of fuel showed a decrease of Euro 49,895 thousand (-29.5%), more than
proportional with respect to the reduction in activity. The impact of this component on revenues was 29.1% compared to 31.3% in
pro-forma 2011.
The costs for the purchase of materials and maintenance services decreased by Euro 18,664 thousand (-22.9%), with a
percentage impact on sales revenue of 15.4% against 15.1% in pro forma 2011.
Meridiana fly - Annual Financial Report at 31 October 2012 - 15
Selling expenses, made up of the commissions and costs of the various commercial brokerage channels (direct/indirect sales)
posted a decrease of Euro 3,879 thousands, with an impact on revenues of 4.7% (4.3% in the first ten months of pro-forma 2011).
The other operating costs and wet leases decreased by Euro 13,124 thousand (-7.7%), with an impact on revenues of 38.7%
(against 31.7% in 2011 pro-forma), due to, among others, the already mentioned significantly higher costs of terminal navigation fees
for the control of the national airspace estimated at about Euro 3.1 million.
The other operating expenses and other services increased by Euro 3,924 thousand, with a percentage impact on sales revenues
of 6.2% compared to 4% in 2011 pro-forma. They include, however, the non-recurring charge for the settlement of the dispute with
the maintenance provider SRT for Euro 2.5 million.
Personnel costs significantly decreased (-Euro 32,302 thousand, equal to -35.9%), with a percentage weight on revenues down to
14.1% compared with 16.7% in the first ten months of 2011 pro-forma, thanks also to benefits from the use of the temporary
redundancy fund (CIGS) during the period (on average 617 FTE employees), along with more efficient use of human resources
related to the new Meridiana fly employment contract (signed in November 2011). This item, however, includes non-recurring
reorganization costs (settlement of labour disputes) for approximately Euro 1.3 million and Euro 0.7 million of non-recurring losses for
the amount of receivables finally defined in relation to solidarity contracts.
The provisions for liabilities and charges amounted to Euro 7,432 thousand (compared to Euro 12,180 thousand in pro-forma
2011) in relation to litigation pending with passengers, employees, suppliers and other parties. In addition to the provisions for various
disputes, this item includes the specific allocation of costs for approximately Euro 3.1 million for "onerous" lease contracts of aircraft
disposed of in January 2013 and with negative contribution margins, net of the use of surplus phase-out provisions for Euro 1.6
million, given the "As is" return terms, therefore without actual maintenance costs included in the contracts.
EBITDAR (determined considering the "allocation to provisions for liabilities and charges") was a negative Euro 17,185 thousand
compared to a positive balance of Euro 8,008 thousand in the pro-forma 2011, therefore posting a reduction of Euro 9,177 thousand.
The EBITDA margin was -4.2% compared to -1.5% in the first ten months of pro-forma 2011.
Operating leases, amounting to Euro 42,808 thousand compared to Euro 45,796 thousand in pro-forma 2011, decreased by only
Euro 2,988 thousands, despite the smaller number of machines under operating lease and favourable renegotiation of some lease
contracts, due to the appreciation of the U.S. Dollar against the Euro (+8.48%), the delay in the actual delivery of an Airbus A330
being phased-out for contractually planned maintenance work and for the extraordinary charge on the early return of an aircraft
Airbus A330 in agreement with the lessor (penalty of Euro 1.5 million). The impact of this component on revenues was 10.5% against
8.5% in pro-forma 2011.
EBITDA (also in this case, calculated taking into account the "Provision for liabilities and charges") was a negative Euro 59,993
thousand compared to Euro 53,804 thousand in pro-forma 2011. The indicator showed a decrease of Euro 6,189 thousand, with the
EBITDA margin declining from -10% in pro-forma 2011 to -14.7% in 2012.
The impact of cost components consisting of depreciation and amortization was 9.2% compared to 1.9% in pro-forma 2011, an
increase mainly due to the goodwill impairment loss (Euro 28,187 thousand) and to a lesser extent to higher depreciation due to the
early return of some aircraft.
The other adjustment provisions, related to the write-downs of doubtful receivables, amounted to Euro 3,800 thousand compared
to Euro 1,984 thousand in pro-forma 2011 due to the deterioration in the credit rating of some trade counterparties (including T.O.).
As a result of the above, the operating result - EBIT - was negative for Euro 101,257 thousand compared to a negative balance of
Euro 66,172 thousand in pro-forma 2011; EBIT margin was -24.8% compared to -12.2% in pro-forma 2011.
Net financial expenses showed a balance of Euro 6,397 thousand compared to Euro 3,205 thousand in pro-forma 2011, increasing
mainly as a result of the higher average level of net financial debt and higher costs for deferred trade payables.
The impairment of financial assets amounting to Euro 80,840 thousand, refer largely to the write-down of the value of the
investments in Air Italy Holding for Euro 75,489 thousand (as a result of the impairment test carried out with the support of the expert
appointed for the purpose on the basis of the subsidiary stand-alone business plan)in Meridiana Maintenance for Euro 1,246
Meridiana fly - Annual Financial Report at 31 October 2012 - 16
thousand (based on the latest available appraisal) and in Wokita for overall Euro 1,529 thousand (inclusive of the capital contribution
made during the year of Euro 250 thousand), on the basis of the subsidiary's equity at the financial statements date, taking into
account that the process of reviewing the business model is still ongoing, as well as the resulting business plan, following the
negative results reported in the past years.
Taxes for the period posted a net balance of Euro 1,940 thousand, mainly consisting of the impairment write-down of deferred tax
assets (net effect Euro 5,057 thousand) net of the income from the group tax consolidation (Euro 3,453 thousand) recognized after
the payment of taxes for 2011 resulting from the sale of Meridiana fly losses; it should be noted that this latter benefit is not going to
be repeated in future years given that Meridiana fly is no longer part of the Meridiana Group tax consolidation.
Meridiana fly therefore closed FY 2012, of 10 months, with a net loss in the separate financial statements of Euro 190,434
thousand compared to a loss of Euro 104,831 thousand in the 2011 separate financial statements.
Taking account the 106,374,003 ordinary shares at 31 October 2012, the net loss per share was Euro 1.79.
At 31 October 2012, after accounting for the capital increase, the net shareholders' equity of the separate financial statements of
Meridiana fly was a negative Euro 104,474 thousand (compared to a positive balance of Euro 69,390 thousand in the separate
financial statements of 2011), as discussed in detail in Section 9.6; as a result, the company met the conditions provided for in article
2447 of the Italian Civil Code (reduction of the share capital below the legal minimum). In this regard, the Board of Directors on 26
February 2013 decided to authorize the President of the Board of Directors and the Chief Executive Officer, acting severally, to
convene the extraordinary Shareholders' Meeting on 29 April 2013 for the adoption of the measures referred to in the mentioned
article 2447 of the Italian Civil Code. Please refer to the comments in paragraph 2.24.14 of the Management Report for the
commitments made by AKFED and Meridiana with regard to to this recapitalization and in order to ensure that the Company and the
Group continue operating as a going concern.
Net financial debt at 31 October 2012 was Euro 79,423 thousand against Euro 31,649 thousand in the separate financial statements
at 31 December 2011.
2.3. The fleet
At 31 October 2012, after the integration with Air Italy, Meridiana fly operates a fleet of 38 commercial aircraft, consisting of:
- 16 Airbus (eleven A320, two A330 and three A319), all under operating lease;
- 10 MD-82, owned by the company;
- 12 Boeing (four B767, two owned, two leased - one under finance lease and one under operating lease - and eight B737 aircraft
under operating lease).
The composition of the commercial fleet and the changes that took place until 31 October 2012 are shown in the table below.
Meridiana fly - Annual Financial Report at 31 October 2012 - 17
Brand Registration Type
Owned, operating lease, financial lease Entry in Fleet Lease expiry
I-EEZJ A330 Operating Lease May-05
EI-EZL A330 Operating Lease Dec-06 Dec-14
I-EEZM A330 Operating Lease Mar-09 Jan-13
I-EEZE A320 Operating Lease Mar-03
I-EEZF A320 Operating Lease Apr-03 Jan-13
I-EEZG A320 Operating Lease May-03 Jan-13
I-EEZH A320 Operating Lease Dec-04 Nov-18
I-EEZI A320 Operating Lease Dec-04 Nov-18
I-EEZK A320 Operating Lease Feb-05 Sep-16
EI-EZN A320 Operating Lease Mar-09 Jan-13
EI-EZO A320 Operating Lease Mar-09 Jan-13
I-EEZP A320 Operating Lease May-09 Jun-15
EI-EZR A320 Operating Lease Jul-10 Feb-16
EI-EZS A320 Operating Lease Jul-10 Apr-15
EI-EZT A320 Operating Lease Aug-10 Apr-15
EI-DFP A319 Operating Lease Jun-04 Jan-13
I-EEZQ A319 Operating Lease Jun-10
EI-DEZ A319 Operating Lease Apr-04 Jan-13
EI-DFA A319 Operating Lease Apr-04 Jan-13
EI-CIW MD82 Operating Lease Jun-09
EI-CKM MD82 Operating Lease Mar-98
EI-CRE MD82 Operating Lease Dec-98
I-SMEC MD82 Operating Lease Oct-98
EI-CRH MD82 Operating Lease Feb-99
EI-CRW MD82 Operating Lease Apr-99
EI-CNR MD82 Operating Lease Jul-07
I-SMEN MD82 Ownership Jan-99
I-SMEL MD82 Ownership Jul-84
I-SMEMA MD82 Ownership Jul-84
I-SMET MD82 Ownership May-87
I-SMEV MD82 Ownership Jul-88
I-SMEP MD82 Ownership Aug-89
I-SMER MD82 Ownership Mar-91
I-SMES MD82 Ownership Feb-92
I-SMEZ MD82 Ownership Apr-93
I-SMEB MD82 Ownership May-98
AIR ITALY FLEET
I-AIGG Boeing B767 Operating Lease Oct-11 Aug-16
I-AIGJ Boeing B767 Finance Lease Oct-11 Mar-17
I-AIGH Boeing B767 Ownership Oct-11
I-AIGI Boeing B767 Ownership Oct-11
I-AIGM Boeing B737 Operating Lease Oct-11
EI-IGR Boeing B737 Operating Lease Oct-11 Apr-16
EI-IGS Boeing B737 Operating Lease Oct-11 May-16
I-AIMR Boeing B737 Operating Lease Oct-11 Dec-12
EI-IGP Boeing B737 Operating Lease Oct-11 Feb-14
EI-IGT Boeing B737 Operating Lease Oct-11 Apr-17
EI-IGU Boeing B737 Operating Lease Oct-11 May-17
EI-EOJ Boeing B737 Operating Lease Oct-11 Apr-14
EI-IGN Boeing B737 Operating Lease Oct-11 Mar-15
Compared to the situation existing at the end of 2011 there were three less commercial aircraft (1 Airbus A330, 1 Airbus A320 and
one Boeing B737-300) and one additional Boeing B737-800 (EI-IGN) returned from a third-party sub-lease.
It should be noted that following the resolution of the Board of Directors on 12 December 2012 (see par. 2.24.6) that provides for the
sale of 10 aircraft as a result of the reduction in network and activities, in January 2013 eight Airbus aircraft were returned to the
leasing company ahead of contractual expiration, of which 4 A320 (I-EEZF, I-EEZG, EI-EZN, EI-EZO), 3 A319 (EI-DFP, EI-DFA, EI-
DEZ) and an A330 (I-EEZM), as described in Paragraph 2.24.8, as well as a Boeing 737 (I-AIMR) in December 2012, as planned.
Meridiana fly - Annual Financial Report at 31 October 2012 - 18
2.4. Services and operating performance
In 2012, upon completion of the process for the integration of airports direct supervision, ground processes were standardized,
thereby ensuring that the personnel in place could alternatively manage Meridiana fly or Air Italy flights. In addition, the SITA DCS
systems were introduced on all operating bases of the Meridiana fly group in order to ensure a single data cutover on SITA for both
companies, thus optimizing the management of operating data.
With regard to service contracts of the handling and airport supervision type, the Group reviewed the handling contracts for several
Italian airports in order to improve operational and financial performance.
The unification of crew shifts and of operating personnel management in general, due to the integration between the two companies,
led to greater efficiency and improved use of internal resources, as part of the "on rotation" CIGS (temporary redundancy fund)
procedure in place within Meridiana fly.
The completion and improvement of the automatic Boarding procedure in various airports allowed for an improvement of punctuality
indicators, and, consequently, of the level of customer service.
In order to achieve greater synergies within the group, maintenance services provided by the subsidiary Meridiana Maintenance
were further developed, thanks to additional licences obtained by the said company (e.g. Airbus checks); these maintenance
services were previously managed by third party suppliers.
Thanks to the efficient internal organization of operating functions, aircraft operating performance was therefore highly positive. The
flight regularity rate (flights carried out in relation to flights scheduled) continued to be high, on average, with values ranging between
99.5% and 100% depending on the type of aircraft (against a 99.8%-100% range the previous year), as was the case of the
punctuality rate at departure (flights delayed by more than 15 minutes compared to scheduled time, excluding external causes not
ascribable to the carrier), which in 2012 was around 97-98% for scheduled flights.
2.5. Network and commercial business
Meridiana fly Group operates in the national and international air transport business, in both the scheduled and charter segments,
with a strategic focus on leisure and selected business customers.
After the completion of the acquisition of Air Italy Holding - a company that controls 100% of Air Italy - which took place on 14
October 2011, Meridiana fly Group represents a single business unit which manages aviation activities in an integrated manner, with
no separate divisions or units such as to constitute autonomous decision-making systems.
While maintaining the charter and scheduled sales channels separate, from a strictly commercial viewpoint, Meridiana fly Group's
operating activities are based on an integrated network between charter and scheduled operations. Therefore, the fleet also
operates in an integrated manner and is managed in such a way that the various types of aircraft can be used flexibly for different
destinations based on passenger demand in the various periods of the year.
Charter business
With regard to charter flights, Meridiana fly primarily sells its capacity to tour operators, who buy it in order to organize their own tour
packages, (including other services such as board and accommodation) through semi-annual and annual contracts defined well in
advance of the beginning of the season (summer and winter) and mainly with the "Advanced blocked sale" procedure, through which
the risk for filling the aircraft is practically shifted to tour operators. In most cases the sale is of the "split charters" type,(i.e. the same
flight is sold with separate allotments to several tour operators).
Meridiana fly - Annual Financial Report at 31 October 2012 - 19
In order to take into account the possible changes in non-controllable factors, such as changes in the exchange rate (EUR / USD)
and the trend in fuel prices, all contracts are indexed to these parameters and provide, within certain limits or exclusions, an
automatic adjustment mechanism of the prices offered to tour operators.
Charter flights, both medium and long haul, reach domestic and especially international destinations, with particular reference to the
high-end leisure segment, serving passengers travelling for vacation.
The destinations served and operational rotations are identified according to demand in the various periods of the year, in order to
maximize the use of Meridiana fly and Air Italy capacity.
There are two distinct areas of activity in the charter business:
• Medium Haul business: includes flights of less than 5 hours’ duration, mainly covering destinations in Italy, Europe and
the Mediterranean basin. These activities are mainly operated with narrow body aircraft (aircraft whose cabins have only
one lane for the passage of passengers), but especially during high season, the use of wide body aircraft may also be
required (aircraft with two lanes for the passage of passengers and, therefore, larger than narrow body aircraft). Among the
major Medium Range routes operated by Meridiana Group there are Egypt, Greece, the Balearics, Canaries, Tel Aviv
(Israel), Lourdes (France). The medium haul traffic is characterized by high seasonality (excluding Egypt) associated with
the climatic characteristics of these regions, which make these destinations more popular during the summer than in winter.
• Long Haul service: this business traditionally includes flights longer than 5 hours mostly serving intercontinental
destinations. These flights are usually operated with wide body aircraft, but for some activities (such as transport of troops)
narrow body aircraft can be used with one or more technical stops. The main long-haul routes currently operated by the
Group under charter arrangements concern the Indian Ocean area (such as the Maldives, Sri Lanka, Kenya, Zanzibar,
Mauritius, Madagascar), Brazil, Caribbean (e.g. Dominican Republic, Cuba, Honduras, etc..).
Scheduled flights
Scheduled flights are based on "Point to Point" routes, with planned regular and frequent flights and destinations.
With regard to the domestic scheduled "network", besides the activity relating to the Territorial Continuity for Sardinia/Sicily, the
Group operates scheduled flights between major Italian cities such as Milan, Verona, Turin, Naples and Catania. During the summer
months typical "Leisure" flights are intensified connecting Olbia with many Italian cities, including the routes Olbia - Genoa, Olbia -
Catania, Olbia - Bari.
Meridiana fly also covers some international routes, such as from Palermo/Naples to New York (operated in the summer), from Milan
and Verona to Pristina (Kosovo), from Milan/Verona/Bologna/Rome to Chisinau (Moldova), from Florence to London, from Cagliari to
Paris Charles de Gaulle (in summer), from Bologna to Moscow, from Milan Malpensa to Dakar (Senegal), Israel, Egypt, Cuba and
Brazil. In particular, Air Italy, which for years has been operating the routes with Cuba, on 8 August 2012 was appointed by the
Cuban and Italian Civil Aviation Authority as a designated carrier to cover the Italy - Cuba routes and was assigned three weekly
flights.
In addition, during the summer the Meridiana fly group operated a number of international routes, including from Sardinia: to the
Cagliari-Paris and Olbia-Nice routes traditionally served, the Olbia/Cagliari to Moscow, Olbia - London (also in code-sharing with
British Airways), Olbia - Paris and Olbia - Hamburg routes were added.
As a result of the stop of Wind Jet flights of 11 August 2012, the Meridiana fly group started to operate a number of additional daily
flights from Catania to Turin, Milan Linate, Verona, Bologna and Rome Fiumicino, with an operating base at the Catania airport.
Meridiana fly group also confirmed the planned winter flights from Turin to Rome Fiumicino, Catania, Cagliari and Olbia.
Finally, after Ryanair has left Verona airport since12 October 2012, Meridiana fly group started operating new flights from Verona,
thus strengthening its presence in this airport.
Meridiana fly - Annual Financial Report at 31 October 2012 - 20
Following the decisions taken by the Antitrust Authority and the decision of Alitalia-Cai to appoint Audirevi S.r.l. as monitoring trustee
(Nexia International network), on 11 October 2012 Meridiana Fly group submitted to the above independent entity its bid for the
assignment of 8 slots to operate the - Milan Linate - Rome Fiumicino route covering the 6-9 am and 6-9 pm time slots, along with a
program which included 8 daily flights originating from Milan-Linate and 8 flights per day originating from Rome-Fiumicino for a total
of 16 connections.
In late October 2012, the Italian Antitrust Authority announced that another carrier had been identified as assignee of the slots for the
operation of the mentioned route.
Business under the "territorial continuity" regime
It should be noted that Meridiana fly also carries out activities covered by the so-called "territorial continuity" regime, covering flights
to and from Sardinia and several cities of the peninsula, Sicily and Minor Islands; within this regime, Meridiana fly fulfils special public
service obligations against which, with respect to certain routes, it receives periodic government grants designed to ensure the
economic and financial balance of the activities carried out by the carrier.
The current territorial continuity regime for Sardinia, which expired on 27 October 2012, was extended for a further year until October
2013, at current rates, but with no contributions for the routes that were previously covered by government grants. The Group has
planned to confirm connections with the Olbia and Cagliari airports and to incur the related costs, except for some routes (Cagliari-
Palermo, Cagliari-Florence) by reviewing frequencies and flights pending the new determinations by the competent authorities.
Meridiana fly group also agreed to start new connections during the 2012-2013 winter season between Alghero airport and the
airports of Milan Linate, Bologna, Turin (already in territorial continuity and previously operated by CAI - Alitalia), as well as Verona
and Naples, thus completing its significant presence on connections with Sardinia.
Due to changed proposed conditions, effective 28 October 2012, the Group ceased operating (operated through wet lease
agreements) the routes in territorial continuity between Sicily and Pantelleria / Lampedusa.
Code-sharing activities
The scheduled service covers additional domestic and international destinations, thanks to commercial Code Sharing agreements
developed in recent years, which currently include Air Malta (flights from the major Italian airports to Malta and traffic arrangements
for connecting flights), British Airways (on the Florence- London Gatwick route, and during the summer, Olbia-London Gatwick route,
both operated by Meridiana fly).
Following revision of the international network, the code sharing arrangements from Florence with Finnair, KLM and Iberia (on the
Florence-Madrid route operated by Meridiana fly ) and that with Air Moldova to Chisinau (Moldavia) were suspended, while the code
sharing with Iberia on flights operated by the Spanish carrier between Milan Linate and Madrid was confirmed, as well as
agreements on connecting flights on the Madrid-Rome Fiumicino route.
Meridiana fly has also ongoing code sharing agreements with Air Berlin for all flights operated by the latter between Italy and
Germany (in this case Meridiana fly operates as marketing carrier) and with Royal Jordanian for flights operated by the latter to
Amman from Rome Fiumicino and Milan Malpensa (Meridiana fly operates as marketing carrier in this case, too) and the route
Verona -Rome operated by Meridiana fly (connecting to Amman).
The subsidiary Air Italy carried out "Code Sharing" activities with Alitalia for the operation of some domestic routes until July 2012, in
particular from Naples, Turin and Verona.
ACMI activities
Meridiana fly - Annual Financial Report at 31 October 2012 - 21
After integration with Air Italy, which over the years has developed an intensive relationship network with international airlines for the
sale of capacity during the low season, Meridiana fly group transferred its operational capacity for short periods through ACMI
contracts ( Aircraft, Crew, Maintenance and Insurance ), also in view of weak market demand, especially during "shoulder" periods.
For example, during the summer new ACMI agreements were entered into with British Midland and Air Algerie connections with
long-haul aircraft (Airbus A330) provided by Meridiana fly.
Moreover, since September 2012, an ACMI agreement has been in place with Turkish Airlines for long-haul connections to the East
with a Meridian fly Airbus A330 transferred to Istanbul; this agreement shall expire on November 2013.
Through these tactical actions aimed at boosting ACMI and ad-hoc charter activities, total revenues in the first ten months of 2012
amounted to approximately Euro 35 million, which neutralized the effect of the economic downturn.
Marketing and product initiatives
In the first ten months of 2012 the Group, including as a result of new commercial strategies following the integration with Air Italy,
successfully implemented new commercial and marketing initiatives, the most significant of which are presented below:
• As from February 2012, launch of a new ticket campaign on return tickets to some destinations (from Milan Linate to Bari
and Naples, from Turin to Rome and Naples and from Verona to Rome) with discounts from 12% to 20% on the final price.
• Launch for the summer season 2012 of some new products such as: direct flights from Rome-Fiumicino to Yerevan,
(Armenia), starting from April with two flights a week; from May, a new route from Hamburg to Olbia 2 times a week; a new
route from Cagliari to Moscow on a weekly basis; with regard to Sardinia, beside the traditional summer flights which
remain pivotal in the network, flights from Bari, Catania and Genoa to Olbia airport and from Milan - Malpensa, Bergamo
and Venice to Cagliari were added; new route operated towards Pemba (Mozambique); as last year, reprogramming of the
charter flights connecting various destinations in Japan to Rome and Milan.
• From 2012 the business class service was improved with restyling of the interiors in the Privilege Business Class of the
Boeing 767 used on long haul flights operated by the Group, with greater comfort of the 12 seats in the cabin and an
innovative in-flight entertainment service via the built-in Tablet (9.7-inch screen with LED backlight and Multi-touch support).
• From 16 April 2012 a summer promotion was launched dedicated to families travelling with children (aged 0 to 12 years),
which provides for free children tickets on some domestic and international flights during the period 7 May to 22 July 2012.
• Launch of the "Companion" Fare that can be purchased on-line from 5 to 15 April 2012 to fly with a companion from 16 April
to 22 July 2012 on certain domestic and international flights included in the promotion, for which the chosen companion can
save 50% of the fare applicable at that time.
• From April 2012 launch of new prepaid "Buy & Fly" Web Carnets offered on websites for business and leisure customers
with a wide range of combinations: favourite destination (Sardinia, domestic flights, or mix of dedicated routes), validity
(from 6 to 12 months), preselected number of beneficiaries (one to three, or more), price fixed when the ticket is purchased.
• Since July 2012 launch of new promotions on flights to Sardinia ( 10% to 30% discounts) valid online until 13 July for those
who purchase a ticket in the period from 3 July to 27 October.
• Special promotion, active from 24 to 31 May and renewed from 1st June to 11 June, providing a discount of Euro 50 for the
fiftieth anniversary of the Costa Smeralda on the purchase of a round-trip ticket to all destinations connected to the Olbia
airport in the period from 1st June to 27 October.
• Other promotional on-line sale campaigns with discounts at various levels on numerous domestic and international
destinations for some limited periods.
Meridiana fly - Annual Financial Report at 31 October 2012 - 22
• A number of changes were introduced for the Frequent Flyer Card, making the accumulated points also available for
purchases with other vendors to increase customer loyalty.
• Introduction of the Mobile Boarding Card through smart phone and tablet for departures from the main Italian airports.
• Changes were also introduced for trade incentives to travel agencies in order to promote the Group sales.
• Launch of Sardinia incoming charter developed by Wokita with the aim of bringing Northern European tourists to Sardinia
outside peak season with flights operated by Meridiana fly.
Launch of the new tariff called "Re-Evolution" with 2 options - Basic, flight-only rate from Euro 39 including tax, and Premium, from
Euro 49 including tax, which also includes:
- reimbursement of the ticket for trip cancellation (up to 7 days before departure)
- transport of 2 checked baggage of 23 kg each
- date change without penalty
- accelerated miles accumulation under the Hi-Fly loyalty program
- free booking of seats (excluding special seat-com seats)
- use of Fast Track, where available
It should be noted that Air Italy was designated as the best airline in Italy and 24th in the world, according to a survey conducted by
E.Dreams.it, one of the largest online travel agencies, based on reviews received from all customers who have travelled by plane in
the last four years and had received a questionnaire asking for their opinion on various aspects of the flight.
2.6. Statistical data
Statistical data on flights performed during FY2012 are shown below, subject to the limitations on data comparability mentioned
above, namely that:
- FY2012 included only two months of operation of Air Italy, which was added to the consolidation area in October 2011;
- for the purposes of comparability on a like-for-like basis, we therefore also present the "pro-forma" data for the first 10 months of
2011, internally prepared and also including Air Italy activities.
Analysis of flight hours
flight hours
10 months
2012 %
10 months
2011
separate
%
10 months
2011 pro-
forma
%
Change vs
10 months
2011 pro-
forma
% change
Medium Haul 59,450 77.2% 62,676 83.4% 75,692 75.1% (16,241) -21.5%
Long Haul 17,539 22.8% 12,434 16.6% 25,075 24.9% (7,536) -30.1%
Total flight hours 76,989 100.0% 75,110 100.0% 100,766 100.0% -23,777 -23.6%
In the first ten months of 2012 the actual number of hours flown totalled 76,989, down 23,777 hours from pro-forma 2011, i.e. -
23.6%; the decline was especially marked for the long-haul segment, due to the network optimization, the cut in unprofitable routes
and alignment of capacity to actual demand.
In percentage terms, the weight of the medium haul segment was 77.2% (compared to 75.1% in pro-forma 2011), while the long haul
segment was 22.8% (compared to 24.9% in pro-forma 2011).
Meridiana fly - Annual Financial Report at 31 October 2012 - 23
Fleet Productivity
Annualized flight hours
10 months
2012
10 months
2011
A320 fleet 2,553 2,608
A320 fleet 3,501 4,769
MD82 Fleet 1,427 1,952
A319 Fleet 2,142 2,439
B737 fleet 2,135 2,001
B767 fleet 3,555 3,751
B757 fleet - 2,658
The productivity per aircraft, in terms of flight hours annualized in 2012 showed a general decrease (except the B737) due to the
reduction in activity already commented above and essentially in line with expectations.
Passengers embarked - scheduled and charter
10 months
2012%
10 months
2011
separate
%
10 months
2011 pro-
forma
%
Change vs
10 months
2011 pro-
forma
% change
Medium Haul 3,356,831 91.3% 3,436,099 92.0% 4,051,249 89.5% (694,418) -17.1%
Long Haul 320,639 8.7% 298,200 8.0% 477,806 10.5% (157,167) -32.9%
Total Passengers 3,677,470 100.0% 3,734,299 100.0% 4,529,055 100.0% -851,585 -18.8%
The total number of passengers, both scheduled and charter, in the first ten months of 2012 was 3,677 thousand, down 852
thousand compared to the first ten months of pro-forma 2011 (-18.8%), with a more marked drop in the long-haul segment. This
trend is in line with the strategic decision to focus on higher added value routes and fleet and also reflects the greater use of
production capacity for ACMI flights and other ad-hoc charter flights.
In percentage terms, the weight of the medium haul segment on total operations was therefore up to 91.3% (against 89.5% in pro-
forma 2011), while the impact of the long haul segment was 8.7% (10.5% in pro-forma 2011).
2.7. Human Resources
It should be noted that the comparison between the average workforce in 2012 and that of 2011 is not totally significant due to the
widening of the scope of consolidation to include Air Italy staff as from 14 October 2011 (in October 2011 the latter had about 397
employees).
In addition, as from September 2011 the temporary redundancy fund procedure (COGS) (zero hour or rotation) has been in place in
Meridiana fly, therefore the average number of employees expressed as full-time equivalent (FTE), i.e. the number of employees
calculated on a full-time basis, does not include employees affected by the mentioned procedure.
The trend in staff expressed as full time equivalents is shown below; for the purposes of comparison the "pro-forma" average
workforce for the first 10 months of 2011 has been calculated, which also includes Air Italy data.
Meridiana fly - Annual Financial Report at 31 October 2012 - 24
(FTE average)
10 months
2012
10 months
2012
10 months
2011 FY 2011 FY 2011
consolidated Separate
pro forma
consolidated consolidated Separate
Managers 19.5 15.5 25.1 22.1 20.7
Employees / workers 526.1 341.6 630.3 496.2 430.4
Tot. Ground 545.6 357.1 655.4 518.3 451.1
Captains and Pilots 325.3 212.5 442.9 343.6 326.0
Flight Attendants 603.9 424.7 1,009.8 800.3 773.7
Tot. Flight 929.2 637.2 1,452.7 1,143.9 1,099.7
Tot. Group 1,474.9 994.4 2,108.1 1,662.2 1,550.8
In 2012 the average number of FTE employees was approximately 1,475 compared to about 2,108 in the comparable 2011 period,
with a reduction of approximately 633 FTE employees, to a large extent related to the use of the temporary redundancy fund (CIGS)
procedure, both "on rotation" and "zero hours" in Meridiana fly.
(FTE average)
October
2012
October
2012
October
2011
December
2011
December
2011
consolidated Separate consolidated consolidated Separate
Managers 18.0 14.0 24.0 23.0 19.0
Employees / workers 515.5 331.2 557.2 538.6 360.6
Tot. Ground 533.5 345.2 581.2 561.6 379.6
Captains and Pilots 354.8 236.8 423.7 378.6 272.6
Flight Attendants 677.4 510.9 865.2 671.0 487.4
Tot. Flight 1,032.2 747.7 1,288.9 1,049.6 760.0
Tot. Group 1,565.7 1,093.0 1,870.1 1,611.2 1,139.6
In October 2012 the average number of Group employees was approximately 1,566 units, 1,093 of whom in the parent company
Meridiana fly, 431 in the subsidiary Air Italy and the remaining 42 employees in other subsidiaries (Sameitaly / Wokita). The
aforementioned number does not include Meridiana fly employees affected by the temporary redundancy (CIGS) procedure,
amounting to 467 FTEs.
Following the agreement reached in June 2011, at the Italian Ministry of Labour and Social Policy, the temporary redundancy
procedure (CIGS) is in place in Meridiana fly for the total duration of about 48 months and affecting a maximum of 845 employees
(432 workers under the so called "zero hours" procedure and 413 workers in rotation), using also the special support regime
provided by the Special Fund for air transport personnel pursuant to Law 291/04.
In 2012 approximately 617 FTE employees were involved in the mentioned procedure, mainly in the Crew category, as per following
table, with significant labour cost savings during the period.
Staff in temporary redundancy procedure (CIGS)
(FTE average)
10 months
2012
Employees / workers 116
Tot. Ground 116
Captains and Pilots 94
Flight Attendants 407
Tot. Flight 501
Total 617
Departure and hiring rates are not relevant for the reorganization under way.
Meridiana fly - Annual Financial Report at 31 October 2012 - 25
During the year, discussions with trade unions and the company's employee representatives continued, with the objective of
reaching shared solutions on the effective management of state subsidised arrangements (CIGS), the specific issues relating to the
combination of Meridiana fly with Air Italy and the renewal of Meridiana fly labour agreements (expired at the end of 2012).
In particular with regard to the last mentioned item, subsequent meetings were held with the trade unions, particularly after the
appointment of the new Chief Executive Officer Mr R. Scaramella on 15 January 2013; however, as at the date of this Report no new
company labour contract for Meridiana fly has been entered into.
It should also be noted that a considerable number of labour litigations is still pending (related to the recognition of the permanent
contract, prior seniority and the application of the former Meridiana labour contracts). For this reason, significant allocations to the
provisions for liabilities and charges were made, as outlined in section 2.15 and in the Notes.
The number of training initiatives of a discretionary nature carried out for staff employees was limited partly reflecting the significant
reorganization in progress.
"Technical" mandatory training, both for ground personnel and for crews, (such as Basic Courses for non-certified flight attendants,
airport security courses, simulator sessions for pilots) was provided, focusing in particular on training on the use of Airbus aircraft
and on training of Flight Attendants on Airbus and Boeing aircraft in order to develop operating synergies and flexibility between
Meridiana fly and Air Italy.
The overall cost for external training courses in 2012 was approximately Euro 1.2 million.
It should be noted that both Meridiana fly and Air Italy hold the ENAC approval certificates attesting that both companies meet all the
requirements of the JAR FCL regulation concerning the establishment of a training organisation; therefore, they are authorized to
operate as training centres for specific courses, including those for flight attendants and aircraft qualification (Meridiana fly with
respect to Airbus A319/320/321/330, MD-80 and Air Italy with respect to Boeing B757/B767/B737-300/900).
Regarding the legislation on occupational safety (Legislative Decree 81/2008), Meridiana fly and the Group updated, where
necessary, the Risk Assessment Report of the various sites in accordance with that legislation, taking into account the specific risks
of aviation activities as well as the special applicable Safety and Security regulations.
During the year 2012 the Group was not involved in any legal action nor was it subject to significant penalties for occupational
diseases; there were no serious accidents at work, nor deaths.
2.8. Environment
The Airbus fleet used by the Meridiana fly Group, given also the level of modernity that characterizes it, complies with current
environmental requirements, in terms of both air and noise pollution. Therefore, there are no significant risks with regard to
environmental protection that may affect the company's use of its aircraft.
Some of the aspects related to the environmental impact and related legislation are specified below.
Emission Trading Scheme (ETS) and air transport
With Directive 2003/87/EC the EU exchange system for greenhouse gas emissions called Emission Trading Scheme (ETS) was set
up. Following Directive 2008/101/EC also aviation activities have been included in this scheme.
With Resolution no. 36/2011, the National Committee for the management of Directive 2003/87/EC has assigned each aircraft
operator CO2 emission allowances free of charge for the period 1 January 2012 to 31 December 2012 and for the period 1 January
2013 - 31 December 2020.
In particular, for 2012, Meridiana fly was assigned 520,562 allowances (1 allowance = 1 ton of CO2) and Air Italy 164,494
allowances.
Aircraft operators that have received allowances free of charge must duly submit a registration form to the Institute for Environmental
Protection and Research (ISPRA), in its quality as director of the National Register of emission allowances.
Meridiana fly - Annual Financial Report at 31 October 2012 - 26
The Meridiana fly group has implemented internal procedures for monitoring and calculating actual CO2 emissions to be declared no
later than 31 March of each year, subject to inspection and certification by an appropriate approved body. After the certification has
taken place, and by April 30 of each year, the allowances declared to the Ministry of the Environment/Competent Authority must be
surrendered. Any gap between declared emission allowances and allowances assigned free of charge must be filled through the
Energy market at market value, except for special financial transactions to hedge financial risk. The first allowances must be
surrendered by 30 April 2013, with reference to emissions produced in 2012.
The Meridiana fly Group has implemented internal monitoring procedures in order to align the management and operational
information to the ETS Directive, taking into account also the corporate restructuring resulting from the business combination with Air
Italy.
In particular, it carried out the emission monitoring and reporting for the years 2010 and 2011 within the established time limits; the
communications have been certified and deemed appropriate, as required by European legislation, by an appropriate certifying
agency and subsequently approved by the relevant National Authority.
Additional requirements are envisaged at the beginning of the ETS 3rd phase (2013-2020), such as the reformulation and
presentation of a new monitoring plan based on the new Commission Regulation No. 601/2012 of 21 June 2012, in relation to which
the relevant National Authority has to issue the technical specifications.
On 22 November 2012, the European Commissioner for Climate Change, Connie Hedegaard, submitted a proposal to the European
Union for the suspension of allowances reporting and surrender for flights with double aerodrome, one of which outside the
European airspace provided that the free allowances have not yet been assigned. The suspension was proposed due to the
objections by non-EU air carriers to the "lack of territorial reciprocity" in the Regulation application and also with regard to the
mechanisms for calculating emissions and the overall scheme.
The suspension will be in effect until the next annual general meeting of the ICAO (International Civil Aviation Organization) in
Autumn of 2013, with the proviso that, if at that date ICAO itself does not or is not able to formulate an alternative or corrective
proposal to EU-ETS for the reduction of CO2 emissions, to be submitted to the approval of the European Commission, the previous
situation shall apply again to these flights, too.
ICAO, set up an international commission in order to reach a satisfactory agreement for all involved parties moving towards a
"Market Based Mechanism" (MBM). It subsequently asked its members to provide data and documents relating to air transport
operations in order to calculate CO2 emissions; Meridiana fly will also provide such data.
At present no significant financial effects are expected due to the reduction and concentration of operations and the steps taken to
reduce CO2 emissions, including through the increased efficiency of the fleet and the network.
Noise pollution
With regard to issues of noise pollution, the aircraft of the Meridiana fly Group fleet are provided with noise certification, as provided
for by the Navigation Code, Title V of Part II "Air Traffic" and by Royal Decree No 356 of 11 January 1925, which certifies compliance
with both European and American regulation.
During FY2012 Meridiana fly was not involved in any litigation nor was it subject to penalties due to environmental damage or
crimes.
2.9. Performance of the Parent Company and its subsidiaries
As at 31 October 2012, Meridiana fly S.p.A directly controls 100% of the share capital of Air Italy Holding, Wokita S.r.l. and Sameitaly
S.r.l. (in liquidation), 100% of Meridiana Express S.r.l. (formed in March 2010 and currently non operative); Meridiana fly also holds a
non-controlling interest in Meridiana Maintenance S.p.A amounting to 16.38% (a subsidiary of Meridiana S.p.A).
Meridiana fly - Annual Financial Report at 31 October 2012 - 27
For more detailed information, the structure of Meridiana Group as at 31 October 2012 is presented below.
Following the shareholders' agreement on 15 January 2013 (see Section 2.24.10) Meridiana S.p.A. increased its control over
Meridiana fly to 89.91%, while the free float remains at 10.09%.
The main operating and financial results of the parent company Meridiana fly S.p.A and its consolidated subsidiaries for fiscal year
2012 are shown in the table below:
Data year 2012
€/000
Sales revenue 408,655 - 189,666 2,449 535
EBIT (101,257) (42) (43,312) 107 (79)
as % of sales revenues -24.8% n.a. -22.8% 4.4% -14.8%
Net Profit (loss) for the period (190,434) (633) (46,602) 55 (79)
Shareholders' Equity (104,474) 16,017 (34,669) 501 8
Net financial position (79,423) (17,036) (41,252) 37 407
Capital expenditure 6,719 - 2,735 - -
(*) data from reporting package for the consolidated statements according to IAS/IFRS
Meridiana fly S.p.A Air Italy
Holding S.r.l. (*)
Air Italy S.p.A.
(*)
Same Italy S.r.l. in
liquidation (*)
Wokita S.r.l. (*)
Meridiana fly S.p.A
Meridiana fly operated the air fleet business with a total fleet of 26-28 aircraft, 994 FTE employees on average, carrying about 3
million passengers in the first ten months of 2012. Total flight hours were approximately 60,000, including activities conducted on
behalf of Air Italy.
Sales revenues were approximately Euro 408.7 million and operating income - EBIT posted a significant loss of Euro 101.3 million;
the net loss was Euro 190.4 million.
Taking into account the net payments for capital increases during the year amounting to Euro 15.9 million and the significant loss
mentioned above, shareholders' equity at year-end was a negative Euro 104.5 million and consequently the Company falls in the
case referred to in art. 2447 of the Italian Civil Code (reduction of the share capital below the legal minimum). In this regard, the
Board of Directors on 26 February 2013 decided to authorize the President of the Board of Directors and the Chief Executive Officer,
acting severally, to convene the extraordinary Shareholders' Meeting on 29 April 2013 for the adoption of the measures referred to in
the mentioned article 2447 of the Italian Civil Code. Please refer to the comments in paragraph 2.24.14 of the Management Report
Meridiana S.p.A. (Holding)Prima S.r.l.
Meridiana fly S.p.A.
(Airline)
Meridiana Maintenance S.p.A. (Mro)
Geasar S.p.A. (Airport Olbia
Costa Smeralda)
Alisarda S.r.l. (Real Estate)
100%
51.20% 83.06% 79.79%
100%
Wokita S.r.l. (Tour
Operator)
Same Italy S.r.l. (General Sales Agent)
Meridiana Express S.r.l.
(Airline)
16.38%
Cortesa S.r.l. (Food & Retail)
Eccelsa S.r.l. (General Aviation)
100%
100%
100%
Air Italy Holding
Air Italy S.p.A. (Aviation)
Air Italy Brazil Air Italy Brasil
AEY Aviation Ltd
AEY Aviation Ltd100%
100%
100%
100%
100% 100%Wokita S.r.l.
(Tour Operator)
Wokita S.r.l. (Tour
Operator)
Same Italy S.r.l. (
Same Italy S.r.l. in liquidation
Meridiana Express S.r.l.
(Airline)
Meridiana Express S.r.l.
(Airline)
Cortesa S.r.l. (Food&Retail) Cortesa S.r.l.
(Food&Retail) Eccelsa S.r.l.
(General Aviation)
Eccelsa S.r.l. (General Aviation)
Meridiana fly - Annual Financial Report at 31 October 2012 - 28
for the commitments made by AKFED and Meridiana with regard to the this recapitalization and in order to ensure that the Company
and the Group continue operating as a going concern.
With regard to comments on the earning and financial situation of Meridiana fly S.p.A. please refer to the details already provided in
Section 2.2, which discusses the data in separate financial statements of Meridiana fly S.p.A.
The performance of the consolidated subsidiaries is detailed below.
Air Italy Holding S.r.l.
Air Italy Holding was founded in 2010 as capacity provider company so as to perfect the transaction for the repurchase of shares
amounting to 40% of the share capital of Air Italy previously held by the Synergo investment fund thereby becoming the parent
company of Air Italy S.p.A. as of 14 September 2010. Subsequently, on 1 July 2011, Air Italy Holding also acquired the remaining
20% of the share capital becoming the sole shareholder of Air Italy S.p.A. On 14 October 2011 Meridiana fly completed the
acquisition of Air Italy Holding S.r.l. and its subsidiary Air Italy S.p.A. thereby creating the new Italian aviation group Meridiana fly -
Air Italy.
On 31 October 2012 the company reported a net loss for the 10 month period of Euro 633 thousand and net equity of Euro 16,017
thousand. Moreover, at 31 October 2012 it had net financial debt of Euro 17,036 thousand.
Therefore, the activities carried out by the company did not materially impacted the consolidated accounts of the Meridiana fly
Group.
Air Italy S.p.A.
Air Italy, an airline established in 2005 with headquarters in Malpensa and registered office in Gallarate (VA), is a leading player in
the charter market for leisure connections from Italy to East Africa and the Caribbean. Air Italy also operates scheduled flights to
some Italian cities in the domestic market.
At 31 October 2012, Air Italy commercial operating fleet consisted of 12 aircraft (4 long-haul Boeing 767 and 8 medium-haul Boeing
737) and employees amounted to 431 FTEs, including a crew of 284.
Carried passengers in the first 10 months of 2012 were approximately 0.7 million and total flight hours amounted to about 30
thousand, including activities conducted on behalf of Meridiana fly.
The company is indirectly owned by Meridiana fly through the ownership of a 100% interest in Air Italy Holding - which in turn owns
100% of Air Italy - acquired on 14 October 2011.
At 31 October 2012, in 10 months of operation, the company reported sales of Euro 189.7 million, with an EBIT loss of Euro 43.3
million and a net loss of Euro 46.6 million. Shareholders' Equity in the financial statements prepared in accordance with IAS/IFRS
was negative for Euro 34.7 million. It should be noted that also the financial statements prepared in accordance with Italian GAAP
show a similar equity deficit at 31 October 2012 and therefore the company falls within the cases provided for by article 2447 of the
Italian Civil Code.
In this regard, the Board of Directors of the Subsidiary authorized the Chief Executive Officer and the President to promptly convene
an Extraordinary General Meeting to pass resolution on the company's recapitalization; in this respect the parent Meridiana fly has
already indicated to the subsidiary's Board of Directors that it is willing, either by waiving trade and financial receivables due from Air
Italy, or through payments for future capital increase, to provide the funding necessary to complete the recapitalization and ensure
the subsidiary's ability to continue operating as a going concern. Following Meridiana/AKFED formal commitments, on the basis of
which the Business Plan has been approved, Meridiana fly has the resources to formalize this commitment, since this commitment is
not only consistent with those made by AKFED and Meridiana for the recapitalization of the Parent Company and to ensure it
continues operating as a going concern, for which see discussion in paragraph 2.24.14 of the Management Report, but also with the
results expected in Budget 2013 of Meridiana fly and Air Italy. This commitment by the Parent Company is also in line with the
commitments made by Meridiana and AKFED for the recapitalization of the Parent Company and to ensure the latter may continue
operating as a going concern, for which see the discussion in paragraph 2.24.14 of the Management Report.
Meridiana fly - Annual Financial Report at 31 October 2012 - 29
Net financial debt of Air Italy at 31 October 2012 amounted to Euro 41.3 million.
The significant loss recognized for the period also reflected some write-downs and non-recurring charges, such as impairment of the
carrying value of two owned long haul aircraft (Boeing 767-200) for Euro 19.8 million, in addition to a spare engine for the same
aircraft for Euro 1 million, resulting from the decision to dispose of those assets as part of the Group Business Plan approved by the
Board of Directors on 26 February 2013; the capital loss of approximately Euro 2.5 million on the sale of another spare engine and
the write-down of the option for taking over an aircraft finance lease (Euro 9 million), also in this case not included in the Business
Plan assumptions.
AEY Aviation Ltd
The Irish subsidiary, 100% owned by Air Italy, was established in February 2009 solely to acquire aircraft availability. It is well known
that international operators request the intervention of Irish companies for the purpose of applying the Johannesburg Convention on
aviation rights.
Therefore, the company is simply a "capacity provider" that is charged by the original lessors and subsequently recharges the lease
instalments to Air Italy without any mark-up except, where necessary, for the cost of the service related to its relationship with the
lessors. The financial statements as at 31 October 2012 (according to Irish accounting standards) recorded a net profit of Euro 9
thousand and Shareholders' Equity of Euro 12 thousand.
Therefore, the activities carried out by the company did not materially impacted the consolidated accounts of the Meridiana fly
Group.
Sameitaly S.r.l. in liquidation
Sameitaly, a company formed by Meridiana in late September 2007 through the contribution of the "Sales Department" operations,
and a wholly owned subsidiary of Meridiana fly, operated as "General Sales Agent" for Meridiana fly and the Tour operator Wokita,
in the segment of travel agencies, entities and businesses until 31 October 2012.
In the first 10 months of 2012 Sameitaly posted an overall turnover of approximately Euro 3.3 million, with EBIT substantially
breaking even (+Euro 0.1 million) and a net profit of Euro 55 thousand. Shareholders' equity at year end amounted to Euro 501
thousand. The change is due solely to the result for the period. These figures were determined based on Italian accounting
standards.
In the context of Group reorganization following the integration with Air Italy, it was decided to proceed with the rationalization of the
sales and back-office organization for the entire Meridiana fly-Air Italy Group and, as a result, to liquidate the company Sameitaly,
transferring the entire staff to Meridiana fly and making use of the temporary redundancy procedure for most of them, as is already
the case for the parent company.
The company was actually placed in liquidation on 14 November 2012 with the appointment of the liquidator.
Wokita S.r.l.
Wokita, a company established by Meridiana in February 2006 to develop the tour operating business via the Internet within the
Group, was engaged in the creation and marketing of tour packages and in the direct sale of individual services to consumers
through its portal www.wokita.com. In addition to selling over the "Internet", Wokita also has a point of sale directly at the Olbia
airport. Wokita is now wholly owned by Meridiana fly.
In the 10 months of 2012 Wokita reported total sales of approximately Euro 0.5 million and a net loss of Euro 79 thousand, resulting
in shareholders' equity at the end of October amounted of Euro 8 thousand; the change in equity only reflected the loss for the
period.
Meridiana fly - Annual Financial Report at 31 October 2012 - 30
The weak performance achieved derives from strong competition in the outgoing tourism market, adversely affected by the general
stagnation in consumption and the general crisis, with reduced margins for the various operators.
In order to cope with this negative scenario, the Group decided to strategically review the business model of the subsidiary Wokita
refocusing its activity towards the role of incoming tour operator focused on the Sardinia market and targeting customers in Northern
Europe, Scandinavia and the Baltic countries, with a view to developing low season businesses and countering the typical
seasonality of the Sardinia market.
The definition of this strategy, despite having already been outlined in its main aspects, is still ongoing also requiring certain
preliminary actions and more detailed feasibility studies in the commercial area. Therefore the business model review process is still
being defined and implemented, as well as the consequent business plan. In the light of this situation, the remaining goodwill relating
to the investment in Wokita of Euro 1.3 million, was fully written down in the Group consolidated financial statements and also the
carrying value of the investment held by the parent company was aligned - in the separate financial statements - to the value of
Wokita shareholders' equity.
2.10. Corporate Offices
The registered and administrative office of Meridiana fly S.p.A. is located in Olbia, near the Costa Smeralda Airport Headquarters,
also headquarters of the parent company Meridiana S.p.A.
Meridiana fly has a branch in New York (USA) at JFK airport; in addition, it has a representative office in Rome, Piazza Capranica, a
local operational branch in Malpensa (VA) at Terminal T1.
Sameitaly (in liquidation), has its registered office in Olbia, at the Costa Smeralda Airport Headquarters, as well as the other
subsidiary Wokita.
Air Italy carries out its activities mainly at its registered and administrative office in Gallarate (VA).
2.11. Research and development activities
Given the nature of its business, the Company and the Group did not carry out any significant research and development activities
during FY2012.
2.12. Capital expenditure
During fiscal year 2012 new purchases of tangible assets were carried out for a total amount of Euro 9,130 thousand (of which Euro
6,561 thousand in Meridiana fly), compared to euro 7,484 thousand in 2011 - 12 month period (of which Euro 4,243 thousand in
Meridiana fly); they consisted of:
� improvements and works on leased aircraft in the amount of Euro 229 thousand;
� improvements and works on owned aircraft in the amount of Euro 6,908 thousand;
� rotable material relating to the owned fleet amounting to euro 1,018 thousand;
� equipment and other assets for Euro 204 thousand
� assets under construction for Euro 771 thousand for improvements and works on aircraft.
Expenditure in intangible assets amounted to Euro 324 thousand (Euro 158 thousand in the parent Meridiana fly) and consisted
mainly in the acquisition of licenses for software application.
Meridiana fly - Annual Financial Report at 31 October 2012 - 31
2.13. Significant events in FY2012
The most significant events occurred during the financial year ended 31 October 2012 are highlighted below.
2.13.1. Shareholders' meeting of 15 February 2012
The Shareholders' Meeting was held on an ordinary and extraordinary basis on 15 February 2012 to decide on the following
matters:
Extraordinary part
(i) to increase from eleven to thirteen the maximum number of members of the Board of Directors;
(ii) to amend Article 17 of the by-laws, in order to provide that, in case of a tie, resolutions of the Board of Directors may be
taken with the prevailing vote of the Chairman of the Board of Directors and that certain resolutions of the Board of
Directors can be made with the affirmative vote of at least 9 members in office, provided that the Board is composed of
at least 10 members.
ordinary part
(iii) appointment of the new Board of Directors, determining the number of members, term of office and compensation
pursuant to art. 2389 of the Italian Civil Code, authorization pursuant to Article 2390, first paragraph, of the Italian Civil
Code and appointment of the Chairman of the Board of Directors.
The Shareholders' Meeting of 15 February 2012 has therefore determined to appoint the new Board of Directors, effective from 27
February 2012, consisting of 12 members.
Finally, as regards the amendments to Article 17 of the Bylaws (as per item (ii) above), it was set forth that in relation to specific
matters (including, with regard to financial reporting, approval of the draft financial statements, the approval or amendment to the
business plan or the annual budget of the Company or the Group, change of accounting methods and principles and approval of the
financial statements of subsidiaries, etc.), if the Board of Directors is composed of at least 10 members, the resolutions of the Board
of Directors shall be passed with the favourable vote of at least 9 directors in office.
It should be noted that the Board of Directors confirmed Franco Trivi as Vice-President and Captain Giuseppe Gentile as Chief
Executive Officer of Meridiana fly. The Board of Directors also appointed director Alessandro Notari, as executive director, with
responsibility for commercial activities.
In compliance with the Corporate Governance Code for Listed Companies, the Board of Directors has verified the requirements of
independence of directors Salvatore Vicari, Vincenzo De Bustis Figarola and Giuseppe Lomonaco. They were also appointed
members of the Audit and Risk Committee and the Remuneration and Appointments Committee (both composed by independent
directors Salvatore Vicari, President, Vincenzo De Bustis Figarola and Giuseppe Lomonaco) and the Committee for Related Party
Transactions (Giuseppe Lomonaco, President, Vincenzo De Bustis Figarola and Salvatore Vicari).
See also the analysis of events after year the end and in particular those described in paragraph 2.24.10, Agreement with Former
Air Italy Holding shareholders and new CEO.
2.13.2. Termination of business relationship with O.R.P.
Due to contractual breaches by Opera Romana Pellegrinaggi - O.R.P., including the non-payment of receivables by way of invoices
for services rendered by Meridiana fly S.p.A., as well as failure to comply with the obligation to pay a minimum annual guaranteed
amount of 80% of the contractually agreed annual turnover, Meridiana fly on 2 April 2012 notified O.R.P. the termination of the multi-
year cooperation agreement concerning transportation services for pilgrimages to places of religious and cultural interest.
Meridiana fly - Annual Financial Report at 31 October 2012 - 32
In accordance with contractual clauses, in the absence of amicable settlement, Meridiana fly brought forward an arbitration
procedure in April 2012, also appointing its representing arbitrator, in order to recover the amount due, as also discussed in Section
2.15 - Significant litigation
2.13.3. Termination of LHT maintenance contracts
Due to litigation incurred with Lufthansa Technik (LHT) for maintenance services on Airbus aircraft (various checks, components,
trolleys and APUs), in March 2012 the relevant contracts were terminated. Meridiana fly signed an interim agreement with Iberia in
order to ensure the availability of maintenance services such that activities may continue in accordance with applicable rules and
regulations and in view of developing final agreements for fleet maintenance with Iberia or other providers.
2.13.4. Capital increase with rights issues and reconstitution of free float
Following Consob authorization, the offer for the subscription of new shares was launched on the market through a rights issue; the
rights were to be exercised in the period between 19 March 2012 and 5 April 2012 inclusive.
The final terms of the offer were determined by the Board of Directors held on 15 March 2012 as follows:
- Subscription price of each new issued ordinary share: Euro 1.275 per share, including share premium of Euro 1.025 per share;
- Subscription ratio: no. 20 new shares for every 1 share owned;
- maximum number of shares offered: 111,526,920
- total value of the offer: Euro 142,196,823.
By letter of 16 March 2012 Meridiana S.p.A., Marchin Investments B.V., Pathfinder S.r.l. And Zain Holding S.r.l. (These last three
companies referred to collectively as "Former Air Italy Holding Shareholders") announced to Meridiana fly that - in implementation of
the provisions of the agreements for the business combination of 18 July 2011 - they had signed an over-the-counter agreement for
the purchase of subscription rights in relation to the increase in capital in question, following which Meridiana, effective from the date
of commencement of the subscription period (i.e. 19 March 2012), sold its rights as follows:
(i) No. 1,495,423 subscription rights for a price of Euro 655,070.25 to Marchin Investments B.V.,
(ii) No. 320,448 subscription rights for a price of Euro 140,364.00 to Pathfinder S.r.l.
(iii) No. 320,448 subscription rights for a price of euro 140,364.00 to Zain Holding S.r.l.
In accordance with the agreements for the business combination, the prices listed above are paid by assignment of the
corresponding portion of the "reserve for future capital increase" set up in favour of the Former Air Italy Holding Shareholders, and
originally set up for conversion of the receivable accrued by them by virtue of the business combination agreements.
Meridiana and Former Air Italy Holding Shareholders subscribed to the capital increase, by using the remaining net reserves for
future capital increase already "earmarked" for each shareholder.
At the end of the offer period (19 March 2012-5 April 2012) therefore, a total of 92,952,780 new ordinary shares were subscribed,
amounting to 83.35% of the offer, for a total consideration of Euro 118.5 million, of which No. 5,904,140 shares for a total of Euro 7.5
million (about 24% of the rights available to the market), refer to entities other than Meridiana and former Air Italy Holding
shareholders, as per the following table.
Meridiana fly - Annual Financial Report at 31 October 2012 - 33
Shareholders No. shares Value (€)
% subscribed
out of total offer
Meridiana S.p.A. 44,322,260 56,510,881.50 39.74%
Marchin Investments B.V. 29,908,460 38,133,286.50 26.82%
Pathfinder S.r.l. 6,408,960 8,171,424.00 5.75%
Zain Holding S.r.l. 6,408,960 8,171,424.00 5.75%
Market 5,904,140 7,527,778.50 5.29%
Total 92,952,780 118,514,795
Total Offer 111,526,920 142,196,823
The shareholder Meridiana S.p.A., as part of its commitment to subscribe the portion of the Capital Increase left unsubscribed by
third parties as of 30 June 2012, if any, up to a maximum total amount of Euro 10 million (referred to as "Underwriting Commitment"),
on 30 June 2012 subscribed 7,843,137 newly issued ordinary shares for a total amount of Euro 9,999,999.68, combined with an
equivalent number of Warrants.
For the payment of the shares, Meridiana used a portion of the shareholders' loan granted by Meridiana to Meridiana fly on 23 March
2012, which therefore is considered as waived for the above specified amount of Euro 9,999,999.68.
Furthermore, in the period 29 April to 30 June 2012 (the first exercise period of the Warrants) 3480 warrants were exercised for the
subscription of additional 1,740 ordinary shares for a total amount of Euro 2,218.50.
Based on the mentioned transactions until 30 June 2012, the new share capital of Meridiana fly, after filing with the Sassari Register
of Companies on 27 July 2012, is therefore equal to Euro 46,100,833.59, represented by 106,374,003 ordinary shares with no par
value , broken down as at 30 June 2012 as per the following table.
Shareholders No. shares %
Meridiana S.p.A. 56,517,829 53.13%
Marchin Investments B.V. 29,908,460 28.12%
Pathfinder S.r.l. 6,408,960 6.03%
Zain Holding S.r.l. 6,408,960 6.03%
Market 7,128,054 6.70%
Total 106,372,263 100.00%
In light of the statement made by Meridiana fly on 20 April 2012 in relation to the partial results of the first of the capital increases
and the possibility that the newly issued shares for which the rights were unexercised, may be offered for subscription to third parties
until 30 June 2012, deadline for subscription of the first of the Capital Increases, on 30 April 2012 Meridiana and Former Air Italy
Holding Shareholders, agreed to postpone the exercise of the Warrants - by way of exception therefore to what was originally
envisaged in the Framework Agreement - to a time after 30 June 2012, and in any case within the deadline of 31 May 2013 provided
for by Regulation " Warrants Ordinary Shares Meridiana fly 2012 - 2013 ". Except for the above specification, all other provisions of
the Framework Agreement were unchanged.
As following the completion of the capital increase through rights issue Meridiana and the three new shareholders held a total of
99,244,209 shares, representing 93.3% of the share capital of the Company, on 31 July 2012 Meridiana and the three new
shareholders, pursuant to art. 50 of the Issuers' Regulation - disclosed to the market their intention to reconstitute, within the time
limit set forth by article 108, paragraph 2 of the CFA, a float sufficient to ensure smooth trading and signed an agreement amending
the Shareholders' Agreement, by which they agreed that a total of. 5,150,000 ordinary shares of Meridiana fly are not subject to the
provisions of the Shareholders' Agreement and that, therefore, such shares may be freely transferred to third parties.
Meridiana fly - Annual Financial Report at 31 October 2012 - 34
As a result of the above, Meridiana S.p.A. and Marchin Investments B.V. announced that, on 18 September 2012, they entered into
an agreement with two foreign investors for the over-the-counter sale of, respectively, 2,050,000 ordinary shares Meridiana fly
(representing 1.93% of its share capital) and 1,550,000 ordinary shares Meridiana fly (representing 1.46% of its share capital) at a
price of Euro 0.63 per share.
As a result of the transfers mentioned above, the float was reconstituted, standing at 10.09% of the share capital, the composition of
which, as at 31 October 2012 was as follows:
Shareholders No. of shares %
Meridiana S.p.A. 54,467,829 51.20%
Marchin investment B.V. 28,358,460 26.66%
Pathfinder S.r.l. 6,408,960 6.02%
Zain Holding S.r.l 6,408,960 6.02%
Market 10,729,794 10.09%
Total 106,374,003 100.00%
See also the analysis of events after year the end and in particular those described in paragraph 2.24.10, Agreement with Former Air Italy
Holding shareholders and new CEO.
2.13.5. Call for tenders for territorial continuity - Sardinia
With reference to the call for tenders for the new territorial continuity - Sardinia, due to expire on 11 April 2012, which provided,
among others, the establishment of a single reduced tariff for residents and non-residents for flights operated by Meridiana fly to and
from Milan Linate / Rome Fiumicino throughout the year, Meridiana fly decided not to participate in the new tender for Territorial
Continuity organized by the Sardinia Region, as the tender did not provide for a sufficient compensation in terms of contributions
and/or operational flexibility which would allow the aircraft operator to make up for the resulting losses.
In view of the fact that no carrier presented bids, given the request of the Sardinia Region to delay the introduction of new charges
and to possibly reschedule them, by Decree of the Ministry of Infrastructure and Transport the territorial continuity regime was
extended for these routes until 27 October 2012.
2.13.6. Closing of the subsidiary Sameitaly
In the context of the reorganization of Meridiana fly Group, and the consequent rationalization of the commercial structure, the Group
decided to close the subsidiary Sameitaly, according to the terms and conditions specified in the agreement signed with the unions
on 11 April 2012.
In particular, the agreement provides for a range of essential conditions such as:
• transfer of the entire Sameitaly staff to Meridiana fly (as per commitment in the agreements of 12 September 2007)
under the same employment conditions, and recognition of seniority and transfer of accruals and severance pay (TFR);
• with regard to the transferred staff, application for the fixed part of the salary of the employment contract for the ground
staff of Meridiana fly (agreement dated 18 November 2011);
• maintaining some employees in a limited number of organizational activities and roles within the reorganized Meridiana
fly commercial structure, while simultaneously using the zero hour redundancy procedure (CIGS) for most of the staff,
taking advantage of redundancy measures already in place for Meridiana fly, subject to the signing of the agreement before
the relevant Ministry.
By a note dated 18 September 2012, the Ministry of Labour and Social Policy notified Meridiana fly that it did not consider necessary
the signing of another agreement in addition to that signed on 23 June 2011 for the redundancy procedure (CIGS) in Meridiana fly;
therefore, part of the employees transferred pursuant to the agreement of 12 September 2007, in the case of transfer of their
employment, may be included within the scope of the Meridiana fly redundancy procedure,
Meridiana fly - Annual Financial Report at 31 October 2012 - 35
By virtue of the above, on 5 November 2012 the extraordinary Shareholders' Meeting of the subsidiary passed resolution for the
company dissolution and subsequent liquidation, appointing a liquidator in order to carry out all acts and obligations related to the
closure of the company.
2.13.7. Debt renegotiation with banks
Meridiana fly Group asked banks to restructure credit facilities and the related terms and conditions granted by the banks to the
Company and the subsidiaries Air Italy Holding and Air Italy, including a review of financial covenants in order to support the Group's
implementation of the Business Plan.
On 31 July 2012 a specific agreement was reached between the lending banks, Meridiana fly S.p.A. and Air Italy Holding S.r.l.,
which in summary, provides for:
• an extension until 28 February 2013 of the waiver already granted by the banks in relation to the financial covenants
originally set forth in the financing contracts (in particular with regard to the non-compliance on 31 December 2011 with the
"Net financial debt / EBITDAR" covenant of 1.35), confirming all cash and guarantee credit lines granted by the syndicate of
banks until the same date of 28 February 2013;
• additional disclosure requirements and statements concerning the financial and business performance of the Meridiana fly -
Air Italy Group during the extended period;
• early termination or withdrawal events, including the withdrawal of credit lines granted by other banks;
• introduction of new covenants replacing existing ones, during the extension period, measured as from 30 September 2012,
as per the following table:
Parameter 30 Sept. 2012
(third
quarter)
31 October
2012
(annual
financial
statements)
31 January
2013
(first quarter)
EBITDAR at least equal to Euro: 35 million 34 million 32 million
Net Financial Debt / EBITDAR for the
period not exceeding:
2.1 x 2.2 x 2.9 x
Cash & Equivalents not less than Euro: 5 million 4 million 2 million
It should be noted that on the basis of contractual provisions:
(a) EBITDAR at 30 September 2012 is calculated as the sum of monthly EBITDAR from January 2012 (inclusive) to September
2012 (inclusive) and therefore calculated over a 9 month period;
(b) EBITDAR at 31 October 2012 is calculated as the sum of monthly EBITDAR from January 2012 (inclusive) to October 2012
(inclusive) and therefore calculated over a 10 month period;
(c) EBITDAR at 31 January 2012 is calculated as the sum of monthly EBITDAR from January 2012 (inclusive) to January 2013
(inclusive) and therefore calculated over a 12 month period;
This agreement includes the parties' commitment to evaluate, for the purposes of debt restructuring, including on the basis of trends
and developments, the use of the ordinary procedures provided for by law in such cases.
Meridiana fly - Annual Financial Report at 31 October 2012 - 36
It should be noted that as a result of the consolidated income statement and financial results at 30 September 2012, the financial
parameters EBITDAR and Net Financial Debt / EBITDAR were not met. It should also be noted that the results as at 31 October
2012 at the consolidated level do not allow the company to meet these covenants. Please refer to paragraph 2.24.4 for a discussion
of the current situation regarding relationships with the lending banks and the liquidity risk associated with this situation, also
illustrated in the specific paragraph 2.23
2.13.8. 2012 Budget and updated Integrated Business Plan
The Board of Directors of Meridiana fly, in consideration of the worsened performance of the variables related to the general
economic crisis which accentuated in the fall of 2011 and the most recent forecasts of macroeconomic variables, as well as the
restructuring actions already under way for the Group reorganization, at the meeting of 20 April 2012, reviewed and approved a new
2012 Budget until 31 October 2012 (date of early closing of the financial year), and an update of the Integrated Business Plan of 18
July 2011; at the same meeting, for the purposes of evaluating the going concern assumption, a projection of monthly results and
cash flow needs was approved with a time horizon of 12 months to March 2013, taking as baseline actual monthly data of March
2012 resulting from the management control system.
2.13.9. Meridiana/AKFED commitments in support of the going concern assumption for FY
2012
During 2011, based on the commitments made by Meridiana with the support of AKFED S.A., a financial institution controlled by the
Meridiana S.p.A. major shareholder (HH the Prince Karim Aga Khan), in particular with reference to the recent commitments of 18
July 2011 as subsequently amended and supplemented, Meridiana made payments for future capital increases for Euro 81.4 million,
including Euro 8.5 million from the conversion of an interest-free loan granted in 2010.
Meridiana also granted additional shareholders' loans as from 18 July 2011 for Euro 55.5 million as provided for in the mentioned
commitments of 18 July 2011 to support the financial needs of Meridiana fly. On the basis of forecasts about the financial
performance and results for the 12 month period, for the purposes of evaluating the going concern assumption, reviewed by the
Board of Directors on 20 April 2012, taking into account the outcome of the Capital Increase and negotiation with the banks, the
shareholder Meridiana, with the support of its parent AKFED, formally notified the Company on 23 April 2012 of an additional
discretionary commitment to provide financial resources to ensure Meridiana fly continued operation as a going concern for a period
of at least 12 months and up to Euro 9,000,000 in the form of interest-bearing shareholders' loans, which, according to the provisions
of the Framework Agreement of 18 July 2011, shall not be used to subscribe additional Meridiana fly capital increases for at least 36
months in order to avoid dilution effects of the controlling shareholders.
Therefore, on the basis of the above mentioned commitments, as at 23 April 2012 Meridiana fly could benefit from additional funding
from Meridiana for a total of Euro 9 million which, as for the previous funding, were counter-guaranteed by similar commitments by
AKFED.
It should be recalled that, again in order to support the financial needs related to the going concern operation of the company, the
guarantee commitments made by Meridiana S.p.A. are still in place (backed by AKFED) on outstanding loan agreements (Euro
22.55 million for Meridiana Fly syndicated loan, for Euro 9 million with the bank that finances Air Italy Holding), in addition to the
commitment to provide additional funding to Meridiana fly up to a maximum of further Euro 7.5 million if and insofar Meridiana fly
does not reach agreements to obtain new bank financing up to the said amount.
The shareholder Meridiana, with the support of its parent AKFED, given the financial needs of Meridiana fly, at the end of October
2012 signed a new interest bearing loan agreement with Meridiana fly up to a maximum of Euro 14 million with a 36 month maturity.
The loan transactions, which from the point of view of the shareholder Meridiana are of a discretionary nature, are part of those
provided for in art. 4.8 of the "Framework Agreement " of 18 July 2011 and as such were already described in the Information
Document relating to significant related party transactions published on 29 October 2011.
Meridiana fly - Annual Financial Report at 31 October 2012 - 37
The list of loan disbursements made by the shareholder Meridiana is provided below for additional information; these payments were
made during the year 2012 to support the Company in continuing operating as a going concern and amounted to a total of Euro 57.5
million as follows:
� Euro 14 million in January 2012;
� Euro 18 million in February 2012;
� Euro 12.5 million between March and April 2012, of which Euro 10 million converted to Equity (See Section 2.13.4)
� Euro 3 million in May 2012;
� Euro 3 million in June 2012;
� Euro 2.3 million in August 2012;
� Euro 0.7 million in September 2012;
� Euro 14 million in October 2012;
2.13.10. Shareholders' meeting of 28 June 2012
The Shareholders' Meeting of Meridiana fly took place on 28 June 2012 to discuss and pass resolution on (i) the approval of the
Financial Statements for the year ended 31 December 2011, (ii) the renewal of the members of the Board of Statutory Auditors and (
iii) the approval of the first section of the Remuneration Report prepared pursuant to art. 123-ter of Legislative Decree no. N. 58/1998
(CFA).
The Shareholders' Meeting resolved as follows.
Approval of the Annual Financial Report for the year ended 31 December 2011
The ordinary Shareholders' Meeting approved the Annual Financial Report as at 31 December 2011. Meridiana fly closed the
financial year with consolidated revenues of Euro 616.6 million (Euro 604.8 million in the 2010 consolidated financial statements)
and a consolidated net loss of Euro 110.7 million. In the separate financial statements, the net loss for the year amounted to Euro
104,831,303 with shareholders' equity of Euro 69,390,253.
The Meeting resolved to carry forward the loss for the period.
Appointment of the Board of Statutory Auditors
The Shareholders' Meeting resolved to appoint Luigi Guerra (Chairman), Antonio Mele and Giovanni Rebecchini as standing
members of the Board of Statutory Auditors and to appoint Luciano Rai and Luigi Moranduzzo as alternate Statutory Auditors. The
Shareholders' Meeting also determined the annual remuneration for the Chairman and the other members of the Board of Statutory
Auditors for the period of office, which pursuant to the By-laws is three years, until the approval of the financial statements for year
ending 31 October 2014.
Approval of the Remuneration Report
The Shareholders' Meeting, having examined the Remuneration Report prepared by the Directors pursuant to art. 123-ter CFA,
approved the first section of the Remuneration Report which describes the Company's remuneration policy for the members of the
administrative bodies and managers with strategic responsibilities as well as the procedures used for the adoption and
implementation of the said policy.
Meridiana fly - Annual Financial Report at 31 October 2012 - 38
2.13.11. General Tax Audit for the years 2006-2011
On 19 May 2011 the Guardia di Finanza - Italian Financial Police - Sassari Tax squad - initiated a tax audit on Meridiana fly relating
to direct taxes, VAT and other taxes for the tax period from 1 January 2009 to 19 May 2011, which was subsequently extended to
the periods 2006 to 2008.
The audit was completed on 22 June 2012 with the notification of a report on findings (PVC), which, while it did not find any
irregularities committed by the Company for VAT purposes or in respect of bookkeeping, found irregularities with regard to significant
transactions for income tax purposes (IRES), and in some cases for IRAP purposes too, to a large extent arising from the fact that
the Company - in the opinion of the tax auditors - was not able to justify through appropriate documentation the deductibility of losses
on receivables, the reversals of realized exchange differences in the adjustment account as well as adjustments to revenues for
penalties with respect to TO customers.
It should be noted that while the tax assessments made for IRAP purposes result in increased amounts owed by the Company by
way of taxes, penalties and interest, the tax assessments made for IRES purposes, in view of the significant losses incurred by the
Company in the audited years, do not result into a higher tax liability, resulting only in an adjustment to tax losses carried forward in
subsequent years (reducing them to a total of Euro 195.9 million), without the application of penalties.
In particular, the overall proposed tax assessment for IRAP purposes due for the years 2007 to 2010 amount to Euro 79 thousand,
plus penalties and interest, while the tax assessment for IRES purposes represent a reduction in the total amount of tax losses
carried forward for Euro 11.4 million.
In light of the above and the amounts in question, considering that it is not in the interest of the Company to establish an uncertain
and costly litigation, the Company decided to accept the above Report on Findings (PVC), benefiting from reduced penalties
pursuant to art. 5-bis of Legislative Decree no. 218/1997, by submitting the relevant application for tax settlement on 13 July 2012
and payment in 4 instalments.
The total expense for Meridiana fly is therefore quantified in Euro 93 thousand (of which Euro 13 thousand by way of reduced
penalties), plus interest.
It should be noted that in relation to the loss adjustment for Euro 1.2 million for the year 2010 (the first year in which Meridiana fly
was included in Meridiana tax consolidation), the Sardinia Revenue Agency considered that the loss adjustment could not be offset
with the accumulated losses in the consolidation due to lack of a formal notification form (IPEC form) by Meridiana and therefore in
September 2012 requested the payment of additional taxes for Euro 328 thousand plus penalties and interest amounting to Euro 69
thousand to Meridiana and Meridiana fly as joint and several co-debtors. This tax assessment has been challenged by Meridiana
and Meridiana fly before the Provincial Tax Commission of Cagliari, arguing that, regardless of the formal notification of the IPEC
Form, the additional IRES (in this case, the lower loss), should be considered absorbed by the unused losses in Meridiana tax
consolidation. Conservatively and in order to avoid incurring considerable additional charges for costs and penalties resulting from
formal tax collection filing, Meridiana asked to pay the sums requested in 12 6-month instalments, starting from October 2012,
pending the decision of the said Tax Commission Moreover, again as a precautionary measure, on 17 October 2012 Meridiana
submitted the IPEC Form. No additional liabilities for the subsidiary Meridiana fly are expected from this dispute.
2.13.12. Cessation of Wind Jet activity
On 11 August 2012, the airline Wind Jet was forced to suspend all flights, causing inconveniences to a considerable number of
passengers.
Meridiana fly and Air Italy, in coordination with the Civil Aviation Authority, initiated a program of additional flights which, as at 16
August 2012, had already achieved significant results in terms of traffic.
Particularly in the four days between Sunday 12 and Wednesday 15 August, 64 flights were operated transporting 7,800 passengers
and handling 55,000 calls through the call center. From Catania, Meridiana fly-Air Italy added new daily flights to Bologna (4 flights)
and Rome Fiumicino (4 flights) and increased its existing flights to Turin (+2 flights), Milan Linate (+4 flights) and Verona (+2 flights).
Meridiana fly - Annual Financial Report at 31 October 2012 - 39
All seats on the additional flights were offered for sale on Group websites at a final price, including airport taxes, between 82 and 86
Euro.
After 2nd September, the flights scheduled by Meridiana fly-Air Italy for Catania continued in a systematic way, and in particular on
the Rome-Catania, Turin-Catania, Verona-Catania, Milan Linate-Catania, Bologna-Catania and Naples-Catania routes, for a total of
34 daily flights.
2.13.13. Agreement for the surrender of A330 Airbus
On 10 August 2012 a global agreement was reached with the lessor ILFC, which, in addition to acknowledging the claim for
maintenance costs incurred and phase-out costs in relation to an aircraft (I-EEZJ), as well as the repayment of the residual net
payables to the lessor, envisaged the early surrender of the other Airbus A330 (I-EEZM) on 25 March 2013, i.e. about one year
ahead of schedule, in line with the integrated business plan which already provided for a gradual reduction of the fleet and
concentration of remaining aircraft with a view to increase productivity and overall operating efficiency. Alongside this agreement, a
one-off sum was agreed for the early surrender ("Early termination fee") quantified in approximately US$ 1,950,000 at the time of
actual delivery at the end of March 2013.
It should be noted that, following a further agreement with the lessor ILFC (see Section 2.24.8), the delivery of the A330 (I-EEZM)
occurred at an even earlier date, i.e. on 11 January 2013.
2.14. Management and coordination activities and transactions with related parties
Meridiana fly S.p.A is subject to management and coordination by Meridiana S.p.A.
As a result of the capital increases (see Section 2.13.4) as at 31 October 2012 Meridiana fly share capital amounts to Euro
46,100,833.59, represented by 106,374,003 ordinary shares, with no par value.
Until 15 January 2013, Meridiana fly was subject to joint control of Meridiana (51.20%) and the three new shareholders (Marchin
Investments, Pathfinder and Zain Holding, with a total of 38.71%).
Following the agreements between the shareholders on 15 January 2013 (see Section 2.24.10), which led to the transfer of shares
held by the three mentioned shareholders to Meridiana, the Company and the Meridiana fly Group is subject to the exclusive control
of Meridiana 89,91%, while the free float is 10.09%.
In addition to Meridiana, there were no other shareholders holding ordinary shares in excess of 2%.
Pursuant to Article 2497-bis and sexies of the Italian Civil Code, the main figures of Meridiana S.p.A. last available financial
statements (as at 31 December 2011), both separate and consolidated, are shown below.
Meridiana fly - Annual Financial Report at 31 October 2012 - 40
Amounts in Euro/000
Consolidated financial
statements for FY 2011
Total revenue 96,420
Costs for purchases and services (48,547)
Staff costs (33,128)
Amortisation, depreciation and write-downs (2,802)
Provisions for liabilities and other provisions (3,840)
EBIT 8,103
Net financial income (expenses) and other adjustments (2,775)
Profit (loss) before tax 5,328
Taxes (4,543)
Net result from Continuing Operations 785
Net result from Discontinued Operations (105,052)
Net profit (loss) for the year (104,267)
Fair value measurement of financial assets available for
sale (6)
Total comprehensive income (104,273)
Amounts in Euro/000
Separate financial
statements for FY 2011
Dividends from investments 627
Write-down of investments (108,276)
Net interest expense (4,182)
Changes in fair value 893
Other financial income/(expense) 642
Staff costs (809)
Other income (expense) (1,755)
Profit (loss) before tax (112,860)
Taxes 812
Net Profit (loss) from continuing operations (112,048)
Net Profit (loss) from discontinued operations -
Net Profit (loss) for the year (112,048)
Fair Value Measurement of investments (401)
Total comprehensive income (112,449)
Amounts in Euro/000
Consolidated financial
statements for fy 2011
Separate financial
statements for fy
2011
Non-current assets 54,459 116,476
Current assets 68,358 5,681
Assets held for joint control 360,130 -
Total assets 482,947 122,157
Shareholders' Equity 3,352 51,958
Non-current liabilities 40,031 28,392
Current liabilities 89,697 41,807
Assets held for joint control 349,867
Total equity and liabilities 482,947 122,157
Net financial position (160,969) (63,589)
No. FTE 2,326.6 4.7
Meridiana fly - Annual Financial Report at 31 October 2012 - 41
With regard to transactions carried out by Meridiana fly and Meridiana fly Group with related parties, they mainly refer to the
provision of services and financial transactions with the parent company Meridiana and AKFED, as well as with companies
controlled by Meridiana S.p.A. (Meridiana Maintenance, Geasar, Alisarda) and other related parties of the Group.
The above transactions, which were carried out at market values, fall within the ordinary operations of the Company and were
performed in the interest of the Company and the Meridiana fly Group.
It should be noted that in 2010 Meridiana fly, together with its subsidiaries Sameitaly and Wokita, exercised the option to be included
in the National Tax Consolidation Regime (referred to in Articles 117-129 of the Income Tax Code) applied by Meridiana S.p.A
(consolidating entity) for the period 2010-2012; however, given the change in the fiscal year and the early end date as at 31 October
2012 (shortened 10 month financial year from 1 January 2012 to 31 October 2012), as approved by the extraordinary general
meeting on 5 December 2011, Meridiana fly exited the fiscal consolidation as from the current year.
For more information on related party transactions, please refer to section 4.13 and 9.12 included in the notes to the consolidated
and separate financial statements.
2.15. Significant litigation
The Meridiana fly Group is involved in a number of commercial litigation brought by and against it, and in legal actions against which,
as better explained in the Explanatory Notes, the provisions for doubtful debt, for liabilities and charges and payables recognized in
the financial statements are considered adequate, despite the inherent uncertainty of estimation procedures.
In particular, the provision for doubtful receivables was estimated taking into account specific provisions on the basis of the
information referred to above, as well as general allocations to cover the risk of default of the portfolio of both current and past due
receivables for which there was no ongoing litigation .
a) Disputes relating to debt collection
The most significant disputes in the Account Receivables area in which the Company is the plaintiff are described below, with an
indication of the original receivable and the status of the dispute; for each of these positions, as described below, an appropriate
provision for doubtful accounts was allocated.
Ministry of Defence
Litigation initiated by Meridiana fly to recover the claim against the Ministry of Defence for approximately Euro 4.2 million, resulting
from an agreement signed in July 2004 and concluded in June 2006. For a portion of the above amount (approximately Euro 1.1
million), on 5 October 2007 Meridiana fly obtained the issue of an injunction against the Ministry from the Court of Rome, which was
opposed by the Ministry. For the remainder of the receivable claimed by the Company from the Ministry of Defence (approximately
Euro 3.1 million), Unicredit Factoring S.p.A to which the Company transferred the receivable with a factoring contract of 11 July 2005
– obtained the issue, by the Court of Rome, of an injunction later opposed by the Ministry of Defence.
The Meridiana fly Group reassessed the value of Meridiana fly receivable in line with the expected partial recovery that emerged
from communications from the legal advisors representing it in litigation, by allocating a specific provision for doubtful debt.
This position is shown in the item "Trade receivables and other current assets" of these financial statements.
I Viaggi del Ventaglio S.p.A.
Following the Bankruptcy Declaration of I Viaggi del Ventaglio S.p.A. on 16 July 2010 and the consequent filing of the Statement of
Liabilities, Meridiana fly was admitted as an unsecured creditor for an amount of Euro 1,333 thousand.
On 17 October 2012 Meridiana fly has been appointed member of the creditors' committee.
Meridiana fly - Annual Financial Report at 31 October 2012 - 42
Given the unlikelihood of recovering this receivable, this position was fully covered by the provision for doubtful receivables allocated
in previous years. The Company is waiting for the distribution plan.
Valtur S.p.A. in Extraordinary Administration
Following the insolvency declaration by the Court of Milan on 20 October 2011, Meridiana fly filed proof of debt in bankruptcy as
unsecured creditor for Euro 784 thousand, obtaining admission on 22 May 2012.
Given the unlikelihood of recovering the receivable, a specific amount was allocated to the provision for doubtful receivables. The
Company is waiting for the distribution plan.
Essevi S.r.l. (formerly Teorema Tour S.p.A.)
With reference to the arbitration proceedings brought by the Company against Teorema Tour S.p.A to recover a receivable of
approximately Euro 3 million and USD 3 million in relation to flights, as well as a claim for penalties on flights cancellations, totalling
Euro 14.7 million (which was not recognized in the financial statements), the arbitration board on 25 November 2009 issued an
award in favour of the Company, ordering Essevi S.r.l. (formerly Teorema Tour SpA) to pay a total sum exceeding Euro 11.8 million.
Following the bankruptcy of Teorema S.a.s. (declared on 24 September 2009) and its general partner Essevi S.r.l., all actions
undertaken by the Company to protect its claims were interrupted, including the revocatory action on the sale of real estate by
Essevi S.r.l..
On 23 December 2009 the company submitted proofs of debt in the bankruptcy. At the hearing on 28 April 2010 the claim was
admitted for Euro 11,983 thousand. By order of 16 June 2010 the Bankruptcy Judge declared the enforceability of claims. On 26
January 2012 the Receiver prepared the interim report for the second half of 2011, which shows the potential partial recoverability of
the claim, although in the medium to long term, subject to successful completion of the revocatory actions currently in progress.
In essence, Meridiana fly Group reassessed the value of the claim in line with the expected partial recovery thereof as mentioned
above, by allocating a specific provision for doubtful debt.
This position is shown in the item "Trade receivables and other current assets" of these financial statements.
Financial intermediaries for credit card sales in the U.S.
Litigation initiated by the Company for the recovery of a receivable of approximately USD 2.2 million (for sales of air tickets) claimed
against financial intermediaries involved in the management of credit card sales on the U.S. market. In 2007 the Company notified a
writ against these financial intermediaries and a number of individuals involved in the case. Following a specific settlement with one
of the defendant parties (Bank of America), the amount of USD 658 thousand was paid to the Company on 31 January 2011.
Following the arbitration proceedings with one of the other parties (FIB - First Independent Bank), the dispute was closed in March
2012 with an arbitration award that ordered FIB to pay the sum of USD 436 thousand, payment of which was actually performed on
22 March 2012.
MG Viaggi S.r.l. (In liquidation)
Following the arbitration proceedings initiated by the Company in October 2006, by means of award on 26 November 2008 the
arbitration board ordered MG Viaggi S.r.l. to pay Meridiana fly the total sum of Euro 1.1 million, included among trade receivables,
and 75% of legal costs. The award was declared enforceable and enforcement procedures were initiated for recovering the credit.
On 23 June 2009 MG Viaggi S.r.l was placed in voluntary liquidation. On 25 September 2009, the Company filed an application
asking that MG Viaggi S.r.l.be declared bankrupt. At the hearing on 15 June 2010, date set for the declaration of bankruptcy, the
judge acknowledged of the application for admission to the composition procedure by MG Viaggi S.r.l., and postponed the hearing to
26 October 2010, which was further postponed to 24 February 2011. On 1 February 2011, the hearing was held for the approval of
the arrangement with creditors requested by MG Viaggi S.r.l., but due to the lack of formalization of the sale of receivable by MG
Meridiana fly - Annual Financial Report at 31 October 2012 - 43
Viaggi S.r.l. - the said sale to be used as guarantee in the arrangement with creditors- the hearing was postponed to 24 February
2011, during which MG Viaggi S.r.l. provided evidence of the formalization of the sale of receivable.
Following the request made by MG Travel S.r.l. for approval of the arrangement with creditors, at the hearing held on 18 March 2011
the Court, by decree, approved the arrangement with creditors for the company MG Travel S.r.l. in liquidation. The decree also
provided that the Liquidator, after payment of the sums by the debtor, pay court fees, 100% of secured creditors and unsecured
creditors for 17.83% of their claims, within the time limit of four months from the date of the decree. The amount of Euro 340
thousand is currently being paid in instalments by MG Viaggi S.r.l. in liquidation.
Meridiana fly requested the termination of the arrangement with creditors through the same appeal filed on 6 July 2012. By judgment
of 11 December 2012 the judge ordered the termination of the arrangement.
Given the likely declaration of bankruptcy by the Court and the unlikelihood of recovering the receivable, Meridiana fly Group fully
wrote-down the said receivable in these financial statements.
Air Comet Inc.
At the end of the arbitration procedure initiated by the Company, in August 2008, for the recovery of its claim against Air Comet Inc.
for failure to pay the instalments of the sub-lease of an A330 (USD 2,763 thousand and Euro 580 thousand), on 30 September 2009
the International Chamber of Commerce, London Office issued an arbitration award accepting all the requests of the Company and
ordering Air Comet Inc. to pay a total amount of Euro 1,411 thousand. By decision of 25 March 2010 the Court of First Instance of
Madrid ordered the enforceability of the award and authorized enforcement against the assets of Air Comet Inc. On 20 April 2010 Air
Comet Inc. was declared bankrupt; given this decision the Company on 28 May 2010 submitted proofs of debt in the bankruptcy.
From an initial examination of creditors, the Company's claims should consist of € 1,452 thousand (ordinary debt), € 85 thousand
(subordinated debt) and € 56 thousand (contingent ordinary credit).
Given that recovery of the claim is unlikely, the receivable was fully written down in the financial statements, by allocating a specific
provision for doubtful receivables.
Maxitraveland S.p.A
With reference to the dispute with the TO Maxitraveland S.p.A., which was declared bankrupt on 15 October 2008, the Company
filed proofs of debt for about Euro 6.44 million, of which approximately Euro 5.56 million as principal amount. At the verification
hearing on 13 February 2009, the Bankruptcy Judge admitted the Company's claims as unsecured credit for an amount of
approximately Euro 2.97 million. On 27 March 2009 the Company challenged the statement of liabilities and on 21 December 2009
the Company was served a summons for the revocation under bankruptcy of a sum of €426 thousand which the Company had
received from Maxitraveland S.p.A. in the 6 months prior to the declaration of bankruptcy. Against this risk there is a specific
provision for liabilities and charges made in previous years.
At the hearing on 8 April 2010, the judge granted the time limit for the filing of pleadings, adjourning the hearing to 2 December 2010
for the examination of the preliminary statements. At the subsequent hearing on 21 December 2010 the judge admitted witness
evidence and let Meridiana fly submit rebuttal evidence. At the hearing scheduled for 17 November 2011, the judge adjourned the
case to 27 September 2012 and subsequently to 7 February 2013 for the clarification of final pleadings.
Given that recovery of the claim is unlikely, the receivable was fully written down in the financial statements, by allocating a specific
provision for doubtful receivables.
I Viaggi del Ventaglio S.p.A. in liquidation
Following the Bankruptcy of the Tour Operator on 16 July 2010, the Company had filed proof of debt in the bankruptcy pursuant to
art. 93 of the Bankruptcy Law as a result of which Meridiana fly was admitted as unsecured creditor for a total sum of Euro 1,333
thousand. The Company is waiting for the distribution plan.
Meridiana fly - Annual Financial Report at 31 October 2012 - 44
Given that recovery of the claim is unlikely, the receivable was fully written down in the financial statements, by allocating a specific
provision for doubtful receivables.
Società Aertre - Aeroporto di Treviso S.p.A.
Litigation initiated by the Company for compensation for damage suffered by the Company owing to an accident occurred in 2002 at
the airport of Aertre (TV). The Court of Venice, on 25 July 2008, ordered Aertre – Aeroporto di Treviso S.p.A. and the Ministry of
Defence jointly to pay the Company damages of Euro 1,290 thousand. In relation to this ruling, on 3 October 2008 Aertre paid the
Company the amount of Euro 700 thousand and on 15 June 2009 the further amount of Euro 700 thousand for the part due by the
Ministry of Defence. In October 2008 the Ministry of Defence appealed against the decision of the Court of Venice. The Company,
Aertre - Treviso Airport SpA, Assicurazioni Generali and the Civil Aviation Authority filed an appearance before the Court. By ruling
on 17 March 2009, the Judge rejected the application for suspension of the provisional enforceability of the judgment, lodged by the
Ministry of Defence. On 13 April 2011 the hearing for definition of the conclusions was held at the Vicenza Court. In its judgment of
20 July 2011 filed with the registry on 7 March 2012, the Court of Appeal of Venice rejected the grounds for the appeal, fully
confirming the first instance judgement and ordered sharing of the costs of the appeal procedure. The Company is currently waiting
for any further legal action by the counterparty (expiry date for the appeal before the Supreme Court is set at 22 April 2013).
The mentioned amounts were recognized as liabilities in the statement of financial position under "Trade payables and other current
liabilities" as advances received pending the final judgment (total Euro 1.4 million).
Valtur S.p.A. in Extraordinary Administration
Following the declaration of insolvency of Valtur S.p.A. in Extraordinary Administration by the Court of Milan, the Company filed proof
of debt in the bankruptcy for Euro 784 thousand as unsecured debt.
At the hearing on 22 May 2012 the Bankruptcy Judge, at the proposal of the Insolvency Administrator, admitted Meridiana fly in the
bankruptcy procedure as per its request. The Company is waiting for the distribution plan.
Given that recovery of the claim is unlikely, the mentioned receivable was written down in the financial statements, by allocating a
specific provision for doubtful receivables.
Opera Romana Pellegrinaggi – ORP / ACF Consulting
Meridiana fly notified Opera Romana Pellegrinaggi- ORP an application for arbitration which asks to ascertain and declare ORP
breach of the obligations assumed under the Collaboration Agreement signed on 20 October 2010 and the Rental Agreement with
attached General Conditions of Contract, signed on the same date, to resolve those contracts and condemn ORP to pay the sum of
Euro 2,020 thousand for services rendered by Meridiana fly and not yet paid, Euro 4,601 thousand as difference between the
guaranteed minimum and services actually billed, Euro 12,000 thousand as a contractual penalty and Euro 2,000 thousand paid by
way of contribution to the project, in addition to any further damages, interest and costs. A request was also made to waive
Meridiana fly from payment of the instalment of Euro 600 thousand as a contribution to the project for the year 2012.
On 13 July 2012 OPR appointed its arbitrator; the arbitration procedure is currently in progress and the hearing has been set on 28
February 2013.
In the opinion of the legal advisors a positive outcome of the proceedings is likely.
The litigation also includes the request for payment, by ACFC S.r.l., of Euro 3.9 million as fee for alleged mediation activities carried
out in the conclusion of the contract between Meridiana fly and ORP. In this ongoing lawsuit Meridiana fly filed its appearance, also
filing a third-party complaint against ORP. The next hearing is scheduled for 28 June 2013.
The claim, which did not yet result in a legal action, has been opposed by Meridiana fly.
Meridiana fly - Annual Financial Report at 31 October 2012 - 45
In addition, the most significant disputes in trade accounts area, relating to Air Italy as plaintiff, and, in relation to which the
provisions for doubtful accounts are considered appropriate, are described below.
Air Italy/Labirinto Viaggi S.r.l.
Upon application by Air Italy, by means of injunction issued in the form of provisionally enforceable order on 11 July 2011, the Court
of Busto Arsizio, separate section of Gallarate, enjoined Labyrinth Viaggi S.r.l. to immediately pay the amount of Euro 228,000 plus
interest, costs, duties and fees to Air Italy. By decision of 22 July 2011 the President of the Court of Brescia authorized the
immediate enforcement of the said injunction pursuant to art. 482 of the Code of Civil Procedure. The company, therefore, notified
six banks with writ of garnishment for an amount of approximately Euro 84 thousand. At the hearing on 30 May 2012, the judge
suspended the enforcement filed by Air Italy, in accordance with the order that revoked the provisional enforceability of the injunction
issued by the Court of Busto Arsizio within the opposition proceedings, the hearing of which had been set on 25 October 2012.
At that hearing Air Italy filed its appearance before the court preliminarily pleading the nullity of the counterclaim for failure to notify
the party and the revocation of the order that suspended the temporary enforcement of the injunction, as well as asking, in the merit,
the confirmation of the payment injunction. The judge postponed the case to the discussion hearing scheduled for 14 February 2013.
The Company is waiting for the relating decisions.
Air Italy/Essevi S.r.l. in bankruptcy proceedings (formerly Teorema Tour)
As part of Essevi S.r.l. (formerly Teorema Tour S.p.a.) bankruptcy declared by the Court of Milan, Air Italy's unsecured receivable
was admitted, as requested, for an amount of approximately Euro 194 thousand. The Company is waiting for the distribution plan.
Air Italy/Alpi Viaggi S.r.l. in bankruptcy proceedings (formerly Avitour S.r.l.)
As part of Alpi Viaggi S.r.l. bankruptcy declared by the Court of Milan, Air Italy unsecured receivable was admitted, as requested, for
an amount of approximately Euro 222 thousand. The Company is waiting for the distribution plan.
Air Italy/Pianeta Terra S.r.l. in bankruptcy proceedings
As part of Pianeta Terra S.r.l. bankruptcy declared by the Court of Milan, Air Italy's unsecured receivable was admitted, as
requested, for an amount of approximately Euro 248 thousand. The Company is waiting for the distribution plan.
Air Italy/ITS International Travel Solutions in liquidation (bankruptcy)
As part of ITS bankruptcy declared by the Court of Milan, Air Italy's unsecured receivable was admitted, as requested, for an amount
of approximately Euro 449 thousand. The Company is waiting for the distribution plan and the recovery of the receivable is unlikely.
Air Italy/I.O.T.O. Group Srl Bankruptcy
As part of the I.O.T.O. Group S.r.l. bankruptcy declared by the Court of Bergamo, Air Italy's unsecured receivable was admitted for
Euro 18 thousand. The Company is waiting for the distribution plan.
Air Italy / Bankruptcy of Trafalgar S.r.l. in liquidation (formerly Rallo)
As part of Trafalgar S.r.l. bankruptcy declared by the Court of Milan, Air Italy's unsecured receivable was admitted, as requested, for
an amount of approximately Euro 59 thousand. The Company is waiting for the distribution plan.
Air Italy/Srintours S.p.A. in bankruptcy proceedings
As part of Sprintours bankruptcy declared by the Court of Rome, Air Italy's unsecured receivable was admitted, as requested, for an
amount of approximately Euro 96 thousand. The Company is waiting for the distribution plan.
Meridiana fly - Annual Financial Report at 31 October 2012 - 46
Air Italy / Itali Airlines
As part of the Itali Airlines bankruptcy declared by the Court of Rome, Air Italy filed proof of debt in the bankruptcy as unsecured
creditor for a total amount of Euro 15 thousand (principal and interest). The hearing for the verification of the statement of liabilities,
set for 11 October 2012, was postponed by the Court until 7 February 2013.
Air Italy/Reliance et al.
Air Italy has a claim against Reliance s.r.l. in liquidation of approximately Euro 265 thousand. The company Reliance is currently run
by the company Enjoy!. This business transfer repeatedly involved, in different capacities, the companies East & West Holidays s.r.l.
(currently in liquidation) and Safe s.r.l., managed and controlled by a single family who also controls Reliance and Enjoy! Therefore,
Air Italy notified a summons against all the aforementioned companies seeking a direct order against Reliance S.r.l. in liquidation
and the joint liability of the other companies, including under Articles 2560-2562 of the Italian Civil Code by reason of the transfer of
business.
Air Italy has an additional receivable from Enjoy! of Euro 16 thousand.
Given the difficulty of notifying the summons, at the hearing on 17 November 2011 the Judge (Court of Milan, XI Civil Section) noted
the failure to meet the deadline for filing an appearance, granted deadline for re-notification of the summons to the defendants and
adjourned the case to 6 June 2012.
At the hearing on 6 June 2012 the Judge granted an early payment order against Reliance for Euro 265 thousand, plus interest and
costs of the proceedings, which has become enforceable.
Following the bankruptcy of the companies Reliance and Enjoy! the company filed late proof of debt in the bankruptcy and is
currently waiting for the hearing for the discussions of the pleadings.
Air Italy/Lastminute.sm S.r.l.
Air Italy has a receivable from Lastminute.sm S.r.l. of approximately Euro 415 thousand, arising from promissory notes issued and
not paid. As from 18 March 2011, Lastminute.sm s.r.l. has been merged into the company Fiesta Caribe s.r.l.. which therefore took
on all assets and liabilities of the former and is currently liable for the payable in question.
Recovery of the receivable is unlikely given the unavailability of the debtor.
Air Italy/Tabaclub
Air Italy has payables from Tabaclub for about Euro 51 thousand for services rendered and not paid. The Company obtained a
payment order by the Court of Busto Arsizio (injunction order no. 868/10, issued 18 November 2010) and the recovery of the
receivable depends on the successful notification of the order to the other party.
Air Italy/ReiseburoPrishtina
At the request of Air Italy, the President of the Court of Busto Arsizio ordered Reisebüro Prishtina to pay the sum of Euro 32
thousand, plus default interest and proceedings costs.
The payment order was not opposed and has become enforceable.
The recovery of the receivables is uncertain, also due to the fact that the other party is a foreign resident.
Air Italy/Koaltour S.r.l.
The tour operator Koaltour S.r.l. obtained an order of judicial seizure of a Euro 150 thousand check from the Court of Busto Arsizio;
the check had been issued by Koaltour in favour of the carrier in compliance with the charter agreement signed by the parties.
Meridiana fly - Annual Financial Report at 31 October 2012 - 47
Air Italy obtained the revocation of the protective order and confirmation of such revocation on appeal.
In connection with the precautionary procedure, Air Italy requested and obtained from the Court of Busto Arsizio a non-enforceable
injunction for the amount of Euro 150 thousand against Koaltour S.r.l., which challenged the injunction asking its withdrawal before
the same court.
On 28 December 2011 Koaltour S.r.l was placed in voluntary liquidation.
At the first hearing, held on 7 February 2012, Air Italy filed an appearance before the court challenging all the demands of the other
party, and asking for the provisional enforceability of the injunction. By order issued outside the hearing on 28 March 2012 the Court
of Busto Arsizio granted the provisional enforcement of the injunction appealed against. Consequently the writ of execution was
notified to the counterparty (18 May 2012) in order to start the enforcement procedure.
The case was postponed to 19 November 2013 for the clarification of final pleadings.
Air Italy/Livingston S.p.A. in Extraordinary Administration
On 22 September 2011, Air Italy submitted a bid for the purchase of the overall corporate assets owned by Livingston S.p.A. in
Extraordinary Administration, for an amount of Euro 200 thousand and covering the purchase of all contracts relating to the ordinary
management of the company, the brands, the assets and rights, all slots and traffic rights granted to Livingston S.p.A. before
admission to the Extraordinary Administrative Proceedings and exercised until suspension of its license by ENAC, effective from 24
October 2010.
The company RT S.r.l., controlled by the sole shareholder Riccardo Toto also participated in the tender.
By decision of 11 November 2011, the Ministry of Economic Development authorized the Special Administration Commissioner of
Livingston S.p.A. to accept the tender submitted by R.T. S.r.l., which provided that the purchase of the whole business would take
place through the establishment of a newco by the company under Special Administration, contribution of the company to the newco,
and subsequent sale of the newco to R.T. S.r.l..and subsequent transfer to R.T. S.r.l. of the 100% shareholding.
By application dated 20 November 2011, Air Italy asked that the Lazio Regional Administrative Court, after granting the related
protective order, annul all the measures to extend and/or modify or otherwise relating to the carrier provisional license and Air
Operator Certificate (AOC) adopted by ENAC, subsequently on 8 October 2010, in favour of Livingston S.p.A. in Extraordinary
Administration, as well as any other measure, howsoever, required, related, consequential or coordinated, before or after those
mentioned above. Air Italy has also sought an order against the Civil Aviation Authority - ENAC- to recover damages either by way of
specific reinstatement or, in the alternative, by way of monetary equivalent. The hearing for discussion on the merit was scheduled
for 14 June 2012; case is still reserved for decision.
On 9 January 2012, Air Italy filed an appeal before the Lazio Regional Administrative Court for the annulment, after suspension, of
(a) the decision of the Ministry of Economic Development of 11 November 2011 authorizing the Special Commissioner of Livingston
S.p.A. in Extraordinary Administration to: i) set up a newco in the form of a limited liability company by contribution of the business,
as identified in RT S.r.l. bid ii) accept the bid submitted by RT S.r.l. and transfer R.T. 100% of the shares of the newco at the price of
1 Euro, (b) the application of 13 October 2011, in which the Special Commissioner asked the Ministry of Economic Development for
permission of setting up a newco by contribution of the business and transferring 100% of the shares in the newco to RT S.r.l. at the
token price of 1 euro, and (c) the public deed of 2 December 2011 consisting of the newco deed of incorporation and the
simultaneous contribution of the corporate assets, in accordance with which Livingston S.p.A. in Extraordinary Administration
established the "New Livingston S.r.l." (d) any other act, howsoever required, related, consequential or coordinated before or after
those mentioned above.
By judgment of 19 November 2012 the Lazio Regional Administrative Court rejected the appeal brought forward against the Civil
Aviation Authority; on the same date the Court declined jurisdiction on the appeal against the Ministry of Economic Development, in
favour of the Lombardy Regional Administrative Court.
Meridiana fly - Annual Financial Report at 31 October 2012 - 48
Following further evaluation with its legal advisors, Air Italy has decided not to appeal this decision.
b) Trade related litigations with suppliers and other counterparties
The most significant disputes against suppliers and other counterparties are described below with indication of the amount of
payables, if any, recognized in the financial statements. In the separate and consolidated financial statements, as described below
and where applicable, a provision for liabilities and charges was recognized.
Corporate Aircraft
In November 2007 Corporate Aircraft notified a writ to the Company to obtain payment of approximately Euro 1 million as
consideration for mediation activities carried out in relation to the transfer of a Financial Leasing contract regarding an A319 aircraft,
which occurred in June 2007. At the hearing on 29 October 2009 evidence was heard from witnesses and the case was adjourned to
17 June 2010 for continuation of the witness evidence. At the hearing of 17 June 2010 part of the witness evidence was heard and
the Judge adjourned the hearing to 3 March 2011 for continuation of the witness evidence and the formal questioning of Corporate
Aircraft legal representative. The judge adjourned the case for the clarification of final pleadings at the hearing on 16 January 2013,
in which additional time was granted for the filing of the closing briefs (15 March 2013) and subsequent pleadings of response (4
April 2013).
The provision for liabilities and charges recognized in the consolidated and separate financial statements takes into account the risk
of adverse outcome of the litigation in question.
Aviapartner S.r.l.
Aviapartner S.r.l. (a company with which Meridiana fly had entered into a contract for handling services and other ancillary services
at the airport of Rome Fiumicino, subsequently terminated on the initiative of Meridiana fly) brought action against the company to
seek damages resulting from the termination of the above contract, asking payment of a total sum of Euro 1,273 thousand. The case
was postponed to 25 October 2013 for the clarification of final pleadings.
The provision for liabilities and charges recognized in the consolidated and separate financial statements takes into account the risk
of adverse outcome of the litigation in question which, however, was quantified as a minimum amount given that the litigation is in an
initial stage and considering the degree of probability of unsuccessful outcome.
ENI S.p.A.
With a writ notified to the Company and to other airlines ENI S.p.A. requested payment of an amount of Euro 242 thousand for the
concession fee due to airport managers (so-called "Fuel royalties"). On 20 April 2007, the Company filed an appearance requesting
rejection of all the demands put forward by ENI S.p.A. and, by way of counterclaim, requesting an order for the latter to repay the
amounts received from 1997 onwards, as a surcharge on the supply of fuel at airports, for a total of approximately € 3.5 million. At
the hearing of 3 February 2010, at the request of ENI S.p.A. the judge adjourned the case to the hearing on 10 June 2010 for
exhibition of documents and admission of the court appointed accounting expertise.
As a result of contribution of the Aviation Business, the proceedings – for the same causa petendi - with which ENI S.p.A. requested
an order against Meridiana for payment of Euro 352 thousand – must also be considered. At the hearing on 10 June 2010, set for
admission of the preliminary evidence, the Judge admitted the court appointed expertise for the accounting verification and
adjourned the hearing to 1 December 2010.
The proceedings, which were suspended due to the bankruptcy of one of the defendants, was resumed with the hearing of 6 July
2011 and subsequently adjourned to 09 February 2012.
At the hearing of 24 January 2013 the Single Judge reserved the case for decision granting 60 days for the filing of the closing briefs.
Meridiana fly - Annual Financial Report at 31 October 2012 - 49
The trade payables recognized in the consolidated and separate financial statements include the entire liability to the supplier for the
payable in dispute; therefore no additional liabilities are expected for the Group including in the event of an unfavourable outcome of
the proceedings.
Aironjet Travel S.r.l.
Aironjet Travel S.r.l. brought legal proceedings against the Company, among others, in order to be hold harmless and obtain
guarantee against payment of Euro 210 thousand, requested by means of revocatory action initiated by the Official Receiver of
Sportiva Calcio Napoli S.p.A. .
By order of 22 May 2012 the single judge of the Court of Naples ordered the separation of the main proceedings (Società Sportiva
Calcio Napoli S.p.A. against Aironjet Travel S.r.l. ) from the combined proceedings against other carriers (including Meridiana fly).
As Meridiana fly has no claim against Aironjet Travel S.r.l., it has no interest in the continuation of the proceedings. To date Aironjet
Travel S.r.l. has not resumed the case against Meridiana fly.
Avitech Consulting Gmbh
With reference to the consulting agreement for the renegotiation of maintenance contracts and for which Meridiana fly received an
initial invoice of about Euro 435 thousand (corresponding to 50% of the alleged consulting costs on the basis of a cost-savings
model), Meridiana fly challenged the basis for the charges calculation and the related parameters and suspended payment thereof.
Following Meridiana non-payment, the other party requested the activation of an arbitration procedure before the Swiss Chamber of
Commerce. The Company, assisted by its lawyers, filed an appearance in the arbitration proceedings, pleading a conflict of interest
situation and the consequent nullity of the agreements and other exceptions related to the actual occurrence of facts, including the
incorrect information received with regard to the possible costs in case of withdrawal from maintenance contracts (especially for SR
Technics Switzerland Ltd - SRT). The arbitration proceedings was completed on 20 July 2012; the award upheld the requests of the
other party and condemned Meridiana fly to the full payment of the consulting services, including interest and legal fees for a total of
Euro 0.6 million.
Meridiana fly appealed to the Court of Appeal of Cagliari, separate Division of Sassari, against the decision of 30 October 2012,
requested and obtained from the counterparty, on the effectiveness in Italy of the final award issued on 20 July 2012 by the Swiss
Arbitrator. The summons hearing has been set on 15 June 2013.
The trade payables recognized in the consolidated and separate financial statements already include the entire amount claimed by
the supplier; therefore no additional liabilities are expected for the Group including in the event of an unfavourable outcome of the
proceedings.
SR Technics Switzerland Ltd - SRT
Meridiana fly was party to two contracts entered into with the company SRT for the provision of maintenance services on aircraft
components and fuselage for the Airbus fleet.
As a result of the termination of the contract entered into with SRT for the provision of maintenance services on the structure and
components of A330 and A320FAM aircraft, at the end of April 2011 SRT notified the Company requests for penalties, damages and
application of other provisions related the termination of the relationship. After discussions between the companies with the
assistance of their respective legal and technical advisors, in order to clarify their respective positions, in October 2011 SRT notified
the Company that they had filed a petition with the court of Zurich in order to obtain recognition of their claims quantified at
approximately Euro 6.1 million. Meridiana fly has not yet received formal notification of that petition.
On the basis of further negotiations aimed at reaching an amicable solution, on 2 August 2012 a settlement agreement was entered
into by which a total amount of Euro 2.5 million was agreed as full and final settlement of the dispute, payable in 10 equal
instalments, plus interest.
Meridiana fly - Annual Financial Report at 31 October 2012 - 50
Therefore, the residual instalments related to the above agreement have been recognized in these financial statements.
LSG SKY CHEFS SPA (LSG)
In relation to the supply contract for on board catering services entered into with LSG, following the early termination of the contract
by Meridiana fly on 5 March 2012, the supplier filed an application to the Court of Milan on 18 June 2012 requesting a precautionary
seizure for an amount up to Euro 3,000,000 (later decreased by Euro 200 thousand for payments received) in relation to the
payment request for overdue payables and damages quantified in a total amount of Euro 2,709 thousand.
After the hearing, held at the Court of Milan on 18 July 2012 to discuss the aforementioned seizure, the judge lifted the reserve on 2
August 2012, partially upholding the application for Euro 460 thousand.
On 3 August 2012 Meridiana fly and LSG achieved an agreement that provides for the payment of Euro 300 thousand in two
instalments, and the agreement by both parties to reconcile the accounting balances by 15 September 2012 and waiver by LSG to
enforce the measure.
The parties are negotiating to reach an out-of-court settlement.
Trade payables recognized in these Financial Statements include the amount payables to the supplier, therefore no additional
liabilities are expected for Meridiana fly Group.
Sky Planet Tours Blue Ocean Travel S.r.l.
On 25 May 2012 Sky Planet notified a summons to Meridiana fly asking the Court of Milan to order the company to indemnify the
tour operator for the alleged damage suffered as a result of cancelled rotations provided for in the contract; this action followed the
request by Meridiana fly for financial penalties in of Euro 1,550 thousand as a result of the irregular cancellation by the TO of all the
rotations provided for in the contract. The first hearing of these proceedings is scheduled for 10 July 2013 before the Court of
Brescia.
Blu Fly Tour Operator srl
In early December 2011, Blue Fly notified Meridiana fly a request for arbitration stating it wished to have recourse to the arbitration
clause contained in art. 19 of the contract signed by the parties on 28 March 2011. It asked for the appointment of an Arbitration
Panel in accordance with a formal arbitration procedure, to ascertain the unlawful "termination by law" demanded by Meridiana fly
and the unlawful denial of boarding its passengers on flights covered by the contract and thus to order Meridiana fly to pay damages
for a total amount of Euro 580 thousand, in addition to the payment of undisputed invoices in the amount of Euro 15 thousand. On 23
December 2011 the Company appointed its representative arbitrator, challenging all claims made by the counterparty and submitting
a counterclaim for amounts billed and payable (Euro 205 thousand), amounts still due pursuant to the general terms and conditions
of contract (Euro 821 thousand), contractual penalty (Euro 155 thousand), plus default interest and additional damages to be
quantified in the course of the proceedings.
After its establishment, the Board of Arbitration ascertained Blu Fly declaration of bankruptcy at the hearing on 25 October 2012,
suspending the proceedings.
Given the bankruptcy of the counterparty, Meridiana fly filed proof of debt in the bankruptcy.
The Company is waiting for the publication of the Statement of liabilities.
The most significant disputes with suppliers and other counterparties involving Air Italy, in relation to which no additional liabilities
are expected in the consolidated financial statements with respect to existing provisions for liabilities and charges or accounts
payable, are described below.
Meridiana fly - Annual Financial Report at 31 October 2012 - 51
Air Italy/Livingston S.p.A. in Extraordinary Administration
Livingston S.p.A. in Extraordinary Administration notified Air Italy a summons for revocation of a payment made in favour of the
airline for a total of approximately Euro 155 thousand, pursuant to art. 67, third paragraph, letter a) of the Bankruptcy Law. The
proceedings are pending before the Court of Busto Arsizio.
The hearing for the clarification of final pleadings was held on 11 July 2012, in which Air Italy filed new documents from another
pending case between Air Italy and Livingston, in which - for the same rental agreement - Livingston sought the payment of Euro 55
thousand through an injunctive order. This sum was paid by Air Italy for prudential reasons and only to prevent the enforcement
action, having filed an opposition to the injunctive order. These circumstances and documents were filed to strengthen the carrier's
defences and, in any case, in the unlikely event of acceptance, even partial, of the plaintiff's pleadings, in order to obtain a reduction
of the claim and/or payment order by the same amount. In that hearing, the judge reserved a decision on the admissibility of the
submitted documentation and postponed the case to the hearing on 12 October 2012, granting Livingston until that date for the
submission of any counterclaims.
At the hearing scheduled for 12 October 2012, the judge adjourned the case to 23 January 2013 for the clarification of final
pleadings. The case has been reserved for decision.
Air Italy/North American Airlines
Air Italy became the ultimate beneficial owner of the B737-304ER aircraft following the allocation of the Trust Agreement existing
between Ale One Ltd and WTC in favour of the "leasing" companies (UniCredit Leasing S.p.A. and Leasint S.p.A.), as well as the
expiry of the lease agreement with UniCredit Leasing S.p.A. and Leasint S.p.A.
NAA brought an action against WTC and other companies before the Court of the State of New York, asking for the reimbursement
of expenses incurred for the maintenance of a leased aircraft. The claim is of "Not less than USD 2.7 million" as a refund of the
guarantee enforced by WTC, plus "punitive damages". The defendants objected that such action was not in accordance with the
agreement and, in any case, they asserted that it should have been authorized - which was not the case.
The ultimate beneficial owner of the aircraft, both under the trust with WTC and following its dissolution (which took place on 30
November 2009) is Air Italy, which is currently operating it under a lease agreement with UniCredit Leasing S.p.A. and Leasint S.p.A.
Therefore, although it is not formally a party in these proceedings, Air Italy shall be exposed to the financial consequences of the
judgment and, in any case, the legal costs, including pursuant to the Act establishing the trust and the lease agreements. The NAA is
currently subject to the Chapter 11 procedure and the U.S. lawyers are engaged in obtaining recognition of Air Italy's receivable.
According to the legal advisors an adverse outcome of the proceedings is possible. The company recognized the related charges in
the financial statements; therefore no additional costs are expected from this dispute in addition to the amounts recognized in these
consolidated financial statements.
Air Italy/Crown Aviation
By writ of summons served on 4 August 2010, Crown Aviation Ltd sued Air Italy in order to have its conclusions upheld, namely
acknowledgement that Air Italy committed a breach of the contract whereby Crown Aviation Ltd was appointed as Exclusive
Representative of Air Italy at the United Nations for the award of flight tenders and consequent order to pay damages estimated at
USD 130 thousand (alternatively, to pay the contractual penalty of the same amount).
Air Italy filed an appearance by pleading, in essence, the invalidity of the contract, its termination for negligence attributable to Crown
Aviation Ltd, breach of contract by Crown Aviation Ltd and the subsequent objection for non-performance raising the "exceptio doli
generalis" and, finally, challenging the entitlement of Crown Aviation Ltd to 9% of the value of the contracts concluded with the UN
on the basis of various arguments.
At the hearing notified on 15 January 2013, the court partly upheld the claim and ordered Air Italy to pay USD 68 thousand, plus
interest and legal costs.
Meridiana fly - Annual Financial Report at 31 October 2012 - 52
c) Other litigations
The most significant disputes due to other reasons are described below.
Labour disputes
With reference to employment-related litigation involving Meridiana fly, most of the disputes concerned the recognition of permanent
contracts of employees repeatedly hired under fixed-term contracts and the request for the recognition of seniority for past periods
by staff with permanent contracts.
They reflect the best estimate of liabilities which, also on the basis of the Company's legal advisors' opinion, Meridiana fly Group
may incur in case of adverse outcome of outstanding disputes, although the progress of the litigation is extremely diverse and
constantly evolving; therefore new risks which at the moment are not yet identifiable cannot be ruled out given the conflicting
interpretations given by the courts on this matter and the lack of case law on the application of the amended labour law.
With reference to the dispute with trade unions in relation to the application of the new labour contract of Meridiana fly of 18
November 2011 brought forward by a trade union representing pilots which had not signed the mentioned agreement, at the hearing
held on 2 May 2012 at the Court of Rome, the court rejected the application and confirmed the applicability of the company labour
agreement to all employees, including non-members of signatory unions. The applicant union has appealed against this decision.
With reference to the dispute brought by certain employees on an individual basis, in particular former crew staff of Meridiana, in
relation to the application of Meridiana fly's labour contract, as a result of the contribution of the Aviation operations of Meridiana to
Eurofly (now Meridiana fly), claiming the application of the former labour contract in force in Meridiana in 2002 and, in the alternative,
in 2009, the Court of Tempio, with judgment filed on 18 December 2012, while it considered the transfer of the business unit as
lawful, upheld the employees' claim stating that the labour contract in force in the transferor company, Meridiana, in 2002 should be
applied to the individual employees. The company considered that this decision might be annulled on appeal also in the light of
recent court decisions (most recent decision of the Court of Appeal of Sassari on 16 January 2013 in a similar case brought by trade
unions), agreed with its lawyers to file an appeal pursuant to law.
It is believed that, in the light of existing legislation (including the most recent amendments to the law, the so-called "Fornero law"),
the outcome of individual cases and the opinion resulting from court decisions, provisions for risks and charges in these separate
financial statements and consolidated financial statements are appropriate and reasonable.
Litigation with passengers
Meridiana fly Group is involved in other legal proceedings brought by passengers seeking damages, for which the Group, albeit in
the climate of uncertainty surrounding any lawsuit, set aside provisions for liabilities and charges that it considers adequate to cover
the estimated liabilities taking into account historical data on this kind of charges.
The provision for liabilities and charges recognized in the consolidated and separate financial statements takes into account the risk
of adverse outcome of the litigation with passengers.
Open tax audits
On 1 March 2010 Air Italy S.p.A. was notified a report on findings (PVC) by the Guardia di Finanza - Italian Financial Police of
Varese, referring to the tax years 2007, 2008 and 2009. The report on findings (PVC) contains findings in relation to the tax years
2007 and 2008, in particular relating to the alleged non deductibility of certain aircraft lease payments on an accrual basis, for the
purposes of direct IRES and IRAP taxes, for a total amount of additional assessed tax of Euro 3.3 million.
On 9 October 2012 the subsidiary was notified the notice of assessment for the first tax year in dispute (1 November 2006-31
October 2007), demanding taxes, interest and penalties of approximately Euro 0.9 million.
The subsidiary filed a tax settlement proposal, challenging the assessment received both in fact and in law. The company is
therefore waiting for the decision by the Lombardy Revenue Agency.
Meridiana fly - Annual Financial Report at 31 October 2012 - 53
A provision to cover possible liabilities for the two tax years was recognized in these financial statements for a total amount of Euro
1.8 million.
In relation to the tax audit concerning Meridiana fly for the period 2006-2011, the audit was closed by accepting the report on
findings (PVC) with a specific application filed on 13 July 2012 (see Section 2.13.11 for more details).
2.16. Security Policy Document
According to the most recent legislation, the obligation of preparing the annual Privacy Policy Document is no longer in force
Simplification Decree) without prejudice to the obligations for companies already in force on the basis of Legislative Decree 196/03 -
Data Protection Code.
Therefore, also taking into account the ongoing corporate and organizational changes of Meridiana fly group, we will update the
Privacy Policy Document after the above mentioned corporate and organizational restructuring has been completed.
The Security Policy Document lists the processing of personal data carried out by the Group, the distribution of tasks and
responsibilities within the structures responsible for processing, analysis of the risks to which the data are subject, the description of
the criteria and how to restore data availability following destruction or damage and the measures taken and to be taken to ensure
the integrity and availability of data as well as the protection of areas and premises, relevant for their custody and accessibility.
2.17. Model of organisation, management and control pursuant to Legislative Decree 231/2001
Legislative Decree 231/2001 containing “Provisions on the administrative liability of legal entities, companies and associations,
including those without legal personality” introduced a system of corporate administrative liability in Italian law with respect to crimes
committed in the interest of or to the advantage of the companies by Board Members, Managers or Employees.
The organizational, management and control model pursuant to Legislative Decree 231/01, drafted by the Company in its first
version in accordance with the "Guidelines" issued by Confindustria, was subsequently updated several times through resolutions of
the Board of Directors, in part to reflect the various changes that have taken place in the law and the corporate organization.
Following the mentioned corporate transactions with the Air Italy group and other regulatory changes (so-called Environmental
crimes) the Model was further updated.
In 2012, the Supervisory Body consisting of the Chairman, Massimiliano Lei, Giovanni Minora and Mauro Casula, the latter manager
responsible for the Compliance & Organization area of the Company, met regularly and carried out the activities envisaged by the
Model and the regulations.
2.18. Legal and regulatory framework
In 2012, no significant legislative or regulatory changes occurred that may have an impact on the commercial air transport industry
and related activities in addition to those already mentioned in the relevant sections of this Report.
2.19. Share Capital
At 31 October 2012 Meridiana fly S.p.A share capital amounted to Euro 46,100,833.59 and consisted of 106.374.003 ordinary
shares, with no par value.
The share capital consists solely of ordinary shares, registered, freely transferable, providing the same the rights and obligations, as
provided for by the current statutory regulations.
Meridiana fly - Annual Financial Report at 31 October 2012 - 54
Therefore, each ordinary share confers the right to a proportionate share of any earnings allocated for distribution and any equity
resulting upon a final winding-up, as well as the right to vote without any restrictions.
As at the date of this Report:
• there are no other classes of shares or other securities issued by the Company;
• there are no shares not representing the capital;
• The Company holds no treasury shares in portfolio, either directly or indirectly;
• The Company has not issued convertible bonds, exchangeable bonds or bonds with warrants;
• There are no share-based incentive plans (stock options, stock-grants, etc..) that involve share capital increases, including
free share capital increases ;
• no shares have been issued which grant special rights of control;
• there is no system of employee shareholding;
• there are no restrictions on voting rights;
The By-laws provide that 5% of net profits resulting from the financial statements be allocated to the legal reserve until the same
reaches one-fifth of the share capital; the remaining profits are allocated as per resolution of the shareholders meeting.
It should be noted that the Shareholders' Agreement (pursuant to art. 122 of the CFA), entered into between Meridiana and the
former shareholders of Air Italy Holding following the integration with Air Italy in July 2011, ceased to have any effect from 15
February 2013 as a result of the performance of the Agreement of 15 January 2013 which provided for the sale and the actual
transfer of all shares and related warrants held by the former shareholders Air Italy Holding to the parent Meridiana (see Section
2.24.10).
After the capital transactions occurred in 2012, at 31 October 2012 the shareholding structure was as follows.
Shareholders No. of shares %
Meridiana S.p.A. 54,467,829 51.20%
Marchin investment B.V. 28,358,460 26.66%
Pathfinder S.r.l. 6,408,960 6.02%
Zain Holding S.r.l 6,408,960 6.02%
Market 10,729,794 10.09%
Total 106,374,003 100.00%
Following performance of the shareholders' agreement of 15 January 2013, along with the exercise of 3200 warrants by minority
shareholders in January 2013, the share capital after the filing of the statement pursuant to art. 2444 of the Italian Civil Code which
took place on 14 February 2013, amounted to Euro 46,101,233.59 represented by 106,375,603 ordinary shares, without par value,
broken down as follows.
Shareholders No. of shares %
Meridiana S.p.A. 95,644,209 89.91%
Market 10,729,794 10.09%
Total 106,374,003 100.00%
Meridiana S.p.A. is in turn controlled by AKFED which holds 76.8% of its share capital; AKFED is a company under the control of His
Highness Prince Karim Aga Khan.
The additional disclosure required by Article 123-bis of Legislative Decree 58/98 is contained in the Report on Corporate
Governance.
Meridiana fly - Annual Financial Report at 31 October 2012 - 55
The stock prices recorded at year-end together with the relevant capitalisation are provided in the following table:
31.10.2012 30.12.2011 Change % Change
Price - € 0.640 5.100 4.460- -87.5%
Issued shares 106,374,003 5,576,346 100,797,657 1808%
Capitalization - € 68,079,362 28,439,365 39,639,997 139.4%
Meridiana fly share price
2.20. Certification pursuant to Art. 37 of Consob Regulation
Pursuant to Article 37 of the Regulations for the implementation of Legislative Decree no.58 of 24 February 1998 on financial
markets (Consob Resolution No. 16191/07) and of art. 2.6.2, paragraph 13 of the Regulation of Markets Organised and Operated by
Borsa Italiana S.p.A, the Company, with regard to the provisions that prohibit the listing of shares of companies subject to
management and co-ordination by another company, Meridiana fly, which is subject to management and coordination activities by
Meridiana S.p.A., herewith certifies that:
a) it has complied with the public notice obligations pursuant to Article 2497-bis of the Italian Civil Code;
b) it has the ability to negotiate with customers and suppliers on an arm's length basis;
c) it has no centralised cash pooling arrangements with the company that exercises group management or with other companies of
the group to which it belongs;
d) it has a sufficient number of independent directors to ensure that their opinions have a material impact on decisions made by the
board of directors.
2.21. Corporate Governance Report
In compliance with regulatory obligations, every year the Company prepares a "Corporate Governance Report". Besides providing
a general description of the corporate governance system applied by the Company, the report provides information about ownership
and about compliance with individual requirements of the Corporate Governance Code for Italian listed companies, which the
Company endorses. According to current legislation such Report must be made available to the shareholders together with the
documentation necessary for the Shareholders' meeting approving the financial statements and sent to the stock exchange
management company which makes it available to the public; the Report is also published on the Company website
(www.meridianafly.com) in the "Corporate Governance" section.
2.22. Shareholdings owned by directors, statutory auditors and managers with strategic
functions
Pursuant to Article 79 of CONSOB Issuers' Regulation no.11971/1999, it is herewith stated that as at 31 October 2012 the only
shareholdings in the company owned by directors, statutory auditors or managers with strategic responsibilities – either directly or
indirectly or through subsidiaries – were the following:
• Giuseppe Gentile - CEO - no. 28,358,460 ordinary shares of Meridiana fly and no. 29,908,460 2012-2013 Warrants on
Ordinary Shares of Meridiana fly, through Marchin Investments B.V.;
• Alessandro Notari - Director - no. 6,408,960 ordinary shares of Meridiana fly and no. 6,408,960 2012-2013 Warrants on
Ordinary Shares of Meridiana fly, through Pathfinder S.r.l.;
Meridiana fly - Annual Financial Report at 31 October 2012 - 56
With effect from 15 February 2013, the above persons transferred all shares and warrants held by them to Meridiana fly. Therefore,
as at the date of publication of this Report, no shares were held by directors or statutory auditors nor by managers with strategic
responsibilities in the Company.
2.23. Main risks and uncertainties for the current year
In conducting its business, the Company and the Group are exposed to risks and uncertainties stemming from external factors
relating to the general macroeconomic environment or specific to the industry sectors in which operations take place. It is also
exposed to risks stemming from strategic decisions and internal operating risks.
The identification and mitigation of such risks was systematically performed by the departments concerned, to allow for a timely
management of any emerging risk.
Among business risks, the main risks identified, monitored and managed by Meridiana fly are the following:
1. Risks related to the implementation of the Business Plan and in carrying out the air transport business on the basis of
provisional licenses.
The Business Plan (see Section 2.24.13) approved by the Board of Directors on 26 February 2013 is considered necessary by the
Group in order to overcome the crisis and improve business results.
In this regard it should be noted that, for the purposes of implementing the Business Plan, the priority is to get back the operating
license for the Company and its subsidiary Air Italy which was suspended by the National Civil Aviation Authority on 11 January
2013, as a result of which the activity is currently carried out on the basis of provisional licenses. In this respect discussions are
already ongoing with the Aviation Authority in order to plan how to obtain the permanent license for the two companies.
From another perspective, the expected and estimated Business Plan results are based on a hypothetical set of assumptions about
future events that may not occur (or occur only partially or in a different manner compared to assumptions) and actions by the
Company management bodies that may not be undertaken, in whole or in part.
In addition, the effective and complete implementation of the new Business Plan and achievement of expected results, synergies
and planned objectives may depend on economic conditions or events that cannot be foreseen and/or controlled by the Company or
the Group, such as, the performance of the target markets, the trend of the euro/dollar exchange rate, the interest rates and fuel
costs, the load factor and the yield; other factors and events included in the new Business Plan are also not under the full control of
the Company or the Group, such as the definition of new employment agreements for the staff and the necessary reduction in the
use of resources through an efficient recourse to welfare measures, obtaining the contribution on the territorial continuity regime,
optimization of financial and contractual relations with key-suppliers and the support of the banks to the Group restructuring plan
(through the confirmation of Air Italy uncommitted credit lines), which affect working capital management.
If, for any reason, in the course of the Plan, financial requirements arise that exceed those estimated in the new Business Plan, there
is no guarantee that AKFED and Meridiana will continue to provide financial support to the Company and the Group, although this
support has always been guaranteed in the past. Therefore, we cannot rule out that the expected results from the Business Plan are
not achieved.
In this case, the Company and the Group would not have, if necessary, the additional resources required to pursue the restructuring
and therefore significant negative impact may affect the operating, financial and equity results of the Company and the Group, with
possible repercussions on their ability to continue operating as a going concern. In this regard, the Directors believe that the current
uncertain situation may cast significant doubt on the ability of the Group and the Company to continue operating as a going concern,
as further described in section 2.26. below. However, after making the necessary checks and having evaluated existing
uncertainties, including the risk of greater than expected losses, the directors believe that there is a reasonable expectation that the
Group and the Company, thanks to the significant commitments made by the major Shareholder, have adequate resources to
continue operating and will be able to meet their obligations in the foreseeable future.
Meridiana fly - Annual Financial Report at 31 October 2012 - 57
2. Risks relating to the recoverability of goodwill in the consolidated and separate financial statements and the carrying
amount of the investments in the separate financial statements
After the adjustments made to goodwill and the carrying amount of the investments as a result of impairment test, the value of
goodwill was reduced to Euro 87,479 thousand in the consolidated financial statements and Euro 28,184 thousand in the separate
financial statements, while the carrying amount of the investment in Air Italy Holding was adjusted to Euro 14,761 thousand.
Please refer to the notes (Ref. 1 - Intangible assets of the consolidated financial statements and the separate financial statements
and Ref. 5 - Investments in the separate financial statements) for a description of the method used to carry out the impairment test
on 31 October 2012.
In this regard it should be noted that the evolution of scenario variables beyond the control of the Company and the Group different
from those envisaged in the Business Plan might lead to the recognition of additional asset write-downs resulting from an update of
the impairment test conducted on 31 October 2012.
In fact, the verification of the carrying amount in the consolidated and in the parent separate financial statements may also be
necessary during the year due to the high sensitivity shown by the CGU's value in use to changes in key assumptions adopted for its
valuation - which are subject to developments beyond the control of the Company and the Group - and, consequently, the need to
resort to additional equity and financial support by Meridiana S.p.A. and AKFED, even before the end of the year, in order to ensure
the going concern assumption is satisfied.
3. Going concern risks associated with strongly negative net working capital and the persistence of negative earnings
a. Deficit in net working capital
Based on the results of the consolidated and separate financial statements at 31 October 2012, and the most recent reported
results, the Company and the Group have a working capital deficit, intended as the difference between current assets and current
liabilities, excluding the item "cash and cash equivalents".
The Meridiana fly Group considers that these requirements may be met thanks to the expected commitment and support by the
parent Meridiana, through AKFED, as well as current and future relations with the banking system and suppliers.
Despite the context of risk given the negative net working capital for the 12 month horizon and despite the variability of assumed
scenarios and the significant uncertainties regarding the above procedures for covering the liquidity requirements - the Company
believes it is in the condition to ensure the proper compliance with the obligations assumed by the Company and the Group and the
normal course of business, and that it may continue operating as a going concern for a period of at least 12 months. On the other
hand, given that the management of financial requirements for the next 12 months also depends on attitudes of third parties such as
the banks and the suppliers (particularly the acceptance of a flexible management of overdue payables), it is conceivable that where
such management methods cannot be applied, the Group would no longer be able to operate as a going concern.
b. Persistent losses for the period
In recent years, - owing to the macroeconomic backdrop characterized by the strong economic crisis of the world economy as well
as structural difficulties - the Company and Meridiana fly Group suffered significant losses which have required a number of
interventions on the Company capital and shareholders' equity; such interventions were also due to the fact that the conditions for a
reduction of capital regulated by Articles 2446 and 2447 of the Italian Civil Code were met (i.e. reduction of the share capital,
respectively, for more than a third and below the legal limit). The recognition of greater than expected losses could result in the need
for a recapitalization of the Company for an amount in excess of that envisaged in the 2013 budget for which Meridiana / AKFED
have ensured their support (see section 2.26).
Moreover, the above economic performance combined with the high level of debt and the current negative net working capital of the
Company, resulted in a significant use of financial resources.
Meridiana fly - Annual Financial Report at 31 October 2012 - 58
It cannot be ruled out that continuing negative results associated with a high level of debt and substantial negative net working
capital, in addition to the effects of business seasonality, may affect in the future, even in the short term, the Company and the
Group ability to operate as a going concern and to meet their debt payment obligations due to financial imbalances.
4. Risks associated with the financial imbalance and high level of debt
As noted above, the Company and the Group have a significant net working capital deficit, inclusive of significant past due trade
payables and net financial liabilities to banks and other counterparties.
In this regard, despite the Company and the Group - given the practice traditionally applied by the Company and not unusual in the
"aviation business" with regard to trade relations - have already made assumptions in the Business Plan for a gradual repayment of
overdue payables to suppliers in order to bring such payables to a level considered as physiological, without impacting on their
continuing relations with suppliers, it cannot be excluded that a worsening of relations with suppliers may determine the need for
additional financing requirements, with possible negative effects on the earnings, equity and/or financial position and activities of the
Company and the Group.
Moreover, since the Group is mainly exposed to floating rate debt, it has policies in place which involve the use of derivative financial
instruments to control the risk arising from interest rate volatility. At 31 October 2012 the variable rate debt of the Meridiana fly Group
covered by derivative contracts was approximately 12%. It should be noted, however, that despite these risk control policies,
changes in market interest rates may affect the group financial income and expenses with consequent adverse effects on the
financial position, results and cash flows of the Issuer and the Group.
Finally, as disclosed in the last quarterly report, at 30 September 2012 the Company did not comply with the Net Financial Debt /
EBITDAR covenant established by the agreements entered into with the banks on 31 July 2012. The Company, however, has
already started negotiations with the lending banks to redefine the terms and conditions of the overall financing relations in place for
the Group.
Failure to implement the new Business Plan, which takes into account the typical seasonal liquidity needs of air transport companies,
failure to achieve expected operating cash flows, delay in obtaining the financial resources envisaged in the commitments
undertaken by Meridiana and failure to implement the other measures and actions aimed at managing the Group's overall financial
needs for the next 12 months may prevent the Company and the Group from meeting their debt obligations.
a. Risks associated with loan agreements relating to Meridiana fly
The Company is exposed to the syndicate of lending banks for a total principal amount of Euro 22.55 million, of which (i) Euro 7.5
million of principal under the "Stand-By Revolving" loan and (ii) Euro 15 million in principal under the debt restructuring agreement.
Existing contracts with the syndicate of banks, in line with market practices for loan transactions having similar characteristics and
amounts, have cross-default clauses and the option for the syndicate of banks to demand early repayment of the loans in full or in
part, plus interest and costs, in case of (i) failure by the Company to comply with certain financial covenants, (ii) events involving
change of ownership control, (iii) the issuance of bonds and other securities not subordinated with respect to the loan, (iv) other acts
or events set forth in the loan agreements.
The mandatory reimbursement of existing loans without obtaining new loans would lead to the inability of Meridiana fly to cope with
its current payables to suppliers and other parties, with possible negative repercussions on the financial and capital balance and the
going concern basis of the Group.
These risks, however, are mitigated by guarantees given to banks by Meridiana and AKFED on 23 December 2010.
b. Risks relating to Air Italy Holding Loan Agreement
UniCredit S.p.A. and Air Italy Holding have entered into a short-term loan agreement for an amount of Euro 9 million with an original
maturity of 30 June 2012 and currently extended until the end of February 2013.
Meridiana fly - Annual Financial Report at 31 October 2012 - 59
If Air Italy Holding were unable to cope with its short-term debt and to comply with the "covenants" provided in the Air Italy Holding
Loan Agreement, such circumstances might have adverse consequences on the earnings, equity and financial position of the Group.
The aforementioned risks are mitigated by guarantees issued to UniCredit S.p.A., the lending bank of Air Italy Holding, by Meridiana
and AKFED on 14 October 2011 to cover all amounts owed by Air Italy Holding to UniCredit S.p.A. pursuant to the Air Italy Holding
Loan Agreement.
c. Risks associated with Air Italy uncommitted credit lines
The subsidiary Air Italy has entered into short-term demand credit lines with various banks, based in part on advances on charter
agreements or other forms of future underlying cash receipts, which are not subject to special guarantees by the parent or of other
entities.
If these credit lines are revoked by the banks, without obtaining new loans, the Group may become unable to cope with its current
debt, with possible negative repercussions on the financial and capital balance and the going concern basis of the Group.
Against this risk, Meridiana / AKFED did not provide specific guarantees.
In this regard, the Directors believe that, based on the information received in ongoing negotiations with the banks, even in the
absence of the required formal waiver and the temporary extension to 31 July 2013 of all existing credit lines, lenders will not
exercise any of the early termination and / or cancellation clauses or events and that therefore they will not request the early
repayment of existing loans, including Air Italy uncommitted credit lines. The Directors' opinion is based not only on their well-
established relationship with the banks but also on the renewed significant commitment by Meridiana S.p.A. and AKFED in respect
of the going concern basis and the implementation of the Business Plan.
5. Risk associated with the territorial continuity
Some connections operated by Meridiana fly from and to Sardinia are governed by the so-called territorial continuity regime; this is a
legal instrument aimed at ensuring, for specific categories of users, favourable conditions of access to air transport services on
certain routes, even in exchange of government grants to companies that operate these routes.
The renewal of the tenders (usually held annually) and any changes in the applicable regulations and the relevant provisions by
ENAC or the regions concerned (for example in terms of further liberalization of the routes or a single rate imposed for residents and
non-residents) may have significant impact on the activities and results of Meridiana fly and the Group.
6. Risks associated with relations with trade unions
In general, the air transport business may be significantly affected by strikes or other forms of dispute that can cause service
interruptions or inconveniences.
The sector is historically subject to repeated periods of labour tension. One cannot rule out services disruptions caused by trade
union activities, with a resulting negative impact on operations and results of the Company and the Group, especially in light of the
personnel reduction and the reorganisation envisaged in the new Business Plan.
7. Risks dependent on non-controllable variables
The results of Meridiana fly and the Group are contingent upon a number of macroeconomic variables (trends in the general
economic cycle, exchange rates, interest rates, oil prices), which are not directly controllable. Despite the contractual and trade
arrangements (such as tariff adjustments provided for in the agreements with tour operators or fuel surcharges) designed to curb
these risks, the Company and the Group are nevertheless partly exposed to the effects of an adverse trend in these variables . The
occurrence of these circumstances, combined with the prevalence of fixed costs compared to variables ones, may result in pressure
on margins and overall profitability. In view of this, the Company and the Group undertake actions aimed at improving the efficiency
Meridiana fly - Annual Financial Report at 31 October 2012 - 60
of the operating leverage in order to mitigate the effect of lower revenues on margins; they also monitor the impacts on the going
concern basis to enable timely actions necessary for the company to continue operating as a going concern. Unpredictable
developments of these variables (and in particular the current economic crisis and recession, the high cost of Jet Fuel and the
demand for air transport) could result in failure to achieve the objectives set out in the new Business Plan, with possible
repercussions both on the recoverability of the carrying amount of certain asset (Goodwill and Investments), and the ability to
continue operating as a going concern in the foreseeable future and within the specific horizon of the plan.
8. Risk relating to competitiveness
The aviation sector continues to be characterised by fierce competition, which has increased in recent years due to the constant
evolution of the sector, the process of progressive liberalisation of air routes and the greater weight of the so-called low-cost carriers
In a scenario marked by a high degree of uncertainty with respect to the business cycle and a resulting reduction in consumer
spending , airlines showed growing tendency to protect their business volumes which resulted in more intense price competition and,
consequently, lower operating margins.
Given this competitive environment in the "scheduled" segment, the Meridiana fly group implemented strategic and tactical actions to
better position itself in the Charter and Scheduled markets, taking also into account the crisis of its competitors. There is no
guarantee, however, that even if the objectives of the New Business Plan were fully achieved, the Company and the Group would be
able to cope in the future with further generalized tariff reductions, with potentially adverse effects on their financial and operating
results, nor can it be ruled out that more intense competitive pressure may in any case adversely affect the earnings, financial and
equity results of the Issuer and the Group.
9. Risks associated with attacks / disasters / political events or serious accidents
The occurrence of natural disasters, epidemics, terrorist attacks or other adverse political events, especially in countries outside
Europe, which being major tourist attractions, are subject to significant demand for air travel, may cause, generally in the short-
medium term (depending on the seriousness of events) a significant downturn in consumer demand for air transport. The Company
and the Group, although they diversify the services offered in terms of covered geographical areas, are exposed to the risk that the
occurrence of such events may lead to adverse financial and earnings effects.
Finally, as an inherent aspect of the air transport business, there is the risk, albeit remote, of the occurrence of more or less serious
incidents relating to the fleet, which could affect the ability of the company to continue operating as a going concern.
10. Commercial risks
In view of the strong exposure to the tour operating business, which is covered by the charter activities of Meridiana fly, the
Company and the Group are exposed to possible negative developments in this sector (such as the trend towards disintermediation
of the tourism business in favour of "do it yourself" approaches or the tendency towards industry concentration, leading to gradually
fewer operators). The Meridiana fly group, however, thanks to its established presence and in-depth knowledge of the industry
strengthened by the acquisition of Air Italy– has implemented concentration strategies with the most important and reliable tour
operators, giving greater assurance of contractual compliance (contracts are in any case always covered by performance deposits
and sureties provided by tour operators as well as clauses providing for cash-in before the flight and possibly also the option to
suspend the flight in the event of non-payment)
Against the benefits in terms of counterparty solidity resulting from focusing on the top tour operators, there is the risk of possible
discontinuation of dealings with one of these customers, fewer in number but relatively more significant in terms of business for the
Company. Such interruption may also significantly affect the operating and financial results of the Company and the Group.
Meridiana fly - Annual Financial Report at 31 October 2012 - 61
11. Risk associated with the occurrence of operational disruption
The Company and the Group are exposed to the risk of occurrence of operational disruption. This may concern problems regarding
both the fleet – with the risk of temporary suspension of normal operations – as well as the non-fulfilment or partial fulfilment in the
provision of services/supplies by third-party operators. In this regard, it should be noted that Meridiana fly group outsources some
services (air traffic control, management of airport services and ground services, catering, maintenance services) concerning ground
operations, consisting in preparatory flight activities for passengers, baggage and cargo in the airport, as well as for the efficient
maintenance of the aircraft. There is therefore a risk of failure or inadequate monitoring on the output of the service rendered by third
parties. Additional operational and commercial difficulties that may arise, which may be accentuated by the seasonality of the
business, may make it difficult to handle the adverse event, including the cost of re-booking passengers. In order to reduce these
risks, Meridiana fly group, has developed agreements with other carriers and suppliers that guarantee their support in case of
operational adverse events, especially in foreign airports.
12. Operating management risks
The Group is exposed to a series of risks concerning, among others: 1) the possibility of fraud relating to credit collection for sales
completed via credit cards, the risk of which is managed by means of good knowledge of such occurrences and the elimination of
the collection channel in the more serious cases, or by agreements with parties specialised in managing such events; 2) failure to
comply with regulations in the event of their amendment or incorrect interpretation, both in the purely business sphere and, more
generically, as regards our status as a listed company. This risk is managed by means of internal and external control systems, also
with the aid of advisors who ensure compliance with current regulations; 3) a major dependence on information systems to ensure
an adequate, seamless and efficient air transport service. For this risk, the Company has implemented back-up and constant-
assistance procedures, also with the aid of specialised providers; 4) the importance of relations with trade unions, which are
particularly active in the crew personnel category and, in case of union tensions including in relation to possible restructuring plans,
can affect the Company’s operations and the expected results From this point of view, the Company has set up a dialogue-based
approach with trade unions with the aim of ensuring respect of workers’ rights as part of an effective and efficient management of the
value generation processes of the Group.
Despite the initiatives undertaken, it is possible that the risks mentioned above may have an adverse effect on the activity and,
consequently, on the Company and the Group results.
13. Financial risks
With regard to the financial risks not previously discussed, it should be noted that the Company and the Group, while monitoring and
managing these risks in the most effective way, are exposed to the following financial risks associated with their operations:
• credit risk: it refers to the risk of insolvency of a counterparty or the deterioration of the attributed credit rating;
• market risk: resulting from exposure to fluctuating interest and exchange rates;
• liquidity risk: in terms of reduced availability of financial resources and access to the credit market.
These financial risks impact directly on the ability in the foreseeable future to manage the business while preserving a financial and
equity balance which is a prerequisite to operate as a going concern and therefore represents a significant risk for the Group. Given
these risks, it should however be noted that the parent company Meridiana, supported by AKFED, has always supported the
Company and the Group as demonstrated by the commitments historically assumed until the date of approval of these financial
statements.
14. Risks associated with the evolution of the regulatory framework
Meridiana fly - Annual Financial Report at 31 October 2012 - 62
The Company and the Group cannot rule out a significant change in the air transport regulatory framework, both nationally and
internationally, which may in the near future lead to restrictions on their commercial and operational capacity, or result in higher costs
or the need for additional investments. In particular, the assignments of traffic rights and airport slots have proven to be critical for
the sector, as these changes may significantly affect the services offered by airlines.
Among the regulatory changes, suffice it to mention Directive 2003/87/EC, which established the Community scheme for
greenhouse gas emission allowance trading called "Emission Trading Scheme" (ETS). Therefore, it is possible that further
developments in the context of this legislation and its application can (i) result in a significantly negative impact on the operational
and business capability of the Company and the Group, or (ii) result in significant cost burdens or the need for investments resulting
in negative earnings and financial effects for the Group and the Company.
15. Environmental and safety risks
As regards environmental risks, reference should be made to section 2.8 - Environment
With regard to issues of safety at work, the Company and the Group are committed to safeguard occupational safety, in accordance
with Italian Legislative Decree no.81 of 9 April 2008 (Italian Consolidated Safety Act) and with specific regulations, including through
the implementation of the organisational, management and control model envisaged by Legislative Decree no. 231 of 8 June 2001.
With specific regard to issues of health and safety of workers in the workplaces, the Company and the Group constantly monitor all
potential risks, the risk assessment procedures, and the characteristics necessary for organisational and management models in
order to ensure prevention and workers protection.
2.24. Significant events subsequent to year end
The main events that occurred subsequent to the financial year end which closed at 31 October 2012 are described below.
2.24.1. New maintenance agreements
Following the LOI - Letter of Intent - in which Meridiana fly - Air Italy group and Meridiana Maintenance agreed in February 2012 to
sign a new contract for the exclusive supply of maintenance services for their aircraft fleet, on 14 November 2012 the Board of
Directors of Meridiana fly S.p.A. approved a new long-term contract (until 31 December 2020) with Meridiana Maintenance S.r.l.
concerning the procurement of maintenance services and the technical management of the aircraft comprised in the Group's fleet
and the related aeronautical components, which replaces the previous contract of February 2010.
The new contract aims to redefine and optimize the overall area of maintenance services and technical management of the fleet
after the business combination with Air Italy, thus taking into account the different levels of activity, the structure of the fleet after the
integration, the operating bases, as well as the enlarged scope of Meridiana Maintenance technical licenses (e.g. A/C check on the
Airbus fleet, formerly partly outsourced to third party suppliers). In particular, with respect to the previous maintenance contract,
there are other benefits for the Meridiana fly group related to greater pricing flexibility based on actually performed activity (e.g. flight
hours, cycles, aircraft) and consequent greater correlation between revenues and operating costs and significant savings on the
overall fees (estimated, other things being equal, at not less than Euro 4 million on an annual basis) due to increased efficiency and
synergies achieved by Meridiana Maintenance thanks to the enlarged scope of their technical licenses and increased internal
productivity. For further information on this matter, please refer to the Information Document on most significant transactions with
related parties published on 21 November 2012.
In addition, at the end of November 2012, a final multi-year agreement was signed with Iberia (following the various temporary bridge
agreements in place from April onwards) to ensure the availability of maintenance services (in particular access to the technical
components of the Airbus fleet) in addition to those provided by Meridiana Maintenance such as to ensure that business operations
are conducted according to rules and regulations in force.
Meridiana fly - Annual Financial Report at 31 October 2012 - 63
2.24.2. Litigation with Lufthansa Technik
Following the termination of the contract with Lufthansa Technik in March 2012, in a letter of 29 November 2012 the above supplier
notified the request for payment, in addition to overdue invoices, also of alleged sums by way of indemnity for the early termination of
the agreements for the provision of maintenance services on Airbus aircraft (various checks, components, trolleys and APU), for an
amount of Euro 3,411 thousand and USD 1,892 thousand, together with other requests related to stock material repurchase or return
obligations associated with the application of the contract.
The Company is making the necessary assessments in order to formally object to the request with the support of its legal advisors;
in any case the company has recognized liabilities in the financial statements to the extent the company considers due according to
internal evaluations.
2.24.3. Update on Sameitaly liquidation
As specified in Section 2.13.6, the subsidiary was placed in liquidation by filing the resolution for the liquidation of the company and
appointment of a liquidator with the Sassari Register of Companies on 14 November 2012. With effect from 1 December 2012, as
per union agreements, all the 39 employees were transferred to Meridiana fly, with simultaneous application for most of them (23
employees) of the "zero hour" temporary redundancy procedure (CIGS) already in place within Meridiana fly, due to the commercial
reorganization already started in the parent company or the overlapping of activities already carried out in Meridiana fly.
2.24.4. Debt renegotiation with banks
In view of the non-compliance at 30 September 2012 of the "Net Financial Debt/EBITDAR" covenant of 1.35 provided for by the
syndicated loan agreements of Meridiana fly with the syndicate of banks, Meridiana fly asked the banks involved to waive the
exercise of contractual remedies granted to banks, until 28 February 2013 (see Section 2.13.7).
The Meridiana fly group asked the banks to restructure the credit lines and the related conditions granted to the Company and the
subsidiaries Air Italy and Air Italy Holding, to support the Group in the implementation of the new Business Plan and, pending such
restructuring, to temporary extend all existing credit lines until 31 July 2013
Negotiation on these issues is still in progress.
In this respect, it should be noted that the Group's bank borrowings are to large extent guaranteed by Meridiana S.p.A. and AKFED
(in particular there are guarantee commitments assumed by Meridiana S.p.A. and counter-guaranteed by AKFED on existing loan
agreements for Euro 22.55 million with the syndicate of banks of Meridiana fly and for Euro 9 million with the bank that finances Air
Italy Holding), with the exception of Air Italy uncommitted credit lines which on 31 October 2012 amounted to Euro 26.9 million, for
which the risk of immediate repayment in the event of expiration of the agreement entered into with the banks is not covered by
guarantees from Meridiana S.p.A. or AKFED.
In this regard, the Directors believe that, based on the information received in ongoing negotiations with the banks which provide for
the rationalization and renegotiation of the overall debt of Meridiana fly-Air Italy Group including through new finance, even in the
absence of the required formal waiver and the temporary extension to 31 July 2013 of all existing credit lines, lenders will not
exercise any of the early termination and / or cancellation clauses or events and that therefore they will not request the early
repayment of existing loans, including Air Italy uncommitted credit lines. The Directors' opinion is based not only on their well-
established relationship with the banks, but also on the renewed significant commitment by Meridiana S.p.A. and AKFED in respect
of the going concern basis and the implementation of the Business Plan (See section 2.24.14 below New Meridiana/AKFED
commitments for the going concern and 2.26 Business Outlook).
2.24.5. Dispute with the lessor ILFC
Meridiana fly - Annual Financial Report at 31 October 2012 - 64
As a result of non-compliance with the repayment plan of past due payables agreed with the lessor ILFC (in particular the
"restructuring agreement " of 10 August 2012 for USD 5.6 million), the latter resorted to the Irish High Court in Dublin to have its
claim ascertained for a total amount quantified by the lessor in USD 12.8 million, obtaining favourable ruling on 10 December 2012.
Subsequently, on 21 December 2012 Meridiana fly signed a lease termination agreement for the early restitution of an Airbus A330
(I-EEZM), against an agreed additional charge of USD 2.5 million; the aircraft was returned on 11 January 2013 (rather than 25
March 2013).
The Company is conducting negotiations with the lessor in order to reach an out of court settlement in order to define a final payable
amount along with a related deferred payment plan; in any case the company recognized the related liability in the financial
statements to an extent deemed payable according to internal assessments, which are confirmed by ongoing negotiations
wherefrom no additional costs are therefore expected.
2.24.6. Board of Directors' meeting of 12 December 2012
On 12 December 2012 the Board of Directors of Meridiana fly met in order to examine the business plan prepared by management
and generally agreed on the guidelines and actions therein contained; however, further analysis was considered necessary including
with reference to the plan financial viability and the preparation of an appropriate related risk assessment that takes into account the
impact of macroeconomic, competitive and market factors on the plan variables.
At the same time and with a view to immediately start certain actions consistent with approved guidelines, the Board of Directors
also authorized the Chief Executive Officer to immediately start a series of actions. In particular, a reduction of the network and
consequently the fleet and staff has been planned as from 7 January, with the sale of 10 aircraft (7 Airbus A320/319, 2 Airbus A330
and 1 Boeing 767), and consequent extension of the temporary redundancy procedure (CIGS) to an additional number of
employees, as specified in more detail in paragraph 2.24.7 hereafter.
In view of the consolidated operating results as at 31 October 2012 and given that they appear to reflect an erosion of the company's
equity, the Board of Directors resolved to convene the shareholders' meeting pursuant to art. 2446 of the Italian Civil Code,
authorizing the Chairman to proceed with the call by setting the relevant date taking into account the necessary time to draw up a
reference statement of financial position.
2.24.7. Agreements for extending the temporary redundancy procedure (CIGS)
As already provided for in the new measures to contain costs, on 27 December 2012 the company Meridiana fly S.p.A. and the
unions formalized an agreement before the Ministry of Labour and Social Policies aimed at enlarging the scope of the "zero hour"
and "rotation" temporary redundancy procedure (CIGS) (already in place in the company Meridiana fly after the agreement of 23
June 2011) from 845 FTE employees to 1,350 FTE employees (out of a total workforce of 2,040 employees), with a consequent
increase of 505 employees, broken down as follows:
• No. 186 Captains and pilots
• N. 908 Flight Attendants
• N. 256 Ground Staff
The above temporary redundancy procedure (CIGS) shall last for a maximum of 48 months expiring in June 2015 and envisages the
support of the Air Transport Special Fund pursuant to Law n. 291/2004.
Also, after a communication dated 24 December 2012, the subsidiary Air Italy initiated another temporary redundancy procedure
pursuant to Law 223/1991 (mobilità) for 184 employees and on 31 December 2012 Air Italy SpA and trade unions signed an
agreement before the Ministry of Labour and Social Policies for the application of the "rotation" temporary redundancy procedure
Meridiana fly - Annual Financial Report at 31 October 2012 - 65
(CIGS) with working hours suspended up to a maximum of zero hours for a maximum of 184 FTE employees (out of a total
workforce of 476 employees), broken down as follows:
• No. 39 Captains and pilots
• N. 61 Flight Attendants
• N. 84 Ground Staff
Also this procedure (CIGS) shall last for a maximum of 48 months (expiring in December 2016) and similarly envisages the support
of the Air Transport Special Fund pursuant to Law n. 291/2004.
The temporary redundancy procedure (CIGS) will be applied to the staff of both companies in accordance with the procedures and
criteria defined in the agreement, taking into account the company organizational needs and in compliance with the applicable law.
2.24.8. Early surrender of aircraft
As already mentioned, as a result of the strategic decision to decrease activities, Meridiana fly early returned to lessor the following 8
aircraft (out of 10 planned) in the month of January 2013:
• No. 2 A320 Airbus (I-EEZF - I-EEZG) on 6 January 2013 (instead of February / April 2015)
• No. 2 A320 Airbus (EI-EI-EZO and EZN) on 10-12 January 2013 (instead of March 2014)
• No. 1 A330 Airbus (I-EEZM) on 11 January 2013 (instead of 25 March2013), at an additional flat charge of USD 2.5 million
(partly covered by phase-out provisions)
• No. 1 A319 Airbus (EI-DFP) on 09 January 2013 (instead of June 2014)
• No. 2 A319 Airbus (EI-DFA e EI-DEZ) on 19 January 2013 (instead of June 2016)
The delivery of these aircraft was negotiated at current maintenance conditions (so-called "As Is Condition"), with consequent
savings in cost and time associated with refurbishment (phase-out) of such aircraft, subject to the offsetting of security deposits and
maintenance claims with outstanding payables. The overall effect of the early return of aircraft resulted in an impact on the
consolidated income statement of Euro 3.5 million, plus the provision for onerous contracts relating to the lease payments for the
period between 1 November 2012 and the date of actual delivery of the aircraft, amounting to Euro 3.1 million as more fully
discussed in the notes to the separate financial statements (Ref. 19 - Provisions for liabilities and charges).
2.24.9. ENAC measures on licenses
On 11 January 2013 the National Agency for Civil Aviation (ENAC) notified Meridiana fly and Air Italy the suspension of their
operating license and the simultaneous issuance of a provisional license for passengers and freight transport for both carriers. This
change, which has no impact on operations nor does it involve changes in terms of either safety or regularity of flights, involves a
monthly monitoring by ENAC on the earning, capital and financial management of the two companies.
The license suspension is a measure that ENAC may take with regard to a Community carrier "if it is no longer satisfied that this
Community air carrier can meet its actual and potential obligations for a 12-month period". (Article 9 of EC Regulation No
1008/2008). The same article 9 of the Regulation in question also states that "the competent licensing authority may grant a
temporary licence, not exceeding 12 months pending financial reorganisation of a Community air carrier provided that safety is not at
risk, that this temporary licence reflects, when appropriate, any changes to the AOC, and that there is a realistic prospect of a
satisfactory financial
reconstruction within that time period". The resolution by which the Authority granted the temporary licenses to Meridiana fly and Air
Italy is valid for six months, renewable for six additional months.
Meridiana fly - Annual Financial Report at 31 October 2012 - 66
In light of the above-mentioned provisions of Community law, by issuing the above provisional licenses to the two Group carriers, the
Aviation Authority considered it reasonable, in light of the verifications carried out, that Meridiana fly and Air Italy submit a realistic
restructuring plan to cope with the temporary financial difficulties, to be implemented over a twelve month period, and formally
adopted by the Directors for the achievement of corporate objectives through the approval on 26 February 2013 of the 2013 budget
which contained the verification of the going concern assumption. The companies, which had already started discussions with the
Aviation Authority in order to plan the procedure to get back the permanent license for the two carriers, by also providing the
Authority with the Plan draft documents enabling it to carry out its verifications, are now going to deliver the final documents to the
Authority which were approved along with this Financial Report.
2.24.10. Agreement with former Air Italy Holding shareholders and appointment of a new CEO
On 15 January 2013, an agreement was reached whereby Meridiana S.p.A. acquired all the ordinary Meridiana fly shares held by
the former Air Italy Holding S.r.l. shareholders ("Air Italy Holding") - i.e. Marchin Investments B.V. ("Marchin"), Pathfinder S.r.l.
("Pathfinder") and Zain Holding S.r.l. ("Zain") - approximately representing 38.71% of the share capital of Meridiana fly for a price of
Euro 0.506 per share on shares sold by Marchin and Euro 0.596 per share on shares sold by Pathfinder and Zain.
After performance of the above Agreement, carried out through the exchange of shares in mid-February 2013, Meridiana S.p.A.
currently holds a total of 89.91% of Meridiana fly share capital.
Pursuant to the agreement Meridiana S.p.A. acquired all Meridiana fly warrants on ordinary shares held by Marchin, Pathfinder and
Zain for a total amount of Euro 3.
Consistent with the above agreement, Captain Giuseppe Gentile resigned from his office as CEO of Meridiana fly and Air Italy S.p.A.
("Air Italy"); Alessandro Notari also resigned from his office as Chief Commercial Officer of Meridiana fly and Air Italy, as well as from
all other offices held.
The Board of Directors of Meridiana fly on 15 January 2013 appointed Roberto Scaramella, AKFED Aviation Director, as Chief
Executive Officer of the company. A similar resolution was passed by the Board of Directors of Air Italy.
The Board of Directors of Meridiana fly subsequently confirmed the guidelines of the business plan, which takes into account a
continuing weak demand due to the current global recession. In particular, these guidelines confirm the Group's commitment in all
strategic areas against, however, a significant reduction in production capacity (in large part already implemented by the network
reduction started 7 January 2013 and the return of aircraft in excess to the lessor), the effect of which in terms of staff is mitigated by
enlarging the scope of the temporary redundancy procedure (CIGS) applied to Meridiana fly and Air Italy, as formally agreed in
December 2012.
Under this agreement, moreover, Marchin, Pathfinder and Zain irrevocably waived the portion of the Earn-out not yet collected, i.e.
the variable component of the amount due to them by Meridiana fly as consideration for the purchase of shares representing 100%
of the Air Italy Holding share capital, estimated at Euro 3.76 million.
Furthermore as part of the above agreement, it was agreed that the interest bearing loan granted by Zain to Air Italy Holding on 30
June 2011 of Euro 3,150 thousand, subsequently sold by Zain to Marchin as documented by the parties, shall irrevocably be
transferred by Marchin to Meridiana at an all-inclusive price of Euro 3 million which Meridiana undertook to pay to Marchin by 30
June 2014.
The Directors of Meridiana fly Giuseppe Gentile, Alessandro Notari, Carlo Rota and Mario Porcaro resigned (the first three also from
their office as Directors of Air Italy) with effect from the date of transfer of the shares, in mid-February 2013. Similarly and with the
same effective date, the standing statutory auditor of Meridiana fly Giovanni Rebecchini, the standing statutory auditor of Air Italy
Paolo Lupi and the alternate auditors of Air Italy Massimo Alfieri and Stefano Baruffato resigned from office.
The Board of Directors of Meridiana fly on 15 January 2013 agreed to pay the former Chief Executive Officer Giovanni Gentile a
lump sum of Euro 500,000 and former Chief Commercial Officer Alessandro Notari the lump sum of Euro 300,000; these amounts
Meridiana fly - Annual Financial Report at 31 October 2012 - 67
had been defined in the above-mentioned agreement (subject to approval of the Committee for Related Party Transactions) and
comprehensively and indistinctly cover: (i) indemnity for the early termination of the offices held by Giuseppe Gentile and Alessandro
Notari as members of the Board of Directors of Meridiana fly S.p.A. and the other Group companies, and (ii) signing by Giovanni
Gentile and Alessandro Notari of a covenant whereby they undertake not to invest in aviation activities or other activities in
competition with those carried out by the Meridiana fly group, in Italy or in any another EU member state, until 30 November 2013.
There are no additional benefits following the termination of the above offices and any entitlements to monetary incentive schemes
shall cease.
As a result of the actual transfer on Meridiana security account, on 15 February 2013, of the shares and warrants purchased from
the former Air Italy Holding shareholders, the resignations of the various directors became effective (Gentile, Notari, Rota and
Porcaro) and the shareholders' agreement signed by Meridiana S.p.A., Marchin, Pathfinder and Zain on 18 July 2011 ceased to
have effect as therein provided. On that date a number of other agreements entered into by the parties as part of the transaction
completed in July 2011 also ceased to have effect, including the Framework Agreement disclosed to the market pursuant to art. 122
of the CFA.
Following performance of the mentioned Agreement, Meridiana currently holds 95,644,209 ordinary shares of Meridiana fly equal to
89.91% of the share capital, no. 94,891,777 warrants Meridiana fly 2012-2013, as well as reserves for Meridiana fly future capital
increases of Euro 58,063 thousand.
2.24.11. Notice of Shareholders' meeting on 27 February 2013
The Shareholders' Meeting has been convened for 27 February 2013 on first call only to pass resolution on the following items:
ORDINARY MEETING
1. Resignation of four Directors and a member of the Board of Statutory Auditors. Proposal to reduce the number of members of the
Board of Directors, in compliance with article 14, first paragraph, of the By-laws, or to take the measures provided for by article 2386
of the Italian Civil Code and article 14, third paragraph, of the By-laws; proposal for adoption of the measures set forth in article 2401
of the Italian Civil Code and article 26 of the By-laws; related and consequent resolutions.
EXTRAORDINARY MEETING
1. Review of the Company statement of financial position pursuant to Article 2446 of the Italian Civil Code; related and consequent
resolutions.
On 25 January 2013, the Board of Directors disclosed the Report on the agenda pursuant to art. 125-ter of the CFA , to which we
refer for additional details.
As specified in the report, in respect of the members of the Board of Directors, given the planned termination of office of the directors
referred to in the Agreement of 15 January 2013 (see Section 2.24.10) and that the majority of the Directors remain in office,
including three independent directors pursuant to art. 147-ter CFA, the Board of Directors considered it appropriate not to co-opt
other Directors pursuant to article 2386, third paragraph, of the Italian Civil Code, and to directly submit the issue to the
Shareholders' Meeting for the appropriate decisions, alternatively proposing to reduce the number of members of the administrative
body from twelve to eight or to fill out the missing positions in the Board of Directors by appointing four Directors who would expire
along with the other members of the Board of Directors still in office.
With regard to the Board of Statutory Auditors, the Board of Directors proposed that the Shareholders' Meeting, pursuant to art. 2401
of the Italian Civil Code, appoint one standing statutory auditor and one alternate statutory auditor, whose office will expire together
with the other statutory auditors in office, i.e. at the meeting called to approve the financial statements for the year ending 31 October
2014.
Meridiana fly - Annual Financial Report at 31 October 2012 - 68
With regard to the extraordinary meeting, please refer to the explanatory report on the company statement of financial position
pursuant to Article 2446 of the Italian Civil Code and Article 74 of Consob Regulation and the related comments of the Board of
Statutory Auditors, disclosed on 6 February 2013. It should be noted, however, that the mentioned statement of financial position did
not reflect the closing accounting entries, nor a number of complex calculations and assessments on such entries, and in particular
the impairment test on the value of non-current assets conducted by the expert appointed for the purpose, which subsequently led to
the case referred to in Article 2447 of the Italian Civil Code (reduction of the share capital below the legal minimum).
2.24.12. Notice of meeting of the holders of Warrants on 23 March 2013
On 20 February 2013 the Board of Directors of Meridiana fly passed resolution to supplement the "Regulation of Meridiana fly
Warrants on ordinary shares 2012-2013" in order to include a specific provision on procedures for the amendment of the Warrants'
regulation. In particular, article 10 of the Warrants' Regulation, as supplemented as a result of the Board of Directors' resolution
provides that the Warrants' Regulation may be amended, provided that the amendments are approved with the favourable vote of
the absolute majority of Warrant-holders, through a resolution passed in a specific warrant-holders' meeting.
The amendment to the Regulation was justified on grounds that, taking into account the subscription price of each of the additional
shares, which is not less than Euro 1.275, and the recent prices of Meridiana fly stock, the exercise of the Warrant by their
respective owners represents a non-economically viable transaction. Furthermore, since the draft financial statements at 31 October
2012 determined a situation relevant under Article 2447 of the Italian Civil Code, it was necessary to convene a meeting of Meridiana
fly shareholders in order to take the necessary measures.
It should also be noted that on 31 January 2013 a total of 6,680 Warrants were exercised, representing approximately 0.0066% of
the total assigned Warrants.
In light of the above considerations, and in particular of the possible share capital transactions, the Board of Directors decided to
convene a meeting of warrant-holders on 23 March 2013, in order to advance the final date for the exercise of the said Warrants,
from 31 May 2013 to 31 March 2013, and to simplify the procedures for carrying out the Company's notifications to the warrant-
holders.
Accordingly, pursuant to the Warrants' Regulation as above amended, the warrant-holder meeting was convened, by publication of a
notice in a national newspaper on 21 February 2013.
2.24.13. Approval of the Business Plan
On 26 February 2013 the Board of Directors approved a new Business Plan that includes both immediate restructuring measures
and medium term structural actions, the most significant points of which are summarized below:
• Optimization of the operating network and use of the commercial fleet according to available capacity and sales volumes,
by increasing the average load factor
• Cutting national / international routes and rotations with small or negative margins
• Strengthening the core business in Sardinia and developing local activities, including a sustainable arrangement for the
renewal of the "territorial continuity" regime;
• Reduction of labour costs through a larger and more efficient use of subsidized redundancy measures both for Meridiana fly
and Air Italy (according to temporary redundancy procedure (CIGS) agreements already signed).
• Signing the new company labour contract for Meridiana fly in line with industry benchmarks
• Review of the organizational and operating structure of the two airlines with a view to increase synergies and efficiency at
Group level
Meridiana fly - Annual Financial Report at 31 October 2012 - 69
• Revamping commercial operations by focusing on brand enhancement and a new set of products and services, along with
the development of local partnerships in strategic geographical areas
• Gradual downsizing of the fleet to 25-28 aircraft, along with fleet renewal and modernization, aimed at increasing
standardization and cost-effectiveness
• Reorganization of aircraft maintenance with greater vertical integration
• Reduction and optimization of overhead including by revising of Group processes and organization
• Review of contracts with major suppliers along with gradual repayment plans for past due payables.
Restructuring loans and relationships with the banking system at Group level. The various assumptions underlying the new
Business Plan include a Euro / USD exchange rate at 1.25 and the cost of Jet Fuel at USD 961 per metric ton, while in respect of
demand (no. passengers) a gradual recovery is conservatively factored in only starting in 2015 (increase in number of passengers
by about 3%), given the level of uncertainty as to an economic recovery in the short-term.
Simultaneously with the approval of the Business Plan, the Board of Directors also approved a monthly budget up to the month of
October 2013 which shows a loss for an amount comparable to that of 2012 and on the basis of which the Directors have assessed
whether the going concern assumption is satisfied (see paragraph 24.2.14. New Meridiana/AKFED commitments for the going
concern and 2.26 Business Outlook).
2.24.14. New Meridiana/AKFED commitments for the going concern
Subsequent to the end of FY 2012, the Shareholder Meridiana S.p.A., with the support of its parent AKFED, considering the financial
needs of Meridiana fly and the subsidiary Air Italy arisen during the first months of 2013, provided additional funding to Meridiana fly
as follows:
� Euro 8 million in November 2012;
� Euro 8 million in December 2012;
� Euro 15 million in January 2013;
� Euro 5 million in February 2013, until 26 February 2013.
The above loans are interest bearing and have a medium term maturity.
Therefore, in order to deal with the financial stress generated by the negative operating performance in the second half of 2012 and
evidenced by the full use of available credit lines and the increase in overdue payables to suppliers and to tax authorities and
considering the funding of Euro 14 million provided by Meridiana in October 2012, Meridiana (backed by AKFED) provided new
loans to the Company in addition to previous commitments totalling Euro 50 million.
In addition, simultaneously with the approval by the Board of Directors of the 2013 Business Plan and 2013budget, Meridiana S.p.A.
(backed by an equal commitment by AKFED) undertook to support the Company and the Group so that they may continue operating
as a going concern, as follows:
� commitment to convert the loans granted to Meridiana fly in equity reserves (or payments for future capital increase and/or
subscription of new shares as part of a capital increase) up to the amount of Euro 116 million, as well as interest accrued to
the date of actual conversion by Meridiana S.p.A.;
� commitment to provide additional financial resources for a total of Euro 65 million in one of the following ways:
- subscription and payment of new shares issued as a result of one or more capital increases;
- payments to equity reserves for future capital increases;
Meridiana fly - Annual Financial Report at 31 October 2012 - 70
- interest-bearing loans;
- a combination of one or more of the above
If financial resources are provided as a loan, this will be provided against payment of a variable interest accruing at market rates
(Euribor + 200 bps) and will expire on 31 December 2015, unless it is early converted into Equity or refunded, even partially, as from
31 October 2013 in the event Meridiana had cash in excess of its operating needs.
This new commitment is in addition to commitments already in place, which relate primarily to bank loans for a total amount of Euro
79.5 million, including guarantees for bank loans (Euro 22.55 million for the syndicated loan granted to Meridiana fly and Euro 9
million for the financing to Air Italy Holding), and residual Euro 3.5 million originated from a previous Meridiana / AKFED commitment
for a total of Euro 7.5 million and only partially used by the Company, but still available to meet the Company and the Group financial
and equity needs.
Overall, the above-mentioned Meridiana / AKFED commitments, amounting to Euro 184.5 million (plus accrued interest) with regard
to the portion usable by way of payment for future capital increase, are considered adequate by the Directors for the purposes of
carrying out a capital increase sufficient to bring the company outside the condition envisaged in Article 2447 of the Italian Civil Code
(which is the situation of the Company as at the date of the financial statements), taking also into account the expected loss for the
current year, as described in paragraph 2.26.
2.25. Other information
Pursuant to Consob communication no. DEM/6064293 of 28 July 2006 it is hereby stated that in the year 2012 no atypical and
unusual transactions have been carried out as defined by the above Communication.
No purchases or sales of treasury shares were made, directly or indirectly, during the financial year. As at 31 October 2012
Meridiana fly does not hold own shares.
2.26. Business Outlook
With regard to the economic outlook for 2013 expectations are still for a recessionary scenario although less negative than last year.
There remains considerable uncertainty as to the likelihood of a recovery in short-term consumption and investment in the absence
of substantial new legislative and regulatory initiatives concerning the real as well as the financial economy.
In this context, air transport demand in the Group's target segments is not expected to reverse, therefore expectations are extremely
cautious with respect to the Group business performance in the current year, in line with the previous year, net of non-recurring
charges and impairment losses.
We believe, however, that, given the performance and facts recorded in the past year, including significant non-recurring charges,
along with the necessary and urgent reorganization actions already implemented and the new ones included in the recently
approved business plan, a major turn-around has initiated with the full support of the parent and, ultimately, of the major shareholder
AKFED (parent company of Meridiana S.p.A.).
In this regard, it should be noted that, for the purposes of implementing the Business Plan and the budget, the priority is to get back
the operating license for the Company and its subsidiary Air Italy which was suspended by the National Civil Aviation Authority on 11
January 2013, as a result of which the activity is currently carried out on the basis of temporary licenses. In this respect, the
Directors specified that discussions are already ongoing with the Aviation Authority in order to plan the necessary procedures to get
back the permanent operating license for both companies.
It should also be emphasized, however, that the forecasts contained in the new 2013-2017 Business Plan and, consequently, a
balanced financial performance are significantly dependent on (i) the performance of external non-controllable factors, including in
particular the EUR/USD exchange rate, Yield, load factor and fuel costs; (ii) the effective rationalization of the network, the fleet and
the contract and operating cost structure; (iii) the achievement of an overall debt restructuring agreement with the lenders, for which
Meridiana fly - Annual Financial Report at 31 October 2012 - 71
the risk of a request for immediate repayment exists, not fully mitigated by the guarantees provided by Meridiana and AKFED,
especially with respect to Air Italy uncommitted credit lines; (iv) the actual favourable renegotiation of employment contracts expired
at the end of 2012 along with an efficient use of the Special Temporary Redundancy Fund (CIGS); and (vi) the outcomes of litigation,
counterparties' creditworthiness, credit terms from suppliers and the management of overdue account payables. These uncertain
and uncontrollable variables may result in significant deviations between budgeted and actual data.
Based on the forecasts of the 2013 Budget, in the early months of next year the Company will again make use of the equity support
provided by Meridiana S.p.A. and AKFED in order to preserve the financial and equity balance that is typical of a going concern. In
this regard, the Directors, while noting that the company can count on total commitments of Euro 184.5 million, do not have other
formal commitments for the portion relating to the capital support that will be necessary over a twelve month period as from the date
of these financial statements, such period having been adopted as reference horizon by the Directors for the purposes of verifying
the going concern assumption; nevertheless, the Directors believe that Meridiana S.p.A. and AKFED will continue to support the
Company and the Group in accordance with the needs that will emerge from a more precise analysis of current results.
In addition, the evolution of scenario variables beyond the control of the Company and the Group other than those assumed in the
new 2013 - 2017 Business Plan, as well as the ineffectiveness of the measures envisaged in the plan itself or the occurrence of non-
recurring charges, may determine a final loss in 2013 higher than expected and, consequently, the need to resort to additional
financial and equity commitments by Meridiana S.p.A. and AKFED, even before the end of the year, in order to satisfy the going
concern assumption.
Finally, those factors could lead to the recognition of additional asset write-downs resulting from an update of the impairment test
conducted on 31 October 2012. The verification of the carrying amount in the consolidated and in the parent separate financial
statements may also be necessary during the year due to the high sensitivity shown by the CGU's value in use to changes in key
assumptions adopted for its valuation - which are subject to developments beyond the control of the Company and the Group - and,
consequently, the need to resort to additional equity and financial support by Meridiana S.p.A. and AKFED.
Considering all of the above circumstances, there is a significant uncertainty that may cast doubts as to the ability of the Company
and the Group to continue operating as a going concern. Nevertheless, after carrying out the necessary checks and assessing the
uncertainties described above, in particular the risk of greater than expected losses due to the significant exposure of results to the
evolution of non-controllable scenario variables, with possible further impact on the carrying amount of the investment in in Air Italy
Holding currently of Euro 14.8 million (Euro 90.3 million at 31 December 2011), the residual Goodwill recognized in the separate
financial statements of Euro 28.2 million (Euro 56.4 million at 31 December 2011) and the residual Goodwill recognized in the
consolidated financial statements of Euro 87.5 million (Euro 145.2 million at 31 December 2011), it is believed that there is a
reasonable expectation that the Group and the Company have adequate resources to continue operating as a going concern and be
able to meet their obligations in the foreseeable future; this opinion is supported by the significant commitments made by the major
Shareholder for an amount of approximately Euro 184.5 million, which is considered adequate for the purposes of carrying out a
capital increase sufficient to reconstitute an adequate capitalization, even taking into account the expected loss for the current
financial year.
Such a view is also based on the consideration that any greater financial requirements than those estimated, even in the event of
failure to reach an agreement with the banks for a renegotiation of credit lines, could be met through the use of other sources of
funds, including by requesting additional financial support to the major shareholder, as done in the past.
Consequently the Directors consider it appropriate to prepare the separate and consolidated financial statements at 31 October 2012
on the going concern basis.
Milan, 26 February 2013
On behalf of the Board of Directors:
The President
Marco Rigotti
Meridiana fly - Annual Financial Report at 31 October 2012 - 72
Proposals by the Board of Directors to the Shareholders' meeting
Dear Shareholders,
The financial statements of Meridiana fly S.p.A for FY 2012 closed with a net loss of Euro 190,433,564 and a negative shareholders'
equity of Euro 104,474,240.
The Board of Directors proposes to:
- Approve the financial statements for the year ended 31 October 2012 which reports an overall loss of Euro 190,433,564;
Meridiana fly - Annual Financial Report at 31 October 2012 - 73
- carry forward the loss for the year amounting to Euro 190,433,564.
Furthermore, given that the Company falls in the cases envisaged in Article 2447 of the Italian Civil Code, the Board of Directors of
Meridiana fly passed resolution authorizing the Chairman and the Chief Executive Officer, severally, to convene the shareholders'
meeting on 29 April 2013, both in ordinary session for the approval of the draft financial statements for the year ended 31 October
2012, and in extraordinary session to take the measures referred to in Article 2447 of the Italian Civil Code.
Milan, 26 February 2013
On behalf of the Board of Directors:
The President
Marco Rigotti
Meridiana fly - Annual Financial Report at 31 October 2012 - 74
3. CONSOLIDATED FINANCIAL STATEMENTS - 10 MONTH PERIOD ENDED 31 October
2012
3.1. Consolidated statement of financial position
31.10 31.12
2012 2011 Change
Notes
1 Intangible assets 88,431 146,748 (58,317)
2 Fleet 79,205 123,487 (44,282)
3 Other Property, plant and equipment 12,413 15,273 (2,860)
4 Deferred tax assets 404 11,153 (10,749)
5 Equity investments 750 1,995 (1,245)
6 Other non-current assets 18,612 20,861 (2,249)
Non-current assets 199,815 319,517 (119,702)
7 Inventories 2,977 2,909 68
8 Trade receivables and other current assets 141,210 136,223 4,987
9 Current financial assets 5,506 5,958 (452)
10 Cash and cash equivalents 9,301 4,002 5,299
Current assets 158,994 149,092 9,902
TOTAL ASSETS 358,809 463,571 (109,800)
11 Share capital 46,101 20,901 25,200
11 Reserves and retained earnings (losses) brought forward 32,343 151,651 (119,308)
11 Net Profit (loss) for the period (190,235) (110,664) (79,571)
Shareholders’ equity attributable to owners of the parent (111,791) 61,888 (173,679)
12 Long-term borrowings 83,296 28,712 54,584
13 Trade payables and other non current liabilities - 3,501 (3,501)
14 Post-employment benefits and other defined benefit provisions 13,007 13,258 (251)
15 Non-current provisions for liabilities and charges 7,284 12,578 (5,294)
16 Deferred tax liabilities 958 7,944 (6,986)
Non-current liabilities 104,545 65,993 38,552
17 Current loans 34,664 35,188 (524)
18 Current portion of long-term borrowings 31,059 36,491 (5,432)
19 Current provision for liabilities and charges 23,400 23,035 365
20 Trade payables and other current liabilities 276,567 244,086 32,481
21 Current financial liabilities 365 1,928 (1,563)
Current liabilities 366,055 340,728 25,327
Total current and non-current liabilities 470,600 401,683 63,879
TOTAL EQUITY AND LIABILITIES 358,809 463,571 (109,800)
€/000
Meridiana fly - Annual Financial Report at 31 October 2012 - 75
3.2. Consolidated Statement of Comprehensive Income
Financial Year % revenues Financial Year % revenues
2012 from sales 2011 from sales Change
Notes
22 Sales revenue 556,556 100.0% 621,744 100.0% (65,188)
23 Other Revenue 22,966 4.1% 25,074 4.0% (2,108)
Total revenues 579,522 104.1% 646,818 104.0% (67,296)
24 Fuel (179,003) -32.2% (196,958) -31.7% 17,955
25 Materials and maintenance services (87,119) -15.7% (99,513) -16.0% 12,394
26 Operating leases (56,631) -10.2% (57,296) -9.2% 665
27 Selling expenses (20,819) -3.7% (22,368) -3.6% 1,549
28 Other operating costs and wet leases (169,469) -30.4% (197,329) -31.7% 27,860
29 Sundry costs and other services (37,911) -6.8% (33,940) -5.5% (3,971)
30 Staff costs (80,726) -14.5% (113,975) -18.3% 33,249
31 Amortisation, depreciation and write-downs (107,340) -19.3% (15,923) -2.6% (91,417)
32 Provision for liabilities and charges (7,911) -1.4% (10,386) -1.7% 2,475
33 Other adjustment provisions (6,733) -1.2% (2,838) -0.5% (3,895)
Operating Profit (loss) (174,140) -31.3% (103,708) -16.7% (70,432)
34 Net financial income (expense) (11,391) -2.0% (7,438) -1.2% (3,953)
35 Impairment of financial assets (3,822) -0.7% (0) 0.0% (3,822)
Profit (loss) before tax (189,353) -34.0% (111,146) -17.9% (78,207)
36 Taxes for the period (882) -0.2% 482 0.1% (1,364)
Net profit (loss) for the year (190,235) -34.2% (110,664) -17.8% (79,571)
14 Gains / (losses) from actuarial valuations (IAS 19) 732 0.1% 93 0.0% 639
14 Tax effect of profit (loss) from actuarial valuations (81) 0.0% (31) 0.0% (50)
Total Profit (loss) (189,584) -34.1% (110,602) -17.8% (78,982)
€/000
Meridiana fly - Annual Financial Report at 31 October 2012 - 76
3.3. Statement of changes in consolidated equity
Balance at 31 December 2010 20,901 41,669 2,722 (10,443) (46,411) 8,439
- Prior years net profit (loss) - - - (46,411) 46,411 -
- Payments for future capital increase - - 164,050 - - 164,050
- Total Comprehensive income (loss) - - 62 - (110,664) (110,602)
Balance at 31 December 2011 20,901 41,669 166,835 (56,853) (110,664) 61,888
- Prior years net profit (loss) - - - (110,664) 110,664 -
- Costs related to capital increase - - (1,625) - - (1,625)
- Share capital increase 25,200 103,316 (110,987) - - 17,529
- Total Comprehensive income (loss) 651 - (190,235) (189,584)
Balance at 31 October 2012 46,101 144,985 54,874 (167,516) (190,235) (111,791)
Net Profit
(loss) for the
year
Shareholders
' equity
€/000
Share capital Other reserves
Reserves and
retained earnings
(losses) carried
forward
Share premium
reserve
Meridiana fly - Annual Financial Report at 31 October 2012 - 77
3.4. Consolidated Statement of Cash Flow
Financial Year Financial Year
2012 2011
€/000
Net cash and cash equivalents at beginning of period (31,186) 5,328
Effect of Air Italy consolidation
Goodwill from Air Italy consolidation - (87,823)
Elimination of equity investments - 87,164
Other non-current assets - (104,778)
Current assets - (28,728)
Non-current liabilities - 24,250
Current liabilities - 83,370
Cash flows related to Air Italy change in scope - (26,546)
Pre-tax profit (loss) (189,353) (111,146)
Adjustments for:
- Depreciation and amortisation for the year 49,584 13,789
- Impairment of goodwill 57,756 2,134
- Net financial income (expense) 11,391 7,438
- (Gains) / losses on disposal of assets 2,765 (102)
- Impairment of investments in associates and affiliates 1,246 -
- Impairment of other non current financial assets 2,576 -
Change in trade receivables and other current assets and other non-current receivables (1,534) 29,967
Change in inventories (68) 100
Change in trade payables and other payables (incl.risks provision ) 17,265 (30,662)
Payment of interest and other financial charges (6,401) (3,849)
Cash flows generated/(absorbed) by operating activities (54,773) (92,330)
Net change in non-current assets:
* Intangible (322) (243)
* Tangible (4,324) (7,268)
* Other non-current assets (328) 6,025
Cash flows generated/(absorbed) by investment activities (4,975) (1,486)
Payment of loan instalments (599) (602)
Other changes in loans (10,171) 2,096
Loans from Meridiana 58,359 11,016
Collection (payment) hedging derivatives and other changes in current financial assets 452 (1,562)
Cash flows generated/(absorbed) by investment activities 48,041 10,948
Payments for future capital increase 17,529 72,900
Cash flows from share capital transactions 17,529 72,900
Increase /(decrease) in cash and cash equivalents 5,823 (36,514)
Net cash and cash equivalents at end of period (25,363) (31,186)
Meridiana fly - Annual Financial Report at 31 October 2012 - 78
4. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4.1. Accounting standards and measurement criteria
4.1.1. General Considerations
These consolidated financial statements for a 10 month financial year closing at 31 October 2012 have been prepared in accordance
with existing regulation on listed companies and are drawn up in Euro as this is the currency in which the Group operates. They are
prepared in accordance with IAS / IFRS international accounting standards as adopted by the European Union.
The financial statements and the amounts reported in the Notes are presented in thousands of euros, taking into account the rounding
of individual items.
The consolidated financial statements include the consolidated statement of financial position with a distinction between current and
non-current assets and liabilities, while the Consolidated Statement of Comprehensive Income provides for the classification of
revenues and expenses by nature, which is considered as a more representative form than the so-called classification by function. The
statement of changes in consolidated equity includes all recorded changes in equity. In particular, the Statement of cash flows is
prepared using the "indirect" method.
An asset/liability is classified as current when it satisfies one of the following criteria:
- it is expected to be recovered/settled or it is expected to be sold or used in the normal operating cycle of the Group or
- it is held primarily for trading or
- it is expected to be realised/discharged within 12 months from the date of the financial statements.
In the absence of all three conditions, assets / liabilities are classified as non-current.
With regard to Consob Resolution No. 15519 of 27 July 2006, gains and losses arising from non-recurring transactions or events that
occur infrequently in the ordinary management of the Group were not reported separately in the consolidated statement of
comprehensive income. These items are however are described in section 4.5. "Significant Non-recurring Events and Transactions."
With reference to the identification in separate lines items of related party transactions, as required by Consob Resolution No.15519 of
27 July 2006, in the income statement, statement of financial position and statement of cash flows there is no separate evidence of
transactions with related parties, as these were deemed as not significant nor useful for the purposes of a straight-forward
presentation of the financial statements. In this regard, the financial statements include a summary of financial transactions with
related parties for the year 2012, in Section 4.13 - Related Party Transactions, with evidence of the impact of these transactions on the
total amount reported in the corresponding line item as well as detailed qualitative information.
The consolidated financial statements are audited by Deloitte & Touche SpA.
4.1.2. Accounting standards, measurement criteria and use of estimates in preparing the
consolidated financial statements
These consolidated financial statements for the 10 month financial year ended on 31 October 2012 have been prepared in
accordance with International Accounting Standards IAS / IFRS issued by the International Accounting Standards Board (IASB) and
endorsed by the European Union as well as the measures implementing art. 9, of Legislative Decree No. 38/2005. "IFRS" also
include International Accounting Standards (IAS) still in force, and all interpretations issued by the International Financial Reporting
Interpretations Committee (IFRIC), previously known as the Standing Interpretations Committee (SIC).
Meridiana fly - Annual Financial Report at 31 October 2012 - 79
The accounting standards, measurement criteria and the use of estimates used by the Company for the purpose of preparing the
consolidated financial statements for the financial year ended 31 October 2012 are described below.
The financial statements are prepared based on the historical cost, adjusted as required for the measurement of certain financial
instruments, and on the going concern basis, as discussed in section 4.1.3. hereafter, which was confirmed by the Directors in
accordance with paragraphs 25 and 26 of IAS 1 on the basis of the considerations in section 2.26 - Business Outlook and further
specified in section 4.1.3 hereafter.
The most important accounting policies adopted are as follows:
• Principles of consolidation
Subsidiaries
These are companies on which the Group exercises control as defined in IAS 27 - Consolidated and separate financial statements.
Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so
as to obtain benefits from its activities. In the evaluation of control, we also consider the potential voting rights currently exercisable
or convertible, as well as the positions of "actual control" on the basis of the voting power, and not only, exercisable at the
shareholders' meeting.
The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control
commences until the moment when that control ceases. The data used for the consolidation are those prepared by the directors of
each company, which may have already been approved by the respective Shareholders' Meetings, appropriately reclassified and
adjusted in order to comply with the accounting principles and measurement criteria of the Group Meridiana fly.
The share capital and reserves attributable to non-controlling interests in subsidiaries and the share of non-controlling interests of
profit or loss of consolidated subsidiaries are identified separately in the consolidated statement of financial position and in the
consolidated income statement. Losses attributable to non-controlling interests in excess of the interest held in a subsidiary are
allocated to equity attributable to non-controlling interests. Changes in ownership interest in a subsidiary that do not result in an
acquisition/loss of control are accounted for as equity transactions
Subsidiaries that are inactive or that generate a not significant annual turnover are not included in the consolidated financial
statements. Their influence over total assets, liabilities, financial position and profit / (loss) attributable to owners of the parent is not
relevant.
Jointly controlled entities
These are companies over which the Group has contractually agreed sharing of control, or for which there are contractual
arrangements whereby two or more parties undertake an economic activity that is subject to joint control. Investments in jointly
controlled entities are accounted for using the equity method, from the date on which control commences until the date when control
ceases.
Associates
These are companies over which the Group has significant influence in accordance with IAS 28 - Investments in associates, but not
control or joint control over financial and operating policies. Investments in associates are accounted for using the equity method,
from the date on which significant influence commences until the date when that influence ceases. If the portion of the associate
losses attributable to owners of the parent exceeds the book value of the investment, the value of the investment is brought down to
zero
Meridiana fly - Annual Financial Report at 31 October 2012 - 80
Consolidation of foreign enterprises
All assets and liabilities of foreign enterprises in a currency other than the Euro that fall within the scope of consolidation are
translated using the exchange rates in effect at the date of the financial statements. Income and expense items are translated at the
average exchange rate. The exchange differences resulting from the application of this method are classified as equity until the
investment is sold.
Transactions eliminated on consolidation The consolidation is done using the line-by-line consolidation method. The criteria for the application of this method include, among
other things:
� eliminating the carrying value of investments in consolidated companies against the related equity and concurrently
recording all their assets and liabilities;
� the elimination of intragroup balances and significant transactions, as well as unrealized gains and losses on intragroup
transactions. Unrealised gains on transactions with associates and jointly controlled entities are eliminated in proportion to
the Group's interest in those entities. Unrealised losses are eliminated except where they cannot later be recovered.
Business Combinations
Business combinations are recognized using the acquisition method. According to this method, the amount transferred in a business
combination is measured at fair value, calculated as the sum of the fair value of the assets transferred and liabilities assumed by the
Group at the date of acquisition and equity instruments issued in exchange for control of the acquiree. The additional charges
associated with the transaction are generally recognized in the income statement when incurred.
At the date of acquisition, the identifiable assets acquired and liabilities assumed are recorded at fair value at the acquisition date;
the following items are exceptions and are measured according to their reference principle:
• Deferred tax assets and liabilities;
• Assets and liabilities for employee benefits;
• Liabilities or equity instruments related to share-based payments transactions of the acquiree or shared-based payments
transactions of the Group issued in replacement of the acquiree's contracts;
• Assets held for sale and discontinued operations.
Goodwill is determined as the difference between the aggregate of consideration transferred in the business combination, the
amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously held equity interest in the
acquiree over the fair value of net assets acquired and liabilities assumed at the date of acquisition. If the value of net assets
acquired and liabilities assumed at the date of acquisition exceeds the sum of the consideration transferred, the amount of any non-
controlling interest in the acquiree and the fair value of the acquirer’s previously held equity interest in the acquiree, the resulting
gain is immediately recognised in profit or loss as gain from the business combination.
The share of non-controlling interest in the acquiree's net assets, at the acquisition date, can be measured at fair value or the pro
rata share in the recognised amounts of the acquiree’s identifiable net assets. The choice of the measurement method is made
transaction by transaction.
Any contingent consideration provided in the business combination agreement is measured at the acquisition date fair value and
included in the amount of the consideration transferred in the business combination for the purposes of determining goodwill. Any
changes in fair value of contingent consideration, which are classified as measurement period adjustments, are retrospectively
included in goodwill. Changes in fair value classified as measurement period adjustments are those that result from new information
about facts and circumstances that existed as of the acquisition date, obtained during the measurement period (which shall not
exceed a period of one year from the business combination).
In the case of business combinations that occurred in stages, the Group's previously held equity interest in the acquiree is re-
measured at fair value at the date of acquisition of control and any resulting gain or loss is recognised in the income statement. Any
Meridiana fly - Annual Financial Report at 31 October 2012 - 81
amount resulting from previously held equity interest recognised in other comprehensive income is reclassified in the income
statement as if the equity interest had been disposed of.
As of 31 October 2012 all the subsidiaries that are consolidated using the line-by-line method are wholly-owned subsidiaries;
therefore there are no net assets attributable to non-controlling interests to be included as a separate component of equity, nor is
there a share of profit or loss attributable to non-controlling interests to be highlighted separately in the consolidated income
statement.
If the initial accounting for a business combination is incomplete at the end of the reporting period in which the business combination
occurs, the Group reports in its consolidated financial statements the provisional amounts of items for which the measurement
cannot be completed. These provisional amounts are adjusted during the measurement period to reflect new information obtained
about facts and circumstances existing at the acquisition date that, if known, would have affected the amount of assets and liabilities
recognised as of that date.
• Recognition of costs and revenues
Sales and purchases of goods are recognised when goods are respectively delivered to the customer or to the Company, with
transfer of the significant risks and rewards associated with ownership of the goods. Sales and purchase of services are recognised
to the extent of their execution and completion on each reporting date, taking into account, in particular, the flight date for passenger
transport services, calculated according to the total value of the service rendered or received.
With reference to tickets for scheduled passenger transport, which, as at the financial statements date, are issued but not yet used
or refund thereof has not been requested, are reported as income under item "Sales Revenue" (the so-called "Proceeds from
prepaid items") estimated on the basis of the historically observed percentage of passengers not using or not requesting refund of
the tickets issued, in order to ensure full recognition of revenue in the financial statements in accordance with the accrual basis.
Interest income and expense are recognized in accordance with the accrual principle. The costs for taking out loans are recognised
in profit or loss when incurred. Ancillary costs for the issue of a financial instrument or for a capital increase are directly deducted
from the proceeds of the loan or capital increase to which they refer. Commissions paid to agencies for the sale of air tickets are
recognised in profit or loss when the related revenues are recognised.
Charge-backs of costs incurred on behalf of third parties are recognised as a reduction of the cost to which they relate.
Dividends are recognised when the shareholders’ right to collect them arises. This usually occurs in the financial year when the
investee company’s shareholder' meeting approving the distribution of earnings takes place.
• Non-current assets
Intangible assets Goodwill arising from business combinations are initially recorded at cost at the acquisition date, as defined above in relation to
"Business Combinations". Goodwill is not amortised but is tested for impairment annually or more frequently if events or changes in
circumstances indicate that it may be impaired. After initial recognition, goodwill is measured at cost less any accumulated
impairment losses.
Upon disposal of part or whole of a company previously acquired and for which goodwill had been recognised upon acquisition, in
the determination of the gain or loss on disposal, the corresponding residual value of goodwill is taken into account.
Intangible assets include the costs, inclusive of ancillary costs, incurred to acquire resources lacking physical substance on condition
that their amount can be reliably measured and the asset is clearly identifiable and controlled by the Company.
These are stated at purchase or production cost including ancillary costs and are amortised according to their useful life. If there is
indication that an asset may be impaired, the intangible asset is written down accordingly, following the criteria indicated in the
subsequent policy “Impairment of assets”.
The amortisation periods applied for the various categories of intangible assets are indicated below:
• development costs relating to initial training of pilots are amortised over a three-year period, while those relating to the
launch of new products/services from which long-lasting future economic benefits are expected are amortised over five
years;
Meridiana fly - Annual Financial Report at 31 October 2012 - 82
• concessions, licenses, trademarks and similar rights are amortised over a five/ ten-year period;
• Costs relating to preparation of the website are amortised over five years.
The useful life and the amortisation criterion are reviewed regularly. If significant changes are found compared with previously made
assumptions, the amortisation rate is corrected using the prospective method
Tangible assets Tangible assets are recorded as "Fleet", for which it was considered appropriate to provide separate exposure due to the
significance of this item, and as "Other Property, Plant and Equipment", which includes all other tangible assets.
Tangible assets are recognised on condition that their cost can be reliably measured and that the Group will be able to enjoy their
future economic benefits.
They are recorded at purchase or production cost, inclusive of ancillary costs and of the portion of direct and indirect costs that can
reasonably be attributed to the asset. Investment grants obtained are recognised in the income statement over the period necessary
to match them with related costs and are directly deducted from such costs. If there is indication that an asset may be impaired, the
tangible asset is written down accordingly, following the criteria indicated in the subsequent policy “Impairment of assets”.
Property, plant and equipment are systematically depreciated on a straight-line basis according to economic/technical rates
established in relation to the assets’ residual useful life. Assets consisting of components with different useful lives are considered
separately when calculating depreciation. The useful life and the amortisation criterion are reviewed regularly. If significant changes
are found compared with previously made assumptions, the amortisation rate is corrected using the prospective method.
Generally speaking, the asset’s useful life is subject to annual verification. It is changed if, during the period, enhancement
maintenance is performed or replacements are made that modify the useful life of the asset to which they refer.
Enhancement and maintenance expenses that significantly increase the production capacity or safety of tangible assets, or that
lengthen the useful life of such assets, are capitalised and recorded as an increase in the amount of the tangible asset to which they
refer. Routine maintenance costs are directly recognized in the income statement.
The applied depreciation rates are reduced, with reference to the increases in tangible assets of the period, according to the
effective commissioning of the assets. Depreciation starts when the assets are ready for use.
Specifically, the annual depreciation rates applied are as follows:
- Land not depreciated
- Buildings 50 years 2%
- light constructions, 10 years 10%
- plant, 10 years 10%
- equipment, 7 years 14%
- rotable components, 25 years 12%
- data processing machines, 5 years 20%
- office furnishing and equipment, 8.3 years 12%
- internal means of transport, 5 years 20%
- vehicles 4 years 25%
- systems of communication, 5 years 20%
- Modifications and standardisations performed on fleet aircraft are depreciated based on the duration of operating lease contracts.
Leasehold improvements are classified as tangible assets, according to the nature of the cost. The amortisation period is the lesser
of the remaining useful life of the tangible asset and the residual term of the contract.
The costs incurred for regular reconditioning of company-owned engines and airframes are recognized as an increase in the book
value of the asset to which they refer, separately from the physical parts. They are depreciated over the period of validity of the
periodic maintenance or the term of the operating lease agreement of the aircraft, respectively. Any net book value of the cost of
previous reconditioning is derecognized, irrespective of whether the cost of the previous reconditioning was explicitly mentioned in
the transaction in which the element was purchased or constructed. In this case, the estimated cost of similar future reconditioning is
used as an indication of what the cost of the reconditioning of the existing component was when the element was purchased or
constructed.
Meridiana fly - Annual Financial Report at 31 October 2012 - 83
In particular, the useful life of the MD-82 fleet (aircraft and its components) is estimated in relation to the date of the expected
decommissioning according to the Business Plan, taking into account the estimated realizable value based on net book value of
maintenance performed, while for the owned aircraft of the Boeing fleet the following useful lives are applied, net of the realizable
value estimated on the basis of available market valuations:
- Airframe/Engines 25 years
- Engine maintenance 4 years
- Rotable material 25 years
The depreciation of the aircraft is determined on the basis of the components.
Leases are classified as finance leases whenever the terms of the contract are such as to substantially transfer all the risks and
rewards of ownership to the lessee. All other leases are considered as operating leases.
Assets held under finance leases are recorded as assets of the Group at their fair value as at the contract date, adjusted for ancillary
costs incurred for the stipulation of the contract and any costs incurred to take over the lease or, if lower, at the present value of
minimum lease payments due for the lease. The corresponding liability vis à vis the lessor is recognized in the statement of financial
position as a financial liability. Payments for rentals are apportioned between principal and interest in order to achieve a constant
interest rate on the residual liability. Financial expense is charged directly to the income statement for the period.
Rental costs relating to operating leases are recognised on a straight-line basis over the term of the contract. The benefits received
or to be received or paid or payable as an incentive to enter into operating leases are also recorded on a straight-line basis over the
term of the contract.
• Impairment of tangible and intangible assets
At each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets and investments to determine
whether there is any indication that those assets are impaired. If such an indication exists, the recoverable amount of these assets is
measured in order to determine the extent of the impairment. If it is not possible to measure the recoverable amount of an asset
separately identified, the Group measures the recoverable amount of the cash-generating unit to which the asset belongs. In
particular, the smallest group of assets is represented by the cash-generating unit; for the identification of a cash generating unit for
the purposes of preparing the consolidated financial statements the reader should refer to section 4.5 Ref 1 Intangible Assets.
The recoverable amount is either the fair value net of sales costs or the use value, whichever is the greater.
The fair value is the market price (net of costs of disposal), provided that the asset is traded in an active market. A market can
reasonably be considered active based on transactions frequency and volumes.
In assessing value in use, future cash flows, related to a time period not exceeding five years are estimated on the basis of
conservative assumptions based on historical data and making prudential forecast about the future performance of the reference
sector; the cash flows are discounted to their present value using a pre-tax rate that reflects current market assessments of the time
value of money and the risks specific to the asset; the terminal value is determined on the basis of a perpetuity.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount
is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss.
Where an impairment loss no longer exists, the carrying amount of the asset (or cash-generating unit), except for goodwill (which for
investments corresponds to the positive difference emerged as of the acquisition date, between the acquisition cost and the fair
value of the share of the investee's net assets attributable to the Group), is increased to the new value resulting from the
measurement of its recoverable amount, but not exceeding the carrying amount that would have been determined had no
impairment loss been recognised. A reversal of impairment loss is recognised immediately in profit or loss.
Investments in other companies Investments in associates are carried at cost (in the absence of a fair value that can be reasonably determined), adjusted for
impairment losses. Any positive difference, emerging at the acquisition date, between the cost of acquisition and the fair value of the
Meridiana fly - Annual Financial Report at 31 October 2012 - 84
share of the investee's net assets attributable to the Group, is therefore included in the carrying amount of the investment. Any write-
down of this positive difference (which represents the goodwill attributed to the investee's businesses at the time of acquisition) is not
reversed in subsequent years even if the conditions that led to the write-down no longer exist. If the Group’s proportional share of
any losses made by the associate exceeds the investment’s carrying value, the investment’s value is written off and the portion of
any further losses is recognised as a provision in liabilities if the Company is under the obligation to cover such losses.
Dividends received are recognized in the income statement, when the right to receive payment is established, only if resulting from a
distribution of earnings subsequent to the acquisition of the investee. If, instead, they result from the distribution of the investee's
reserves prior to acquisition, the dividends are recorded as a reduction in the cost of the investment.
Other non-current assets
Other non-current assets and other non-current receivables are stated at their nominal value, which coincides with the estimated
realisable value.
Non-current assets and liabilities held for sale Non-current assets (or groups of assets held for sale) classified as "held for sale" are measured at the lower of their previous
carrying value and market value less costs to sell.
Non-current assets (or groups of assets held for sale) are classified as "held for sale" when it is expected that their carrying amount
will be recovered through a disposal rather than through their use in the company's operations. This condition is met only when at
the reporting date the sale is highly probable, the asset (or group of assets) is available for immediate sale in its present condition
and management has made a commitment to the sale, which is set to take place within twelve months from the date of classification
under this item.
The profit or loss generated by the operation of the assets and liabilities held for sale for the months between the last approved
financial statements and the date of disposal - in accordance with IFRS 5 - is classified as "Results of discontinued operations "
together with the economic effects of the operations, net of ancillary costs to sell.
Current assets and liabilities
Inventories Inventories, consisting of stocks of technical materials, catering materials and scheduled air tickets, are recorded at their specific
purchase cost or, if lower, at their realisable value based on market trends. This lower value is not maintained in subsequent years if
the reasons for it no long exist and value is reinstated, if the conditions exist to do so, within the limits of the original purchase cost.
Financial Instruments Financial assets and liabilities are recognised at the time when the Group becomes a party to the instruments’ contractual clauses.
- Trade receivables
Trade receivables are stated at their nominal value less an appropriate write-down to reflect estimated losses on receivables.
- Financial assets
Financial receivables relating to capital redemption contracts are measured at cost, i.e. nominal value, plus interest accrued. This
value is not lower than the value of initial insured capital plus guaranteed minimum return. Financial receivables relating to
performance deposits are posted at nominal value, which coincides with estimated realisable value.
Receivables for security deposits for utilities and other periodic service supplies are measured at nominal value, which coincides with
estimated realisable value. Receivables for deposits against contractual commitments with third parties are posted at nominal value
and adjusted, if necessary, to align the amount paid with presumed recovery value.
On subsequent reporting dates, financial assets that the Group intends and is able to hold to maturity are recognised at amortised
cost net of any impairment write-downs.
Financial assets other than those held to maturity are classified as held for trading or available for sale and are measured at fair
value at the end of each period. When financial assets are held for trading, gains and losses arising from changes in fair value are
recognized in the income statement for the period. On the other hand, for financial assets available for sale, profits and losses
Meridiana fly - Annual Financial Report at 31 October 2012 - 85
deriving from variations in fair value are recorded directly in net equity until they are sold or have suffered a loss in value; in this
case, the overall profits or losses previously recorded in net equity are recorded in the income statement for the period.
- Cash and cash equivalents
The item relating to cash and cash equivalents includes cash and current bank accounts, demand deposits, and other short-term,
highly liquid financial investments that can be readily monetised and are subject to insignificant risk of changes in value.
- Bank and other loans and bank overdrafts
Loans and interest-bearing bank loans and bank overdrafts are recorded based on the amounts received, net of transaction costs
and subsequently measured at amortized cost using the effective interest rate method.
- Trade payables
Trade payables are stated at their nominal value.
Derivative financial Instruments
In carrying out its business the Company is exposed to the risks of changes in exchange rates (mainly Euro/USD) and in fuel prices.
To minimize these risks, the Group enters into derivatives contracts to hedge both specific transactions and total exposures, making
use of the instruments offered by the market.
Hedging derivative instruments, in keeping with the provisions of IAS 39, are accounted for in accordance with the methods laid
down for hedge accounting only when:
• at the start of the hedge there is formal designation and documentation of the hedging relationship;
• the hedge is highly effective;
• the effectiveness can be reliably demonstrated.
When a financial instrument is designated as a hedge of exposure to the variability of cash flows of the hedged transactions (cash
flow hedge; e.g. hedging the variability of cash flows of expected future transactions against the effect of fluctuations in exchange
rates), the gains and losses deriving from the fair value changes of the hedging instrument are accounted for directly in
shareholders’ equity for the effective part (any ineffective part is instead accounted for immediately in the income statement under
the item gains/(losses) on foreign exchange).
The amounts recognized in equity are subsequently reflected in the income statement for the period in which the contracts and
expected transactions are manifested in the income statement.
If an instrument is designated as a hedge of exposure to changes in the fair value of hedged instruments (e.g. hedging of the
variability of the fair value of receivables and payables in foreign currencies), it is recognized at fair value with the effects booked to
the income statement; accordingly, the hedged instruments are adjusted to reflect the fair value changes associated with the hedged
risk.
Changes in the fair value of derivatives that do not meet the conditions to qualify as hedges are recognized in profit or loss. Given
the alternative treatments permitted by IAS 39 for the classification of such transactions, the Group has decided that the change in
fair value of contracts on commodities is to be classified in the income statement as an adjustment to operating costs.
Financial and non-financial contracts are analysed to identify the existence of embedded derivatives to be unbundled and measured
at fair value. Gains and losses resulting from subsequent changes in fair value are recognized in profit or loss.
• Employee Post-employment benefits
Payments for defined contribution plans are charged to the income statement in the period in which they are due.
“Post-employment benefit provision” (T.F.R.) expresses the liability towards employees for the benefits accrued up to the reporting
date in compliance with current laws and contractual agreements. This liability is considered similar to a defined-benefit plan, the
cost of which is calculated using the actuarial Projected Unit Credit method; actuarial valuations are performed at the end of each
financial year. Gains and losses are recognized in the statement of comprehensive income and included in income components such
as income and expenses defined as "changes resulting from transactions with non-shareholders". The cost related to employees'
past service is recognized immediately the extent that the benefits have already accrued or otherwise is amortised on a straight-line
Meridiana fly - Annual Financial Report at 31 October 2012 - 86
basis over the average period in which benefits are expected to accrue. The financial component included in these plans is
recognized in financial income and expenses.
Until 31 December 2006 the post-employment benefit provision (TFR) was considered a defined benefit plan. The rules for such
provision were changed by Italian Law no. 296 of 27 December 2006 (the 2007 National Budget Law) and by subsequent decrees
and regulations enacted in the early months of 2007.They now envisage payment of post-employment benefits as they accrue to a
separate entity (pension fund or central treasury fund of the INPS (state pension & welfare agency). In light of these changes, and in
particular as regards companies with at least 50 employees, under IAS 19 the post-employment benefit provision should be
considered as a defined-benefit plan solely for benefits accrued before 1 January 2007 (and not yet paid out as at the reporting
date), whereas after this date it should be considered as a defined contribution plan.
The right granted to employees and former employees to buy an air ticket at a discount compared to its price list is a long-term
benefit, and the corresponding liability is recorded in the financial statements according to the actuarial valuation methodology
provided for under IAS 19. The provision specifically established (the "provision for subsidised tickets") is released periodically and
recorded as an increase in the amount of revenue from the sale of tickets.
• Income taxes
Income taxes for the period are the sum of current and deferred taxes.
Current taxes are based on the period's taxable profit. Taxable profit differs from profit as reported in the income statement because
it excludes items of income and expense that are taxable or deductible in other years (temporary tax differences) and it further
excludes items that are never taxable or deductible (tax permanent differences). Current tax liability is calculated using current tax
rates or the rates substantially in force at the end of the reporting period.
Deferred taxes are taxes that the Group expects to be payable or recoverable on the temporary differences between the book value
of assets and liabilities and the corresponding tax bases used in computation of taxable profit. Deferred tax liabilities are generally
recognized for all taxable temporary differences while deferred tax assets are recognized to the extent that it is probable that there
will be future taxable profits in the future based on business plans approved by the Group. In particular, the carrying value of
deferred tax assets is reviewed at each reporting date and reduced to the extent that is no longer probable that sufficient taxable
profits will be available to allow all or part of the assets to be recovered.
Deferred taxes are calculated at the tax rates that the Group expect to be in force when the asset is recovered or the liability settled.
Deferred taxes are directly booked to the statement of comprehensive income, except for those relating to transactions with
shareholders' which are recognized directly in equity, in which case the corresponding deferred taxes are also recognized in equity.
Deferred tax assets and liabilities are offset when there is a legal right to offset current tax assets and liabilities and when they relate
to taxes due to the same tax authority and the Company intends to settle its current tax assets and liabilities on a net basis.
• Grants
Grants are recognized at fair value when there is reasonable assurance that they will be received and that the conditions attaching to
them will be met. Grants for operating expenses are recognized in full in the income statement at the moment in which the conditions
for recognition are met. Capital grants are deducted directly from the purchase cost of the asset to which they refer.
• Provisions for liabilities and charges
Allocations to the provisions for liabilities and charges are made when the Group has a present obligation (legal or implicit obligation)
as a result of a past event and it is likely that the use of resources will be required to settle the obligation. Provisions are recognized
when it is possible to reliably estimate the costs required to settle the obligation at the reporting date and are discounted to present
value when the effect is material.
• Foreign currency items and items subject to "foreign exchange risk"
Receivables and payables originally denominated in the foreign currency of countries outside the Euro zone are translated into Euro
at the exchange rates in force at the date of the underlying transactions. Foreign exchange differences incurred on collection of
receivables and settlement of payables in foreign currencies are recorded in the income statement. Non-current assets denominated
in foreign currencies are recorded at the exchange rate in force at the time of purchase or at the lower exchange rate in force at the
end of the period if the reduction is deemed as long-lasting.
Meridiana fly - Annual Financial Report at 31 October 2012 - 87
Assets and liabilities, originally denominated in foreign currency of countries outside the Euro zone, still outstanding at year end,
including non-current assets of a monetary nature, are aligned at the spot exchange rate at the reporting date; the related exchange
gains and losses are recorded in the income statement and any net profit is allocated to a special non-distributable reserve until
realisation.
• Gas emission allowances
Gas emission allowances allocated to the Group, following the adoption by the Council and the European Parliament of Directive
2008/101/EC amending Directive 2003/87/EC to include aviation activities in the Community scheme for greenhouse gas emissions
allowance trading - EU Emissions Trading System ("EU ETS"), are recognized as current assets at their fair value measured at the
financial statements date, in the event the Group has excess allowances compared to its need determined on the basis of emissions
released during the year.
If, however, the emissions released in the period exceed the value of allocated allowances, as at the financial statements date,
including also any purchased emissions, a special risk provision is recognized for excess emissions. The allowances annually
surrendered in relation to the amount of greenhouse gases released into the atmosphere each year, will be derecognized by using
the risk provisions allocated in the previous year.
• Use of estimates
The preparation of the consolidated financial statements and related notes requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the
reporting date as well as the value of revenues and expenses recognized in the reporting period. Estimates and assumptions are
based on previous experience and other factors deemed relevant. Actual results may therefore differ from these estimates.
Estimates and assumptions are reviewed periodically and the effects of any changes made to them are reflected in the income
statement in the period in which the estimates are revised, if the revision affects only that period, or also in subsequent years if the
revision affects both the current year and future years.
In this respect, it should be noted that in the current economic and financial crisis, notably in the Eurozone, and the related market
turmoil, assumptions regarding future performance were made, which are characterized by significant uncertainty; therefore, it
cannot be ruled out that in the future the results may differ from the estimates and hence may require even significant adjustments to
the carrying value of the related items that to date are clearly neither estimable nor predictable. The main items affected by these
situations of uncertainty are non-current assets (tangible and intangible assets), and in particular goodwill, the fleet and deferred tax
assets.
Below we summarise the critical assessments and key assumptions used by management in applying accounting standards and
policies with regard to the future, that may have material effects on reported amounts or for which there is a risk of adjustments to
the carrying value of assets and liabilities in the financial year following the one to which these financial statements refer.
Provision for doubtful receivables Provision for doubtful receivables reflects the management’s estimates about the losses on doubtful accounts concerning end
customers.
The estimate of this provision is based on the losses expected by the Company based on experience with similar receivables,
current and historical past-due receivables, losses and collections, careful monitoring of credit quality, and on forecasts of economic
and market conditions – supported in this by the opinions of the legal advisors representing the Company in pre-litigation and
litigation phases. The reader should refer to section "Ref 9 - Trade and other receivables "of this explanatory notes for
considerations on the main disputes underway concerning the recovery of receivables.
Provision for liabilities and charges
Meridiana fly - Annual Financial Report at 31 October 2012 - 88
The provision for liabilities and charges refers to the management estimate of probable losses that the Group may incur in the
context of litigation with third parties, including passengers, staff, suppliers and other parties.
The provision for liabilities and charges is estimated on the basis of an analysis of the risk of negative outcome of the most
significant litigation, taking into account the opinions provided by legal advisors of the Group who represent the Company in pre-
litigation and litigation, and, for minor disputes of scarce relevance, also on the basis of historical experience and other statistical
evidence supporting risk assessment. Finally, the item includes the liability arising from the opening of the temporary redundancy
procedure (CIGS), which, according to the legislation in force requires that the company pays a social security cost commensurate
with the sums paid by INPS to employees in temporary redundancy. The provision envisages an estimation process to take into
account the actual use of the total number of workers in temporary redundancy on rotation.
Recoverable amount of non-current assets Non-current assets include goodwill, the fleet and property, plant and equipment and other assets, intangible assets as well as non-
controlling equity investments. The Management periodically reviews the carrying value of non-current assets held and used in
operations as well as assets held for sale, when facts and circumstances make such review necessary. This activity is performed by
using estimates of future cash flows and appropriate discount rates to calculate present value or to estimate fair value less costs to
sell, based on assessments conducted with the support of third party experts' opinions. Therefore, this audit of the carrying value of
non-current assets is based on a hypothetical set of assumptions regarding future events and actions of the administrative bodies
that may not necessarily occur in the expected manner and timing.
In particular, in order to determine the recoverable amount of Meridiana fly - Air Italy Cash Generating Unit, inclusive of goodwill, the
company relied on an estimate of the value in use, made by an expert appointed for the purpose and determined on the basis of the
unlevered discounted cash flow method using the expected cash flows resulting from the Plan approved by the Board of Directors on
26 February 2013, according to the criteria described in more detail in section 4.5 - Ref 1 "Intangible assets". The evolution of
scenario variables beyond the control of the Company and the Group different from those envisaged in the Business Plan might lead
to the recognition of additional asset write-downs resulting from an update of the impairment test conducted on 31 October 2012. In
fact, the verification of the carrying amount in the consolidated and in the parent separate financial statements may also be
necessary during the year due to the high sensitivity shown by the CGU's value in use to changes in key assumptions adopted for its
valuation - which are subject to developments beyond the control of the Company and the Group - and, consequently, the need to
resort to additional equity and financial support by Meridiana S.p.A. and AKFED. (See Section 2.23 "Main risks and uncertainties for
the current year-Ref 2"). With respect to the recoverable value of the property located in Milan - Via Balagutti - the company relied on
the estimate obtained in previous years by an expert appointed for the purpose which was still considered valid given the possible
use of the property, currently leased to third parties for most of the available space.
Deferred tax assets and liabilities
The Group recognizes current and deferred taxes in accordance with applicable regulations. The recognition of taxes requires using
estimates and assumptions concerning the interpretation of applicable regulations and their effect on the Company’s taxation, with
regard to the transactions completed during the financial year in question. In addition, recognition of deferred tax assets and
liabilities requires use of estimates concerning prospective taxable income and its development, as well as applicable tax rates.
These activities are performed through an analysis of completed transactions and their tax profile, also with the support, when
necessary, of external advisors on the various aspects addressed. They also take the form of simulations and sensitivity analyses of
prospective income.
Income from unused tickets (so-called "Proceeds from prepaid tickets")
The estimate of income from unused issued tickets (the so-called "Proceeds from prepaid items") is made on the basis of the
historically observed percentage of passengers not using or not requesting refund of the tickets issued, in order to ensure full
recognition of revenue in the financial statements in accordance with the accrual basis determined on the basis of historical trends in
Meridiana fly - Annual Financial Report at 31 October 2012 - 89
unused tickets applied to the residual payable for prepaid items as at the financial statements date. Different trends from those
historically experienced in the actual number of tickets unused by passengers or the real charges of unused tickets refund may result
in revenues different from those measured at the reporting date based on estimates made by management.
Defined benefit plans The Post-employment benefit provision (T.F.R.) and the Provision for Subsidised Tickets can be classified as defined-benefit plans
(with regard to T.F.R. for the portion accrued before 31 December 2006 only). Management uses various statistical assumptions and
assessment factors with the aim of anticipating future events in order to calculate the costs, liabilities and assets relating to such
plans. Assumptions concern the discount rate, the expected return on assets on which the plan is based, and the rates of future pay
increases. In addition, the actuaries advising the Company also use subjective factors such as, for example, mortality and
employees turnover rates.
Contingent liabilities
The Group is involved in lawsuits and tax disputes relating to complex and difficult problems and with a varying degree of
uncertainty, including the facts and circumstances regarding each case, jurisdiction and the different applicable laws.
Given the uncertainties inherent in these issues, it is difficult to predict the outlay that may arise from such disputes.
Consequently, management after consultation with its legal advisors and legal and tax experts, recognises a liability for such
litigation when it considers that a cash outlay is likely to occur and the amount of the resulting losses can be reasonably estimated. If
a cash outlay becomes possible but the amount cannot be determined, this fact is disclosed in the notes to the financial statements.
New accounting standards and interpretations Accounting standards, amendments and interpretations applicable as from 1 January 2012 The new accounting standards, amendments and interpretations which, being applicable as from 01 January 2012, supplement as
from that date the accounting policies used in preparing the consolidated financial statements are presented below.
It should be noted that these account for cases that are not present or have limited and negligible effects in terms of representation,
evaluation and disclosure in this Annual Report, including:
• Minor amendments to IAS 12 - Income Taxes - for the measurement of deferred taxes, which requires an entity to measure
the deferred tax relating to investment property measured at fair value depending on the manner in which the carrying
amount of the asset will be recovered (through continued use or through sale). Specifically, the amendment establishes a
rebuttable presumption that the carrying amount of an investment property measured at fair value in accordance with IAS
40 is entirely recovered through a sale transaction and that the measurement of deferred taxes, in jurisdictions where the
tax rates are different, reflect the rate on the sale. The adoption of this amendment did not have any effect on the valuation
of deferred taxes as at 31 October 2012;
• Amendment to IAS 1 - Presentation of Financial Statements, which requires companies to group items presented in the
Statement of "Other gains / (losses)" (" Other comprehensive income ") depending on whether they are potentially re-
classifiable to profit or loss subsequently. The amendment is effective from the financial year beginning on or after 1
January 2012. The adoption of this amendment did not have any effect on the presentation of the financial statements;
• amendments to IFRS 7 - Financial instruments / Additional disclosure - These amendments were issued with the intent to
improve the understanding of transactions involving the transfer ( derecognition ) of financial assets, including the
understanding of the possible effects arising from any risk that may remain with the transferor. In particular, the
amendments require greater transparency on exposure to risks in the event of transactions where a financial asset is
transferred but the transferor retains some form of continuing involvement in it. The amendments also require additional
information in the event that a disproportionate amount of these transactions take place near the end of an accounting
period. The adoption of this amendment did not have any effect on financial statements disclosures.
Accounting standards, amendments and interpretations not yet effective and not adopted in advance by the Group
Meridiana fly - Annual Financial Report at 31 October 2012 - 90
Listed below are other Standards, amendments and interpretations not yet effective and not adopted in advance by the Group, for
which however the approval process has not been completed yet for the adoption of the amendments and standards by the relevant
bodies of the European Union:
• IFRS 9- Financial instruments: (applicable from 1 January 2015, retrospectively) in order to fully replace IAS 39,
introducing new criteria for the classification and measurement of financial assets and liabilities.
• IFRS 10 - Consolidated Financial Statements, which replaces SIC-12 Consolidation - Special Purpose Entities (SPE)
and parts of IAS 27 - Consolidated and Separate Financial Statements, which will be renamed "Separate Financial
Statements" and shall regulate the accounting treatment of investments in separate financial statements; the main changes
contained in the new standard are as follows:
- According to IFRS 10 there is a single basic criterion to consolidate all types of entities, and this criterion is based on
control. This change removes the perceived inconsistency between the previous IAS 27 (based on control) and SIC 12
(based on the transfer of risks and benefits);
- And new definition of control over an entity has been introduced, more consistent than in the past, based on three
elements: (a) power over the acquiree, (b) exposure, or rights, to variable returns from involvement in the entity, and (c)
ability to affect those returns through power over the entity;
- IFRS 10 requires that for the purposes of evaluating control over an acquired entity, an investor must focus on activities that
significantly affect the returns from that entity;
- IFRS 10 requires that, in assessing whether control exists, only substantive rights are taken into account, i.e. those that can
be exercised in practice when important decisions must be taken with respect to the acquired company;
- IFRS 10 provides practical guidance to assist in assessing whether control exists in complex situations, such as the de
facto control, potential voting rights, situations in which it is necessary to determine whether the person who has decision-
making power is acting as agent or principal , etc..
The standard is applicable retrospectively from 1 January 2014. The Group has not yet carried out an analysis of the
effects of this new standard on the consolidation scope;
• IFRS 11 - Joint arrangements, which will replace IAS 31 - Interests in Joint Ventures and SIC-13 - Jointly controlled entities
- Non-monetary contributions by joint venturers. Without prejudice to the criteria for the identification of joint control, the new
standard provides criteria for the accounting treatment of joint arrangements based on the rights and obligations arising
from the arrangements rather than on their legal form and establishes the equity method as the only method to account for
investments in jointly controlled entities in the consolidated financial statements. According to IFRS 11, the existence of a
separate vehicle is not a sufficient condition for classifying a joint arrangement as a joint venture . The new standard is
applicable retrospectively from 1 January 2014. Following the issue of the standard, IAS 28 - Investments in associated
companies - was amended to include in its scope also investments in joint ventures, as from the effective date of the
standard. The Group has not yet carried out an analysis of the effects resulting from the application of this new standard;
• IFRS 12 - Additional Disclosures of interests in other entities, which is a new and comprehensive principle on additional
disclosure to be provided in the consolidated financial statements on each type of interests, including those in subsidiary
companies, joint arrangements, associates, special purpose entities and other unconsolidated structured entities. The
standard is applicable retrospectively from 1 January 2014.
• IFRS 13 - Fair value measurement, which explains how fair value should be determined for financial statement purposes
and is applicable to all the standards that require or permit fair value measurement or information to be presented on the
basis of fair value, with a limited number of exceptions. In addition, the standard requires additional disclosure on fair value
measurement (fair value hierarchy) than is currently required by IFRS 7. The standard is applicable prospectively from 1
January 2013.
• amendment to IAS 19 - Employee Benefits, which eliminates the option to defer the recognition of actuarial gains and
losses through the corridor approach, requiring that all actuarial gains and losses be recognized immediately in the
Statement of Other Comprehensive Income so that the entire net amount of defined benefit plans (net of assets related to
the plan) must be included in the consolidated statement of financial position. The amendments also provide that changes
from one year to the next in the defined benefit plan and the assets related to the plan must be broken down into three
Meridiana fly - Annual Financial Report at 31 October 2012 - 91
components: the cost components relating to service period shall be recorded in the income statement as "service costs";
net financial expense calculated by applying the appropriate discount rate to the net defined benefit plan net of assets as at
the start of the year must be recognized in the income statement as such; gains and losses that arise from remeasurement
of assets and liabilities must be included in the Statement of Other Comprehensive Income. Moreover, the return on assets
included in net interest expense, as mentioned above, shall be calculated on the basis of the liability discount rate rather
than the expected return on assets. Finally the amendment introduces new disclosure to be provided in the notes. The
amendment is effective retrospectively from the financial year beginning on or after January 1, 2013. The effects that may
be reasonably estimated from the application of the changes in the standard to the balances at 31 October 2012 are not
currently considered as significant;
• amendments to IAS 32 - Financial Instruments: Presentation to clarify the application of some criteria for offsetting financial
assets and financial liabilities found in IAS 32. The amendments are effective retrospectively from the financial years
beginning on or after 1 January 2014.
• amendments to IFRS 7 - Financial Instruments: Disclosures, with regard to the information on the effects or potential effects
of offsetting financial assets and financial liabilities on the statement of financial position of a company. The amendments
are effective from the financial years beginning on or after 1 January 2013. The information must be provided
retrospectively.
• IFRIC 20 - Stripping Costs in the Production Phase of a Surface Mine , which applies to the costs of waste removal that are
incurred in the activities of a surface mine during the production phase of the mine. This Interpretation applies to annual
periods beginning on or after 1 January 2013.
Accounting standards, amendments and IFRS interpretations not yet endorsed by the European Union
At the date of these consolidated financial statements, the relevant bodies of the European Union had not yet completed the
endorsement process necessary for the adoption of the amendments and standards described below.
• On 12 November 2009 the IASB published IFRS 9 - Financial instruments;, the same standard was subsequently amended
on 28 October 2010. The standard, applicable from 1 January 2015, retrospectively, is the first part of a multi-step process
that aims to fully replace IAS 39 and introduces new criteria for the classification and measurement of financial assets and
liabilities. In particular, with regard to financial assets, the new standard uses a unified approach based on how an entity
manages its financial instruments and the characteristics of contractual cash flows of the financial assets to determine the
measurement criteria, replacing the different rules in IAS 39. For financial liabilities, instead, the main change introduced
concerns the accounting treatment of changes in fair value of a financial liability designated as a financial liability at fair
value through profit or loss, if these changes are due to a variation in the creditworthiness of the liability itself. According to
the new standard these changes should be recognized in "Other comprehensive income" and no longer through profit or
loss.
• Phases two and three of the project on financial instruments, dealing respectively with the impairment of financial assets
and hedge accounting are still in progress. The IASB is also considering limited improvements to IFRS 9 for the part
relating to the classification and measurement of financial assets.
• On 17 May 2012, the IASB published the document Annual Improvements to IFRSs : 2009-2011 Cycle, which reflects the
changes to the standards as part of the annual process for their improvement, focusing on changes assessed as
necessary, but not urgent. Below are those that involve a change in the presentation, recognition and measurement of
assets and liabilities, excluding those that involve only a change in terminology or editorial changes with minimal effect on
the accounts and those that affect standards or interpretations not applicable to Group:
- IAS 1 Presentation of Financial Statements - comparative information: it is clarified that in case additional comparative
information is provided, it must be presented in accordance with IAS / IFRS. In addition, it is clarified that in case an entity
changes an accounting policy or makes a retrospective adjustment/reclassification, the entity should present a statement of
financial position also at the beginning of the comparative period ("third statement of financial position" in the financial
Meridiana fly - Annual Financial Report at 31 October 2012 - 92
statements) while no comparative disclosures for the "third statement" are required in the notes, apart from the items
concerned.
- IAS 16 Property, plant and equipment - Classification of servicing equipment : clarifies that servicing equipment must be
classified as Property, plant and equipment when used for more than one year, in inventory otherwise.
- IAS 32 Financial Instruments: Presentation - Direct taxes on distributions to holders of equity instruments and transaction
costs on capital instruments: clarifies that direct taxes relating to these cases are subject to IAS 12.
- IAS 34 Interim Financial Reporting - Total assets for a reportable segment : Clarifies that total assets should be reported
only if this information is regularly provided to the chief operating decision maker of the entity and there has been a material
change in the total assets of the segment compared to the reported amounts in the last annual financial statements.
The effective date of the proposed amendments is for annual periods beginning on or after 1 January 2013, with early
application permitted.
• 28 June 2012, the IASB published the document Consolidated Financial Statements, Joint Arrangements and Disclosure of
Interests in Other Entities: Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12) . First, the document
intends to clarify the intentions of the Board with reference to the transition rules of IFRS 10 Consolidated Financial
Statements. The document explains that, for an entity with a financial year corresponding to the calendar year and first
application of IFRS 10 for the year ended 31 December 2013, the date of initial application will be 1 January 2013.
In the event that the conclusions on the consolidation scope are the same according with IAS 27 and SIC 12 and according
to IFRS 10 at the date of initial recognition, the entity shall have no obligation. Likewise, no obligation will arise in the event
that the investment has been sold in the comparative period (and as such no longer present on the date of initial
application).
The document aims to clarify how an investor might retrospectively rectify the comparative period/s if the conclusions on the
consolidation scope are not the same according to IAS 27 / SIC 12 and IFRS 10 on the date of initial recognition. In
particular, when a retrospective adjustment as defined above is not possible, an acquisition / disposal will be recorded at
the beginning of the comparative period, and a resulting adjustment recognized in retained earnings.
In addition the Board amended IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities to provide
a similar simplification for presenting or modifying comparative information for periods prior to that defined " the
immediately preceding period "(i.e. the comparative period presented in the financial statements). IFRS 12 is further
amended by limiting the request to present comparative information for disclosures relating to "structured entities" that were
not consolidated in periods prior to the effective date of IFRS 12.
These amendments are applicable, together with the reference standards, from the financial years beginning on or after 1
January 2014, with early application permitted
• On 31 October 2012 the amendments to IFRS 10, IFRS 12 and IAS 27 "Investments Entities" were issued, which introduce
an exception to the consolidation of subsidiaries for an investment company, except in cases in which the subsidiaries
provide services that relate to the investment activities of such companies. Pursuant to those amendments, an investment
company must evaluate its investments in subsidiaries at fair value through profit or loss. To qualify as an investment
company, an entity shall:
- obtain funds from one or more investors with the purpose of providing them with investment management services;
- commit to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment
income, or both; and
- measure and evaluate the performance of substantially all of its investments on a fair value basis.
These amendments are applicable for financial statements beginning on or after 1 January 2014, with early application
permitted.
• On 19 March 2011, the IASB published an amendment to IFRS 1 - First Time Adoption of International Financial Reporting
Standards - Government Loans amending the reference to the recognition of government loans in the transition to IFRS.
4.1.3. Going concern assumption
Meridiana fly - Annual Financial Report at 31 October 2012 - 93
Please refer to section 2.26. "Business Outlook", for a detailed analysis of the considerations on the basis of which the Directors, in
spite of considerable uncertainty that may cast significant doubt on the ability of the Group and the Company to continue operating
under the going concern assumption, have considered that the Group will be operating as a going concern in the foreseeable future
of at least 12 months, and therefore considered it appropriate to prepare the financial reporting documents on a going concern basis.
4.2. Comparability of accounting data
The accounting statements, set out in Chapter 3 above - "Financial Statements of 2012" are compared with data from the
consolidated financial statements at 31 December 2011. It should be preliminarily mentioned that in 2011 the company acquired the
Air Italy group which makes comparability of economic data in the consolidated financial statements not significant in absolute terms,
as Air Italy group data were consolidated with effect from 1 November 2011; on the contrary, data in the statement of financial
position are comparable.
As a result, income statement results are not comparable in absolute terms, as in the first 10 months of 2011 the contribution of Air
Italy consolidation is not included. In this regard, the income statement results may be assessed in relation with the prior year only in
terms of percentage of revenues.
It should also be noted that these financial statements relate to a 10 month period (from 1 January to 31 October) ending 31 October
2012 due to the early closure of the financial year approved by the extraordinary general meeting on 5 December 2011.
In these financial statements "Revenues from pre-paid tickets" were classified as "Sales Revenues" in the statement of
comprehensive income, unlike the previous year when the same item was classified as "Other income"; the reclassification was
carried out in light of the recurring nature of this revenue component which for all intents and purposes relates to the sale of tickets
for scheduled flights, which, since 2010 - following the transfer of the Aviation operations of Meridiana S.p.A. - constitute an integral
part of the core business of Meridiana fly and the estimate of which is based on increasingly more refined calculation instruments.
This classification is also supported by the historical recurrence of this revenue component which is also included in the revenues
from scheduled air traffic recorded by Air Italy, consolidated with effect from 1 November 2011.
The mentioned revenues refer to an estimate of unused tickets for scheduled flights which have been prepaid and can be used on
flights departing in periods subsequent to the reporting date. More specifically, this change of approach has led to a reclassification
of comparative figures as follows:
• in the consolidated financial statements for 2011, Euro 5,186 thousand were reclassified from "Other income" to "Sales
Revenues" in the income statement.
Furthermore, in these consolidated financial statements, with respect to the previous year, the credit balances of some fuel suppliers
were reclassified as being more precisely advances on service supplies. Therefore, this change of approach has led to a
reclassification of comparative figures as follows:
• in the consolidated financial statements for 2011, Euro 5,038 thousand were reclassified from "Trade payables and other
current liabilities" into "Trade receivables and other current assets" in the statement of financial position.
For a better comparison of information on a comparable basis, the following reclassified pro-forma consolidated income statement at
31 October 2011 was prepared (which includes Air Italy operations for the first 10 months); reference to this statement should also
be made when commenting changes in income statement figures for the period in absolute terms as well as in relative percentage
terms on revenues.
Meridiana fly - Annual Financial Report at 31 October 2012 - 94
Financial Year % revenues Financial Year % revenues
2012 from sales 2011 from sales
Proforma Data %
Sales revenue 556,556 100.0% 716,054 100.0% (159,498) -22.3%
Other Revenue 22,966 4.1% 26,852 3.8% (3,886) -14.5%
Total revenues 579,522 104.1% 742,907 103.8% (163,385) -22.0%
Fuel (179,003) -32.2% (218,582) -30.5% 39,579 18.1%
Materials and maintenance services (87,119) -15.7% (108,623) -15.2% 21,504 19.8%
Selling expenses (20,819) -3.7% (25,487) -3.6% 4,668 18.3%
Other operating costs and wet leases (169,469) -30.4% (211,306) -29.5% 41,837 19.8%
Sundry costs and other services (37,911) -6.8% (34,907) -4.9% (3,004) -8.6%
Staff costs (80,726) -14.5% (111,763) -15.6% 31,037 27.8%
Provision for liabilities and charges (7,911) -1.4% (14,170) -2.0% 6,259 44.2%
EBITDAR (3,436) -0.6% 18,069 2.5% (21,505) -119.0%
Operating leases (56,631) -10.2% (56,644) -7.9% 13 0.0%
EBITDA (60,067) -10.8% (38,575) -5.4% (21,492) -55.7%
Amortisation, depreciation and write-downs (107,340) -19.3% (19,043) -2.7% (88,297) -463.7%
Other adjustment provisions (6,733) -1.2% (2,749) -0.4% (3,984) -144.9%
EBIT (174,140) -31.3% (60,367) -8.4% (113,773) -188.5%
Net financial income (expenses) (11,391) -2.0% (7,619) -1.1% (3,772) -49.5%
Impairment of financial assets (3,822) -0.7% (0) 0.0% (3,822) ns
Profit (loss) before tax (189,353) -34.0% (67,986) -9.5% (121,367) -178.5%
Taxes for the period (882) -0.2% (1,489) -0.2% 607 n.s.
Net Profit (loss) from continuing operations (190,235) -34.2% (69,474) -9.7% (120,761) -174%
Net profit (loss) from discontinued operations or held
for sale, net of tax effects - 2,478 (2,478) -100%
Net profit (loss) for the year (190,235) -34.2% (66,996) -9.4% (123,239) -183.9%
€/000
Change
It should be recalled that the aim of preparing the pro-forma data is to represent, according to measurement criteria consistent with
historical data and compliant with the relevant legislation, the effects of the acquisition as if it had taken place on 1° January 2011 for
the purposes of the Income Statement. However, it should be noted that if the acquisition had really taken place at that hypothetical
date, the results obtained might have differed from the pro-forma data.
The pro forma figures are unaudited.
4.3. Seasonality of the business
The demand for air transport, above all in the leisure/holiday segment, is characterized by significant seasonality. As regards
Meridiana fly, the business is concentrated in the third quarter and is more limited in the second and fourth quarter, except for
periods closed to the holidays (Christmas/New Year, Easter and long weekends). The Medium Haul business is particularly
significant in the summer period, while the Long Haul leisure business to exotic and tropical destinations has inverse seasonality, as
it is concentrated in the winter period (November – April).
Meridiana fly - Annual Financial Report at 31 October 2012 - 95
4.4. Consolidation scope and criteria
These consolidated financial statements at 31 October 2012 include the data of Meridiana and those of its subsidiaries prepared at
the same date.
A list of the consolidated companies, together with the related information set out in in Art. 38 of Legislative Decree 127/91, is
provided below:
In addition, the subsidiary Meridiana Express S.r.l. (wholly owned) was not consolidated, as it was founded in March 2010 and is still
not operational.
The subsidiary (in an indirect way) Air Italy Brazil is not consolidated, as it was formed solely to acquire an identification number in
Brazil in order to be able to operate commercially on site, and, therefore, it is not operational.
Therefore, the line-by-line consolidation of data from these subsidiaries would not have led to significant effects on the consolidated
financial statements.
4.5. Significant Non-recurring Events and Transactions.
Amounts in Euro/000
Description
Value % Value % Value % Value %
Book value (A) (111,791) (190,235) (136,078) 5,823
SRT legal settlement 2,500 2.2% 2,500 1.3% 750 0.6% 750 12.9%
Reorganization costs 1,286 1.2% 1,286 0.7% 1,136 0.8% 1,136 19.5%
Receivable for solidarity contracts- non
recurring gain 674 0.6% 674 0.4% - 0.0% - 0.0%
Early surrender of aircraft 6,555 5.9% 6,555 3.4% - 0.0% - 0.0%
Capital loss on disposal of engine 2,518 2.3% 2,518 1.3% (2,174) -1.6% (2,174) -37.3%
Impairment of goodwill 57,756 51.7% 57,756 30.4% - 0.0% - 0.0%
Write-down of investments 1,246 1.1% 1,246 0.7% - 0.0% - 0.0%
Write-down of B767 fleet 23,862 21.3% 23,862 12.5% - 0.0% - 0.0%
Write-down of option to take over AV One
lease contract 9,000 8.1% 9,000 4.7% - 0.0% - 0.0%
Reversal of deferred taxes 5,057 4.5% 5,057 2.7% - 0.0% - 0.0%
Total non-recurring transactions (B) 110,455 -98.8% 110,455 -58.1% (288) 0.2% (288) -4.9%
Gross notional value (A + B) (1,336) (79,780) (136,366) 5,535
(*) They refer to an increase or decrease in the period of net cash and cash equivalents
Shareholders' EquityNet Profit (loss) for the
year
Net financial
positionCash flows(*)
Share capital Ownership
Direct Indirect Total Total
Meridiana fly S.p.A Olbia (OT) € 20,901,419.34 - - - -
Air Italy Holding S.r.l. Gallarate (VA) € 14,310,000.00 100.00% - 100.00% 100.00%
Air Italy S.p.A. Gallarate (VA) € 6,666,667.00 - 100.00% 100.00% 100.00%
Wokita S.r.l. Olbia (OT) € 35,000.00 100.00% - 100.00% 100.00%
Sameitaly S.r.l. in liquidation Olbia (OT) € 95,000.00 100.00% - 100.00% 100.00%
AEY Aviation Ltd Dublin-Ireland € 500.00 100.00% 100.00% 100.00%
Meridiana express S.r.l. Olbia (OT) € 10,000.00 100.00% - 100.00% 100.00%
Air Italy Brazil Rio de Janeiro, Brazil € 16,892.00 100.00% - 100.00% 100.00%
Registered Office Percentage owned
Parent Company:
Non- consolidated subsidiaries:
Fully consolidated subsidiaries:
Meridiana fly - Annual Financial Report at 31 October 2012 - 96
SRT legal settlement
During the period a non-recurring charge of Euro 2.5 million was recognized in relation to the settlement agreement reached in the
dispute with the maintenance provider SR Technics for termination of contracts.
Reorganization costs
The Group incurred costs associated with settlements agreements with the staff in order to terminate employment contracts as part
of the reorganization and structural cost-saving project for approximately Euro 1.3 million.
Non-recurring loss on receivables for solidarity contracts
A non-recurring loss of Euro 0.7 million was recognized in the period in relation to the final determination of the amount receivables
from relevant Institutions for the application of solidarity contracts to the staff expired on September 2010;
Early return of aircraft
A non-recurring charge of Euro 1.5 million (USD 1.95 million) by way of penalties (reduced compared to contractual provisions) was
recognized for the early return of an A330 Airbus (Early termination fee) following the agreement reached with the lessor ILFC.
A provision of approximately Euro 3.1 million was recognized for contract losses ("onerous" aircraft lease contracts pursuant to IAS
37) to take into account the loss from the use of the aircraft before being returned in January 2013, partially offset by the use of
phase-out provisions for Euro 1.6 million as well as an additional amortization charge on capitalized aircraft phase-in costs due to the
early return of the aircraft (approximately Euro 1 million).
Also in relation with the agreements for the early return of some aircraft in January 2013, financial assets were adjusted by Euro 2.5
million as a result of the write-off of security deposits agreed with the lessor to offset the accumulated payables and charges.
Write down of aircraft carrying amount (B767 fleet)
The carrying amount of owned aircraft (Boeing 767-200) was written-down by Euro 23.8 million, including a spare engine, as a result
of the planned disposal of these assets provided in the Business Plan and taking into account fair market value.
Write-down of the option to take over a lease contract
The option to take over the finance lease contract of one aircraft with the financial lessor AV ONE was written-down (originally
recognized for Euro 9 million as construction in progress in the "Fleet" item) due to the expensive conditions for its exercise in light of
the current market value of the aircraft (Boeing 767-300).
Impairment of goodwill and investments
The Directors also deemed it appropriate to recognize significant non-recurring impairment losses on some assets as a result of the
impairment test; they included the impairment of goodwill (Euro 57.8 million), as well as the impairment loss recognized on the
carrying amount of the investment in Meridiana Maintenance (Euro 1.2 million).
Write-down of deferred tax assets
Following the approval of the Business Plan, given the limited taxable income expected for the Group on the basis of the mentioned
Plan and uncertainties related to its implementation (see section 2.26 of the Report), the Directors decided to write down the net
deferred tax assets for Euro 5.1 million. The effect of this write-down was offset by non-recurring income of Euro 3.5 million on the
sale of tax losses to Meridiana S.p.A. which the latter used to offset the profits from other Meridiana S.p.A. group companies - as
part of the tax consolidation agreement.
Meridiana fly - Annual Financial Report at 31 October 2012 - 97
4.6. Analysis of the consolidated statement of financial position
Non-current assets
Non-current assets at 31 October 2012 amounted to Euro 199,815 thousand, down by Euro 119,702 thousand compared to Euro
319,517 thousand at 31 December 2011.
Ref 1 Intangible assets
Intangible assets amounted to Euro 88,431 thousand, down by Euro 58,317 thousand from Euro 146,748 thousand at 31 December
2011, primarily for the write-down of goodwill of Euro 57,756 thousand resulting from the impairment test as detailed below, which
quantified the value of goodwill in Euro 87,479 thousand.
As required by the accounting standards described in section 4.1 above, the Directors, supported by the expert appointed for the
purpose (Mr Marco Lacchini), performed the impairment test on goodwill in accordance with IFRS / IAS international standards, in
particular IAS 36 "Impairment of assets".
The document supporting the impairment test performed on the Meridiana fly - Air Italy CGU was reviewed and approved by the
Board of Directors on 26 February 2013, prior to the approval of the consolidated financial statements. The considerations made in
relation to the impairment tests performed are described below.
Impairment test on the CGU Meridiana fly- Air Italy
Following the completion of the acquisition of the subsidiary Air Italy, the two airlines Meridiana fly and Air Italy represent a single
business unit which, for the purposes of the Group "impairment" test, should not be broken down in several CGUs. In this regard it
should be noted that the continued existence of separate legal entities is not sufficient to justify separate CGUs given the unified and
consistent business direction and strategic vision of the Directors also confirmed by the formulation of the Plan; in fact, while
showing a significant change in light of the reduction in operating capacity to cope with the sharp drop in demand, the competitive
strategy of as formulated in the plan shows no distinction in respect of the two air companies/entities. It should be noted that a
distinction, for the purposes of the impairment test between scheduled and charter activities, between activities with and without the
constraints of territorial continuity, between medium and long haul flights, would not be consistent with the Directors' strategic vision
and would be characterized by the absence of autonomy in the formulation of competitive strategy.
Consequently, as there are no production units within the aviation activity carried out by the group, that constitute decision-making
systems that are independent with respect to the economic entity, and therefore such as to be identified as a CGU in accordance
with IAS 36, the impairment test on the air transport activity was carried out with reference to the CGU Meridiana fly - Air Italy as a
whole. Consequently, the recoverable amount is determined by reference to the single CGU Meridiana fly - Air Italy.
Finally it should be remembered that after the business combination, that took place in 2010 with former Meridiana Aviation
Operations, as further described in section 4.11, the segment reporting required by IFRS 8 is not provided with regard to interim
results of separate business units, as the "reporting tools for decision making "do not separate direct and indirect inputs but rather
they present them in a uniform and consistent way with management strategies and structures, as well as the functional organization
of the company described above. This approach is also confirmed after the integration with Air Italy, since - as described above - the
Business Plan is characterized by the absence of a separate competitive strategy for the two airlines / entity.
According to IAS 36, the recoverable amount is the higher of the fair value and the value in use. Fair value is the amount obtainable
from the sale in an arm's length transaction between knowledgeable, willing parties, less any directly attributable expenses.
Depending on circumstances, this amount is determined according to the agreed price if there is a binding sale agreement stipulated
in a transaction between independent parties (net of disposal costs) or the market price, less costs to sell if the asset is traded in an
active market.
On the other hand, the value in use results from discounting, using an appropriate discount rate (equal to the weighted average cost
of capital), expected positive and negative cash flows to be derived from using the asset / CGU until the end of its useful life. The
impairment loss resulting from the impairment test is measured by the excess of the carrying amount of the asset compared to its
recoverable amount.
Meridiana fly - Annual Financial Report at 31 October 2012 - 98
On the basis of these consolidated financial statements, the carrying amount of the CGU Meridiana fly - Air Italy before impairment
was determined in Euro 81,293 thousand, net of deferred tax items, the amount of which was in any case quite small.
The main assumptions used for the calculation of value in use and adopted by the expert, concerned the estimated cash flows of the
CGU during the period used for the calculation, the weighted average cost of capital and the rate of growth.
As described in the previous paragraph 2.24.13, on 26 February 2013, the Board of Directors approved the 2013-2017 Business
Plan. Based on this plan the appointed expert estimated the value in use of Meridiana fly - Air Italy CGU using the Discounted Cash
Flow (DCF) method, i.e. the discounting of future positive and negative cash flows generated by the CGU until the end of its useful
life. The net operating cash flows estimated for this purpose were derived from the above mentioned Plan according to the generally
used "unlevered" approach, according to which cash flows are calculated regardless of the company financial structure by
subtracting the CGU net debt at the valuation date from the present value of the cash flows.
The weighted average cost of capital used to discount the cash flows of the explicit period and to calculate the Residual Value was
determined at 13.3% (11.87% at 31 December 2011), based on of the following parameters:
"Risk-free" rate (Rf) 4.49% (5.35% at 31 December 2011), equal to the average yield of Treasury Bonds with 5/10 year maturity
Beta factor (β) 0.99 (0.96 at 31 December 2011), determined on the basis of the "air transport" beta factor
Risk premium (Rm - Rf) 7.5% (5.50% at 31 December 2011), identified on the basis of the long-term spread between the stock
market index and Italian government bonds
Specific risk factor 3% (3.70% at 31 December 2011), calculated according to valuation practice
Cost of equity (Ke) 14.91% (14.34% at 31 December 2011)
Cost of debt (Kd) 7.74% (7.5% at 31 December 2011), estimated on the basis of a 4.5% spread applied to the risk-free rate
Equity / total sources of financing ratio of 1.86, based on the debt/equity ratio average of the reference sample (0.65 at 31
December 2011)
A 3.1% premium for the additional risk taking into account the operational characteristics of the Meridiana group
Weighted average cost of capital (WACC) 13.3% (11.87% at 31 December 2011)
With reference to the rate g used to calculate the Terminal Value, the expert factored in a recovery in demand in the long term, also
based on the forecasts provided by third-party sources about these trends, also specifically considered with reference to the market
in which the Group operates. Based on these considerations and information, the expert determined a growth rate g equal to 2% (for
the impairment test carried out the previous year g had been assumed equal to 0%).
With regard to the cash flow for the periods after the explicit period (residual value), the cash flows were determined by forecasting
an unlimited capitalization of normalized (sustainable) operating cash flows calculated based on the expected cash flow for the last
year of the explicit forecast period (2017). In this regard it should be noted that the expert decided to use the cash flow of the last
year of the explicit period as it was deemed representative of the company's ability to maintain such cash flow over time.
The results deriving from the application of this methodology for the analysed entity are shown in the following table.
Thousands of Euro 31 October 2012 31 December 2011
Present value of cash flows -71,880 19,646
Discounted terminal value 96,701 148,843
Value in use 24,821 168,489
In light of the above findings a permanent loss arose in the carrying amount of the CGU Meridiana fly - Air Italy, determined as
follows.
Meridiana fly - Annual Financial Report at 31 October 2012 - 99
Meridiana Fly CGU Consolidated
Value in use
CGU carrying amount 81,293
Value in use 24,821
Impairment -56,472
Moreover, the value in use consists exclusively of the discounted cash flows that make up the Terminal Value (at 31 December
2011, the terminal value accounted for approximately 88% of the value in use), i.e. the cash flows associated with periods distant in
time, the achievement of which is characterized by a higher risk profile and more exposed to uncontrollable changes in external
variables that may differ from those envisaged in the Plan.
In light of these considerations, the expert carried out a sensitivity analysis to verify the change in the value of the CGU Meridiana fly
- Air Italy economic capital to changes in the discount rate (weighted average cost of capital, WACC) and the growth rate (g):
EUR/M
WACC
12.30% 12.80% 13.30% 13.80% 14.30%
G
row
th R
ate
1.00% 27.9 21.7 16.1 11.0 6.3
1.50% 33.0 26.3 20.3 14.8 9.7
2.00% 38.7 31.4 24.8 18.9 13.5
2.50% 44.9 36.9 29 8 23.3 17.5
3.00% 51.8 43.1 35.3 28.2 21.9
The above sensitivity analyses show a significant variation of the "value in use" to changes in the WACC and g. In this regard it
should therefore be noted that the adoption of different levels of these parameters would result in the recognition of additional asset
write-downs and further needs for capital support by Meridiana S.p.A. and AKFED.
Other sensitivity analysis made by the Directors and discussed at the meeting of the Board of Directors that approved the Business
Plan, showed the following results in response to changes in the main exogenous variables individually considered, compared to the
base case, throughout the period of the plan.
€/M
Fuel sensitivity Value in use
2013 2014 2015 2016 2017
Best case -5% -5% -5% -5% -5% 58.157
Base case $961/ton $961/ton $961/ton $961/ton $961/ton 24.821
Worst case +5% +5% +5% +5% +5% -8.514
€/M
Exchange rate sensitivity Value in use
2013 2014 2015 2016 2017
Best case $/€ 1.30 $/€ 1.30 $/€ 1.30 $/€ 1.30 $/€ 1.30 61.511
Base case $/€ 1.25 $/€ 1.25 $/€ 1.25 $/€ 1.25 $/€ 1.25 24.821
Worst case $/€ 1.20 $/€ 1.20 $/€ 1.20 $/€ 1.20 $/€ 1.20 -11.867
The above sensitivity analyses show a significant variation of the "value in use" to changes in uncontrollable macroeconomic
Meridiana fly - Annual Financial Report at 31 October 2012 - 100
variables, which, in the "worst case" scenario would lead to additional write-downs, including of significant amount. In this regard,
the considerations already mentioned in paragraph 2.26 are confirmed, i.e. that changes in scenario variables beyond the control of
the Company and the Group different from those assumed in the Budget and the Business Plan might lead to the recognition of
additional asset write-downs, resulting from an update of the impairment test of 31 October 2012, and the need for additional capital
support by Meridiana S.p.A. and AKFED.
In addition to the above considerations and in view of the fact that Meridiana fly is a company listed on the Italian stock exchange
and therefore the conditions provided for by international accounting standards are met so that the company value may be measured
on the basis of market prices expressed by the stock price, the expert also estimated the fair value of the CGU Meridiana fly - Air
Italy, with reference to the market value of the Company equal to the average share price on the stock exchange during the period
from April to October 2012, amounting to Euro 0.69 per share; the resulting market capitalization would amount to Euro 73.4 million
and, taking into account the net financial position, the corresponding fair value of the CGU Meridiana fly-Air Italy would be higher
than its carrying amount. However, the Directors, in view of the lack of representativeness of this method for the purposes in
question, as it results among other things from (i) a low percentage weigh of the free float in relation to all outstanding shares
(approximately 10% of the total) and (ii) a low ratio between the trading value and the average capitalization of 2012 (Turnover
Velocity) 1, decided to recognize the impairment resulting from the application of the DCF methodology described above, also in line
with the impairment test carried out for the preparation of the consolidated financial statements at 31 December 2011, which,
however, had not led to any write-downs.
Please refer to Section 2.23 above Ref 2 for a discussion on the risks related to the impairment evaluation process, given the
conditions in which the Company and the Group are currently operating.
Impairment test on goodwill arising upon consolidation of Wokita
As specified in paragraph 2.9 of the Management Report, in the 10 months of 2012 Wokita recorded total sales of approximately
Euro 0.5 million and a net loss of Euro 79 thousand.
The weak performance achieved derives from strong competition in the outgoing tourism market, adversely affected by the general
stagnation in consumption and the general crisis, with reduced margins for the various operators.
In order to cope with this negative scenario, the Group decided to strategically review the business model of the subsidiary Wokita
refocusing its activity towards the role of incoming tour operator focused on the Sardinia market and targeting customers in Northern
Europe, Scandinavia and the Baltic countries, with a view to developing low season businesses and countering the typical
seasonality of the Sardinia market.
The definition of this strategy, despite having already been outlined it its main aspects, is still ongoing also requiring certain
preliminary actions and more detailed feasibility studies in the commercial area. Therefore the business model review process is still
being defined and implemented, as well as the consequent business plan. In light of this situation, the remaining goodwill relating to
the investment in Wokita of Euro 1.3 million was fully written down in the Group consolidated financial statements.
With reference to the provisions of IFRS 3, with the preparation of these consolidated financial statements the maximum period of
one year has elapsed since the initial consolidation of Air Italy and Air Italy Holding for the purposes of making the final allocation of
the greater value recognized to the seller compared to the book value of the net assets acquired. This higher value, originally set at
Euro 87.5 million, was partially written down - along with the only CGU Meridiana fly operating in the air transport industry - as part of
the impairment test described above, which reduced goodwill as at 31 December 2011 amounting to Euro 145.2 million to Euro 87.5
million relating, however, to the whole CGU (not only to Air Italy - Air Italy Holding consolidation). Following this write-down, the
Directors carried out an analysis of acquired assets and liabilities in order to define the allocation of the residual surplus amount
recognized in the financial statements. At the outcome of this analytical process, no assets (tangible or intangible, other than
1
An analysis was carried out that showed a value of Turnover Velocity in relation to Meridiana fly stock market capitalization equal to 42% in 2012, compared with an average of
the FTSE Mib equal to approximately 153%.
Meridiana fly - Annual Financial Report at 31 October 2012 - 101
goodwill) could be identified whose fair value at the financial statements date was higher than the initial recognition amount.
Therefore, at the outcome of the impairment test described above, the residual surplus recognized in the financial statements was
finally allocated to Goodwill.
"Concessions, licenses, trademarks and similar rights" amounted to Euro 532 thousand. They include the value of Meridiana brand,
the costs incurred for the use of software licenses, implementation/upgrade of the website platform and the acquisition of operating
software. The increase during the year is linked to purchases of new software.
"Start-up and expansion costs", amounting to Euro 13 thousand, mainly include the net residual costs of pilots training; these costs
are guaranteed by surety in favour of Meridiana fly in the event of staff leaving in the three years following the training.
"Other intangible assets" amounting to Euro 407 thousand, are mainly related to the residual net value of the ancillary charges
incurred for new aircraft acquired through operating leases.
Ref 2 Fleet The net book value of the fleet at 31 October 2012 amounted to Euro 79,205 thousand (Euro 123,487 thousand at 31 December 2011).
The item "Fleet" includes the carrying amount of aircraft owned or held under finance lease contracts, i.e. 10 owned MD-82, 2 owned
Boeing B767-200 ER, 1 Boeing B767-300 ER under finance lease contract, as well as related rotable material.
The additional capital expenditure made in FY 2012 for major maintenance and purchases of rotable material amounted to Euro
7,926 thousand, while depreciation amounted to Euro 12,136 thousands.
In FY 2012 the fleet was subject to significant write-downs, which are described below:
• Euro 23.8 million on the carrying amount of 2 owned Boeing B767-200 ER and related spare engine as the Business
Plan provides for their disposal in the short term and therefore their carrying amount was aligned to the estimated
realizable value, net of selling costs, estimated on the basis of expressions of interest received by the company;
• Euro 9 million for the write-down of the advance granted to AV-One Aviation Ltd (included in "Assets under construction"
in the 2011 financial statements) for the purchase of the right of taking over a finance lease contract of an aircraft
operated by Air Italy on the basis of an operating sub-lease contract entered into with the same counterparty, having
verified that the market value of the aircraft to be taken over, including the proposed conditions for taking over the lease
contract in question, would have made the transaction not economically viable and the above amount unrecoverable.
With reference to the item "Fleet", shown in the financial statements as a separate item, the useful life of these assets is consistent
with the assumptions contained in the Business Plan and depreciation was calculated on that basis. With reference to the individual
components, the useful life was estimated taking into account the possible use of the individual components, also considering the
disposal of the fleet.
As part of the update of the impairment test carried out on 31 October 2012 in relation to the CGU Meridiana fly (i.e. the CGU that
operates in the air transport industry), the value of the fleet, after the above write-downs, was included in the relevant carrying
amount and it is therefore considered that based on the results obtained the residual carrying amount of such aircraft can be
confirmed.
Ref 3 Other property, plant and equipment
"Other property, plant and equipment" amounted to Euro 12,413 thousand, decreasing by Euro 2,860 thousands compared to Euro
15,273 thousands at 31 December 2011. Capital expenditure during the year amounted to Euro 1,204 thousand, while depreciation
was Euro 3,703 thousand.
This item includes:
- “Land and buildings” (Euro 5,993 thousand) which relate to the office building in Via Ettore Bugatti 15, Milan, to which a
total mortgage of Euro 10,000 thousand is attached in the lender bank’s favour. The recoverability of the carrying value of
Meridiana fly - Annual Financial Report at 31 October 2012 - 102
the property has been verified by the Directors with reference to its market value on the basis of an estimate of the fair
value, net of selling costs, already made in previous years and still considered valid, given the demonstrated use of the
property which is, albeit partially, leased to third parties, with related revenue recognized in the income statement in 2012
for a total of Euro 231 thousand.
- "Equipment on leased aircraft" (Euro 2,819 thousand), which refers to the net value of improvements made to the residual
fleet under operating lease, and the net value of provisions for maintenance for aircraft reconditioning and phase out, which
are capitalised and depreciated systematically.
- "Plant and Machinery" (Euro 504 thousand), which consist mainly of specific systems (heating, cooling, electrical) on third-
party assets.
- "Industrial equipment" (Euro 1,358 thousand), which mainly relate to operational equipment (especially catering equipment)
in use at the Company's bases and aircraft and flight simulators for pilots training.
- "Other assets" (Euro 968 thousand), include the net book value of electronic equipment as well as the net residual value of
furniture, furnishings, vehicles and other property in use.
- "Work in progress" (Euro 771 thousand) for investments not yet completed as at the financial statements date relating to
improvements to the fleet under operating lease.
Below is a statement of the changes in intangible and tangible assets between 31 December 2011 and 31 October 2012.
Meridiana fly - Annual Financial Report at 31 October 2012 - 103
Summary of changes in tangible and intangible assets
(€/000)
Assets 31.12 Other 31.10 31.12 Other 31.10 31.12 Write-Down 31.10 31.12 31.10
Intangible 2011 changes 2012 2011 changes 2012 2011 Write-ups 2012 2011 2012
Goodwill 150,808 - - - 150,808 - - - - - (5,572) (57,756) (63,328) 145,236 87,479
Start-up and expansion costs 5,505 - - - 5,505 (5,484) (8) - - (5,492) - - - 21 13
Development costs 464 - - - 464 (464) - - - (464) - - - - -
Concessions, licenses, trademarks and similar rights 8,653 184 - - 8,837 (7,963) (359) - 17 (8,305) - - - 690 532
Other intangible assets 2,882 140 (1) - 3,021 (2,081) (504) - (17) (2,602) - (12) (12) 801 407
Total 168,312 324 (1) - 168,635 (15,992) (871) - - (16,863) (5,572) (57,768) (63,340) 146,748 88,431
(€/000)
Fleet 31.12 Other 31.10 31.12 Other 31.10 31.12 Write-Down 31.10 31.12 31.10
2011 changes 2012 2011 changes 2012 2011 Write-ups 2012 2011 2012
Aircraft 289,885 51 (9,173) - 280,763 (194,834) (6,668) 2,301 235 (198,966) (24,810) (23,853) (48,663) 70,241 33,134
Maintenance 44,742 6,857 - - 51,599 (24,156) (2,297) - (53) (26,506) - - - 20,586 25,093
Rotable material 56,614 1,018 (373) - 57,259 (32,381) (3,171) 26 (182) (35,708) (573) - (573) 23,660 20,978
Assets under construction 9,000 - - - 9,000 - - - - - - (9,000) (9,000) 9,000 -
Total 400,241 7,926 (9,546) - 398,621 (251,371) (12,136) 2,327 - (261,180) (25,383) (32,853) (58,236) 123,487 79,205
(€/000)
Other property, plant 31.12 Other 31.10 31.12 Other 31.10 31.12 Write-Down 31.10 31.12 31.10
and equipment 2011 changes 2012 2011 changes 2012 2011 Write-ups 2012 2011 2012
Systems on third party aircraft 41,119 229 (2,717) (334) 38,297 (35,327) (2,521) 2,370 - (35,478) - - - 5,792 2,819
Land, buildings and works on third party property 9,930 - - 345 10,275 (3,194) (233) - - (3,427) (855) - (855) 5,881 5,993
Plant and machinery 2,649 - - 20 2,669 (1,979) (186) - - (2,165) - - - 670 504
Equipment 8,948 5 - (23) 8,930 (7,346) (226) - - (7,572) - - - 1,602 1,358
Other assets 14,995 199 (72) (8) 15,114 (13,667) (537) 67 - (14,137) - (9) (9) 1,328 968
Assets under construction 771 - - 771 - - - - - - - - - 771
Total 77,641 1,204 (2,789) - 76,056 (61,513) (3,703) 2,437 - (62,779) (855) (9) (864) 15,273 12,413
Historical cost Depreciation and amortization Write-down/Write-up Net book value
Increases Decreases Increases Decreases
Historical cost Depreciation and amortization Write-down/Write-up Net book value
Increases Decreases Increases Decreases
Historical cost Depreciation and amortization Write-down/Write-up Net book value
Increases Decreases Increases Decreases
Meridiana fly - Annual Financial Report at 31 October 2012 - 104
Ref 4 Deferred tax assets
This item amounted to Euro 404 thousand, decreasing by Euro 10,749 thousand compared to the corresponding item at 31
December 2011, amounting to Euro 11,657 thousand, mainly reflecting the write-down of the deferred tax assets on tax losses and
temporary tax differences that will reverse in future years. This write-down was recognized on the basis of the expected taxable
income resulting from the Business Plan. In particular, the prediction of lower taxable income during the Plan period and the high
exposure of forecasted data to fluctuations of scenario variables beyond the control of the Company and the Group are such that the
achievement of taxable income is no longer likely; such likelihood, on the other hand, constitutes an essential condition for the
continued recognition of deferred tax assets recorded in previous years, except for the amount of Euro 404 thousand to a large
extent related to the IRAP share of temporary differences that are expected to reverse in fiscal years in which the Group expects to
achieve taxable income at least for IRAP purposes.
In particular, the above-mentioned write-down concerns deferred tax assets for IRES purposes with reference to the parent
Meridiana fly for a total amount of Euro 7.5 million.
Ref 5 Equity investments
Investments in other companies amounted to Euro 750 thousand compared to Euro 1,995 thousand at 31 December 2011.
This item includes the investment in Meridiana Maintenance (Euro 722 thousand), the investment in Meridiana Express (Euro 10
thousand) and in Air Italy Brazil (Euro 17 thousand).
With reference to the assessment of the recoverability of the carrying amount of the investment in Meridiana Maintenance, the
Directors decided to adjust the recoverable amount of the investment to take account of the estimated fair value of the investment
prepared in May 2012 by an expert appointed by the directors of Meridiana Maintenance parent company (i.e. Meridiana S.p.A.).
The impairment loss recognized in order to align the carrying amount to the results of the estimates made available by the Directors
of Meridiana S.p.A. (shareholders of the Parent Company) was considered permanent by the Directors in view of the continuing
absence of prospects of recovering the contribution value determined by the expert, on the basis of confirmed positive expected
cash flows which are not however sufficient to recover the loss in value, including in the medium term.
The economic value of Meridiana Maintenance calculated by discounting the expected operating cash flows was estimated at Euro
4,411 thousand, and therefore the fair value of the investment held by Meridiana fly (16.38%) is equal to Euro 722 thousand. The
impairment loss with respect to the carrying amount of the investment, amounting to Euro 1,246 thousand, was recognized under
"Impairment of financial assets" in the statement of comprehensive income.
Ref 6 Other non-current assets
"Other non-current assets" amounted to Euro 18,612 thousand compared to the data at 31 December 2011 of Euro 20,861
thousand.
They mainly consist of security deposits to aircraft lessors and other security deposits to other suppliers, the restricted deposit at
Intesa Sanpaolo S.p.A. for the issuance of guarantees in favour of aircraft lessors, as well as other non-current trade receivables.
Current assets
Current assets at 31 October 2012 amounted to Euro 158,994 thousand, up by Euro 9,902 thousand compared to Euro 149,092
thousand at 31 December 2011.
Ref 7 Inventories
Inventories amounted to Euro 2,977 thousand (Euro 2,909 thousand at 31 December 2011).
These inventories are physically located at a number of warehouses directly managed by the Group (Olbia airport and Air Italy
Gallarate headquarters) and other operational sites (e.g. with the affiliate Geasar and third party warehouses).
The inventories consist primarily of aeronautics supplies, catering material and personnel uniforms.
Meridiana fly - Annual Financial Report at 31 October 2012 - 105
Ref 8 Trade receivables and other current assets
"Trade receivables and other current assets" amounted to Euro 141,210 thousand, recording an increase of Euro 4,987 thousand
(Euro 136,223 thousand in the 2011 financial statements). The changes are shown in the table below.
31.10 31.12
2012 2011
Trade receivables 93,047 98,174 (5,127)
Provision for doubtful receivables (20,172) (16,175) (3,997)
Total trade receivables 72,875 82,000 (9,125)
Receivable contribution for territorial continuity 24,287 18,469 5,818
Receivable for solidarity contracts - 8,303 (8,303)
Receivable for CO2 allowances 372 - 372
Receivables for advances given under temporary redundancy procedure (CIGS) 18,742 3,051 15,691
Accrued income and prepaid expenses 8,860 14,477 (5,617)
VAT receivables 536 87 449
Advances to suppliers 5,707 5,078 629
Current portion of AIRBUS receivable - 328 (328)
Other current assets 10,913 5,513 5,400
Provision for doubtful receivables -other debtors (1,082) (1,083) 1
Total current assets 68,335 54,223 14,112
Total trade receivables and other current assets 141,210 136,223 4,987
€/000Change
Trade receivables consist primarily of receivables from tour operators, private clients, airlines and agencies. They are adjusted by
the provision for doubtful receivables; the table below shows the changes in this item starting from the consolidated financial
statements at 31 December 2011:
€/000
31.12.2011 Provisions Utilisations
Foreign
exchange
adjustments
31.10.2012
Provision for doubtful trade receivables (16,175) (6,733) 2,741 (5) (20,172)
Provision for doubtful receivables -other debtors (1,083) - 1 - (1,082)
Provision for doubtful receivables (17,258) (6,733) 2,742 (5) (21,254)
"Trade receivables" also include amounts due from related parties, described in detail in Section 4.13 - Related Party Transactions.
Given pending litigation, the Directors considered that the allocations to the provision for doubtful receivables reflected in these
financial statements are appropriate and adequate to represent the risk of write-off of receivables due from counterparties.
The item "Receivables for solidarity contract" concerns receivables from public social security institutions in relation to the solidarity
contracts of Meridiana fly whose benefits expired in September 2010; this item was down to zero for payments received during the
year, while a non-recurring loss of Euro 674 thousand was recognized for the final determination of these receivables from the
relevant bodies.
"Receivables for CIGS Advances" for Euro 18,472 thousand refer to amounts advanced on a monthly basis to employees under the
temporary redundancy arrangement (CIGS both "zero hours" and "rotation") following the reorganization procedure initiated in
September 2011 by the parent Meridiana fly, for which reimbursement is due from INPS and the Special Aviation Fund.
In the first ten months of 2012 receivables from INPS were offset on the DM10 form for Euro 1,444 thousand after specific
Meridiana fly - Annual Financial Report at 31 October 2012 - 106
authorization of INPS. With regard to the Special Fund pursuant to Law 291/04, the Company received payments for Euro 3,877
thousand against the advance payment made to employees under the CIGS procedure. After the closing date of 31 October 2012,
additional receivables from INPS were offset on the DM10 form for Euro 3,510 thousand and Euro 13,691 thousand were received
by the Special Fund pursuant to Law 291/04 against the advance payments made to employees under the CIGS procedure.
"Receivables for territorial continuity contributions" of Euro 24,287 thousand relate to receivables from the National Civil Aviation
Authority and the Autonomous Region of Sardinia for contributions for territorial continuity with Sardinia and Sicily, due for the
periods from 2007 to 31 October 2012. In the first ten months of 2012, Euro 4,420 thousand were collected from the Civil Aviation
Authority as partial to repayment of the amounts due in relation to the territorial continuity regime with Sardinia and Sicily for various
periods between 2007 and 2009. With regard to the receivables from the Civil Aviation Authority it should be noted that after the end
of the financial year, approximately Euro 8.6 million were collected.
"Accrued income and prepaid expenses" amounted to Euro 8,860 thousand (Euro 14,477 thousand in 2011) and mainly relate to
prepaid operating costs such as aircraft rental, maintenance, insurance, software rental and marketing costs for the portion
pertaining to future years.
The "Current portion of Airbus receivable" (Euro 328 thousand at 31 December 2011), which related to short-term receivables for the
purchase of aviation goods and services by Airbus, went down to zero during the period.
The item "Other current assets", amounting to Euro 10,913 thousand mainly includes receivables from the parent Meridiana S.p.A.
from the sale of tax losses under the "fiscal consolidation regime" (Euro 3.4 million), income tax receivables (Euro 1.3 million),
receivables from intermediaries for sales with credit cards (Euro 1.1 million), receivables from employees for various advances (Euro
0.7 million), advances to suppliers (Euro 0.9 million) and other receivables of various kinds.
Ref 9 Current financial assets
"Current financial assets" amounted to Euro 5,506 thousand at 31 October 2012 (Euro 5,958 thousand in 2011). They consist of:
31.10 31.12
2012 2011
Security deposits given to third parties 1,501 2,041 (540)
Financial receivable from Meridiana Spa 4,005 3,917 88
Total current financial assets 5,506 5,958 (452)
€/000Change
Euro 1,501 thousand for security deposits to aircraft lessors reclassified as current assets due to the return of the aircraft in the short
term and Euro 4,005 thousand as financial receivable from Meridiana S.p.A expiring in 2013 with the payment of interest at market
rates.
Ref 10 Cash and cash equivalents
Cash and cash equivalents at 31 October 2012 amounted to Euro 9,301 thousand (Euro 4,002 thousand in 2011). They consist of
bank and postal deposits and cash / cash equivalents.
At the end of October 2012, Euro 1,155 thousand on bank current accounts were subject to seizure for actions brought by third
parties in relation to legal disputes.
Shareholders’ equity attributable to owners of the parent Ref. 11 Share Capital and reserves
At 31 October 2012 the share capital of Meridiana fly S.p.A, fully paid up, amounted to Euro 46,101 thousand divided into
106.374.003 shares with no par value.
The equity attributable to owners of the parent at year-end amounted to Euro 111,791 thousand (net positive equity for Euro 61,888
thousand in the 2011 financial statements). The parent Meridiana fly S.p.A., having recorded a comprehensive loss of Euro 189.8
Meridiana fly - Annual Financial Report at 31 October 2012 - 107
million, had a negative equity of Euro 104.5 million, which makes it fall within the cases provided for by article 2447 of the Italian Civil
Code. In this regard, the Board of Directors on 26 February 2013 decided to authorize the President of the Board of Directors and
the Chief Executive Officer, acting severally, to convene the extraordinary Shareholders' Meeting on 29 April 2013 for the adoption of
the measures referred to in the mentioned article 2447 of the Italian Civil Code.
The changes in the consolidated shareholders' equity included the net loss for the period amounting to Euro 190,235 thousand and
the capital transactions carried out in the period (subscriptions of new shares by the market, net of expenses directly related to the
share capital increase).
For additional details on changes in shareholders' equity, please refer to section 4.8 - Analysis of changes in consolidated equity.
Non-current liabilities
Non-current liabilities at 31 October 2012 amounted to Euro 104,545 thousand compared to Euro 65,993 thousand at 31 December
2011.
Ref 12 Long-term borrowings
"Long-term borrowings", amounting to Euro 83,296 thousand compared to Euro 28,712 thousand in 2011, are detailed in the
following table.
31.10 31.12
2012 2011
Mortgage loan 337 956 (619)
Finance Leases 13,584 16,740 (3,156)
Loans from Meridiana S.p.A. 69,375 11,016 58,359
Total long-term borrowings 83,296 28,712 54,584
€/000Change
The mortgage loan taken out in 2003 with Banca Profilo decreased by Euro 619 thousand as a result of the repayment of the half-
yearly instalments of the mortgage in January and July 2012. This loan is secured by a mortgage on the property in Milan, Via
Bugatti, for Euro 10 million.
The financial leases for Euro 13,584 thousand refer to the payable to Leasing companies deriving from the recognition, using the
financial method in accordance with IAS 17, of the finance leases contracts for the Boeing 767-300 aircraft.
Loans from Meridiana for a total of Euro 69,375 thousand relate to the non-current payable to the shareholder Meridiana S.p.A. for
medium-term loans, inclusive of interest (of which Euro 57.5 million disbursed in 2012, plus accrued interest). Subsequent to year
end Meridiana S.p.A. - supported by AKFED - provided additional funding (up to 26 February 2013) for an amount of Euro 36 million.
See section 2.24.14 of the Management Report for a comprehensive analysis of Meridiana / AKFED commitments for the going
concern.
The Group has no borrowings exceeding 5 years.
The non-current syndicated loan was reclassified as current following the breach of the financial covenants contractually agreed in
late 2011, as a result of which the acceleration clause came into operation with respect to the parent company Meridiana fly, as also
specified in note - Ref 18.
Ref 13 Trade payables and other non-current liabilities
This item, which amounted to Euro 3,501 thousand at the end of 2011 was zero at 31 October 2012.
It referred to the portion of payable maturing over 12 months due to the former Air Italy Holding shareholders by way of Earn-out on
the purchase price, recognized pursuant to the terms established by the agreements for the business combination with Air Italy. The
above payable was reclassified as current liabilities in light of the agreements reached between the shareholders on 15 January
2013.
Meridiana fly - Annual Financial Report at 31 October 2012 - 108
Ref. 14 Provisions for post-employment benefits (TFR) and other defined benefit plans
This item amounted to Euro 13,007 thousand (Euro 13,258 thousand in 2011) and consists of:
31.10 31.12
2012 2011
Post-employment benefits provision 12,233 11,582 651
Provision for subsidised tickets 774 1,676 (902)
Total 13,007 13,258 (251)
€/000
Change
This item comprises the "post-employment benefit provision" (TFR) for the termination of employment contracts, and the "subsidised
tickets provision" on the routes operated by the Company granted to retired former employees of Meridiana (and their spouses) with
at least ten years of service and having retired while employed by the Company.
Both of these liabilities are considered "defined-benefit plans" and therefore are determined at year-end by using actuarial methods
in accordance with the provisions of IAS 19.
The assessment of the post-employment benefit provision, in accordance with IAS 19, resulted in a liability at 31 October 2012 of Euro 12,233 thousand. This assessment was made taking into account the rules on post-employment benefit provision established by Law no. 296 of 27 December 2006. The table shows the changes that occurred during FY 2012, in the "post-employment benefit provision" (TFR) in comparison with the 2011 consolidated financial statements:
€/000 2012 2011
Net liability at 1 January 11,582 11,883
Change for contribution - 202
Current cost for the year - -
Net interest expense (income) 443 471
Actuarial (Gains) losses 231 (301)
Cost for the year 674 170
(services paid) (23) (673)
Net final liability 12,233 11,582 The table below shows the changes in the "subsidised tickets provision" occurred during the year:
€/000 2012 2011
Net liability at 1 January 1,676 1,488
Current cost for the year 45 27
Net interest expense (income) 65 63
Actuarial (Gains) losses (963) 208
(services paid) (49) (110)
Net final liability 774 1,676
It should be noted that for both the liabilities mentioned above, actuarial profits were recognized in the statement of comprehensive
income for an amount of Euro 732 thousand before tax.
The main assumptions underlying the actuarial calculations were the following:
- technical demographic basis according to statistical tables by independent sources, split by sex;
- probability of advance payment request of the post-employment benefit at a rate of approximately 4-5% for a maximum of
70% of the benefits accrued;
- retirement age as provided for by the most current legislation;
- for employees in temporary redundancy (CIGS), annual probability of payment of the provision due to turnover equal to
Meridiana fly - Annual Financial Report at 31 October 2012 - 109
20% for employees at least 55 years old and 10% for the others;
- discount rate to calculate present value of 2.89% per annum;
- average annual inflation rate of 2%
- salary growth rate around 1.8% per annum;
- with respect to subsidised tickets, reduction of the propensity to fly at an elderly age, with an annual 3% reduction of the
cost up to the age of 80
Ref 15 Provisions for non-current liabilities and charges
Provisions for non-current liabilities and charges amounted to Euro 7,284 thousand (Euro 12,578 thousand at 31 December 2011 ),
down by Euro 5,294 thousand.
They consist to a greater extent of maintenance provisions for reconditioning and phase-out aircraft under operating lease for the
portion for which return is expected over 12 months.
The changes are shown in the table below:
€/00031.12.2011 Provisions Utilisations Change in scope Other changes 31.10.2012
Reconditioning provision for leased Airbus 9,034 - - - (4,776) 4,258
Provision for restructuring 1,744 - - - (518) 1,226
Tax provision 1,800 - - - 1,800
Total non-current provisions for liabilities
and charges
12,578 - - - (5,294) 7,284
The risk provision for taxes of Euro 1.8 million relates to the likely risk of liability related to the tax dispute of the subsidiary Air Italy
S.p.A., which already existed at the date of acquisition.
The other changes of Euro 5,294 thousand refer to the reclassification to "current" provisions for liabilities and charges of the
provisions set aside for the phase-out of aircraft under operating lease and the amounts due to INPS for use of the temporary
redundancy fund (CIGS).
With regard to Boeing aircraft held under operating lease by Air Italy, the periodic maintenance carried out during the operating lease
exclude any phase-out costs at the end of the contract, as it is also evident from past situations of aircraft being delivered back by Air
Italy in previous years.
Ref 16 Deferred tax liabilities
Deferred tax liabilities amounted to Euro 958 thousand, decreasing by Euro 6,986 thousand compared to the corresponding item of
Euro 7,944 thousand in the 2011 financial statements.
In detail, these are deferred tax liabilities relating to temporary differences for the mismatch between the book values of certain
assets and the corresponding values recognized for tax purposes (mainly the MD-82 fleet owned) and the recognition of finance
lease contracts (engine / aircraft of Air Italy) as a capital lease, plus other adjustments resulting primarily from the consolidation of Air
Italy.
Current liabilities
Current liabilities at 31 October 2012 amounted to Euro 366,055 thousand, up by Euro 25,327 thousand compared to Euro 340,728
thousand at 31 December 2011.
Ref 17 Short-term borrowings
Short-term borrowings amounted to Euro 34,664 thousand, down by Euro 524 thousand compared to Euro 35,188 thousand in the
2011 financial statements.
Meridiana fly - Annual Financial Report at 31 October 2012 - 110
31.10 31.12
2012 2011
Bank overdrafts and other credit facilities 26,998 27,704 (706)
Loan from MF - - -
Revolving syndicated loan 7,666 7,484 182
Total current borrowings 34,664 35,188 (524)
€/000Change
These bank loans consist of advances on invoices / charter contracts and other current loans for Euro 26,998 thousand (these are
uncommitted credit lines of the subsidiary Air Italy, see section 2.23, item 4 sub c.) and short-term revolving loans for Euro 7,666
thousand, guaranteed by Meridiana / AKFED.
Meridiana fly short-term revolving loans with a syndicate of banks are valued using the amortized cost method to take into account
also the costs related to the signing of the loan having a principal amount of Euro 7,550 thousand.
Ref 18 Current portion of long-term borrowings
The current portion of long-term borrowings amounted to Euro 31,059 thousand, down by Euro 5,432 thousand compared to Euro
36,941 thousand at 31 December 2011.
This item consists of (i) short-term portion of the mortgage loan to Banca Profilo for the purchase of the property in Via Bugatti,
Milan, for Euro 633 thousand, (ii) the current financing by former shareholder Marchin investments B.V. of Euro 3,150 thousand
(originally granted to Air Italy Holding by the other former shareholder Zain Holding S.r.l. and subsequently transferred to Marchin
Investments B.V.), (iii) Unicredit loan of Euro 9,000 thousand to Air Italy Holding - guaranteed by Meridiana / AKFED, (iv) debt equal
to Euro 14,830 thousand, secured by Meridiana / AKFED (net of expenses recognized with the amortized cost method) for a 36
month loan, with an original maturity at December 2013 recognized as current portion, for failure to comply with the financial
covenants contractually established by the date of the 2011 financial statements as described in paragraph 2.13.7 Renegotiation of
bank debts, (v) short-term portion of payables due under Finance lease contracts for Boeing 767 aircraft for a total of Euro 3,445
thousand (with a reduction compared to the end for the redemption of a finance lease of an aircraft engine, subsequently sold to third
parties in 2012).
Ref 19 Provisions for current liabilities and charges
The "Provisions for current liabilities and charges" amounted to Euro 23,400 thousand, increasing by Euro 365 thousand compared
to Euro 23,035 thousand at 31 December 2011.
The changes are shown in the table below.
€/00031.12.2011 Provisions Utilisations Change in scope Other changes 31.10.2012
Provision for litigation 18,472 6,961 (6,228) - (312) 18,893
Provision for onerous contracts - 3,095 (2,494) 2,568 3,169
Reconditioning provision for leased Airbus 2,082 - (2,188) - 591 485
Reconditioning provision for leased MD
aircraft 1,486 - (1,312) - - 174
Provision for restructuring 468 - (307) - 518 679
Provisions for other risks 527 - - - (527) -
Total current provisions for liabilities and
charges
23,035 10,056 (12,529) - 2,838 23,400
These provisions increased due to allocations made in 2012 for Euro 10,056 thousand to cover the risks of the various ongoing
actions and disputes with passengers, employees, suppliers and other parties (see Section 2.15 - Significant Litigation), as well as
provisions for loss-making contracts ("onerous" aircraft lease contracts pursuant to IAS 37) for approximately Euro 3.1 million
recognized to take account of the losses from use of the aircraft before delivering them back in January 2013, partially offset by the
use of phase-out provisions for the same aircraft of Euro 1.6 million.
Meridiana fly - Annual Financial Report at 31 October 2012 - 111
"Uses" for the period concerned the litigation area (Euro 6.2 million), mainly in relation to labour disputes, and the actual costs of
aircraft reconditioning and return to lessor (Euro 3.5 million).
The other changes included the reclassification from "non-current" provisions for liabilities and charges of portions due within 12
months, the reclassification of phase-out provisions to the "onerous" aircraft lease contracts provision, as well as surplus phase-out
provisions being reversed to the income statement.
Referring to section 4.1.2 above "Use of estimates" for a discussion on the estimating nature of the process for assessing the
adequacy of the provisions for liabilities and charges and the inherent resulting uncertainties, it was considered - also based on the
opinions of independent legal support - that the provisions for liabilities and charges resulting from the financial statements at 31
October 2012 are adequate and reflect the likely liabilities of the Group in accordance with IAS 37.
Ref 20 Trade payables and other current liabilities
Trade payables and other current liabilities amounted to Euro 276,567 thousand, up by Euro 32,481 thousand compared to Euro
244,086 thousand in the 2011 financial statements.
31.10 31.12
2012 2011
Trade payables 209,347 182,381 26,966
Payables for pre-paid/invoiced tickets and taxes 24,914 22,621 2,293
Due to social security institutions 4,563 4,799 (236)
Taxes payable 7,566 5,634 1,932
Payables to former Air Italy Holding shareholders for Earn-out 3,764 750 3,014
Liability for Security deposits 719 567 152
Accrued liabilities and deferred income 10,418 7,360 3,058
Advances 1,106 4,765 (3,659)
Other payables 14,170 15,209 (1,039)
Total trade payables and other current liabilities 276,567 244,086 32,481
€/000Change
"Trade payables" include amounts due to related parties which are described in detail in Section 4.13 - Related Party Transactions.
"Payables for pre-paid/pre-invoiced tickets and taxes" refer to scheduled flights sold and cashed in still to be carried out, as well as
pre-sales of charter flights to tour operators to be carried out after 31 October 2012.
"Taxes payables" mainly relate to liabilities for withholding tax, VAT and other taxes.
"Payables to Former Air Italy Holding shareholders for Earn-out" refer to the Earn-out payable considered current as a result of
shareholders' agreements of 15 January 2013.
The "Security deposits received" are connected to the sums received as guarantee for charter activities by various Tour operators .
The item "Other payables" refers primarily to amounts due to employees for holidays not taken and additional monthly payments,
deposits received as collateral, payments due to directors and statutory auditors and other miscellaneous payables.
At 31 October 2012 there were no pending injunctions of significant amount issued by suppliers.
Past due payables to third party suppliers amounted to Euro 102.7 million, and to related parties amounted to Euro 28.6 million.
Overdue tax and social security payables amounted to Euro 3 million, and are currently being paid out.
Ref. 21 Current financial liabilities
This item amounted to Euro 365 thousand against Euro 1,928 in the financial statements at 31 December 2011.
It consists of (i) payable for "fair value" measurement of Hedging derivatives to cover interest rate fluctuations for Euro 196
thousand, (ii) other trade payables for which payment extension has been granted against the issue of financial bills for Euro 169
thousand.
Meridiana fly - Annual Financial Report at 31 October 2012 - 112
4.7. Analysis of the consolidated income statement results for the year
Preliminarily, it should be noted that where in this section reference is made to changes in "on a like-for-like basis" or "pro-forma
2011", comments are made to economic changes in comparison with data of the pro-forma income statement internally prepared for
the period 1 January - 31 October 2011, which also includes the consolidation of Air Italy results.
Ref 22 Revenues from sales
Revenues from sales totalled Euro 556,556 thousand compared to Euro 716,054 thousand in pro forma 2011, with a decrease in
revenues of Euro 159,498 thousand, corresponding to a percentage decrease of 22.3%; this decrease reflects the decision to reduce
operational activity resulting from the optimization of the integrated network and the cutting of heavy loss rotations in a situation of
extremely weak demand.
This item includes revenues from direct flights (line / charter), boarding fees, income from code-sharing, ACMI revenues, ancillary
revenues and other income from traffic; this item also includes the "income from prepaid tickets" arising from the estimate of income
related to the non-use of tickets issued, made on the basis of evidence of non-use or non-redemption by passengers, in order
ensure full recognition of revenues in accordance with the accrual basis.
Ref 23 Other revenues
"Other revenues" amounted to Euro 22,966 thousand compared to Euro 26,852 thousand in pro forma 2011, down Euro 3,886
thousand, as summarized in the following table.
Financial Year Financial Year
€/000 2012 2011 pro-forma
Operating grants 17,383 16,335 1,048
Other income from Meridiana group companies 1,411 2,528 (1,117)
Freight income on aircraft and rotable material 814 3,692 (2,878)
Net income from CO2 allowances 372 - 372
Other income and non recurring gains 2,986 4,297 (1,311)
Total 22,966 26,852 (3,886)
Change
This item includes "operating grants" which are represented by revenues from operations under the territorial continuity regime in
Sardinia and Sicily.
The item "Other income from related parties" refers to services and benefits provided to Meridiana Group companies as further
analyzed in section 4.13.
Ref 24 Fuel
The cost of fuel, amounting to Euro 179,003 thousand compared to Euro 218,582 thousand in 2011 pro-forma, recorded an
increased impact on revenues to 32.2% (30.5% in 2011 pro-forma and 31.7% in 2011 ), also due to the increase in the price of jet
fuel (in Euro +10.66%). The decrease in costs compared to pro-forma figures by Euro 39,579 thousand is related to the reduction of
operational activities, partially offset by an increase in the average price.
Ref 25 Materials and maintenance services
Meridiana fly - Annual Financial Report at 31 October 2012 - 113
The costs of materials and maintenance services amounted to Euro 87,119 thousand compared to Euro 108,623 thousand in 2011
pro-forma, down Euro 21,504 thousand. The impact on sales revenues stood at 15.7% against 15.2% in pro-forma 2011 (16% in
2011).
They mainly consist of the costs for ordinary maintenance operations on aircraft ("Net Aircraft Maintenance"), maintenance of
engines as well as maintenance costs periodically advanced to lessors in accordance with the contracts ("maintenance reserves"),
charges for on board "Catering" services. This item also includes other variable maintenance expenses that change according to
activity levels (e.g. flight hours / cycles).
Financial Year Financial Year
€/000 2012 2011 pro-forma
Maintenance, freight and catering services from Meridiana group companies 29,870 18,617 11,253
Maintenance reserves 20,401 23,248 (2,847)
Net Aircraft Maintenance 20,775 39,670 (18,895)
Fees for engine overhaul and other aeronautical materials 2,496 8,299 (5,803)
Material for catering and meals 10,382 12,201 (1,819)
Freight engines and rotable materials 1,033 4,004 (2,971)
Technical assistance and breakdowns 5 - 5
Other materials and maintenance services 2,157 2,584 (427)
Total 87,119 108,623 (21,504)
Change
Ref 26 Operating Leases
The aircraft operating lease amounted to Euro 56,631 thousand compared to Euro 56,644 thousand in the 2011 pro-forma.
The impact on sales revenues was 10.2% compared to 7.9% in 2011 pro forma (9.2% in 2011).
Despite the smaller number of aircraft under operating lease and the renegotiation of certain lease contracts according to more
favourable terms, the appreciation of the U.S. dollar (+8.48%) had an adverse impact, a non-recurring charge was recognized by
way of penalty for early delivery of an Airbus A330 agreed with the lessor ILFC amounting to Euro 1.5 million (USD 1.95 million), in
addition to the delay in the actual delivery of another Airbus A330 being phased-out for maintenance work under the contract.
Commitments for future lease payments for the Airbus and Boeing fleet, on the basis of current contract terms and conditions are
shown in the following table:
€/'000
Future minimum payments due under operating leases 40,041 75,696 3,702 119,439
Total 40,041 75,696 3,702 119,439
Over five yearsWithin 12
months
Between one and
five yearsTotal
For information, the commitments for future aircraft finance lease payments are shown in the following table. These commitments
are liabilities of a financial nature recognized in the financial statements according to IAS 17.
€/'000
Total minimum payments due for finance leases 3,445 13,584 - 17,029
Present value of minimum lease payments 3,445 13,584 - 17,029
Within 12
months
Between one and
five yearsOver five years Total
Ref 27 Selling expenses
Selling expenses, consisting of brokerage fees and other brokerage costs on the various distribution channels, amounted to Euro
20,819 thousand compared to Euro 25,487 thousand in 2011 pro forma, down by Euro 4,688 thousand.
The impact on sales revenues was 3.7% compared to 3.6% in 2011 pro forma (approximately 3.6% in 2011).
Meridiana fly - Annual Financial Report at 31 October 2012 - 114
Ref 28 Other operating costs and wet leases
Wet leases and operating costs amounted to Euro 169,469 thousand compared to Euro 211,306 thousand in pro-forma 2011, down
by Euro 41,837, as per following table.
Financial Year Financial Year
€/000 2012 2011 pro-forma
Handling 106,203 131,084 (24,881)
Route charges 37,737 41,729 (3,992)
Code sharing and Blocked space (seats purchased from other carriers ) 2,448 4,381 (1,933)
Wet lease 6,587 10,027 (3,440)
Handling and wet lease from Meridiana group companies 9,379 9,850 (471)
Passenger assistance and damage reimbursement 199 587 (388)
Others 6,916 13,649 (6,733)
Total 169,469 211,306 (41,837)
Change
Their impact on sales revenues stood at 30.4% against 29.5% in pro forma 2011 (31.7% in the 2011)
Wet Lease costs are mainly linked to the acquisition of flight capacity in particular for the territorial continuity regime with Sicily.
In the period there was a significant increase (+400% of the tariff) in "terminal navigation fees" with effect 1 July 2012 applied in Italy
by ENAV (Air Traffic Control) for the control of the airspace; the tariff increase resulted in higher costs for the Group during the
period from July to October 2012 for approximately Euro 3.7 million.
Ref 29 Other operating costs and other services
"Other operating costs and other services" amounted to Euro 37,911 thousand compared to Euro 34,907 thousand in pro-forma
2011; their percentage weight on revenue was 6.8% compared to 4.9% in pro-forma 2011 (5.5% in 2011).
This item includes the costs for consulting and collaboration services, advertising and promotion, insurance, utilities, leases, other
rentals, data processing services and IT support and various other services as well as various non-recurring losses.
This item includes the non-recurring loss of Euro 2.5 million resulting from the sale of an engine, carried out in May 2012, which was
no longer functional to the Group operations and the non-recurring cost for the settlement of the dispute with the maintenance
supplier SRT of Euro 2.5 million.
Ref 30 Staff costs
Staff costs amounted to Euro 80,726 thousand compared to Euro 111,763 thousand in pro-forma 2011, with a significant saving of
Euro 31,037 thousand (-27.8%).
The impact on sales revenues stood at 14.5% against 15.6% in pro-forma 2011 (18.3% in 2011).
Staff costs include all spending recorded in the payroll staff, including merit-based pay rises, promotions, inflation-based increases,
holidays not taken, other amounts accrued as required by laws and the collective contracts.
The savings on labour costs are in particular related to the benefits from the temporary redundancy procedure (CIGS) used in 2012
(about 617 FTE employees under this procedure) and the more efficient use of personnel allowed by the new Meridiana fly labour
contract.
This item includes non-recurring reorganization costs (settlements agreements with Personnel) of approximately Euro 1.3 million and
the non-recurring loss of Euro 0.7 million for the final determination of the receivable for the implementation of solidarity contracts for
the staff expired in September 2010.
Meridiana fly - Annual Financial Report at 31 October 2012 - 115
Ref 31 Depreciation, amortization and impairment
They amounted to Euro 107,340 thousand compared to Euro 19,043 thousand in pro forma 2011.
This item includes, among others, higher depreciation for capitalized costs relating to the phase-in of aircraft now being returned
ahead of schedule (approximately Euro 1 million), and following significant non-recurring write-downs:
� the impairment of goodwill as a result of the impairment test (Euro 57.8 million) made on the basis of the report of the expert
appointed for the purpose who used the DCF method by estimating cash flows on the basis of the Business Plan approved
by the Board of Directors on 26 February 2013 (see Section 4.6-Ref. 1 "Intangible Assets"); at the same meeting, the Board
of Directors approved the results of the impairment test which are reflected in the financial statements;
� The carrying amount of owned aircraft (Boeing 767-200) was written-down by Euro 23.9 million, including a spare engine,
as a result of the planned disposal of these assets provided in the Business Plan and taking into account fair market value;
� the write-down of the option to take over the finance lease contract of an aircraft (Euro 9 million), included in the fleet
construction in progress, due to the lack of economic viability of this transaction, taking into the terms to take over the lease
and the market value of the aircraft.
Ref 32 Allocation to the provision for liabilities and charges
This item amounted to Euro 7,911 thousand compared to Euro 14,170 thousand in pro forma 2011.
This item includes provisions allocated for Euro 6,961 thousand to cope with pending legal disputes with passengers, employees,
suppliers and other counterparties and the specific allocation for loss-making contracts (onerous aircraft lease contracts in
accordance with IAS 37) for Euro 3,095 thousand to take into account the losses from use of the aircraft before surrendering them in
January 2013. In addition, during the period a risk provision was released for lack of the underlying risks for Euro 2,144 thousand, to
a large extent (approximately Euro 1.6 million) related to the early surrender of aircraft in January 2013 with reduced reconditioning
and reconfiguration expenses (phase-out).
Ref 33 Other adjustment provisions
The item "Other adjustment provisions" amounted to Euro 6,733 thousand compared to Euro 2,749 thousand in pro forma 2011.
This item includes the additional write-downs recognized on doubtful accounts based on historical experience and detailed analysis
of each doubtful position, net of surplus provisions allocated to cover receivables written off during the financial year.
The higher cost is due to lower creditworthiness of some commercial counterparts (e.g. tour operators) and the expected recovery of
non-performing loans.
Ref 34 Net financial income (expenses)
The balance of "Net financial expenses" amounted to Euro 11,391 thousand compared to Euro 7,619 thousand in pro forma 2011.
The above amount is primarily the result of net foreign exchange losses (Euro 1.5 million), net interest and other financial charges
(Euro 6.2 million), various fees on sureties and bank charges (Euro 1.5 million), as well as the interest cost resulting from actuarial
valuation of post-employment benefit provisions and other benefits (Euro 0.5 million) and other minor items.
The details of this item are shown below.
Meridiana fly - Annual Financial Report at 31 October 2012 - 116
Financial income
Financial Year Financial Year
€/000 2012 2011 pro-forma
Bank interest income 37 57 (20)
Foreign exchange gains 3,019 5,573 (2,554)
Interest income on loans to Meridiana 89 107 (18)
Other income 99 42 57
Total 3,244 5,779 (2,535)
Change
Financial expense
Financial Year Financial Year
€/000 2012 2011 pro-forma
Interest on leasing contract - - -
Provision to cover losses in subsidiaries 4 - 4
Interest costs, post-employment benefits and subsidized tickets 498 445 53
Interest cost on other liabilities 518 - 518
Interest expenses on bank loans 3,909 2,657 1,252
Interest expense on loan from Meridiana 859 14 845
Interest expense on finance leases 964 1,185 (221)
Charges on bank current accounts 269 341 (72)
Foreign exchange losses 4,426 6,637 (2,211)
Losses on derivatives 82 203 (121)
Interest expense on mortgage 41 41 -
Bank loans waiver fee 300 188 112
Commissions on sureties 462 449 13
Commission on sureties from Meridiana 493 494 (1)
Non-recurring gains (losses) 190 (88) 278
Other 1,620 832 788
Total 14,635 13,398 1,237
Change
Ref 35 Impairment of financial assets
This item amounted to Euro 3,822 thousand and was not present in the previous year.
It includes, for Euro 1,246 thousand, the impairment of the investment in Meridiana Maintenance S.p.A. to take account of the
estimated fair value of the investment according to the report prepared in May 2012 by an expert appointed by Meridiana S.p.A.
It also includes the write-down of security deposits (Euro 2,576 thousand) as a result of the agreements for the early surrender of 8
aircraft in January 2013 which provide for a substantial setoff with payables and surrender charges.
Ref 36 Income taxes for the period
Taxes for the period result in a net benefit of Euro 882 thousand (Euro 1,489 thousand of net charge in pro-forma 2011); this result
reflects in particular the recognition of the income of Euro 3.4 million from the national tax consolidation for the year 2011 following
the yearly determination of taxes, in addition to the reversal of temporary tax differences and deferred tax effect related to IAS / IFRS
consolidation adjustments.
It also includes the write-down of deferred tax assets / liabilities (net charge to income statement of Euro 5.1 million) resulting from
the impairment test carried out on the basis of the new Business Plan (see Section Ref.4 and 16).
In particular, they consisted of:
Meridiana fly - Annual Financial Report at 31 October 2012 - 117
Financial Year Financial Year
€/000 2012 2011
Current IRES 14 96 (82)
Current IRAP 536 420 116
Extraordinary gains/losses on taxes from prior years 111 (116) 227
Income from tax consolidation (3,453) (62) (3,391)
IRES-IRAP deferred taxes 3,674 (963) 4,637
Total 882 (482) 1,364
Change
4.8. Analysis of changes in consolidated equity
The changes in equity during the year 2012 are summarized in the following table:
• Cash payments from the market following the implementation of the first phase of the rights issue for Euro 7,529 thousand,
net of expenses directly related to this transaction amounting to Euro 1,625 thousand, as well as the recognition of an
additional cash payment by Meridiana of Euro 10,000 thousand in accordance with the commitments made (so-called
"Underwriting Commitment").
• Recognition of a net loss for the period amounting to Euro 190,235 thousand.
• Gain on actuarial valuation (pursuant to IAS 19) of Euro 651 thousand, net of the tax effect relating to the post-employment
provisions and similar provisions.
The net consolidated equity at 31 October 2012 was negative for Euro 111,791 thousand.
The following table presents a reconciliation of shareholders' equity with the loss for the period of the parent Meridiana fly S.p.A.as
well as the corresponding consolidated figures.
Shareholders' equity
Profit (loss) for the
period
€/000 31.10.2012
Parent Company Meridiana fly (104,474) (190,434)
Losses of consolidated companies (47,250) (47,250)
Elimination of the carrying value of consolidated investments 39,933 47,449
Consolidated Meridiana fly (111,791) (190,235)
The losses of consolidated subsidiaries are mainly attributable to Air Italy; the investment was subject to specific impairment.
The effect on shareholders' equity of the consolidation adjustment for Euro 39,333 thousand, relating to the elimination of the carrying
amount of the investments is as follows:
• decrease of Euro 49,790 thousand resulting from the elimination of the carrying amount of consolidated investments and the
impairment of goodwill which arose from the consolidation of Air Italy, Wokita and Sameitaly;
• increase of Euro 89,723 thousand reflecting the reversal of impairment losses on investments that have been consolidated.
Meridiana fly - Annual Financial Report at 31 October 2012 - 118
4.9. Financial and capital management
As shown in the consolidated cash flow statement, which illustrates the changes in net cash and cash equivalents with the indirect
method, FY 2012 was characterized by an increase in cash, net of current bank loans (similar to bank overdrafts), for Euro 5,823
thousand.
Reconciliation net cash and cash equivalents
Financial Year Financial Year
2012 2011
€/000
Net Cash and cash equivalents at the beginning of period (31,186) 5,328
Cash and cash equivalents 4,002 12,670
Current bank loans (35,188) (7,342)
Net Cash and cash equivalents at end of period (25,363) (31,186)
Cash and cash equivalents 9,301 4,002
Current bank loans (34,664) (35,188)
The main changes in cash flows are analysed below.
- Cash flows absorbed by operating activities
In the financial year, operating activities resulted in a net negative change of Euro 54,773 thousand, which was due in particular to
the pre-tax loss for the period, despite non-monetary adjustments such as amortization, depreciation and write-downs.
- Cash flows absorbed by investing activities
This area resulted in a decrease of Euro 4,975 thousand, mainly due to the net change in tangible assets.
- Cash flows generated from financing activities
In the period, the cash flows generated from financing activities were positive for Euro 48,041 thousand, largely resulting from new
loans granted by the shareholder Meridiana.
- Cash flow generated from share capital transactions
Positive cash flows were generated for Euro 17,529 thousand due to payments for capital increase by the market (Euro 7,529
thousand) and the parent Meridiana (Euro 10,000 thousand) in fulfilment of the commitments made during the year.
4.10. Net financial position
The net financial position at 31 October 2012 was negative for Euro 136,078 thousand compared to Euro 94,400 thousand at the
end of 2011.
Meridiana fly - Annual Financial Report at 31 October 2012 - 119
€/000 31.10.2012 31.12.2011 Change
A Cash and deposits with bank (1) 9,301 4,002 5,299
B. Derivative Instruments included in cash equivalents (1) - - -
C. Cash and cash equivalents (A) + (B) 9,301 4,002 5,299
D. Current financial receivables 4,005 3,917 88
E. Current Bank loans(1) (2) 34,664 35,188 (524)
F. Current portion of long-term borrowings 31,059 36,491 (5,432)
G. Other current financial liabilities 365 1,928 (1,563)
H. Current financial debt (E) + (F) + (G) 66,088 73,607 (7,519)
I. Net current financial debt (H) - (D) - (C) 52,782 65,688 (12,906)
J. Long-term borrowings from banks 337 956 (619)
K Bonds issued - - -
L. Other non-current financial liabilities 82,959 27,756 55,203
M Non-current financial debt (J) + (K) + (L) 83,296 28,712 54,584
N Net financial debt (I) + (M) 136,078 94,400 41,678
Reconciliation with statement of cash flow and statement of financial position:
(1) Net cash and cash equivalents (25,363) (31,186) 5,823
(2) Current borrowings from banks 34,664 35,188 (524)
C - Cash and cash equivalents
Cash and cash equivalents at 31 October 2012 amounted to Euro 9,301 thousand and consisted of cash on hand and positive
balances on bank current accounts.
D - Current financial receivables
This item amounted to Euro 4,005 thousand, and comprised the current receivable from the parent Meridiana for collections of
"claims" attributable to Meridiana fly, the payment of which was deferred by agreement between the parties to 2013 with interest
accruing at market rates.
H- Current financial debt
Current financial debt amounted to Euro 66,088 thousand compared to Euro 73,607 thousand at 31 December 2011.
Amounts due to banks amounted to Euro 34,664 thousand, consisting of short-term revolving loans for Euro 7,666 thousand,
advances on invoices / charter contracts and other current loans for Euro 26,998 thousand.
The current portion of non-current borrowings of Euro 31,059 thousand is composed of (i) the short-term portion of a mortgage loan
of Meridiana fly for Euro 633 thousand, (ii) the short-term portion of debt for finance lease contracts and the supply of aircraft against
deferred payment for a total of Euro 3,445 thousand, (iii) the loan granted by Marchin Investments (sold by the former to Zain
Holding) for Euro 3,150 thousand, (iv) Unicredit loan (to Air Italy Holding) for Euro 9,000 thousand, (v) amounts due to banks for
loans with a 36 month maturity for Euro 14,830 recognized as current liabilities due to breach of the agreed financial covenants at
the end of 2011 without having obtained the relevant waiver by the lending banks within 31 December 2011.
The "other current financial payables" consist of (i) payable for "fair value" measurement of Hedging derivatives to cover interest
rate fluctuations for Euro 196 thousand, (ii) other trade payables for which payment extension has been granted against the issue of
financial bills for Euro 169 thousand.
M- Non-Current financial debt
Meridiana fly - Annual Financial Report at 31 October 2012 - 120
Non-current financial debt at 31 October 2011 amounted to Euro 83,296 thousand compared to Euro 28,712 thousand at the end of
2011.
Non-current amounts due to banks of Euro 337 thousand represent the amount in excess of the 12 months portion of the mortgage
loan in place with Banca Profilo. The other non-current financial payables amounting to Euro 82,959 thousand, include (i) the non-
current portion of liabilities for finance lease contracts on the Boeing 767-300 aircraft for Euro 13,584 thousand, (ii) the non-current
payable to the shareholder Meridiana S.p.A. for medium-term loans disbursed for a total of Euro 69,375 thousand (Euro 11,016
thousand at the end of 2011), which according to the agreements will have to be repaid within 36 months from the date of
disbursement.
4.11. Guarantees, commitments and other contingent liabilities
Sureties and other guarantees given
At 31 October 2012 the guarantees given to third parties by banks on behalf of the Group amounted to approximately Euro 41.9
million. These bank sureties mainly refer to guarantees issued in favour of credit card providers, ENAC for tender participation on the
routes under territorial continuity, aircraft lessors, and in favour of fuel suppliers and other service providers (airports, materials,
operating and financial services).
At 31 October 2012, a surety issued by an insurance company in favour of the Ministry of Defence to guarantee the 2011 contract of
Euro 2.4 million, and a pledge in favour of a bank for a total of USD 4.2 million, were outstanding.
A first mortgage of the value of Euro 10 million is recorded on the Company's former registered office in Via Bugatti, Milan, 15 in
favour of Banca Profilo as a guarantee of the mortgage loan granted by it for the purchase of the said property.
At the end of FY 2012 there are outstanding bills for a total of Euro 169 thousand as a guarantee for the rescheduling of trade
payables during the period.
Commitments and other agreements
At 31 October 2012 commitments for operating leases on Airbus and Boeing aircraft amounted to Euro 119.4 million, including all
future contractual maturities, while similar commitments for finance leases on aircraft amounted to Euro 17 million.
It should also be noted that outsourcing agreements with Meridiana Maintenance for the provision of exclusive maintenance services
determine a financial commitment which varies according to the maintenance activities carried out.
Contingent liabilities
With regard to ongoing disputes and the situation concerning these proceedings, as outlined in section 2.15 - Significant litigation,
although the Group may be required to pay higher amounts than those allocated to the provision for liabilities and charges, it is not
possible to reasonably predict the outcome of the proceedings and assess the likelihood of additional charges against the Group.
4.12. Segment reporting
With reference to IFRS 8 on segment reporting, the operating segments that are deemed as necessary by the management for the
purposes of assessing operating performance and making consequential decisions, are currently identified in the overall Group's
business.
Indeed, following the acquisition of Air Italy, the Meridiana fly – Air Italy Group is now a single business unit which cannot be "split"
into different CGUs.
In this regard it should be noted that the allocation, for the purposes of the impairment test between scheduled and charter activities,
between activities with and without the constraints of territorial continuity, between medium and long haul flights, would not be
Meridiana fly - Annual Financial Report at 31 October 2012 - 121
consistent with the Directors' strategic vision of the Company and would be characterized by the absence of autonomy in the
formulation of competitive strategy. In addition, it should be noted that the joint management of resources (human, material and
financial resources) would make it impossible to identify autonomous cash flows attributable to the individual operating units,
especially in light of the internal organisation adopted by management for the new post-combination entity; this organisation, in fact,
expressly provides that activities carried out respond to a single central structure, which is responsible for defining management
guidelines applicable across the various business functions.
Therefore there are no production units within the aviation business carried out by the Group such as to represent independent
decisions making systems with respect to the entity and therefore to be identified in distinct reporting segments pursuant to IFRS 8.
Therefore, in these notes, there are no data or tables presented for distinct business segments at a more detailed level than that of
the entire Group.
4.13. Related party transactions
Following the implementation of the capital increase and restoration of the float, at 31 October 2012 Meridiana fly S.p.A. was held by
Meridiana S.p.A. with a share of 51.2%.
At 31 October 2012, Meridiana fly was subject to joint control of Meridiana (51.2%) and the three new shareholders (Marchin
Investments, Pathfinder and Zain Holding, with a total of 38.7%).
Following the agreements between the shareholders on 15 January 2013 (see Section 2.24.10), which led to the transfer of shares
held by the three mentioned shareholders to Meridiana, the Company and the Meridiana fly Group are subject to the exclusive
control of Meridiana which owns 89,91% of the share capital, while the free float is 10.09%.
The transactions with related parties carried out by the Group during the first ten months of 2012 mainly concerned services and
financial transactions with Meridiana S.p.A. And other associate or affiliate companies (in particular Meridiana Maintenance, Geasar,
Alisarda), as well as other companies related to the AKFED group.
These transactions fall within the ordinary management of the Group, are made on an arm's length basis, i.e. at the same conditions
that would be applied between two independent parties and are performed in the interest of the Group.
Related party transactions at 31 October 2012 as defined in accordance with IAS 24 on disclosure of related party transactions as
well as some details on the main commercial and operational relationships with related parties are summarised in the tables below.
Meridiana fly - Annual Financial Report at 31 October 2012 - 122
Assets and liabilities with related parties
€/000
Absolute
value%
Absolute
value%
Absolute
value% Absolute value %
Absolute
value% Absolute value %
Absolute
value%
Other current financial assets 18,612 - 0.0% 4,005 21.5% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%
Trade receivables and other current assets 141,210 417 0.3% 3,475 2.5% 13 0.0% 11 0.0% 70 0.0% 2,867 2.0% - 0.0%
Long-term borrowings 83,296 - 0.0% 69,375 83.3% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%
Trade payables and other current liabilities 276,567 13,723 5.0% 46 0.0% 215 0.1% 1,374 0.5% 39 0.0% 24,850 9.0% 24 0.0%
€/000
Absolute
value%
Absolute
value%
Absolute
value%
Absolute
value% Absolute value %
Absolute
value% Absolute value %
Absolute
value%
Other non-current financial assets - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% 4,005 21.5%
Trade receivables and other current assets 1,406 1.0% 21 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% 8,280 5.9%
Long-term borrowings - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% 69,375 83.3%
Trade payables and other current liabilities 440 0.2% - 0.0% - 0.0% 565 0.2% 639 0.2% 2,635 1.0% 565 0.2% 45,114 16.3%
Revenues and expenses with related parties
€/000
Absolute
value%
Absolute
value%
Absolute
value% Absolute value %
Absolute
value% Absolute value %
Absolute
value%
Other revenues 22,966 355 1.5% 85 0.4% 13 0.1% 14 0.1% 6 0.0% 927 4.0% - 0.0%
Materials and maintenance services (87,119) (261) 0.3% - 0.0% - 0.0% - 0.0% - 0.0% (29,609) 34.0% - 0.0%
Selling expenses (20,819) (19) 0.1% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%
Other operating costs and wet leases (169,469) (9,401) 5.5% - 0.0% - 0.0% (41) 0.0% - 0.0% - 0.0% - 0.0%
Sundry costs and other services (37,911) (346) 0.9% (168) 0.4% (541) 1.4% (154) 0.4% - 0.0% (43) 0.1% (242) 0.6%
Net financial income (expense) (11,391) - 0.0% (1,263) 11.1% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%
€/000
Absolute
value%
Absolute
value%
Absolute
value%
Absolute
value% Absolute value %
Absolute
value% Absolute value %
Absolute
value%
Other revenues 359 1.6% 8 0.0% 15 0.1% - 0.0% - 0.0% - 0.0% - 0.0% 1,782 7.8%
Materials and maintenance services - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% (29,870) 34.3%
Selling expenses - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% (19) 0.1%
Other operating costs and wet leases - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% (9,442) 5.6%
Sundry costs and other services - 0.0% - 0.0% - 0.0% - 0.0% (621) 1.6% - 0.0% - 0.0% (2,115) 5.6%
Net financial income (expense) - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% (1,263) 11.1%
Cash flows with related parties
€/000
Absolute
value%
Absolute
value%
Absolute
value% Absolute value %
Absolute
value% Absolute value %
Absolute
value%
Cash flows from operating activities (54,773) (4,744) 8.7% (3,304) 6.0% (326) 0.6% 27 0.0% (21) 0.0% (26,566) 48.5% (242) 0.4%
Cash flows from investing activities (4,975) - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%
Cash flows from financing activities 48,041 - 0.0% 58,359 121.5% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%
Cash flows from share capital transactions 17,529 - 0.0% 10,000 57.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%
€/000
Absolute
value%
Absolute
value%
Absolute
value%
Absolute
value% Absolute value %
Absolute
value% Absolute value %
Absolute
value%
Cash flows from operating activities 766 -1.4% 310 -0.6% 21 0.0% 565 -1.0% 18 0.0% 2,110 -3.9% 452 -0.8% (30,935) 56.5%
Cash flows from investing activities - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%
Cash flows from financing activities - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% 58,359 121.5%
Cash flows from share capital transactions - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% 10,000 57.0%
Pathfinder S.r.l.
Pathfinder S.r.l.
Meridiana Maintenance
S.p.A.
Meridiana Maintenance
S.p.A.
DALF Business
Service S.r.l.
DALF Business
Service S.r.l.
Marchin
Investments B.V.
Total Financial year
2012
Geasar S.p.A.DALF Business
Service S.r.l.Meridiana S.p.A. Alisarda S.r.l. Cortesa S.r.l.
AKFED Finaircraft Air Uganda Zain Holding S.r.l. BVR & Partners Pathfinder S.r.l. Total related parties
AKFED
Total related parties
Eccelsa S.r.l.Meridiana Maintenance
S.p.A.
Eccelsa S.r.l.Total Financial year
2012
Geasar S.p.A. Meridiana S.p.A. Alisarda S.r.l. Cortesa S.r.l.
Finaircraft Air Uganda Zain Holding S.r.l. BVR & PartnersMarchin
Investments B.V.Total related parties
Eccelsa S.r.l.
AKFED Finaircraft Air Uganda Zain Holding S.r.l. BVR & Partners
Total as at
31.10.2012
Geasar S.p.A. Meridiana S.p.A. Alisarda S.r.l. Cortesa S.r.l.
Marchin
Investments B.V.
Meridiana fly - Annual Financial Report at 31 October 2012 - 123
Receivables / Payables
Receivables from Meridiana S.p.A. at 31 October 2012 amounted to Euro 7,480 thousand. They include loans given to Meridiana
(Euro 4,005 thousand) with interest accruing at market rates. Amounts due to Meridiana amounted to Euro 69,421 thousand mainly
concerning non-current loans for Euro 69,375 thousand.
Other receivables and payables to related companies are mainly trade receivables- payables, accrued for services rendered or
received with the various related companies as per their existing relationships, which are described in a subsequent section.
Revenues/costs for purchases and supply of services
Revenues at 31 October 2012 from related parties amounted to Euro 1,782 thousand and are mainly due to services rendered to
Meridiana Maintenance for global service, payroll management, administrative and fiscal services and amounts charged to Geasar
for commercial services, payroll and IT.
Operating costs amounted to a total of Euro 41,446 thousand, mainly relating to maintenance activities provided by Meridiana
Maintenance (Euro 29.6 million), handling activities provided by GEASAR (Euro 9.4 million), supervisory activities and other services
and advice provided by Meridiana.
Net financial expenses include fees earned by Meridiana on sureties given and interest expense of non-current loans granted by
Meridiana.
Relations with Meridiana Relations with Meridiana mainly concern commitments relating to the subscription and payment of the capital increases, as well as
financial arrangements (cash shareholders' loans and guarantees on Meridiana fly's loans from the Lending Banks of the Meridiana
fly's Group). Meridiana charges the Meridiana fly Group with the fees for guarantees given to third parties on its behalf, as well as for
other minor services performed. Revenue generating transactions with Meridiana concern the provision of administrative
management services, payroll services and other general services, as well as loans granted.
Relations with Geasar Supply transactions with Geasar (controlled by Meridiana) relate to advertising and commercial support services, payroll services
and computer management.
Purchasing transactions relate to handling/catering services for aircraft and passengers at the Olbia airport, provision of advertising
spaces and other ancillary services at the Olbia airport .
Relations with Meridiana Maintenance Purchasing transactions with Meridiana Maintenance (a subsidiary of Meridiana and 16.38% owned by Meridiana fly) cover
maintenance services, technical management and other services related to the management of special service agreements relating
to the fleet of Meridiana fly. Meridiana fly acts as service provider to Meridiana Maintenance with regard to administrative, legal and
corporate management, human resources and payroll services as well as other "global services".
Relations with AKFED AKFED undertook to provide Meridiana with the financial resources - in the form of shareholders' loans and payments for future
capital increase, or a combination of the two - necessary to ensure the going concern assumption is met and therefore enable the
implementation of Meridiana fly's Business Plan (see Section 2.24.14 of the Management Report for an analysis of the new
commitments by Meridiana/AKFED to the going concern).
An agreement is in place with AKFED for the provision of consulting services in the field of air transport by Meridiana fly.
Meridiana fly - Annual Financial Report at 31 October 2012 - 124
Relations with Alisarda Services provided by Alisarda (a subsidiary of Meridiana) concern the leasing of offices and equipment at the Olbia Headquarters
and other spaces at the Olbia airport; Meridiana fly, on the other and, provides various administrative services.
Relations with Cortesa Services provided by Cortesa (a subsidiary of Geasar) concern the service for the use of airport parking and other ancillary Terminal-
related services, while Meridiana provides payroll services.
Relations with Eccelsa Transactions with Eccelsa (a subsidiary of Geasar) concern the provision of administrative payroll services to Eccelsa.
Relations with Air Uganda, Air Burkina, Air Mali, Finaircraft Relations with these companies which are part of the AKFED group concern minor services.
Relations DALF Business Service A strategy consulting agreement was in place whereby this company provided services to the subsidiary Air Italy in the commercial,
financial and business strategy fields. DALF Business Service S.r.l. is 49% owned by Alessandro Notari, Chief Commercial Officer
the Company. This agreement was terminated following the shareholders' agreement of 15 January 2013.
Relations with Marchin Investments, Pathfinder and Zain Holding At 31 October 2012 the payables to the 3 Air Italy Holding former shareholders referred to the Earn-out on the acquisition of Air
Italy, broken down as follows:
- Euro 2,365 thousand in favour of Marchin Investments B.V. of which Giuseppe Gentile is the sole shareholder and sole
director;
- Euro 565 thousand in favour of Pathfinder Corporation S.r.l., of which Alessandro Notari is the sole shareholder;
- Euro 565 thousand in favour of Zain Holding S.r.l. (which is traceable to Mr Borgognoni Vimercati).
Relations with BVR The firm Borgognoni-Vimercati-Romano & Partners (BVR) has contracts in place for the provision of legal advisory services to
Meridiana fly group which resulted in a charge to the income statement for the first ten months of 2012 of Euro 621 thousand.
4.14. List of equity investments
Investments at 31 October 2012 are shown in the following table.
Company NameRegistered
OfficeShare capital
Percentage
owned
Overall
interest
Direct Indirect Total
MERIDIANA EXPRESS S.R.L. Olbia (OT) € 10,000.00 100.00% - 100.00% 100.00%
Air Italy Brasil S.A. Rio de Janeiro-Brasil € 16,892.00 - 100.00% 100.00% 100.00%
Meridiana Maintenance S.p.A. Olbia (OT) € 12,015,000.00 16.38% - 16.38% 16.38%
4.15. Remuneration paid to Directors and Statutory Auditors
Please refer to Section 9.13 of the separate financial statements
Meridiana fly - Annual Financial Report at 31 October 2012 - 125
4.16. Fees paid to the Independent Auditors
The fees paid to the independent auditors at Group level are detailed in the following table.
Fees Financial Year
Type of service Service provider Recipient 2012Euro '000
Independent Auditor Deloitte & Touche S.p.A. Parent Company 236
Certification services (1) Deloitte & Touche S.p.A. Parent Company 165
Other services (2) Deloitte & Touche S.p.A. Parent Company 3
Independent Auditor Deloitte & Touche S.p.A. Subsidiaries 102
Total 506
(1) Report on forecast prepared by the Board of Directors and included in paragraph 13.3 of
Information Document
(2) Certification of Tax Returns
4.17. Disclosure on financial risks
The section below provides a general analysis of the main financial risks identified and managed by the Group.
The Group is exposed to the following financial risks associated with its operations:
• credit risk: which includes the possibility of default by a counterparty or the possibility of deterioration of the
creditworthiness assigned to counterparties;
• market risk: resulting from exposure to fluctuating interest and exchange rates;
• liquidity risk: the risk of available financial resources being insufficient and lack of access to the credit market
The quantitative data reported below have no predictive value. In particular, the sensitivity analyses on market risks cannot reflect
the complexity and the connected reactions of the markets that may derive from any assumed change.
As required by IFRS 7, below we detail the financial assets and liabilities at 31 October 2012 identified for the purposes of this
analysis.
Meridiana fly - Annual Financial Report at 31 October 2012 - 126
31.10
2012
Other non-current assets 18,612
Long term financial assets 18,612
Trade receivables and other current assets 141,210
Current financial assets 5,506
Current financial assets 146,716
Total financial assets 165,328
Long-term borrowings 83,296
Future interest 9,048
Non-current financial liabilities 92,344
Current loans 34,664
Current portion of long-term borrowings 31,059
Trade payables and other current liabilities 276,567
Current financial liabilities 365
Current financial liabilities 342,655
Total financial liabilities 434,999
€/000
Credit risk The maximum theoretical credit risk is represented by the accounting value of financial assets, current and non-current, realised as
part of sales to third parties or for providing guarantees to third parties The Group currently generates most of its turnover through
the sales of scheduled flights and seats on charter flights, with the consequence that its ordinary customer base mainly consists of
private entities, tour operators and travel agencies. The risk of non-collection of receivables is addressed contractually by requiring
payment in advance of actual flight dates and guarantees or performance deposits guaranteeing fulfilment of contractual obligations.
At operating level, compliance with the terms of payment is constantly monitored. It should be noted that in recent years, due to the
global crisis and the trend towards disintermediation, the tour operator industry has undergone a consolidation process, which
involved a reduction in the number of operators, resulting in situations of customer concentration.
The Group also adopts a very restrictive policy with regard to late payments, selecting and evaluating its customers on the basis of
their reliability and financial as well as commercial soundness.
The Group also provides adequate impairment on individual positions corresponding to problem loans, doubtful loans and non-
performing loans; it also writes-down debt on an overall basis, taking into account historical experience or statistical data.
The tables below provide information about the Group's exposure to credit risk at 31 October 2012.
Meridiana fly - Annual Financial Report at 31 October 2012 - 127
€/000
Between 0 and
30 days
Between 30
and 60 days
Between 60
and 90 days
Between 90
and 120 days
Over 120
days
31.10.2012
Breakdown of trade receivables not yet expired:
Trade receivables 20,109 13,980 3,266 1,667 5,130 44,152
Breakdown of trade receivables past due:
Trade receivables 4,214 7,140 1,234 8,304 28,004 48,895
Total 24,323 21,120 4,500 9,971 33,134 93,047
Provision for doubtful receivables (20,172)
Total 72,875
Trade receivables past due by over 120 days include trade payables in litigation With respect to loans overdue by more than 120 days which are not covered by the provision for doubtful receivables, taking into
account historical experience, the progress of litigation and legal opinions relating to them as well as the existence of guarantees
issued by customers, the credit risk is considered to be mitigated.
Market Risk Foreign exchange risk The Group is exposed to the risks arising from fluctuations in exchange rates. Overall, the main business in foreign currency is
transacted in USD, which represent nearly 13.1% of trade receivables and 23.1% of trade payables at year end.
€/000 Euro USD Other Tot
Trade receivables 80,806 12,187 54 93,047
Provision for doubtful receivables (18,774) (1,398) - (20,172)
Other non-current assets 6,517 12,084 12 18,612
Total current and non-current loans (149,019) - - (149,019)
Trade payables (158,919) (48,417) (2,011) (209,347)
Net exposure (239,389) (25,544) (1,946) (266,879)
31.10.2012
As regards the management of risks arising from changes in exchange rates, it should be remembered that:
• The cost of airline tickets for scheduled flights contains a variable fuel surcharge component that is charged to the customer.
• The charter contracts entered into by the Group with tour operators provide the option to adjust prices according to the EUR/ USD
exchange rate at the time of flight.
Price Risk The hedging policy implemented by the Group aims to reduce the risks of fluctuations in expected cash flows resulting from
purchases of jet fuel, hence they can be classified as highly likely transactions, according to IAS standards.
In FY 2012 no specific financial products were adopted to hedge the variability of fuel prices, therefore the hedging of risk of
fluctuations in fuel prices was mainly pursued through adjustments provided under the terms of charter contracts and by means of
the fuel surcharge charged to customers on scheduled flights.
In any case, it should be noted that the use of hedging instruments such as derivatives and the like is governed by policies approved
by the Board of Directors, consistently with Risk Management strategies, within the overall credit limits granted by the financial
counterparties.
Derivative hedging instruments, if any, in keeping with the provisions of IAS 39, are accounted for with the methods set out for hedge
accounting only when:
- at the start of the hedge there is formal designation and documentation of the hedging relationship;
Meridiana fly - Annual Financial Report at 31 October 2012 - 128
- the hedge is highly effective;
- the effectiveness can be reliably demonstrated.
When a financial instrument is designated as a hedge of exposure to the variability of cash flows of the hedged transactions (cash
flow hedge; e.g. hedging the variability of cash flows of expected future transactions against the effect of fluctuations in exchange
rates), the gains and losses deriving from the fair value changes of the hedging instrument are accounted for directly in
shareholders’ equity for the effective part (any ineffective part is instead accounted for immediately in the income statement under
the item gains/(losses) on derivative instruments).
The amounts recognized in equity are subsequently reflected in the income statement for the period in which the contracts and
expected transactions are manifested in the income statement.
If an instrument is designated for hedging exposure to changes in the fair value of the hedged instruments (e.g. hedging against the
changes in the fair value of loans at a floating rate and receivables and payables in foreign currencies), it is recognized at fair value
with the effects booked to the income statement; accordingly, the hedged instruments are adjusted to reflect the fair value changes
associated with the hedged risk.
Changes in the fair value of derivatives that do not meet the conditions to qualify as hedges are recognized in profit or loss.
Interest rate risk The Group has some floating rate liabilities in place and is therefore exposed to the risks associated with rising interest rates. At 31
October 2012 the Group has set up contracts to hedge changes in interest rates, in particular through IRS - Interest rate swaps - for
a portion of the bank floating rate loans and a finance lease on an engine, as per the following table:
Liquidity risk Liquidity risk is represented by the inability to secure enough financial resources at economic conditions to cover all the obligations
falling due.
Below is the schedule presenting the time frame of the financial liabilities of the Group at 31 October 2012, based on non-discounted
contractual payments.
Type Hedging purpose Counterparty CurrencyFair value at 31.10.2012
in € / 000
Notional amount in
€/000
Derivatives with negative fair value (financial liabilities)
IRS - Interest
Rate Swap
Fixing of interest rate on
bank debt 36 months
Banca
Nazionale
Lavoro
EUR 03/02/2011 23/12/2013 7,500
Maturity of derivative contract Description
Hedge of interest rate fluctuation
on Banking Facility 36 months
EURIBOR 3M +4%
Hedged underlying amount
(197)
Meridiana fly - Annual Financial Report at 31 October 2012 - 129
Value contractual 6 months
€/000 book Cash flows or less 6-12 months 1-2 years 2-5 years
Non-derivative financial liabilities
Current loans (34,664) (7,550) (7,550) - - -
Current portion of long-term borrowings (31,059) (31,229) (2,449) (13,443) (15,337) -
Long-term borrowings (83,296) (83,296) (337) - (13,282) (69,677)
Other non-current liabilities - - - - - -
Trade payables and other current liabilities (276,567) (276,567) (177,004) (86,336) - -
Current financial liabilities (365) (365) (365) - - -
Interest on loans - (9,048) (1,815) (1,686) (2,473) (3,074)
Derivative financial assets/liabilities
Derivative instruments to hedge jet fuel:
Cash-in - - - - - -
Cash-out (196) (196) (98) (98) - -
Total (426,147) (408,251) (189,618) (101,562) (31,092) (72,751)
* Contractual cash flows do not include payables in litigation and liabilities for prepaid tickets and accrued liabilities and deferred income
At 31 October 2012 the Group presented overdue tax and social security payables for Euro 3 million, for which the group expects to
make the necessary payments. In addition, there were no past due payables to employees.
At 31 October 2012, Meridiana fly group had past due payables to third party suppliers on a consolidated basis of Euro 102.7
million, while the past due payables to related parties amounted to Euro 28.6 million.
There were no suspensions in supplies. There were no demands for payment on overdue debts, except for those within the ordinary
course of business.
€/000
Between 0
and 30 days
Between 30 and
60 days
Between 60
and 90 days
Between 90
and 120 days
Over 120
days
31.10.2012
Breakdown of trade payables not yet
expired:
Trade payables 48,015 22,182 7,000 337 516 78,050
Breakdown of trade payables past due:
Trade payables (*) 33,370 12,844 8,292 12,598 64,192 131,297
Total 81,385 35,026 15,292 12,935 64,708 209,347* Trade payables past due by over 120 days include trade payables in litigation
At 31 October 2012 there were no pending injunctions of significant amount being enforced by suppliers.
As a result of commitments made by Meridiana (backed by AKFED), as better described in the Management Report, it is believed
that liquidity risk has been mitigated even considering the uncertain outlook discussed in Section 2.26.
4.18. Other information
Meridiana fly - Annual Financial Report at 31 October 2012 - 130
Pursuant to Consob communication no. DEM/6064293 of 28 July 2006 it is hereby stated that in the first ten months of 2012 no
atypical or unusual transactions were carried out as defined by the above Communication.
No purchases or sales of own shares were made, directly or indirectly, during the period. At 31 October 2012, Meridiana fly and the
other companies of the Meridiana fly Group did not hold own shares.
Taking into account the shares comprising the share capital at 31 October 2012, the net loss per share amounts to Euro 1.79.
These consolidated financial statements were authorized for publication by the Board of Directors of the Company at its meeting in
Milan on 26 February 2013 and will be disclosed to the public, together with the report of the Independent Auditors and Statutory
Auditors in the manners prescribed by law.
Milan, 26 February 2013 On behalf of the Board of Directors: The President Marco Rigotti
5. CERTIFICATION OF ANNUAL REPORT PURSUANT TO ART. 154-bis of
Legislative Decree. 58/98.
1. The undersigned Roberto Scaramella, in his capacity as Chief Executive Officer, and Maurizio Cancellieri, in his capacity as
Financial Reporting Officer
of Meridiana fly S.p.A., also considering the requirements of Article 154-bis, paragraphs 3 and 4 of
Italian Legislative Decree no. 58 of 24 February 1998,
- hereby certify the adequacy, in relation to business characteristics, and
- the effective application of administrative and accounting procedures in preparing the consolidated financial statements during
the financial year ended 31 October 2012
2. In this regard there were no significant issues.
3. It is further certified that the consolidated financial statements at 31 October 2012:
a) were prepared in compliance with applicable international accounting standards endorsed by the European Union pursuant to
regulation (EC) no. 1606/2002 of the European Parliament and the Council, dated 19 July 2002,
b) correspond to the underlying documentary and accounting books and records;
Meridiana fly - Annual Financial Report at 31 October 2012 - 131
c) are suitable, to their knowledge, to provide a true and fair view of the assets and liabilities, earnings, and financial position of the
Issuer and of all the companies included in the scope of consolidation.
The management report includes a reliable analysis of the operating performance and results and of the financial situation of the
Issuer and the companies included in the scope of consolidation, together with a description of the main risks and uncertainties to
which they are exposed.
Milan, 26 February 2013 Roberto Scaramella Maurizio Cancellieri
Chief Executive Officer Financial
Reporting Officer
________________________ _____________________________
Meridiana fly - Annual Financial Report at 31 October 2012 - 132
6. INDEPENDENT AUDITORS' REPORT ON THE CONSOLIDATED FINANCIAL
STATEMENTS AT 31 OCTOBER 2012
Meridiana fly - Financial Statements at 31 October 2012 - 133
INDEPENDENT AUDITORS’ REPORT ON THE
CONSOLIDATED FINANCIAL STATEMENTS AT 31
OCTOBER 2012
PURSUANT TO ARTICLES 14 AND 16 OF LEGISLATIVE
DECREE NO.39 OF 27.1.2010
To the Shareholders of MERIDIANA FLY S.p.A.
1. We conducted our audit of the consolidated financial statements consisting of the consolidated
statement of financial position, the consolidated statement of comprehensive income, the statement of changes in consolidated equity, the consolidated statement of cash flows and the related notes, of Meridiana fly S.p.A. and its subsidiaries (hereinafter also referred to as the "Meridiana fly Group" or the "Group") for the 10 month financial year ended 31 October 2012. The responsibility for preparing the financial statements in accordance with International Financial Reporting Standards endorsed by the European Union, as well as the regulations issued to implement article 9 of Legislative Decree no. 38/2005, rests with the Directors of Meridiana fly S.p.A.. It is our responsibility to express an opinion on these financial statements based on our audit.
2. Our examination was conducted in accordance with the standards and criteria for carrying out an audit as recommended by CONSOB. In accordance with such standards and criteria, the audit was planned and performed with a view to obtain the evidence necessary to ascertain whether the consolidated financial statements are free of material misstatement and are fairly presented when taken as a whole. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the adequacy and correctness of the accounting principles used and the reasonableness of estimates made by the Directors. We believe that our audit provides a reasonable basis for expressing our opinion. For the opinion on the consolidated financial statements of the prior year, which are presented for comparative purposes, reference is made to our report issued on 27 April 2012.
3. In our opinion, the consolidated financial statements of Meridiana fly Group period for the 10 month period ended 31 October 2012 comply with the International Financial Reporting Standards as adopted by the European Union, as well as the regulations issued to implement article 9 of Legislative Decree no. 38/2005; the financial statements were drawn up clearly and give a true and fair view of the financial position, results of operations and cash flows of the Group Meridiana fly for the year ended on that date.
ANCONA Bari Bologna Bergamo Brescia Cagliari Firenze Genova Milano Napoli Padova Palermo Parma Roma Torino Treviso Verona Registered Office: Via Tortona, 25 - 20144 Milan ■ Share Capital: Euro 10,328,220.00 fully paid up Tax code / Register of Companies of
Milan no. 03049560166 ■ REA Milan no 1720239 VAT.no. IT 03049560166
Deloitte & Touche SpA
Meridiana fly - Financial Statements at 31 October 2012 - 134
4. For a better understanding of the consolidated financial statements as at 31 October 2012, we draw your attention to the following information given in the Management Report and in the notes:
a. the consolidated financial statements at 31 October 2012 show a comprehensive loss of Euro 189.6 million and shareholders' equity attributable to owners of the parent is negative for euro 111.8 million, while net financial debt amounted to Euro 136.1 million. At the same date also Meridiana fly S.p.A. (The "Company" or the "Parent Company"), having recorded a comprehensive loss of Euro 189.8 million, had negative equity of Euro -104.5 million, which makes it fall into the cases provided for by article 2447 of the Italian Civil Code. In this regard, the Board of Directors on 26 February 2013 decided to authorize the President of the Board of Directors and the Chief Executive Officer, acting severally, to convene the extraordinary Shareholders' Meeting on 29 April 2013 for the adoption of the measures referred to in the mentioned article 2447 of the Italian Civil Code. In the management report, the Directors described the main reasons for such a loss, including the significant fall in demand, the unfavourable exchange rate Euro/U.S. Dollar, the recognition of significant impairment losses on corporate assets and non-recurring charges. However, as from the month of October 2012, in order to cope with the strained financial situation evidenced by the full use of the available credit lines and the increase in overdue payables to trade and fiscal counterparties, Meridiana S.p.A. -Supported by AKFED S.A. ("AK.FED"), a financial institution
controlled by the same major shareholder of Meridiana S.p.A. - disbursed new funding to the Company higher than the previously assumed commitments - for a total of Euro 50 million. Given this situation, the Directors indicated that, as a result of the change in the Company's shareholding structure, whereby on 15 January 2013 Meridiana S.p.A. - supported by AKFED - bought the shares held by Air Italy Holding S.r.l. former shareholders, thus becoming the owner of shares representing about 89.9% of the Company's capital, and the simultaneous appointment of a new Chief Executive Officer, on 26 February 2013 the Board of Directors approved a new 2013-2017 Business Plan (the "Business Plan" or the "Plan"), which envisages a numbers of actions, some of which have already been undertaken as from December 2012, to address the decline in demand - such as the reduction of the fleet and the extension of temporary redundancy agreements (CIGS) - and provides for the reduction and optimization of overheads, the reorganization of operating, maintenance and commercial processes as well as a gradual modernization of the fleet. At the same meeting, the Board of Directors also approved a monthly budget until 31 October 2013 (the "Budget"), on the basis of which the Directors have verified the applicability of the going concern assumption in the preparation of the separate and consolidated financial statements at 31 October 2012. In this regard, in section 2.26 of the Management Report "Business Outlook" and in section 4.1.3. ''Going Concern" of the notes, the Directors indicate that for the purposes of implementing the Budget and the Business Plan, the priority is that the Company and its subsidiary Air Italy get back the operating license necessary to carry out the activity in the air transport business, which had been suspended by the National Civil Aviation Authority thus causing the activity to be carried out on the basis of temporary licenses. In this respect the Directors specified that discussions are already ongoing with the Aviation Authority in order to plan the necessary procedures for the obtainment of the permanent operating license for both airlines. Moreover, the Directors
Meridiana fly - Financial Statements at 31 October 2012 - 135
indicated that the attainment of the objectives contained in the Budget and in the Business Plan, which is essential to achieving financial and equity balance in the short term and income balance in the medium term, is significantly dependent on (i) the evolution of uncontrollable external factors, including in particular the trend in demand, the Euro / U.S. Dollar exchange rate, the cost of fuel, (ii) the effective implementation of measures envisaged in the Business Plan including the rationalization of the network and the fleet, of operating costs and overheads, including staff costs, (iii) achieving an overall debt rescheduling agreement with the lending banks, as there is currently a risk that lenders request the immediate repayment of outstanding debt, especially in respect of Air Italy uncommitted credit lines amounting to Euro 26.9 million, not completely mitigated by guarantees provided by Meridiana and AKFED, and (iv) the evolution of litigation, counterparties' solvency, credit conditions granted by suppliers and the management of overdue trade payables. The Directors finally indicated that, Based on the forecasts of the 2013Budget, in the early months of next year the Company will again be in the condition of having to rely on the equity support provided by Meridiana S.p.A. and AKFED in order to preserve the financial and equity balance that is typical of a going concern. In this regard, the Directors, while noting that the company can count on total commitments of Euro 184.5 million, do not have, however, other formal commitments with regard to the capital support that will be necessary over a twelve month period as from the date of these financial statements, such period having been adopted as reference horizon by the Directors for the purposes of verifying the going concern assumption; nevertheless, the Directors believe that Meridiana S.p.A. and AKFED will continue to support the Company and the Group in accordance with the needs that will emerge from a more precise analysis of current results. From another perspective, the Directors indicated that scenario variables beyond the control of the Company and the Group moving along trends other than those assumed in the Budget and in the Business Plan, as well as the ineffectiveness of the measures envisaged in the plan itself or the occurrence of non-recurring charges may determine a final loss in 2013 higher than expected and, consequently, the need to resort to additional financial and equity commitments by Meridiana S.p.A. and AKFED, even before the end of the year, in order to satisfy the going
concern assumption. These directors also report that these circumstances could result in the recognition of additional impairment of asset following an update of the impairment test conducted on 31 October 2012, as more fully described in item b. of this paragraph, and further needs for capital support by Meridiana S.p.A. and AKFED. Considering all of the above circumstances, the Directors pointed out that there is a significant uncertainty that may cast doubts as to the ability of the Company and the Group to continue operating as a going concern. Nevertheless, the Directors, after making the necessary checks and assessing the uncertainties described above, indicated that they have a reasonable expectation that the Group has adequate resources to continue in operating in the foreseeable future, based on (i) the already mentioned commitment by Meridiana S.p.A. and AKFED, to be paid in the form and manner described in greater detail in the management report in section 2.24.14 "New Meridiana / AKFED commitments for the going concern" which the Directors consider adequate for carrying out a capital increase for an amount sufficient to ensure the reinstatement of an adequate) level of capitalization, also taking into account the expected loss for the current financial year until October 2013, and (ii) the fact that any financial and equity requirements
Meridiana fly - Annual Financial Report at 31 October 2012 - 136
greater than those estimated, including in the event of failure to reach an agreement with the banks for a renegotiation of credit lines, could be met through the use of other sources of funds, including by requesting additional financial support to Meridiana S.p.A. and AKFED as done in the recent past. Consequently the Directors considered it appropriate to prepare the consolidated financial statements at 31 October 2012 on the going concern basis. b. at 31 October 2012, Goodwill amounted to Euro 87.5 million (Euro 145.2 million at 31 December 2011) and refers to the only cash generating unit identified by the Directors, namely that relating to the air transport business. In the notes the Directors explain that Goodwill was tested for impairment with the support of an expert appointed for the purpose. The test, conducted according to the unlevered discounted cash flow method revealed a comprehensive loss of Euro 56.5 million. In addition, the Directors reported that the value in use of the cash generating unit in question is fully represented by the terminal value, which presents a significant variability to changes in the performance of scenario variables that cannot be controlled. Accordingly, - at the outcome of the sensitivity analysis described in "Ref Intangible assets of the notes to the consolidated financial statements - the Directors indicated that actual developments of the Group performance, other than those provided for in the Plan, the implementation of which, as already mentioned, depends on scenario variables that cannot be controlled, could lead to further write-downs of goodwill with the possible effects on the Company and the Group equity which would lead to the emergence of additional needs for the capital support by Meridiana S.pA. and AKFED.
5. The responsibility for preparing the management report and the corporate governance and ownership structure report, the latter being published in the "Investor Relations-Corporate Governance" section of Meridiana fly S.p.A. website, in compliance with laws and regulations, rests with the Directors of Meridiana fly S.p.A. It is our responsibility to express an opinion on the consistency of the management report and the information referred to in paragraph 1, letters c), d), f), l), m) and paragraph 2, letter b) of article 123-bis of Legislative Decree no. 58/1998 and presented in the corporate governance and ownership structure report, along with the consolidated financial statements, as required by law. To this end, we have performed the procedures required by auditing standard 001 issued by the Consiglio Nazionale dei Dottori Commercialisti e degli Esperti Contabili (Italian National Council of Certified Accountants) and recommended by CONSOB. In our opinion, the management report and the information referred to in paragraph 1, letter c). d), f). l). m) and paragraph 2, letter b) of article 123-bis of Legislative Decree no. 58/1998 and presented in the corporate governance and ownership structure report, are consistent with Meridiana fly Group consolidated financial statements, as required by law. DELOITTE & TOUCHE S.p.A. Lorenzo Rossi Partner Milan, 28 February 2013
Meridiana fly - Financial Statements at 31 October 2012 - 137
7. STATUTORY AUDITORS' REPORT ON THE FINANCIAL STATEMENTS AT 31
OCTOBER 2012
Meridiana fly - Financial Statements at 31 October 2012 - 138
Meridiana fly S.p.A - Statutory Auditors' Report for the Year 2012
Meridiana fly S.p.A
Management and coordination by Meridiana S.p.A. pursuant to article 2497 bis of the
Italian Civil Code ♦ ♦ ♦
STATUTORY AUDITORS' REPORT FOR THE YEAR ENDED 31/10 2012 (Article
153 of Legislative Decree 24/2/1998 no ° 58 and Article 2429, paragraph 2,
Italian Civil Code)
Dear Shareholders,
This report refers to the activity carried out by this Board pursuant to Articles 149 and
ff. of Legislative Decree no. 58 of 24 February 1998; it is presented in the manner
suggested by CONSOB communication No. 1025564 of 6 April 2001 as subsequently
amended. The Board of Statutory Auditors of the company expiring with the approval
of the financial statements at 31/12/2011, was appointed by the shareholders'
meeting of 28 June 2012: in addition, with effect from 15 February 2013, a member of
the Board of Statutory Auditors resigned, and therefore the composition of the
Supervisory Body during the financial year and until today was as follows:
Luigi Guerra – President
Antonio Mele - Standing Statutory Auditor –
Cesare Conti - Standing Statutory Auditor from 1 January 2012 to 28 June 2012
Giovanni Rebecchini- standing Statutory Auditor from 28 June 2012 to 15 February
2013
Luciano Rai - Standing Statutory Auditor from 15 February 2013 to 27 February 2013 -
Paolo Sbordoni - Standing Statutory Auditor from 28 February 2013,
It should also be recalled that the closing of the fiscal year has been changed from 31
December to 31 October, as approved by the shareholders' meeting on 5 December
2011 and therefore the Financial year ended 31 October 2012 (hereinafter also "FY
2012") has a 10 month duration (1 January -31 October 2012).
The Annual Financial Report of Meridiana fly S.p.A. at 31 October 2012 (hereinafter the
Company) which is submitted for your consideration, reflects the operating
performance of the Company, and is presented through a single report that contains
the statement of financial position, the income statement and the cash flow statement
which are illustrated in detail by the Board of Directors in the "Draft Financial
Statements", in the "Management Report" and in the "Notes to the Separate financial
statements of Meridiana fly S.p.A." The consolidated financial statements for the year
ended 31 October 2012 of the Meridiana fly group is also made available.
According to the provisions of Article 40 paragraph 2 bis of Legislative Decree no. 127
of 9 April 1991 the Management Report has been prepared in the form of a single
document, and includes both the report pursuant to Article 2428 of the Italian Civil
Code and the report on the consolidated financial statements, focusing, where
necessary, on the issues that are relevant for all the companies included
Meridiana fly S.p.A - Statutory Auditors' Report for the year 2012
Meridiana fly - Financial Statements at 31 October 2012 - 139
in the consolidation.
The supervisory activities required by law were carried out regularly, keeping in mind
both the Rules of Conduct of the Board of Statutory Auditors of listed companies
issued by the National Board of Certified Accountants and Auditors and the
recommendations and communications issued by CONSOB.
* * *
1 Comments on facts and operations carried out by the Company with
significant impact on its income, financial and capital position and on their
compliance with the law and by-laws
During the FY 2012 the company carried out significant transactions that we briefly
mention herein as the relevant information has already been provided by the
Administrative Body in paragraph 2.13 of the Report to which reference is made for
every detail:
• Share capital increases
On 15 March 2012 the Company received authorisation to publish the prospectus for
the capital increase, against consideration, for a maximum amount of Euro 142.2
million, with matching Warrants (to be allocated at no cost to subscribers of the capital
increase in the number of 1 Warrant Meridiana fly Ordinary Shares 2012-2013 for each
new ordinary share being issued) and related admission to listing of the said Warrants;
the subscription offer was consequently carried out envisaging that the subscription
rights should be exercised in the period between 19 March 2012 and 5 April 2012
included.
As a result of the rights issue and the Stock Exchange auction for the residual
unexercised rights, 83.35% of the capital increase was subscribed, amounting to
92,952,780 newly issued ordinary shares at a price per share of Euro 1.275 of which
Euro 1.025 as share premium, for a total of Euro 118.5 million, of which Euro 111
million subscribed by Meridiana and Air Italy Holding formed shareholders by
converting receivables and/or capital contributions and Euro 7.5 million subscribed by
the market. The shareholder Meridiana S.p.A., as part of its commitments to
underwrite and the portion of the Capital Increase not subscribed by third parties, on
30 June 2012 subscribed 7,843,137 newly issued ordinary shares for a total amount of
Euro 9,999,999.68 combined with an equivalent number of Warrants. As following the
completion of the capital increase through rights issue Meridiana and the three new
shareholders held a total of 99,244,209 shares, representing 93.3% of the share
capital of the Company, on 31 July 2012 Meridiana and the three new shareholders
informed the market
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that within the time limit referred to in article 108 paragraph 2 of the CFA they
intended to reconstitute enough free float to ensure regular trading; such transaction
was completed on 18 September 2012.
• Debt renegotiation with banks
Given that on 31 December 2011 Meridian fly was in breach of the covenants provided
for in the loan agreements between Meridiana fly and the syndicate of banks, for a
total nominal value of Euro 22.55 million, Meridiana fly asked the syndicate of banks
to waive the exercise of contractual remedies attributed to the banks. The request was
accepted by the three banks involved with formal notice of 23 April 2012, subject to
the suspensive condition that an agreement be reached not later than 25 June 2012 on
the form, terms and conditions of the debt of Meridiana fly - Air Italy group, for which
negotiations are under way with the banks. On 3 July 2012 the syndicate of banks
(BNL S.p.A. UniCredit S.p.A. and Intesa Sanpaolo S.p.A.) notified the Company the
positive resolution to extend the credit lines until 28 February 2013, with respect to
the repayment of the principal instalments on the Group outstanding loans and
confirming the short term credit lines until the same date. The said extension and the
related credit lines confirmation were agreed through a specific agreement on 31 July
2012 according to which, subject to compliance with obligations and new financial
covenants to be verified at 30 September 2012, 31 October 2012 and 31 January
2013, the parties continued negotiations to reach an agreement to reschedule the debt
within the said time limit of 28 February 2013: the company asked the banks to
extend the deadline until 31 July 2013.
• 2012 Budget and updated Integrated Business Plan
On 20 April 2012, the Board of Directors of Meridiana fly reviewed and approved the
new Budget for the year 2012 as well as an update of the Integrated Business Plan of
18 July 2011. The main relevant facts occurred after the end of the financial year are
mentioned hereafter; for a complete description please refer to section 2.24 of the
Management Report:
• Board of Directors' meeting of 12 December 2012
On 12 December 2012 the Board of Directors of Meridiana fly met to review the
business Plan prepared by management and generally upheld the related guidelines
and actions therein contained, authorizing the Chief Executive Officer to immediately
start a series of measures, including the network reduction and consequently of the
fleet and the staff.
In light of the consolidated operating results at 31 October 2012 and having
ascertained that they seemed indicative of an erosion of the share capital, the
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Board of Directors resolved to convene the Shareholders' Meeting pursuant to article
2446 of the Italian Civil Code, authorizing the President to take steps for the call of the
meeting.
• Shareholders' meeting of 27 February 2013
The meeting convened pursuant to Article 2446 of the Italian Civil Code was convened
on 27 February 2013 to examine the statement of financial position at 30 October
2012 and decided not to carry out any transactions, in light of the situation resulting
from the financial statements at 31 October 2012 and the subsequent convening of the
shareholders' meeting for the appropriate decisions.
• Agreements for extending the temporary redundancy procedure (CIGS)
As already envisaged in the new measures for cost containment, on 27 December
2012 the company and the unions formalized an agreement before the Ministry of
Labour and Social Policies aimed at enlarging the scope of the "zero hour" and "on
rotation" temporary redundancy procedure (CIGS) (already in place in the company
Meridiana fly) from 845 FTE employees to 1,350 FTE employees (out of a total
workforce of 2,040 employees), with a consequent increase of 505 employees.
• National Civil Aviation Authority Measures
On 11 January 2013 the National Civil Aviation Authority (ENAC) notified Meridiana fly
and Air Italy the suspension of their operating license and the simultaneous issuance
of a temporary license for passengers and freight transport for both carriers, with no
effect on their respective operations.
• New Chief Executive Officer
On 15 January 2013, an agreement was reached whereby Meridiana S.p.A. acquired all
the ordinary shares of Meridiana fly held by Air Italy Holding S.r.l. former
shareholders. Consistent with the above agreement, Captain Giuseppe Gentile
resigned from his position as Chief Executive Officer of Meridiana fly and Air Italy
S.p.A, as well as from all other positions taken.
The Board of Directors of Meridiana fly on 15 January 2013 appointed Roberto
Scaramella, current Aviation Director of AKFED S.A., as Chief Executive Officer of the
Company. . A similar resolution was passed by the Board of Directors of Air Italy.
• New Business Plan
On 26 February 2013 the Board of Directors approved a new Business Plan that
includes both immediate restructuring measures and medium term structural actions,
the most significant points of which are described in the Management Report.
• New Meridiana/ AKFED S.A. commitments for the going concern
The parent Meridiana, backed by AKFED S.A., on 25
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February 2013 confirmed its financial and equity support to the Company for the
purposes of the necessary recapitalization and going concern basis, as detailed by the
Directors.
In relation to the transactions and events described by the Directors and partly
mentioned above, the Board of Statutory Auditors believes that they have been carried
out in compliance with the law, the By-laws and the principles of sound administration.
To the extent of its knowledge and without expressing a judgment on the merits of
management decisions, the Board of Statutory Auditors does not consider those
choices as risky operations, operations in potential conflict of interest - in addition to
those already highlighted by the directors - in contrast with the resolutions adopted by
the Shareholders' meeting or such as to compromise the integrity of corporate assets.
The Board of Statutory Auditors, however, emphasizes that the separate and
consolidated financial statements have been prepared on a going concern basis;
however, a number of circumstances exist, as set out by the Directors themselves,
characterized by considerable uncertainty that may cast significant doubt on the ability
of the Group and the Company to continue operating as a going concern.
The Directors have concluded that in spite of this uncertainty, which may cause losses
exceeding expectations contained in the budget for the current year, there is a
reasonable expectation that the Company has adequate resources to continue
operations and meet its obligations in the foreseeable future: this expectation is based
on the significant commitments made by Meridiana S.p.A. and AKFED S.A. for an
amount of approximately Euro 183.5 million, which are considered adequate to
reconstitute an adequate level of capitalization. also taking into account the loss
expected for the current year.
The Directors have advised you that pursuant to the provisions of the 2013 Budget
and the Business Plan, in the first months of next year the Company will have to resort
to the support from Meridiana S.p.A. and AKFED S.A.
Also in the Report the Directors inform that scenario variables beyond the control of
the Company moving along trends other than those assumed in the new Business
Plan, as well as failure to reach some of the objectives or ineffectiveness of the
measures envisaged in the plan itself may determine higher than expected losses
already in 2013 and, consequently, the need to resort to additional financial and equity
commitments by Meridiana S.p.A. and AKFED S.A. Additional commitments may arise
even in case of failure to reach an agreement with the lenders for the renegotiation of
credit lines. In relation to the above, it should be noted that the Directors, although no
formal commitment has yet been formalized, they believe that Meridiana S.p.A. and
AKFED S.A. will continue to
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support the Company, as they have done until now, beyond the time horizon of 31
October 2013 and for any additional needs that may arise during the current year.
2 Atypical and/or unusual or non-recurring related party transactions
The Board did not identify any atypical and/or unusual transaction, as defined by
CONSOB Communication DEM/6064293 of 28 July 2006, with related parties, third
parties or group companies, in line with the information provided by the Directors in
the Management Report.
The main transactions and non-recurring events that occurred in 2012, described by
the directors in the Management Report in section 4.5 and section 9.4, mainly relate to
write-downs of goodwill and the fleet.
With reference to these non-recurring transactions the Board of Statutory Auditors has
no remarks to make. 2.1 Intragroup and related party transactions in the
ordinary course of business
In accordance with CONSOB provisions on related party transactions, the Board of
Directors has approved the establishment of a special Committee composed by three
independent non-executive Directors.
The (ordinary) nature, type, the counterparties and the economic and financial effects
are described in detail in the Management Report, in the "Notes to the Separate
Financial Statements of Meridiana fly S.p.A." and in the "Notes to the Consolidated
Financial Statements". During the year the Board of Statutory Auditors, in coordination
with the Internal Control Committee and making use of the internal audit function
verified that intragroup or related party transactions were carried out in compliance
with the Procedure.
Also thanks to the safeguards adopted, intra-group transactions examined by the
Board of Statutory Auditors appeared reasonable and in the interests of the Company.
3 Evaluation of the adequacy of the information provided by the Directors
on atypical or unusual transactions
Given that no typical and / or unusual transactions were carried out, no assessment is
necessary in this respect.
4 Remarks on the special mention of disclosure by the Independent Auditor
On 28 February 2013, the auditing firm Deloitte & Touche S.p.A. issued its Report to
the 2012 Separate Financial Statements.
In the report, the independent auditors have drawn attention to the following
information provided by the Directors, as summarized below:
• At 31 October 2012, the financial statements reported a loss of Euro 104,5 million,
as a result of which
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the company falls in the cases provided for by article 2447 of the Italian Civil Code:
• the Directors described the main causes that have generated the loss:
• on 26 February the Board of Directors approved the new business plan, including a
monthly budget until 31 October 2013, on the basis of which the Directors have
verified the applicability of the going concern assumption in the preparation of the
Financial Statements (separate and consolidated) as at 31 October 2012:
• the implementation of the plan is significantly dependent on factors such as obtaining
a permanent license by the Civil Aviation Authority, the performance of external, non-
controllable factors, the effectiveness of planned rationalization actions concerning the
fleet and the staff, reaching an agreement with the banking system and key suppliers:
• the financial support by Meridiana S.p.A. and AKFED S.A., guaranteed and likely, and
the possible need for further support during the course of the year, in addition to the
commitments already received:
• the going concern basis, considered appropriate by the Directors who provided the
reasons therefor, which were recalled by the independent auditors;
• the recognition of goodwill in the separate financial statements for Euro 28.2 million
and the investment in Air Italy Holding Srl for Euro 14.8 million
On 28 February 2013, the independent auditors issued their Report to the
Consolidated Financial Statements for FY 2012 in which they draw attention essentially
on the same information, except for the different amounts reported in the consolidated
financial statements, including the recognition of goodwill for Euro 87.5 million.
The Board of Statutory Auditors believes that the special mention on disclosure by the
independent auditors duly draws attention to the main issues and risks associated with
actual occurrence of certain conditions that characterize the current business situation
and the business plan, already partly specified in paragraph 1.
5 Complaints pursuant to art. 2408 of the Italian Civil Code
During the year no complaints or notices of objections were received from
shareholders.
6 Presentation of formal report No formal report was submitted
7 Additional engagement of the Independent Auditor
During the year the Company appointed Deloitte & Touche to carry out assignments
other than the statutory audit which are specified in section 4.16 of the Notes to the
Consolidated Financial Statements and section 9.14 of the Notes to the Separate
Financial Statements of
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Meridiana fly S.p.A.. These assignments originate from transactions of a non-recurring
nature that occurred during 2012 and the related obligations pursuant to regulations
on listed companies (verification of the pro forma data included in the Information
Document). Additional assignments to the independent auditors concern the
certification of tax returns, as required by law.
On the basis of assessments made by the Board of Statutory Auditors and the
communication received from the independent auditors, in accordance with article 10
and 17 of legislative decree 39/2010, no critical aspects were identified with respect to
the "independence and objectivity of the independent auditors nor any cause of
incompatibility.
8 Appointment of persons related to the Independent Auditor
From the information acquired no assignments were given to related parties of the
independent auditors
9 Opinions issued in accordance with the law
The Board of Statutory Auditors did not issue opinions in accordance with the law
during the year, nor those required by internal corporate governance provisions.
10 Frequency of meetings of the Board of Directors and Board of Statutory
Auditors
In 2012, the Board of Statutory Auditors met 8 times, participated in 13 meetings of
the Board of Directors and 5 meetings of the Audit and Risk Committee, as well as in 2
in ordinary and extraordinary shareholders' meetings.
11 Observations on the principles of proper administration
The Board of Statutory Auditors monitored compliance with the principles of proper
administration through participation in the meetings of the Board of Directors and the
Audit and Risk Committee, as well as through personal meetings with the directors,
observations and investigations directly carried out, analysis of internal audit results,
meetings with the corporate bodies of the main subsidiaries, gathering information
from the heads of corporate functions, meetings with the independent auditors, also
aimed at the mutual exchange of relevant information and data pursuant to article
150, third paragraph of the CFA. The Board of Statutory Auditors activities also
concerned the control of management decisions by Directors, with specific regard to
their lawfulness and compliance with rational criteria from a financial, income and
equity standpoint, (albeit taking into account the specific conditions of the reference
industry and the competitive environment) and their consistency with the
Shareholders' Meetings resolutions and the delegated powers.
However, it should be noted that the control exercised by the Board of Statutory
Auditors did not concern the merits, appropriateness or suitability of the choices made.
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Meridiana fly - Financial Statements at 31 October 2012 - 146
The Board of Statutory Auditors also verified that the typical and usual business
operations and the most relevant transactions were not rendered invalid due to their
being outside of the corporate purpose, in contrast with the by-laws or due to conflict
of interest and, moreover, that they were not such as to prejudice the integrity of
corporate assets or that, in any case, they were not manifestly imprudent or risky.
The Board of Statutory Auditors also verified that they were not implemented in
contrast with the resolutions of the governing bodies or that they were harmful to the
rights of non-controlling interests.
The Board of Statutory Auditors also exercised supervision to ensure that the Board of
Directors decisions on most significant transactions were supported by the usual
inquiries, investigations, audits, and acquisition of opinions and assessments from
external advisors regarding the financial and economic suitability of transactions and
their consistency with the Company's interest. It also verified that the Board of
Directors was in the position to make informed decisions, evaluating, where
appropriate, also the relevant legal aspects. In this regard, during the year the Board
of Statutory Auditors' activities also aimed at ensuring that timely information on
operating results achieved by the delegated Directors were provided to the Board of
Statutory Auditors, in order to be able to take action, where necessary. During the
year some transactions carried out by the delegated Directors exceeded the limits of
delegation; these transactions were in any case submitted to the Board of Directors for
the appropriate resolutions.
12 Comments on the adequacy of the organizational structure
The Board has acquired knowledge and monitored the adequacy of the Company
organizational structure, internal control and the accounting system. This activity was
carried out through direct observation, data and information collection from the
relevant functions, and by holding meetings with the heads of internal and external
audit, participation in the Audit and Risk Committee meetings and periodic meetings
with the Supervisory Body pursuant to Legislative Decree 231/01, meetings with the
corporate bodies of the main subsidiaries. In this respect, the Board of Statutory
Auditors, in its capacity as "Control and Audit committee" according to Legislative
Decree no. 39/2010, worked in close and continuous coordination with the Audit and
Risk Committee. As a result of the implementation of governance measures provided
for in the shareholders' agreements entered into in July 2011 between Meridiana
S.p.A. and former Air Italy Holding shareholders as well as other measures adopted to
implement in practice the integration with the Air Italy Holding group, during the year
the Company and its scope of consolidation underwent relevant changes, which have
affected the management structure, the management information systems, the
operational, accounting and reporting systems and the organization and review of
operational processes. The Meridiana fly-Air Italy group developed into an organization
of relevant size with significant operational and administrative complexity that required
the implementation of major projects
Meridiana fly - Financial Statements at 31 October 2012 - 147
for the standardization and integration of information, reporting and management
control systems which started at the end of 2011 and in part are still being fine-tuned.
Related party transactions involving Air Italy and its shareholders also have gained in
significance in relation to which the Board of Statutory Auditors began to carry out the
necessary audit activities.
During the year, the organizational structure as a whole proved to be adequate,
while taking into account the critical issues that are inherent in integration processes.
It should be noted, however, that during the year the system of internal powers was
characterized by a high level of concentration of power resting with the delegated
Directors: this arrangement had been designed in the specific agreements between
shareholders, formalized in the shareholders' agreements of July 2011 and partially
included in specific by-laws provisions approved by the Shareholders' meeting in
February 2012.
In some cases this arrangement resulted in retrospective action by the Board of
Directors with regard to operational, financial and commercial measures adopted by
the management.
13 Comments on the adequacy of the internal control system
With regard to the internal control system, the Board of Statutory Auditors carried out
its activities relying also on the support of the internal audit function. This function was
characterized in recent months by high management turnover: the head of the
function appointed in late 2011 and effectively operative in February 2012, left the
company on 31 December 2012, being replaced in early 2013 by a new internal
resource. However, the function could rely on the support of an external consultant
that reasonably ensured effective operation. In this regard it should be observed that
the internal audit function, which is independent from management, was actively
engaged in identifying any critical issues and in solving them, working together with
other corporate functions.
The Board of Statutory Auditors worked in close and continuous coordination with the
Audit and Risk Committee, which actively supported the Board of Directors in
assessing the state of procedures, the processes that constitute the system of internal
controls and risk management procedures. The activity of the Audit and Risk
Committee and the internal control and risk management system are described in the
Corporate Governance Report, to which reference is made. The internal control system
is still in a stage of development in connection with the completion of the integration
process with the Air Italy Holding group and the development of new extensive
measures concerning the company strategy, network, personnel and fleet which were
adopted by the Board of Directors in the month of December and included in the new
2013-2017 business plan. The latter was described in great detail in the Management
Report. Operational and control processes are therefore being harmonized and / or
revised in accordance with the ongoing organizational and strategic developments. It
appears necessary to implement or conclude such harmonization processes
Meridiana fly - Financial Statements at 31 October 2012 - 148
on schedule, given their importance for the attainment of the Plan's objectives.
As regards the system of risks identification, measurement and control, the above
mentioned measures shall require further implementation and developments, in line
with the gradual progress in the implementation of the said measures.
In this regard, it must be noted that, in their report, the Directors provided ample
information on the major risks to which the Company is exposed; they pointed out that
the Company and the Group are exposed to risks and uncertainties stemming from
external factors related to both the general economic environment and the specific
situation of market segments in which the company operates, as well as to risks
arising from strategic decisions and to internal management risk. Among these risks
and uncertainties the following should be mentioned, inter alia:
• risks associated with the implementation of the Business Plan.
• risks associated with the recoverability of goodwill.
• going concern risks associated with strongly negative net working capital and the
persistence of negative earnings.
• risks associated with the financial imbalance and high level of debt.
• risks arising from the competitive pressure
• the risks related to uncontrollable external variables and the risks of a financial
nature. In this respect, it is clear that the risk measurement, monitoring and
management processes - along with systems to mitigate these risks - appear
particularly relevant not only for the achievement of the plan's objectives but also for
the very survival of the Company. Moreover, the continued refinement of processes
for the identification of management events and for strategic planning and control
appear as necessary, in order to mitigate the mentioned risks and allow for timely
managerial action.
With regard to the exogenous non controllable factors to which the Company and the
Group are exposed and their impact on the achievement of the business plan
objectives, it should be noted that the ability to respond to an adverse development of
such variables is, in the medium / long term, a condition necessary to survive in such
a highly competitive market characterized by oversupply as is the air transport, while,
at the moment, the ability of the Company to continue operating as a going concern is
still dependent on the financial support provided by the major shareholder.
14 Comments on the adequacy of the administrative and accounting system
With regard to the administrative and accounting system, the Board of Statutory
Auditors regularly met the CFO, the independent auditors, the internal auditor, the
Chief Corporate Officer and key administrative managers, obtaining the information
necessary to assess the adequacy of
Meridiana fly - Financial Statements at 31 October 2012 - 149
the said system.
The administrative structure was particularly impacted by the extraordinary corporate
transactions carried out (capital increase resolved from by the Shareholders' Meeting
of 5 December 2011, integration of administrative and accounting processes related to
the integration Meridiana fly-Air Italy), the implementation of the program for the
revision and integration of the accounting information systems of the companies
included in the consolidation, the implementation, within the Air Italy Holding group, of
business and control processes that are mandatory for companies owned by listed
companies, and the related corporate governance, reporting and financial disclosure
obligations.
With regard to the inevitable issues emerged, the Company continued to make
adjustments to the information system and planned a number of revisions of the
organization and procedures in place within the financial information control systems.
The Board of Statutory Auditors also positively evaluated the recent organizational
change involving the position of the CFO, who, since early 2013, has been reporting
directly to the CEO.
15 Comments on the adequacy of the instructions given to subsidiaries (Art.
114 CFA)
The Company issued instructions to its subsidiaries in order to ensure compliance with
the provisions of article 114, paragraph 2 of the CFA; the dissemination of procedures
is simplified by the substantial centralization of the subsidiaries administrative
management within the parent company and by the fact that Meridiana fly delegated
bodies are also present in Air Italy group.
16 Significant matters discussed during meetings with the independent
auditors (Article 150 of the CFA)
During the financial year the Board of Statutory Auditors was regularly in contact with
the independent auditors with whom there has been a fruitful exchange of data and
information also in consideration of the Board of Statutory Auditors' functions as
"Internal Control and Audit Committee". This collaboration involved meetings attended
also by representatives of the Company and informal contacts between individual
members of the Board of Statutory Auditors and representatives of the independent
auditors during which the following matters were, inter alia, discussed: i) analysis of
risks, the planning and conduct of the audit of annual and consolidated accounts (ii)
the audit standard adopted, procedures for documenting the checks carried and the
quality control system (iii) aspects relating to the independence of the auditor, with
particular reference to non-audit services provided (iv) the relevant aspects related to
the audit activity. It should also be noted that Deloitte & Touche S.p.A. on 28
February 2013, presented the report referred to in the third paragraph of Article 19 of
Legislative Decree no. 39/2010, highlighting
Meridiana fly - Financial Statements at 31 October 2012 - 150
the significant matters identified during the audit of the separate and consolidated
financial statements, which are widely discussed and illustrated in the Management
Report and the Notes. With regard to these matters, the independent auditors did not
report any critical issue or anomaly.
In the same report, the independent auditors also noted that no significant
weaknesses in the internal control system had been identified with reference to the
financial disclosure process.
17 Compliance with the Corporate Governance Code
During the year, the Board of Statutory Auditors monitored the procedures for the
implementation of the corporate governance rules contained in the Corporate
Governance Code issued by Borsa Italiana. The Company, which had already endorsed
the Code, took a number of measures to reflect the changes introduced in the above
Code in December 2011, while the updating of the other provisions is regularly
planned and is currently ongoing.
The Board of Directors on 26 February 2013 approved the Annual Report on Corporate
Governance (the "Corporate Governance") and ownership structure for the year 2012,
to which reference is made in full. In this regard, it should be noted that:
■ an Audit and Risk Committee is in place within the Board of Directors. With regard
to the role, tasks and operation, please refer to Chapter 11 of the Annual Report on
Corporate Governance;
■ the Board of Directors identified the CEO as the executive director in charge to
oversee the functioning of the internal control system. This system includes, in
addition to the Audit and Risk Committee, also the position of Head of the Internal
Audit function;
■ in compliance with the provisions of the Corporate Governance Code, the Company
appointed an Investor Relations Manager with the aim of facilitating relations with
shareholders and institutional investors.
The Board of Statutory Auditors verified the correct application of the criteria adopted
by the Board of Directors for the purposes of evaluating the independence of its non-
executive members, and the correct application of the relevant assessment
procedures. The Board of Statutory Auditors also assessed the independence of its own
members with positive outcome. With regard to these verifications, therefore, the
Board of Statutory Auditors has no comments to make.
18 Final assessment of supervisory activities
During the year the Board of Statutory Auditors monitored compliance with the law
and the by-laws, respect for the principle of proper administration, the adequacy of the
Company's organizational structure, within its own remit, the system of internal
control and the accounting and administrative system and its reliability in
Meridiana fly - Financial Statements at 31 October 2012 - 151
correctly representing management events, and the practical implementation of the
rules of corporate governance contained in the Code of Conduct. In this regard, no
omissions, or irregularities were identified to be reported to the Shareholders' meeting.
19 Proposals to the Shareholders' Meeting (Article 153 CFA)
The financial statements for the year ended 31 October 2012 closed with a loss of Euro
190,433,564 and negative equity of € 104,474,240. The income, financial and equity
situation is described in the financial statements and the notes. In the Management
Report the Directors have provided, among other things, detailed information on
operating performance, the earnings and financial performance for the period, the
risks and uncertainties to which the Company is exposed and the conditions which, in
their opinion, satisfy the going concern assumption. The Board of Statutory Auditors,
on the basis of the checks carried out and the information exchanged with the
independent auditors, also acknowledging the Report issued by the Independent
auditors and their opinion on the financial statements and on the consistency of the
Management Report and Report on Corporate Governance and ownership structure
with the financial statements, taking note that the Directors did not exercise the
optional derogation pursuant to article 2423 of the Italian Civil Code, fourth paragraph,
considers that there are no impediments to your approval of the Financial Statements
of Meridiana fly S.p.A. for the year ended 31 October 2012 and the Management
Report. The consolidated financial statements of Meridiana fly S.p.A. at 31 October
2012 show a negative result for the period of Euro 190,235 thousand and a negative
shareholders' equity of Euro 111,791 thousand. The consolidated income, financial
and equity situation is described in the financial statements and the notes. In the
Management Report , the Directors have provided detailed information on operating
performance at consolidated level, the earnings and financial performance for the
period, the risks and uncertainties to which the group consolidated perimeter is
exposed and the conditions which, in their opinion, satisfy the going concern
assumption. The consolidated financial statements have been audited by Deloitte &
Touche SpA, which delivered its opinion on them. In this regard, the Board of
Statutory Auditors has no cognizance of elements opposed to such results and
information as well as the consolidated financial statements as a whole. With regard to
the proposal to carry forward the loss for the year of Euro 190,433,564, the Board of
Statutory Auditors has no comments to make, taking into account that the Board of
Directors passed resolution to authorize the President and the Chief Executive Officer
to convene a meeting for the measures referred to in Article 2447 of the Italian Civil
Code.
Milan, 28 February 2013
Meridiana fly - Financial Statements at 31 October 2012 - 152
THE BOARD OF STATUTORY AUDITORS
Luigi Guerra - President
Antonio Mele - Standing Auditor
Paolo Sbordoni - Standing Auditor
On behalf of the Board of Statutory Auditors
Meridiana fly - Annual Financial Report at 31 October 2012 - 153
Meridiana fly - Financial Statements at 31 October 2012 - 154
8. MERIDIANA FLY SPA - DRAFT SEPARATE FINANCIAL STATEMENTS FOR THE 10
MONTH FINANCIAL YEAR ENDED 31 OCTOBER 201 2
8.1. Statement of financial position of Meridiana fly S.p.A.
31.10 31.12
2012 2011 Change
Notes
1 Intangible assets 28,848,350 57,565,566 (28,717,216)
2 Fleet 29,091,060 28,291,633 799,427
3 Other Property, plant and equipment 9,756,129 12,583,037 (2,826,908)
4 Deferred tax assets 399,988 8,215,885 (7,815,897)
5 Equity investments 15,948,424 90,611,655 (74,663,231)
6 Other non-current assets 13,573,388 17,419,975 (3,846,587)
Non-current assets 97,617,339 214,687,751 (117,070,412)
7 Inventories 621,165 729,736 (108,571)
8 Trade receivables and other current assets 130,840,314 115,188,626 15,651,688
9 Current financial assets 10,128,712 5,115,081 5,013,631
10 Cash and cash equivalents 5,156,140 2,400,838 2,755,302
Current assets 146,746,331 123,434,281 23,312,050
TOTAL ASSETS 244,363,670 338,122,032 (93,758,362)
11 Share capital 46,100,834 20,901,419 25,199,415
11 Reserves and retained earnings (losses) brought forward 39,858,490 153,320,137 (113,461,647)
11 Net Profit (loss) for the period (190,433,564) (104,831,303) (85,602,261)
Shareholders' Equity (104,474,240) 69,390,253 (173,864,493)
12 Long-term borrowings 69,712,040 11,972,497 57,739,543
13 Trade payables and other non current liabilities - 3,500,555 (3,500,555)
14 Post-employment benefits and other defined benefit provisions 12,662,290 12,942,790 (280,500)
15 Non-current provisions for liabilities and charges 5,546,652 10,628,149 (5,081,497)
16 Deferred tax liabilities 527,235 2,960,603 (2,433,368)
Non-current liabilities 88,448,217 42,004,594 46,443,623
17 Current loans 7,665,891 8,874,443 (1,208,552)
18 Current portion of long-term borrowings 15,464,430 15,243,707 220,723
19 Current provision for liabilities and charges 22,553,000 22,570,834 (17,834)
20 Trade payables and other current liabilities 214,341,256 178,160,930 36,180,326
21 Current financial liabilities 365,116 1,877,271 (1,512,155)
Current liabilities 260,389,693 226,727,185 33,662,508
Total current and non-current liabilities 348,837,910 268,731,779 80,106,131
TOTAL EQUITY AND LIABILITIES 244,363,670 338,122,032 (93,758,362)
€
Meridiana fly - Financial Statements at 31 October 2012 - 155
8.2. Statement of comprehensive income of Meridiana fly S.p.A
Financial Year % sales Financial Year % sales
2012 revenues 2011 revenues Change
Notes
22 Sales revenue 408,655,079 100.0% 599,389,909 100.0% (190,734,830)
23 Other Revenue 24,616,105 6.0% 24,967,652 4.2% (351,547)
Total revenues 433,271,184 106.0% 624,357,561 104.2% (191,086,377)
24 Fuel (119,114,197) -29.1% (188,137,388) -31.4% 69,023,191
25 Materials and maintenance services (62,998,439) -15.4% (95,641,773) -16.0% 32,643,334
26 Operating leases (42,808,411) -10.5% (54,648,287) -9.1% 11,839,876
27 Selling expenses (19,363,749) -4.7% (24,083,473) -4.0% 4,719,724
28 Other operating costs and wet leases (158,282,868) -38.7% (193,449,841) -32.3% 35,166,973
29 Sundry costs and other services (25,525,836) -6.2% (31,562,782) -5.3% 6,036,946
30 Staff costs (57,739,306) -14.1% (107,647,980) -18.0% 49,908,674
31 Amortisation, depreciation and write-downs (37,463,786) -9.2% (12,104,398) -2.0% (25,359,388)
32 Provision for liabilities and charges (7,432,116) -1.8% (10,236,224) -1.7% 2,804,108
33 Other adjustment provisions (3,799,848) -0.9% (2,821,137) -0.5% (978,711)
Operating Profit (loss) (101,257,372) -24.8% (95,975,722) -16.0% (5,281,650)
34 Net financial income (expense) (6,396,685) -1.6% (5,536,532) -0.9% (860,153)
0.0% 0.0% -
35 Impairment of financial assets (80,839,618) -19.8% (4,130,267) -0.7% (76,709,351)
Profit (loss) before tax (188,493,675) -46.1% (105,642,521) -17.6% (82,851,154)
36 Taxes for the period (1,939,889) -0.5% 811,218 0.1% (2,751,107)
Net profit (loss) for the year (190,433,564) -46.6% (104,831,303) -17.5% (85,602,261)
14 Gains / (losses) from actuarial valuations (IAS 19) 751,176 0.2% 92,818 0.0% 658,358
14 Tax effect of profit (loss) from actuarial valuations (87,000) 0.0% (30,677) 0.0% (56,323)
Total Profit (loss) (189,769,388) -46.4% (104,769,162) -17.5% (85,000,226)
€
Meridiana fly - Financial Statements at 31 October 2012 - 156
8.3. Statement of changes in shareholders' equity of Meridiana fly S.p.A
Balance at 31 December 2010 20,901 48,789 2,721 (10,442) (51,861) 10,109
- Prior years net profit (loss) - - - (51,861) 51,861 -
- Payments for future capital increase - - 164,050 - - 164,050
- Total profit (loss) - - 62 - (104,831) (104,769)
Balance at 31 December 2011 20,901 48,789 166,834 (62,303) (104,831) 69,390
- Prior years net profit (loss) - - - (104,831) 104,831 -
- Costs related to capital increase - - (1,625) - - (1,625)
- Share capital increase 25,200 103,316 (110,987) - - 17,529
- Total profit (loss) - - 664 - (190,434) (189,769)
Balance at 31 October 2012 46,101 152,105 54,886 (167,134) (190,434) (104,474)
Net Profit
(loss) for the
year
Shareholders
' equity
€/000
Share capital Other reserves
Reserves and
retained earnings
(losses) brought
forward
Share premium
reserve
Meridiana fly - Financial Statements at 31 October 2012 - 157
8.4. Statement of Cash Flows of Meridiana fly S.p.A.
Financial Year Financial Year
2012 2011
€/000
Net cash and cash equivalents at beginning of period (6,473) 4,458
Pre-tax profit (loss) (188,494) (105,643)
Adjustments for:
- Depreciation and amortisation for the year 9,277 12,104
- Impairment of goodwill 28,187 -
- Net financial income (expense) 6,397 5,537
- (Gains) / losses on disposal of assets (29) (102)
- Impairment of investments in subsidiaries 78,264 4,130
- Svalutazioni di attività finanziarie 2,576 -
Change in trade receivables and other current assets and other non-current receivables (12,186) 25,672
Change in inventories 109 (103)
Change in trade payables and other payables (incl.risks provision ) 22,551 (33,785)
Payment of interest and other financial charges (2,633) (3,141)
Cash flows generated/(absorbed) by operating activities (55,980) (95,331)
Net change in non-current assets:
* Intangible (158) (243)
* Tangible (6,531) (4,034)
* Other non-current assets 1,270 4,237
* Equity investments (3,601) (200)
Cash flows generated/(absorbed) by investment activities (9,020) (240)
Payment of loan instalments (598) (602)
Other changes in loans (1,313) 2,045
Loans from Meridiana 58,359 11,016
Collection (payment) hedging derivatives and other changes in current financial assets (5,014) (719)
Cash flows generated/(absorbed) by investment activities 51,434 11,740
Payments for future capital increase 17,529 72,900
Cash flows from share capital transactions 17,529 72,900
Increase /(decrease) in cash and cash equivalents 3,963 (10,931)
Net cash and cash equivalents at end of period (2,510) (6,473)
Meridiana fly - Financial Statements at 31 October 2012 - 158
9. NOTES THE SEPARATE FINANCIAL STATEMENTS OF MERIDIAN FLY S.P.A.
9.1. Accounting standards and measurement criteria
9.1.1. General Considerations
These separate financial statements at 31 October 2012 have been prepared in accordance with existing regulation on listed
companies and are drawn up in Euro as this is the currency in which the Company operates. They are prepared in accordance with
the international accounting standards as adopted by the European Union.
The statement of comprehensive income and the statement of financial position are presented in Euro, taking into account the
rounding off of individual items, while the cash flow statement and the statement of changes in shareholders' equity are presented in
thousands of Euro, as are the amounts reported in the Notes.
With regard to the financial statements the Company presents the statement of financial position with the distinction of assets and
liabilities between current and non-current, while the Statement of Comprehensive Income provides for the classification of revenues
and expenses by nature, which is considered as a more representative form than the so-called classification by function. The
statement of changes in equity includes all recorded changes in equity. The Statement of cash flows is prepared using the "indirect"
method.
An asset/liability is classified as current when it satisfies one of the following criteria:
- it is expected to be recovered/settled or it is expected to be sold or used in the normal operating cycle of the Company or
- it is held primarily for trading or
- it is expected to be realised/discharged within 12 months from the date of the financial statements.
In the absence of all three conditions, assets / liabilities are classified as non-current.
With regard to Consob Resolution No. 15519 of 27 July 2006, gains and losses arising from non-recurring transactions or events that
occur infrequently in the ordinary management of the Company, were not reported separately in the income statement. These items
are however are described in section 9.4. "Significant Non-recurring Events and Transactions."
With reference to the identification in separate lines items of related party transactions, as required by Consob Resolution No.15519
of 27 July 2006, in the income statement, statement of financial position and statement of cash flows there is no separate evidence
of transactions with related parties, as these were deemed as not significant nor useful for the purposes of a straight-forward
presentation of the financial statements.
It should also be noted, with regard to the financial statements, that the summary of financial transactions with related parties for the
year 2012 is provided in the next Section - 9.11 Related Party Transactions, with evidence of the impact of these transactions on the
total amount reported in the corresponding line item.
The separate financial statements are audited by Deloitte & Touche S.p.A.
9.1.2. Accounting standards, measurement criteria and use of estimates in preparing the
financial statements
These separate financial statements for the 10 month financial year ended 31 October 2012 (1 January- 31 October) by virtue of the
early closing of the financial year pursuant to resolution of the extraordinary shareholders' meeting of 5 December 2011, have been
prepared in accordance with International Accounting Standards IAS / IFRS issued by the International Accounting Standards Board
(IASB) and endorsed by the European Union as well as the measures implementing art. 9, of Legislative Decree No. 38/2005.
Meridiana fly - Financial Statements at 31 October 2012 - 159
"IFRS" also include International Accounting Standards (IAS) still in force, and all interpretations issued by the International Financial
Reporting Interpretations Committee (IFRIC), previously known as the Standing Interpretations Committee (SIC).
The accounting standards, measurement criteria and the use of estimates used by the Company for the purpose of preparing the
separate financial statements at 31 October 2012 are described below. They are substantially the same as those used in the prior
year.
The financial statements are prepared based on the historical cost, adjusted as required for the measurement of certain financial
instruments, and on the going concern basis, which was confirmed by the Directors in accordance with paragraphs 25 and 26 of IAS
1 on the basis of the considerations in section 2.26 - Business Outlook and specified hereafter in section 9.1.3.
The most important accounting policies adopted are as follows:
• Recognition of costs and revenues
Sales and purchases of goods are recognised when goods are respectively delivered to the customer or to the Company, with
transfer of the significant risks and rewards associated with ownership of the goods. Sales and purchase of services are recognised
to the extent of their execution and completion on each reporting date, taking into account, in particular, the flight date for passenger
transport services, calculated according to the total value of the service rendered or received.
With reference to tickets for scheduled passenger transport, which, as at the financial statements date, are issued but not yet used
or refund thereof has not been requested, are reported as income under item "Sales Revenue" (the so-called "Proceeds from
prepaid items") estimated on the basis of the historically observed percentage of passengers not using or not requesting refund of
the tickets issued, in order to ensure full recognition of revenue in the financial statements in accordance with the accrual basis.
Interest income and expense are recognized in accordance with the accrual principle. The costs for taking out loans are recognised
in profit or loss when incurred. Ancillary costs for the issue of a financial instrument or for a capital increase are directly deducted
from the proceeds of the loan or capital increase to which they refer. Commissions paid to agencies for the sale of air tickets are
recognised in profit or loss when the related revenues are recognised.
Charge-backs of costs incurred on behalf of third parties are recognised as a reduction of the cost to which they relate.
Dividends are recognised when the shareholders’ right to collect them arises. This usually occurs in the financial year when the
investee company’s shareholder' meeting approving the distribution of earnings takes place
Non-current assets Intangible assets Goodwill resulting from business combinations is initially recorded at cost at the acquisition date. Goodwill is not amortised but is
tested for impairment annually or more frequently if events or changes in circumstances indicate that it may be impaired. After initial
recognition, goodwill is measured at cost less any accumulated impairment losses.
Upon disposal of part or whole of a company previously acquired and for which goodwill had been recognised upon acquisition, in
the determination of the gain or loss on disposal, the corresponding residual value of goodwill is taken into account.
Intangible assets include the costs, inclusive of ancillary costs, incurred to acquire resources lacking physical substance on condition
that their amount can be reliably measured and the asset is clearly identifiable and controlled by the Company.
These are stated at purchase or production cost including ancillary costs and are amortised according to their useful life. If there is
indication that an asset may be impaired, the intangible asset is written down accordingly, following the criteria indicated in the
subsequent policy “Impairment of intangible and tangible assets and investments”.
The amortisation periods applied for the various categories of intangible assets are indicated below:
development costs relating to initial training of pilots are amortised over a three-year period, while those relating to the launch of new
products/services from which long-lasting future economic benefits are expected are amortised over five years;
concessions, licenses, trademarks and similar rights are amortised over a five/ ten-year period;
Costs relating to preparation of the website are amortised over five years.
Meridiana fly - Financial Statements at 31 October 2012 - 160
The useful life and the amortisation criterion are reviewed regularly. If significant changes are found compared with previously made
assumptions, the amortisation rate is corrected using the prospective method
Tangible assets Tangible assets are recorded as "Fleet", for which it was considered appropriate to provide separate exposure due to the
significance of this item, and as "Other Property, Plant and Equipment", which includes all other tangible assets.
Tangible assets are recognised on condition that their cost can be reliably measured and that the Company will be able to enjoy their
future economic benefits.
They are recorded at purchase or production cost, inclusive of ancillary costs and of the portion of direct and indirect costs that can
reasonably be attributed to the asset. Investment grants obtained are recognised in the income statement over the period necessary
to match them with related costs and are directly deducted from such costs. If there is indication that an asset may be impaired, the
tangible asset is written down accordingly, following the criteria indicated in the subsequent policy “Impairment of assets”.
Property, plant and equipment are systematically depreciated on a straight-line basis according to economic/technical rates
established in relation to the assets’ residual useful life. Assets consisting of components with different useful lives are considered
separately when calculating depreciation. The useful life and the amortisation criterion are reviewed regularly. If significant changes
are found compared with previously made assumptions, the amortisation rate is corrected using the prospective method.
Generally speaking, the asset’s useful life is subject to annual verification. It is changed if, during the period, enhancement
maintenance is performed or replacements are made that modify the useful life of the asset to which they refer.
Enhancement and maintenance expenses that significantly increase the production capacity or safety of tangible assets, or that
lengthen the useful life of such assets, are capitalised and recorded as an increase in the amount of the tangible asset to which they
refer. Routine maintenance costs are directly recognized in the income statement.
The applied depreciation rates are reduced, with reference to the increases in tangible assets of the period, according to the
effective commissioning of the assets.
Depreciation starts when the assets are ready for use.
Specifically, the annual depreciation rates applied are as follows:
- Land not depreciated
- Buildings 50 years 2%
- light constructions, 10 years 10%
- plant 10 years 10%
- equipment 7 years 14%
- rotable components, 12 years 8.33%
- data processing machines, 5 years 20%
- office furnishing and equipment 8.3 years 12%
- internal means of transport, 5 years 20%
- vehicles, 4 years 25%
- systems of communication, 5 years 20%
- Modifications and standardisations performed on fleet aircraft are depreciated based on the duration of operating lease contracts.
Leasehold improvements are classified as tangible assets, according to the nature of the cost. The amortisation period is the lesser
of the remaining useful life of the tangible asset and the residual term of the contract.
The costs incurred for regular reconditioning of company-owned engines and airframes are recognized as an increase in the book
value of the asset to which they refer, separately from the physical parts. They are depreciated over the period of validity of the
periodic maintenance or the term of the operating lease agreement of the aircraft, respectively.
Any book value net of the cost of the previous reconditioning is derecognized, irrespective of whether the cost of the previous
reconditioning was explicitly mentioned in the transaction in which the element was purchased or constructed. In this case, the
Meridiana fly - Financial Statements at 31 October 2012 - 161
estimated cost of similar future reconditioning is used as an indication of what the cost of the reconditioning of the existing
component was when the element was purchased or constructed.
In particular the useful life of the MD-82 fleet (aircraft and its components) is estimated in relation to the expected date of disposal in
accordance with business plans, taking into account the estimated realizable value based on the net book value of maintenance
operations carried out until the date of future disposal.
The depreciation of the aircraft is determined on the basis of the components.
Leases are classified as finance leases whenever the terms of the contract are such as to substantially transfer all the risks and
rewards of ownership to the lessee. All other leases are considered as operating leases.
Operations that are the subject of a financial leasing contract are recorded as Company operations at their fair value on the date the
contract is stipulated, adjusted by the incidental charges on stipulation of the contract and any charges incurred for taking over the
contract or, if lower, the current value of minimum payments due for the leasing contract. The corresponding liability vis-à-vis the
lessor is recognized in the statement of financial position as a financial liability. Payments for rentals are apportioned between
principal and interest in order to achieve a constant interest rate on the residual liability. Financial expense is charged directly to the
income statement for the period.
Rental costs relating to operating leases are recognised on a straight-line basis over the term of the contract. The benefits received
or to be received or paid or payable as an incentive to enter into operating leases are also recorded on a straight-line basis over the
term of the contract.
Equity investments Investments in subsidiaries, associates and other investments are carried at cost (in the absence of a fair value that can be
reasonably determined), adjusted for impairment losses. Any positive difference, emerging at the acquisition date, between the cost
of acquisition and the fair value of the share of the investee's net assets attributable to the Company, is therefore included in the
carrying amount of the investment. Any write-down of this positive difference (which represents the goodwill recognized to the
investee's business at the time of acquisition) is not reversed in subsequent years even if the conditions that led to the write-down no
longer exist. If the Company’s proportional share of any losses made by the investee exceeds the investment’s carrying value, the
investment’s value is written off and the portion of any further losses is recognised as a provision in liabilities if the Company is under
the obligation to cover such losses.
Dividends received are recognized in the income statement, when the right to receive payment is established, only if resulting from a
distribution of earnings subsequent to the acquisition of the investee. If, instead, they result from the distribution of the investee's
reserves prior to acquisition, the dividends are recorded as a reduction in the cost of the investment.
In the event of investments held under joint control (companies in which the Company has contractually agreed to share control, or
for which there are contractual agreements by which two or more parties undertake an economic activity subject to joint control),
those investments are accounted for with the equity method as from the date on which joint control starts until the moment it ceases
to exist.
Impairment of tangible assets, intangible assets and investments At each reporting date, the Company reviews the carrying amounts of its tangible and intangible assets and its investments to
determine whether there is any indication that those assets are impaired. If such an indication exists, the recoverable amount of
these assets is measured in order to determine the extent of the impairment. If it is not possible to measure the recoverable amount
of an asset separately identified, the Company measures the recoverable amount of the cash-generating unit to which the asset
belongs. In particular, the smallest group of assets is represented by the cash-generating unit; for the identification of a cash
generating unit for the purposes of preparing the financial statements the reader should refer to section 9.5 Ref 1 Intangible Assets.
The recoverable amount is the higher of fair value less costs to sell and value in use.
The fair value is the market price (net of costs of disposal), provided that the asset is traded in an active market. A market can
reasonably be considered active based on transactions frequency and volumes.
In assessing value in use, future cash flows, related to a time period not exceeding five years are estimated on the basis of
conservative assumptions based on historical data and making prudential forecast about the future performance of the reference
Meridiana fly - Financial Statements at 31 October 2012 - 162
sector; the cash flows are discounted to their present value using a pre-tax rate that reflects current market assessments of the time
value of money and the risks specific to the asset, the terminal value is determined on the basis of a perpetuity.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount
is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss.
Where an impairment loss no longer exists, the carrying amount of the asset (or cash-generating unit), except for goodwill (which for
investments corresponds to the positive difference resulting as of the acquisition date, between the acquisition cost and the fair value
of the share of the investee's net assets attributable to the Company), is increased to the new value resulting from the measurement
of its recoverable amount, but not exceeding the carrying amount that would have been determined had no impairment loss been
recognised. A reversal of impairment loss is recognised immediately in profit or loss.
Other non-current assets Other non-current assets and other non-current receivables are stated at their nominal value, which coincides with the estimated
realisable value.
Non-current assets and liabilities held for sale Non-current assets (or groups of assets held for sale) classified as "held for sale" are measured at the lower of their previous
carrying amount and market value less costs to sell.
Non-current assets (or groups of assets held for sale) are classified as "held for sale" when it is expected that their carrying amount
will be recovered through a disposal rather than through their use in the company's operations. This condition is met only when at
the reporting date the sale is highly probable, the asset (or group of assets) is available for immediate sale in its present condition
and management has made a commitment to the sale, which is set to take place within twelve months from the date of classification
under this item.
The profit or loss generated by the operation of the assets and liabilities held for sale for the months between the last approved
financial statements and the date of disposal - in accordance with IFRS 5 - is classified as "Results of discontinued operations "
together with the economic effects of the operations, net of ancillary costs to sell.
Current assets and liabilities Inventories Inventories, consisting of stocks of technical materials, catering materials and scheduled air tickets, are recorded at their specific
purchase cost or, if lower, at their realisable value based on market trends. This lower value is not maintained in subsequent years if
the reasons for it no long exist and value is reinstated, if the conditions exist to do so, within the limits of the original purchase cost.
Financial Instruments Financial assets and liabilities are recognised at the time when the Company becomes a party to the instruments’ contractual
clauses.
Trade receivables Trade receivables are stated at their nominal value less an appropriate write-down to reflect estimated losses on receivables.
Financial assets Financial receivables relating to capital redemption contracts are measured at cost, i.e. nominal value, plus interest accrued. This
value is not lower than the value of initial insured capital plus guaranteed minimum return. Financial receivables relating to
performance deposits are posted at nominal value, which coincides with estimated realisable value.
Receivables for security deposits for utilities are measured at nominal value, which coincides with estimated realisable value.
Receivables for deposits against contractual commitments with third parties are posted at nominal value and adjusted, if necessary,
to align the amount paid with presumed recovery value.
Meridiana fly - Financial Statements at 31 October 2012 - 163
On subsequent reporting dates, financial assets that the Company intends and is able to hold to maturity are recognised at
amortised cost net of any impairment write-downs.
Financial assets other than those held to maturity are classified as held for trading or available for sale and are measured at fair
value at the end of each period. When financial assets are held for trading, gains and losses arising from changes in fair value are
recognized in the income statement for the period. Conversely, in the case of financial assets available for sale, gains and losses
arising from changes in fair value are recognized directly in equity until they are sold or have been impaired; in such cases, the
overall gains or losses previously recognized in equity are recognized in the income statement for the period.
Cash and cash equivalents The item relating to cash and cash equivalents includes cash and current bank accounts, demand deposits, and other short-term,
highly liquid financial investments that can be readily monetised and are subject to insignificant risk of changes in value.
Bank and other loans and bank overdrafts Loans and interest-bearing bank loans and bank overdrafts are recorded based on the amounts received, net of transaction costs
and subsequently measured at amortised cost using the effective interest rate method.
Trade payables Trade payables are stated at their nominal value.
Derivative financial Instruments In carrying out its business the Company is exposed to the risks of changes in exchange rates (mainly Euro/USD) and in fuel prices.
To minimize these risks, the Group enters into derivatives contracts to hedge both specific transactions and total exposures, making
use of the instruments offered by the market.
Derivative hedging instruments, in keeping with the provisions of IAS 39, are accounted for in accordance with the methods laid
down for hedge accounting only when:
- at the start of the hedge there is formal designation and documentation of the hedging relationship;
- the hedge is highly effective;
- the effectiveness can be reliably demonstrated.
When a financial instrument is designated as a hedge of exposure to the variability of cash flows of the hedged transactions (cash
flow hedge; e.g. hedging the variability of cash flows of expected future transactions against the effect of fluctuations in exchange
rates), the gains and losses deriving from the fair value changes of the hedging instrument are accounted for directly in
shareholders’ equity for the effective part (any ineffective part is instead accounted for immediately in the income statement under
the item gains/(losses) on foreign exchange).
The amounts recognized in equity are subsequently reflected in the income statement for the period in which the contracts and
expected transactions are manifested in the income statement.
If an instrument is designated as a hedge of exposure to changes in the fair value of hedged instruments (e.g. hedging of the
variability of the fair value of receivables and payables in foreign currencies), it is recognized at fair value with the effects booked to
the income statement; accordingly, the hedged instruments are adjusted to reflect the fair value changes associated with the hedged
risk.
Changes in the fair value of derivatives that do not meet the conditions to qualify as hedges are recognized in profit or loss. Given
the alternative treatments permitted by IAS 39 for the classification of such transactions, the Company has decided that the change
in fair value of contracts on commodities is to be classified in the income statement as an adjustment to operating costs.
Financial and non-financial contracts are analysed to identify the existence of embedded derivatives to be unbundled and measured
at fair value. Gains and losses resulting from subsequent changes in fair value are recognized in profit or loss.
Employee Post-employment benefits Payments for defined contribution plans are charged to the income statement in the period in which they are due.
Meridiana fly - Financial Statements at 31 October 2012 - 164
“Post-employment benefit provision” (T.F.R.) expresses the liability towards employees for the benefits accrued up to the reporting
date in compliance with current laws and contractual agreements. This liability is considered similar to a defined-benefit plan, the
cost of which is calculated using the actuarial Projected Unit Credit method; actuarial valuations are performed at the end of each
financial year. Actuarial gains and losses are recognized in the statement of comprehensive income and included in income
components such as income and expenses defined as "changes resulting from transactions with non-shareholders". The cost related
to employees' past service is recognized immediately the extent that the benefits have already accrued or otherwise is amortised on
a straight-line basis over the average period in which benefits are expected to accrue. The financial component included in these
plans is recognized in financial income and expenses.
Until 31 December 2006 the post-employment benefit provision (TFR) was considered a defined benefit plan. The rules for such
provision were changed by Italian Law no. 296 of 27 December 2006 (the 2007 National Budget Law) and by subsequent decrees
and regulations enacted in the early months of 2007.They now envisage payment of post-employment benefits as they accrue to a
separate entity (pension fund or central treasury fund of the INPS (state pension & welfare agency). In light of these changes, and in
particular as regards companies with at least 50 employees, under IAS 19 the post-employment benefit provision should be
considered as a defined-benefit plan solely for benefits accrued before 1 January 2007 (and not yet paid out as at the reporting
date), whereas after this date it should be considered as a defined contribution plan.
The right granted to employees and former employees to buy an air ticket at a discount compared to its price list is a long-term
benefit, and the corresponding liability is recorded in the financial statements according to the actuarial valuation methodology
provided for under IAS 19. The provision specifically established (the "provision for subsidised tickets") is released periodically and
recorded as an increase in the amount of revenue from the sale of tickets.
Income taxes Income taxes for the period are the sum of current and deferred taxes.
Current taxes are based on the period's taxable profit. Taxable profit differs from profit as reported in the income statement because
it excludes items of income and expense that are taxable or deductible in other years (temporary tax differences) and it further
excludes items that are never taxable or deductible (tax permanent differences). Current tax liability is calculated using current tax
rates or the rates substantially in force at the end of the reporting period.
Deferred taxes are taxes that the Company expects to be payable or recoverable on the temporary differences between the book
value of assets and liabilities and the corresponding tax bases used in computation of taxable profit. Deferred tax liabilities are
generally recognized for all taxable temporary differences while deferred tax assets are recognized to the extent that it is probable
that there will be future taxable profits based on business plans approved by the Group. In particular, the carrying value of deferred
tax assets is reviewed at each reporting date and reduced to the extent that is no longer probable that sufficient taxable profits will be
available to allow all or part of the assets to be recovered.
Deferred taxes are calculated at the tax rates that the Company expects to be in force when the asset is recovered or the liability
settled. Deferred taxes are directly booked to the statement of comprehensive income, except for those relating to transactions with
shareholders' which are recognized directly in equity, in which case the corresponding deferred taxes are also recognized in equity.
Deferred tax assets and liabilities are offset when there is a legal right to offset current tax assets and liabilities and when they relate
to taxes due to the same tax authority and the Company intends to settle its current tax assets and liabilities on a net basis.
Grants Grants are recognized at fair value when there is reasonable assurance that they will be received and that the conditions attaching to
them will be met. Grants for operating expenses are recognized in full in the income statement at the moment in which the conditions
for recognition are met. Capital grants are deducted directly from the purchase cost of the asset to which they refer.
Provisions for liabilities and charges Allocations to the provisions for liabilities and charges are made when the Company has a present obligation (legal or implicit
obligation) as a result of a past event and it is likely that the use of resources will be required to settle the obligation. Provisions are
recognized when it is possible to reliably estimate the costs required to settle the obligation at the reporting date and are discounted
to present value when the effect is material.
Meridiana fly - Financial Statements at 31 October 2012 - 165
Foreign currency items and items subject to "foreign exchange risk" Receivables and payables originally denominated in the foreign currency of countries outside the Euro zone are translated into Euro
at the exchange rates in force at the date of the underlying transactions. Foreign exchange differences incurred on collection of
receivables and settlement of payables in foreign currencies are recorded in the income statement. Non-current assets denominated
in foreign currencies are recorded at the exchange rate in force at the time of purchase or at the lower exchange rate in force at the
end of the period if the reduction is deemed as long-lasting.
Assets and liabilities, originally denominated in foreign currency of countries outside the Euro zone, still outstanding at year end,
including non-current assets of a monetary nature, are aligned at the spot exchange rate at the reporting date; the related exchange
gains and losses are recorded in the income statement and any net profit is allocated to a special non-distributable reserve until
realisation.
Gas emission allowances Gas emission allowances allocated to the Group, following the adoption by the Council and the European Parliament of Directive
2008/101/EC amending Directive 2003/87/EC to include aviation activities in the Community scheme for greenhouse gas emissions
allowance trading - EU Emissions Trading System ("EU ETS"), are recognized as current assets at their fair value measured at the
financial statements date, in the event the Group has excess allowances compared to its need determined on the basis of emissions
released during the year.
If, however, the emissions released in the period exceed the value of allocated allowances, as at the financial statements date,
including also any purchased emissions, a special risk provision is recognized for excess emissions. The allowances annually
surrendered in relation to the amount of greenhouse gases released into the atmosphere each year, will be derecognized by using
the risk provisions allocated in the previous year.
Use of estimates The preparation of the separate financial statements and related notes requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the reporting date as
well as the value of revenues and expenses recognized in the reporting period. Estimates and assumptions are based on previous
experience and other factors deemed relevant. Actual results may therefore differ from these estimates. Estimates and assumptions
are reviewed periodically and the effects of any changes made to them are reflected in the income statement in the period in which
the estimates are revised, if the revision affects only that period, or also in subsequent years if the revision affects both the current
year and future years.
In this respect it should be noted that in the current economic and financial crisis, notably in the Eurozone, and the related market
turmoil, assumptions regarding future performance were made which are characterized by significant uncertainty; therefore, it cannot
be ruled out that in the future the results may differ from the estimates and hence may require even significant adjustments to the
carrying value of the related items that to date are clearly neither estimable nor predictable. The main items affected by these
situations of uncertainty are non-current assets (tangible and intangible assets), and in particular goodwill and deferred tax assets.
Below we summarise the critical assessments and key assumptions used by management in applying accounting standards and
policies with regard to the future, that may have material effects on reported amounts or for which there is a risk of adjustments to
the carrying value of assets and liabilities in the financial year following the one to which these financial statements refer.
Provision for doubtful receivables Provision for doubtful receivables reflects management’s estimates about the losses on doubtful accounts concerning end
customers.
The estimate of this provision is based on the losses expected by the Company based on experience with similar receivables,
current and historical past-due receivables, losses and collections, careful monitoring of credit quality, and on forecasts of economic
and market conditions – supported in this by the opinions of the legal advisors representing the Company in pre-litigation and
litigation phases.
Meridiana fly - Financial Statements at 31 October 2012 - 166
Provision for liabilities and charges The provision for liabilities and charges refers to the management estimate of probable losses that the Group may incur in the
context of litigation with third parties, including passengers, staff, suppliers and other parties.
The provision for liabilities and charges is estimated on the basis of an analysis of the risk of negative outcome of the most
significant litigation, taking into account the opinions provided by legal advisors of the Group who represent the Company in pre-
litigation and litigation, and, for minor disputes of scarce relevance, also on the basis of historical experience and other statistical
evidence supporting risk assessment. Finally, the item includes the liability arising from the opening of the temporary redundancy
procedure (CIGS), which, according to the legislation in force requires that the company pays a social security cost commensurate
with the sums paid by INPS to employees in temporary redundancy. The provision envisages an estimation process to take into
account the actual use of the total number of workers in temporary redundancy on rotation.
Recoverable amount of non-current assets Non-current assets include goodwill, the fleet and property, plant and equipment and other assets, intangible assets as well as equity
investments. The Management periodically reviews the carrying value of non-current assets held and used in operations as well as
assets held for sale, when facts and circumstances make such review necessary. This activity is performed by using estimates of
future cash flows and appropriate discount rates to calculate present value or using estimated fair value less costs to sell, also
based on assessments conducted with the support of independent experts' opinions. Therefore, this audit of the carrying value of
non-current assets is based on a hypothetical set of assumptions regarding future events and actions of the administrative bodies of
the Company that may not necessarily occur in the expected manner and timing.
More specifically,
in order to determine the recoverable amount of the controlling investment in "Air Italy Holding", the company used an estimate of
the equity value, net of the subsidiary financial debt (including Air Italy S.p.A. financial debt), provided by an expert appointed for the
purpose, determined using the unlevered discounted cash flow method on the basis of expected cash flows for the subsidiary
included in the Group Business Plan approved by the Board of Directors on 26 February 2013, according to the criteria described in
detail in paragraph 4.5 - Ref 1 "Intangible assets". The evolution of scenario variables beyond the control of the subsidiary and the
Group different from those envisaged in the Business Plan might lead to the recognition of additional asset write-downs resulting
from an update of the impairment test conducted on 31 October 2012. In fact, the verification of the carrying amount of the
investment in Air Italy Holding may also be necessary during the year due to the high sensitivity shown by the subsidiary's equity
value to changes in key assumptions adopted for its valuation - which are subject to uncontrollable developments - and,
consequently, the need to resort to additional equity and financial support by Meridiana S.p.A. and AKFED. (See Section 2.23 "Main
risks and uncertainties for the current year-Ref 2").
in order to determine the recoverable amount of the Cash Generating Unit, Meridiana fly stand alone, inclusive of goodwill, the
company relied on an estimate of the value in use, made by the same expert appointed for the purpose and determined on the basis
of the unlevered discounted cash flow method using the expected cash flows included in the Group Business Plan approved by the
Board of Directors on 26 February 2013, according to the criteria described in more detail in section 9.5 - Ref 1 "Intangible assets".
The evolution of scenario variables beyond the control of the Company and the Group different from those envisaged in the
Business Plan might lead to the recognition of additional asset write-downs resulting from an update of the impairment test
conducted on 31 October 2012. In fact, the verification of the carrying amount in the parent separate financial statements may also
be necessary during the year due to the high sensitivity shown by the CGU's value in use to changes in key assumptions adopted for
its valuation - which are subject to developments beyond the control of the Company and the Group - and, consequently, the need to
resort to additional equity and financial support by Meridiana S.p.A. and AKFED. (See Section 2.23 "Main risks and uncertainties for
the current year-Ref 2").
With respect to the recoverable value of the property located in Milan - Via Balagutti - the company relied on the estimate obtained in
previous years by an expert appointed for the purpose which was still considered valid given the possible use of the property,
currently leased to third parties for most of the available space.
Deferred tax assets and liabilities
Meridiana fly - Financial Statements at 31 October 2012 - 167
The Company recognizes current and deferred taxes in accordance with applicable regulations. The recognition of taxes requires
using estimates and assumptions concerning the interpretation of applicable regulations and their effect on the Company’s taxation,
with regard to the transactions completed during the financial year in question. In addition, recognition of deferred tax assets and
liabilities requires use of estimates concerning prospective taxable income and its development, as well as applicable tax rates.
These activities are performed through an analysis of completed transactions and their tax profile, also with the support, when
necessary, of external advisors on the various aspects addressed. They also take the form of simulations and sensitivity analyses of
prospective income.
Income from unused tickets (so-called "Proceeds from prepaid tickets") The estimate of income from unused issued tickets (the so-called "Proceeds from prepaid tickets") estimated on the basis of the
historically observed percentage of passengers not using or not requesting refund of the tickets issued, in order to ensure full
recognition of revenue in the financial statements in accordance with the accrual basis. Different trends from those historically
experienced in the actual number of tickets unused by passengers or the real charges of unused tickets refund may result in
revenues different from those measured at the reporting date based on estimates made by management.
Defined benefit plans The Post-employment benefit provision (T.F.R.) and the Provision for Subsidised Tickets can be classified as defined-benefit plans
(with regard to T.F.R. for the portion accrued before 31 December 2006 only). Management uses various statistical assumptions and
assessment factors with the aim of anticipating future events in order to calculate the costs, liabilities and assets relating to such
plans. Assumptions concern the discount rate, the expected return on assets on which the plan is based, and the rates of future pay
increases. In addition, the actuaries advising the Company also use subjective factors such as, for example, mortality and
employees turnover rates.
Contingent liabilities The Company is involved in lawsuits and tax disputes relating to complex and difficult problems and with a varying degree of
uncertainty, including the facts and circumstances regarding each case, jurisdiction and the different applicable laws.
Given the uncertainties inherent in these issues, it is difficult to predict the outlay that may arise from such disputes.
Consequently, the management after consultation with its legal advisors and legal and tax experts, recognises a liability for such
litigation when it considers that a cash outlay is likely to occur and the amount of the resulting losses can be reasonably estimated. If
a cash outlay becomes possible but the amount cannot be determined, this fact is disclosed in the notes to the financial statements.
New accounting standards and interpretations Accounting standards, amendments and interpretations applicable as from 1 January 2012 The new accounting standards, amendments and interpretations which, being applicable as from 01 January 2012, supplement as
from that date the accounting policies used in preparing the separate financial statements are presented below.
It should be noted that these account for cases that are not present or have limited and negligible effects in terms of representation,
evaluation and disclosure in this Annual Report, including:
• Minor amendments to IAS 12 - Income Taxes - for the measurement of deferred taxes, which requires an entity to measure
the deferred tax relating to investment property measured at fair value depending on the manner in which the carrying
amount of the asset will be recovered (through continued use or through sale). Specifically, the amendment establishes a
rebuttable presumption that the carrying amount of an investment property measured at fair value in accordance with IAS 40
is entirely recovered through a sale transaction and that the measurement of deferred taxes, in jurisdictions where the tax
rates are different, reflect the rate on the sale. The adoption of this amendment did not have any effect on the valuation of
deferred taxes as at 31 October 2012;
• Amendment to IAS 1 - Presentation of Financial Statements, which requires companies to group items presented in the
Statement of "Other gains / (losses)" ("Other comprehensive income") depending on whether they are potentially
Meridiana fly - Financial Statements at 31 October 2012 - 168
reclassifiable to profit or loss subsequently. The amendment is effective from the financial year beginning on or after 1
January 2012. The adoption of this amendment did not have any effect on the presentation of the financial statements;
• amendments to IFRS 7 - Financial instruments / Additional disclosure - These amendments were issued with the intent to
improve the understanding of transactions involving the transfer (derecognition) of financial assets, including the
understanding of the possible effects arising from any risk that may remain with the transferor. In particular, the amendments
require greater transparency on exposure to risks in the event of transactions where a financial asset is transferred but the
transferor retains some form of continuing involvement in it. The amendments also require additional information in the event
that a disproportionate amount of these transactions take place near the end of an accounting period. The adoption of this
amendment did not have any effect on financial statements disclosures.
Accounting standards, amendments and interpretations not yet effective and not adopted in advance by the Company Listed below are other Standards, amendments and interpretations not yet effective and not adopted in advance by the Company,
for which however the approval process has not been completed yet for the adoption of the amendments and standards by the
relevant bodies of the European Union:
• IFRS 9- Financial instruments: (applicable from 1 January 2015, retrospectively) in order to fully replace IAS 39,
introducing new criteria for the classification and measurement of financial assets and liabilities.
• IFRS 10 - Consolidated Financial Statements, which replaces SIC-12 Consolidation - Special Purpose Entities (SPE)
and parts of IAS 27 - Consolidated and Separate Financial Statements, which will be renamed "Separate Financial
Statements" and shall regulate the accounting treatment of investments in separate financial statements; the main changes
contained in the new standard are as follows:
- According to IFRS 10 there is a single basic criterion to consolidate all types of entities, and this criterion is based on
control. This change removes the perceived inconsistency between the previous IAS 27 (based on control) and SIC 12
(based on the transfer of risks and benefits);
- And new definition of control over an entity has been introduced, more consistent than in the past, based on three
elements: (a) power over the acquiree, (b) exposure, or rights, to variable returns from involvement in the entity, and (c)
ability to affect those returns through power over the entity;
- IFRS 10 requires that for the purposes of evaluating control over an acquired entity, an investor must focus on activities that
significantly affect the returns from that entity;
- IFRS 10 requires that, in assessing whether control exists, only substantive rights are taken into account, i.e. those that can
be exercised in practice when important decisions must be taken with respect to the acquired company;
- IFRS 10 provides practical guidance to assist in assessing whether control exists in complex situations, such as the de
facto control, potential voting rights, situations in which it is necessary to determine whether the person who has decision-
making power is acting as agent or principal , etc... The standard is applicable retrospectively from 1 January 2014. The
Company has not yet carried out an analysis of the effects of this new standard on the consolidation scope;
• IFRS 11 - Joint arrangements, which will replace IAS 31 - Interests in Joint Ventures and SIC-13 - Jointly controlled
entities - Non-monetary contributions by joint venturers. Without prejudice to the criteria for the identification of joint control,
the new standard provides criteria for the accounting treatment of joint arrangements based on the rights and obligations
arising from the arrangements rather than on their legal form and establishes the equity method as the only method to
account for investments in jointly controlled entities in the consolidated financial statements. According to IFRS 11, the
existence of a separate vehicle is not a sufficient condition for classifying a joint arrangement as a joint venture . The new
standard is applicable retrospectively from 1 January 2014. Following the issue of the standard, IAS 28 - Investments in
associated companies - was amended to include in its scope also investments in joint ventures, as from the effective date
of the standard. The Company has not yet carried out an analysis of the effects resulting from the application of this new
standard;
• IFRS 12 - Additional Disclosures of interests in other entities, which is a new and comprehensive principle on additional
disclosure to be provided in the consolidated financial statements on each type of interests, including those in subsidiary
Meridiana fly - Financial Statements at 31 October 2012 - 169
companies, joint arrangements, associates, special purpose entities and other unconsolidated structured entities. The
standard is applicable retrospectively from 1 January 2014.
• IFRS 13 - Fair value measurement, which explains how fair value should be determined for financial statement purposes
and is applicable to all the standards that require or permit fair value measurement or information to be presented on the
basis of fair value, with a limited number of exceptions. In addition, the standard requires additional disclosure on fair value
measurement (fair value hierarchy) than is currently required by IFRS 7. The standard is applicable prospectively from 1
January 2013.
• amendment to IAS 19 - Employee Benefits, which eliminates the option to defer the recognition of actuarial gains and
losses through the corridor approach, requiring that all actuarial gains and losses be recognized immediately in the
Statement of Other Comprehensive Income so that the entire net amount of defined benefit plans (net of assets related to
the plan) must be included in the consolidated statement of financial position. The amendments also provide that changes
from one year to the next in the defined benefit plan and the assets related to the plan must be broken down into three
components: the cost components relating to service period shall be recorded in the income statement as "service costs";
net financial expense calculated by applying the appropriate discount rate to the net defined benefit plan net of assets as at
the start of the year must be recognized in the income statement as such; gains and losses that arise from remeasurement
of assets and liabilities must be included in the Statement of Other Comprehensive Income. Moreover, the return on assets
included in net interest expense, as mentioned above, shall be calculated on the basis of the liability discount rate rather
than the expected return on assets. Finally the amendment introduces new disclosure to be provided in the notes. The
amendment is effective retrospectively from the financial year beginning on or after January 1, 2013. The effects that may
be reasonably estimated from the application of the changes in the standard to the balances at 31 October 2012 are not
currently considered as significant;
• amendments to IAS 32 - Financial Instruments: Presentation to clarify the application of some criteria for offsetting
financial assets and financial liabilities found in IAS 32. The amendments are effective retrospectively from the financial
years beginning on or after 1 January 2014.
• amendments to IFRS 7 - Financial Instruments: Disclosures, with regard to the information on the effects or potential
effects of offsetting financial assets and financial liabilities on the statement of financial position of a company. The
amendments are effective from the financial years beginning on or after 1 January 2013. The information must be provided
retrospectively.
• IFRIC 20 - Stripping Costs in the Production Phase of a Surface Mine , which applies to the costs of waste removal that
are incurred in the activities of a surface mine during the production phase of the mine. This Interpretation applies to annual
periods beginning on or after 1 January 2013.
Accounting standards, amendments and IFRS interpretations not yet endorsed by the European Union At the date of these separate financial statements, the relevant bodies of the European Union had not yet completed the
endorsement process necessary for the adoption of the amendments and standards described below.
• On 12 November 2009 the IASB published IFRS 9 - Financial instruments;, the same standard was subsequently
amended on 28 October 2010. The standard, applicable from 1 January 2015, retrospectively, is the first part of a multi-step
process that aims to fully replace IAS 39 and introduces new criteria for the classification and measurement of financial
assets and liabilities. In particular, with regard to financial assets, the new standard uses a unified approach based on how
an entity manages its financial instruments and the characteristics of contractual cash flows of the financial assets to
determine the measurement criteria, replacing the different rules in IAS 39. For financial liabilities, instead, the main change
introduced concerns the accounting treatment of changes in fair value of a financial liability designated as a financial liability
at fair value through profit or loss, if these changes are due to a variation in the creditworthiness of the liability itself.
According to the new standard these changes should be recognized in "Other comprehensive income" and no longer
through profit or loss.
Meridiana fly - Financial Statements at 31 October 2012 - 170
• Phases two and three of the project on financial instruments, dealing respectively with the impairment of financial assets
and hedge accounting are still in progress. The IASB is also considering limited improvements to IFRS 9 for the part
relating to the classification and measurement of financial assets.
• On 17 May 2012, the IASB published the document Annual Improvements to IFRSs : 2009-2011 Cycle, which reflects
the changes to the standards as part of the annual process for their improvement, focusing on changes assessed as
necessary, but not urgent. Below are those that involve a change in the presentation, recognition and measurement of
assets and liabilities, excluding those that involve only a change in terminology or editorial changes with minimal effect on
the accounts and those that affect standards or interpretations not applicable to Group:
- IAS 1 Presentation of Financial Statements - comparative information: it is clarified that in case additional comparative
information is provided, it must be presented in accordance with IAS / IFRS. In addition, it is clarified that in case an entity
changes an accounting policy or makes a retrospective adjustment/reclassification, the entity should present a statement of
financial position also at the beginning of the comparative period ("third statement of financial position" in the financial
statements) while no comparative disclosures for the "third statement" are required in the notes, apart from the items
concerned.
- IAS 16 Property, plant and equipment - Classification of servicing equipment : clarifies that servicing equipment must be
classified as Property, plant and equipment when used for more than one year, in inventory otherwise.
- IAS 32 Financial Instruments: Presentation - Direct taxes on distributions to holders of equity instruments and transaction
costs on capital instruments: clarifies that direct taxes relating to these cases are subject to IAS 12.
- IAS 34 Interim Financial Reporting - Total assets for a reportable segment : Clarifies that total assets should be reported
only if this information is regularly provided to the chief operating decision maker of the entity and there has been a material
change in the total assets of the segment compared to the reported amounts in the last annual financial statements.
The effective date of the proposed amendments is for annual periods beginning on or after 1 January 2013, with early
application permitted.
28 June 2012, the IASB published the document Consolidated Financial Statements, Joint Arrangements and Disclosure of
Interests in Other Entities: Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12) . First, the document
intends to clarify the intentions of the Board with reference to the transition rules of IFRS 10 Consolidated Financial
Statements. The document explains that, for an entity with a financial year corresponding to the calendar year and first
application of IFRS 10 for the year ended 31 December 2013, the date of initial application will be 1 January 2013.
In the event that the conclusions on the consolidation scope are the same according with IAS 27 and SIC 12 and according
to IFRS 10 at the date of initial recognition, the entity shall have no obligation. Likewise, no obligation will arise in the event
that the investment has been sold in the comparative period (and as such no longer present on the date of initial
application). The document aims to clarify how an investor might retrospectively rectify the comparative period/s if the
conclusions on the consolidation scope are not the same according to IAS 27 / SIC 12 and IFRS 10 on the date of initial
recognition . In particular, when a retrospective adjustment as defined above is not possible, an acquisition / disposal will be
recorded at the beginning of the comparative period, and a resulting adjustment recognized in retained earnings. In addition
the Board amended IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities to provide a similar
simplification for presenting or modifying comparative information for periods prior to that defined " the immediately
preceding period "(i.e. the comparative period presented in the financial statements). IFRS 12 is further amended by limiting
the request to present comparative information for disclosures relating to "structured entities" that were not consolidated in
periods prior to the effective date of IFRS 12. These amendments are applicable, together with the reference standards,
from the financial years beginning on or after 1 January 2014, with early application permitted
• On 31 October 2012 the amendments to IFRS 10, IFRS 12 and IAS 27 "Investments Entities" were issued, which
introduce an exception to the consolidation of subsidiaries for an investment company, except in cases in which the
subsidiaries provide services that relate to the investment activities of such companies. Pursuant to those amendments, an
investment company must evaluate its investments in subsidiaries at fair value through profit or loss. To qualify as an
investment company, an entity shall:
- obtain funds from one or more investors with the purpose of providing them with investment management services;
Meridiana fly - Financial Statements at 31 October 2012 - 171
- commit to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment
income, or both; and
- measure and evaluate the performance of substantially all of its investments on a fair value basis.
These amendments are applicable for financial statements beginning on or after 1 January 2014, with early application
permitted.
On 19 March 2011, the IASB published an amendment to IFRS 1 - First Time Adoption of International Financial Reporting
Standards - Government Loans amending the reference to the recognition of government loans in the transition to IFRS.
9.1.3. Going concern assumption
Please refer to section 2.26. "Business Outlook", for a detailed analysis of the considerations on the basis of which the Directors, in
spite of considerable uncertainty that may cast significant doubt on the ability of the Group and the Company to continue operating
under the going concern assumption, have considered that the Company will be operating as a going concern in the foreseeable
future of at least 12 months, and therefore considered it appropriate to prepare the financial reporting documents on a going concern
basis.
9.2. Comparability of accounting data
The accounting statements, set out in Chapter 8 above - "Financial Statements of 2012" are compared with data from the separate
financial statements at 31 December 2011.
It should be noted that the financial year 2012 was shortened to 10 months (1 January to 31 October) due to the early closure of the
financial year of Meridiana fly approved by resolution of the Extraordinary Shareholders' Meeting on 5 December 2011. Therefore,
the income statement data are not comparable in absolute terms but only in relative terms (e.g. as percentage of revenues), while
data in the statement of financial position are comparable as reference is made with data as at 31 December 2011.
In these separate financial statements "Revenues from pre-paid tickets" were classified as "Sales Revenues" in the statement of
comprehensive income, unlike the previous year when the same item was classified as "Other income"; the reclassification was
carried out in light of the recurring nature of this revenue component which for all intents and purposes relates to the sale of tickets
for scheduled flights, which, since 2010 - following the transfer of the Aviation operations of Meridiana S.p.A. - constitute a relevant
part of the core business of Meridiana fly and the estimate of which is based on increasingly more refined calculation instruments.
This classification is also supported by the historical recurrence of this revenue component which is also included in the revenues
from scheduled air traffic recorded by Air Italy, consolidated with effect from 1 November 2011.
The mentioned revenues refer to an estimate of unused tickets for scheduled flights which have been prepaid and can be used on
flights departing in periods subsequent to the reporting date. More specifically, this change of approach has led to a reclassification
of comparative figures as follows:
• in the separate financial statements for 2011, Euro 5,186 thousand were reclassified from "Other income" to "Sales
Revenues" in the income statement.
Furthermore, in these separate financial statements, with respect to the previous year, the credit balances of some fuel suppliers
were reclassified as being more precisely advances on service supplies. Therefore, this change of approach has led to a
reclassification of comparative figures as follows:
• in the separate financial statements for 2011, Euro 5,038 thousand were reclassified from "Trade payables and other current
liabilities" into "Trade receivables and other current assets" in the statement of financial position.
Meridiana fly - Financial Statements at 31 October 2012 - 172
For a better comparison of information on a comparable basis, the following reclassified pro-forma separate income statement at 31
October 2011 was prepared; reference to this statement should also be made when commenting changes in income statement
figures for the period in absolute terms as well as in relative percentage terms on revenues.
Financial Year % sales 10 months % sales
2012 revenues 2011 revenues
Proforma Data %
Sales revenue 408,655 100.0% 540,282 100.0% (131,627) -24.4%
Other Revenue 24,616 6.0% 20,854 3.9% 3,762 18.0%
Total revenues 433,271 106.0% 561,136 103.9% (127,865) -22.8%
Fuel (119,114) -29.1% (169,009) -31.3% 49,895 29.5%
Materials and maintenance services (62,998) -15.4% (81,662) -15.1% 18,664 22.9%
Selling expenses (19,364) -4.7% (23,243) -4.3% 3,879 16.7%
Other operating costs and wet leases (158,283) -38.7% (171,407) -31.7% 13,124 7.7%
Sundry costs and other services (25,526) -6.2% (21,602) -4.0% (3,924) -18.2%
Staff costs (57,739) -14.1% (90,041) -16.7% 32,302 35.9%
Provision for liabilities and charges (7,432) -1.8% (12,180) -2.3% 4,748 39.0%
EBITDAR (17,185) -4.2% (8,008) -1.5% (9,177) -114.6%
Operating leases (42,808) -10.5% (45,796) -8.5% 2,988 6.5%
EBITDA (59,993) -14.7% (53,804) -10.0% (6,189) -11.5%
Amortisation, depreciation and write-downs (37,464) -9.2% (10,384) -1.9% (27,080) -260.8%
Other adjustment provisions (3,800) -0.9% (1,984) -0.4% (1,816) -91.5%
EBIT (101,257) -24.8% (66,172) -12.2% (35,085) -53.0%
Net financial income (expenses) (6,397) -1.6% (3,205) -0.6% (3,192) -99.6%
Impairment of financial assets (80,840) -19.8% - 0.0% (80,840) -
Profit (loss) before tax (188,494) -46.1% (69,377) -12.8% (119,117) -171.7%
Taxes for the period (1,940) -0.5% (689) -0.1% (1,251) -
Net profit (loss) for the year (190,434) -46.6% (70,066) -13.0% (120,368) -171.8%
€/000
Change
It should be recalled that the aim of preparing the pro-forma data is to represent, according to measurement criteria consistent with
historical data and compliant with the relevant legislation, the profits and loss results for the 2011 financial year shortened to 10
months. However, it should be noted that if the financial year had been actually closed at 31 October 2011, the results obtained
might have differed from the pro-forma data.
The pro forma figures for 2011 are unaudited.
9.3. Seasonality of the business
The demand for air transport, above all in the leisure/holiday segment, is characterized by significant seasonality. As regards
Meridiana fly, the business is concentrated in the third quarter and is more limited in the second and fourth quarter, except for
periods closed to the holidays (Christmas/New Year, Easter and long weekends). The Medium Haul business is particularly
significant in the summer period, while the Long Haul leisure business to exotic and tropical destinations has inverse seasonality, as
it is concentrated in the winter period (November – April).
9.4. Significant Non-recurring Events and Transactions.
Some significant non-recurring events, the consequences of which were reflected in the financial and equity performance of FY
Meridiana fly - Financial Statements at 31 October 2012 - 173
2012, are described in the following summary table.
Amounts in Euro/000
Description
Value change Value change Value change Value change
Book value (A) (104,473) (190,434) (79,423) 3,963
SRT legal settlement 2,500 2.4% 2,500 1.3% 750 0.9% 750 18.9%
Reorganization costs 1,286 1.2% 1,286 0.7% 1,136 1.4% 1,136 28.7%
Receivable for solidarity contracts- non
recurring gain 674 0.6% 674 0.4% - 0.0% - 0.0%
Early surrender of aircraft 6,555 6.3% 6,555 3.4% - 0.0% - 0.0%
Impairment of goodwill 28,187 27.0% 28,187 14.8% - 0.0% - 0.0%
Write-down of investments 78,264 74.9% 78,264 41.1% - 0.0% - 0.0%
Deferred tax assets/liabilities written off 5,057 4.8% 5,057 2.7% - 0.0% - 0.0%
Total non-recurring transactions (B) 122,523 117.3% 122,523 64.3% 1,886 2.4% 1,886 47.6%
Gross notional value (A + B) 18,050 (67,911) (77,537) 5,849
(*) Refer to an increase or decrease in the period of net cash and cash equivalents
Shareholders' EquityNet Profit (loss) for the
year
Net financial
positionCash flows(*)
SRT legal settlement
During the period a non-recurring charge of Euro 2.5 million was recognized in relation to the settlement agreement reached in the
dispute with the maintenance provider SR Technics for termination of contracts.
Reorganization costs
The Group incurred costs associated with settlements agreements with the staff in order to terminate employment contracts as part
of the reorganization and structural cost-saving project for approximately Euro 1.3 million.
Non-recurring loss on receivables for solidarity contracts
A non-recurring loss of Euro 0.7 million was recognized in the period in relation to the final determination of the amount receivables
from relevant Institutions for the application of solidarity contracts to the staff expired on September 2010;
Early surrender of aircraft
A non-recurring charge of Euro 1.5 million (USD 1.95 million) by way of penalties (reduced compared to contractual provisions) was
recognized for the early surrender of an A330 Airbus (Early termination fee) following the agreement reached with the lessor ILFC.
A provision of approximately Euro 3.1 million was recognized for contract losses ("onerous" aircraft lease contracts pursuant to IAS
37) to take into account the loss from the use of the aircraft before being returned in January 2013, partially offset by the use of
phase-out provisions for Euro 1.6 million as well as an additional amortization charge on capitalized aircraft phase-in costs due to the
early return of the aircraft (approximately Euro 1 million).
Also in relation with the agreements for the early return of some aircraft in January 2013, financial assets were adjusted by Euro 2.5
million as a result of the write-off of security deposits agreed with the lessor to offset the accumulated payables and charges.
Impairment of goodwill and investments
Finally it should be noted, that the Directors also deemed it appropriate to recognize significant non-recurring impairment losses on
some assets as a result of the impairment test; they included the impairment of goodwill (Euro 28.2 million), the write-down of the
carrying amount of the investment in Air Italy Holding (Euro 75.5 million), the write-down of the carrying amount of the investment in
Meridiana Maintenance (Euro 1.2 million) and Wokita (Euro 1.5 million)
Meridiana fly - Financial Statements at 31 October 2012 - 174
Write-down of deferred tax assets
Following the approval of the Business Plan, given the limited taxable income expected for the Company on the basis of the
mentioned Plan and uncertainties related to its implementation (see section 2.26 of the Report), the Directors decided to write down
the net deferred tax assets for Euro 5.1 million. The effect of this write-down was offset by non-recurring income of Euro 3.5 million
on the sale of tax losses to Meridiana S.p.A. which the latter used to offset the profits from other Meridiana S.p.A. group companies -
as part of the tax consolidation agreement.
9.5. Analysis of the statement of financial position, income statement and cash flow
Non-current assets
Non-current assets at 31 October 2012 amounted to Euro 97,617 thousand, down by Euro 117,070 thousand compared to Euro
214,688 thousand at 31 December 2011.
Ref 1 Intangible assets
Intangible assets amounted to Euro 28,848 thousand and decreased by Euro 28,717 thousand compared to Euro 57,566 thousand
at 31 December 2011, reflecting in particular the goodwill impairment loss of Euro 28,187 thousand as a result of a specific
impairment test , as detailed below.
"Goodwill" at 31 December 2011 amounted to Euro 56,371 thousand and resulted from the transfer of the Meridiana Aviation
business carried out at the end of February 2010. The recognition of goodwill resulted from (i) the recognition at fair value rather than
at historical values of the aforementioned contribution operation in accordance with the provisions of the OPI 1 document for
"business combination of entities or businesses under common control " and (ii) identification of the Aviation business as the buyer in
the business combination, given its greater size compared to Meridiana fly both in terms of the amount of revenue and value of net
assets
More specifically, as required by the accounting standards described in section 9.1., the Directors, supported by an ad hoc appointed
expert, performed the goodwill impairment test in accordance with IFRS / IAS international standards, in particular IAS 36
"Impairment of assets", as a result of which the goodwill was decreased to Euro 28,184 thousand.
According to IAS 36, the recoverable amount is the higher of the fair value and the value in use. Fair value is the amount obtainable
from the sale in an arm's length transaction between knowledgeable, willing parties, less any directly attributable expenses.
Depending on circumstances, this amount is determined according to the agreed price if there is a binding sale agreement stipulated
in a transaction between independent parties (net of disposal costs) or the market price, less costs to sell if the asset is traded in an
active market.
On the other hand the value in use results from discounting, using an appropriate discount rate (equal to the weighted average cost
of capital), expected positive and negative cash flows to be derived from using the asset / CGU until the end of its useful life. The
impairment loss resulting from the impairment test is measured by the excess of the carrying amount of the asset compared to its
recoverable amount.
In order to test goodwill for impairment in the separate financial statements of Meridiana fly, its carrying amount was determined, net
of the carrying amount of the investment in Air Italy Holding (inclusive of loans granted to Air Italy Holding and the indirect subsidiary
Air Italy S.p.A., as well as trade receivables from Air Italy) for a total of Euro 107,410 million. Based on these separate financial
statements, the carrying amount of Meridiana fly, on a stand-alone basis, before impairment was determined (net of the carrying
amount of Air Italy, as well as the items related to deferred taxation, albeit of a non-material amount) in a negative value of Euro -
24,034 thousand.
The main assumptions used for the calculation of value in use and adopted by the expert, concerned the estimated cash flows of
Meridiana fly during the period used for the calculation, the weighted average cost of capital and the rate of growth.
Meridiana fly - Financial Statements at 31 October 2012 - 175
As described in the previous paragraph 2.24.13, on 26 February 2013, the Board of Directors approved the Business Plan. Based on
this plan - which was also prepared on a stand-alone basis- the appointed expert estimated the value in use of Meridiana fly using
the Discounted Cash Flow (DCF) method, i.e. the discounting of future positive and negative cash flows generated by Meridiana fly
until the end of its useful life. The net operating cash flows estimated for this purpose were derived from the above mentioned Plan
according to the generally used "unlevered" approach, according to which cash flows are calculated regardless of the company
financial structure by subtracting the CGU net debt at the valuation date from the present value of the cash flows.
The weighted average cost of capital used to discount the operating cash flows of the explicit period and to calculate the Residual
Value was determined at 13.3% (11.87% at 31 December 2011), based on the same parameters described in section 4.6 Ref.1
Intangible assets of the notes to the consolidated financial statements.
With reference to the rate g used to calculate the Terminal Value, the expert factored in a recovery in demand in the long term, also
based on the forecasts provided by third-party sources about these trends, also specifically considered with reference to the market
in which the Group operates. Based on these considerations and information, the expert determined a growth rate g equal to 2%.
With regard to the cash flow for the periods after the explicit period (residual value), the cash flows were determined by forecasting
an unlimited capitalization of normalized (sustainable) operating cash flows calculated based on the expected cash flow for the last
year of the explicit forecast period (2017). In this regard it should be noted that the expert decided to use the cash flow of the last
year of the explicit period as it was deemed representative of the company's ability to maintain such cash flow over time.
The results deriving from the application of this methodology for the analysed entity are shown in the following table.
Thousands of Euro 31 October 2012
Present value of cash flows -92,263.00
Discounted terminal value 40,041.77
Value in use -52,221.23
In light of the above findings a permanent loss arose attributed to Meridiana fly goodwill, determined as follows:
Meridiana fly stand alone
carrying amount -24,034.00
Value in use -52,221.23
Impairment 28,187.23
Moreover, the value in use consists exclusively of the discounted cash flows that make up the Terminal Value, i.e. the cash flows
associated with periods distant in time, the achievement of which is characterized by a higher risk profile and more exposed to
uncontrollable changes in external variables that may differ from those envisaged in the Business Plan.
In light of these considerations, the expert carried out a sensitivity analysis to verify the change in the value of Meridiana fly
economic capital - on a stand-alone basis - to changes in the discount rate (weighted average cost of capital, WACC) and the growth
rate (g):
EUR/M
WACC
12.30% 12.80% 13.30% 13.80% 14.30%
G
row
th R
ate
1.00% -51.9 -54.0 -55.8 -57.5 -58.9
1.50% -49.8 -52.1 -54.1 -55.9 -57.5
2.00% -47.5 -50.0 -52.2 -54.2 -56.0
2.50% -44.9 -47.7 -50.2 -52.3 -54.3
3.00% -42.0 -45.2 -47.9 -50.3 -52.5
Meridiana fly - Financial Statements at 31 October 2012 - 176
The above sensitivity analyses show a significant variation of the "value in use" to changes in the WACC and g. In this regard it
should therefore be noted that the adoption of different levels of these parameters would result in the recognition of additional asset
write-downs and further needs for capital support by Meridiana S.p.A. and AKFED.
Please refer to Section 2.23 above Ref 2 for a discussion on the risks related to the impairment evaluation process, given the
conditions in which the Company and the Group are currently operating.
"Concessions, licenses, trademarks and similar rights" amounted to Euro 509 compared to Euro 660 thousand in the 2011 financial
statements. They include the value of the Company brand, the costs incurred for the use of software licenses, the
implementation/upgrade of the website platform and the acquisition of software.
"Start-up and expansion costs", amounting to Euro 13 thousand, mainly include the net residual costs of pilots training; these costs
are guaranteed by surety in favour of Meridiana fly in the event of staff leaving in the three years following the training.
"Other intangible assets" amounting to Euro 142 thousand, are related to the residual net value of the ancillary charges incurred for
new aircraft of the A320 and A330 type, acquired through operating leases; they recorded a decrease resulting from the early
surrender of a number of aircraft.
Ref 2 Fleet
The net book value of the fleet at 31 October 2012 amounted to Euro 29,091 thousand (Euro 28,292 thousand at 31 December
2011). The additional capital expenditure for the period for major maintenance and purchases of rotable material amounted to Euro
6,140 thousand, while depreciation amounted to Euro 5,340 thousands.
As part of the impairment test carried out in relation to the CGU Meridiana fly, the value of the fleet was included in its carrying
amount, and therefore, on the basis of our previous discussion on the criteria used in the identification of the CGU, we consider that
the conclusions reached confirm the amount at which the aircraft were recognised, based on the impairment test performed on the
CGU Meridiana fly as a whole.
Ref 3 Other property, plant and equipment
"Other property, plant and equipment" amounted to Euro 9,756 thousand, decreasing by Euro 2,827 thousand compared to the data at 31
December 2011, amounting to Euro 12,583 thousand. Capital expenditure during the year amounted to Euro 421 thousand, while
depreciation was Euro 3,248 thousand.
This item includes:
- Land, buildings and works on third party property (Euro 5,716 thousand). This item relates to a large extent to the office
building in Via Ettore Bugatti 15, Milan, to which a total mortgage of Euro 10,000 thousand is attached in the lending bank’s
favour. The recoverability of the carrying value of the property has been verified by the Directors with reference to its market
value on the basis of an estimate of the fair value, net of selling costs, already made in previous years and still considered
valid, given the demonstrated use of the property which is, albeit partially, leased to third parties, with related revenue
recognized in the income statement in 2012 for a total of Euro 231 thousand.
- "Equipment on leased aircraft" (Euro 1,849 thousand), which refer to the net value of improvements made to the fleet under
operating lease, and the net value of provisions for maintenance for aircraft reconditioning and phase out, which are
capitalised and systematically depreciated . The decrease compared to 2011 (when they amounted to Euro 3,944
thousand) is linked to the agreements for the early surrender of aircraft under operating lease which, to a large extent, took
place in January 2013.
- "Plant and Machinery" (Euro 542 thousand), which consist mainly of specific systems (heating, cooling, electrical) on third-
party assets. They decreased by Euro 136 thousand compared to 2011 as a result of the depreciation for the period.
- "Industrial equipment" (Euro 863 thousand, down by Euro 183 thousand from 2011 as a result of depreciation for the
period), which mainly relate to operational equipment (especially catering equipment) in use at the Company's bases and
aircraft and flight simulators used for training.
Meridiana fly - Financial Statements at 31 October 2012 - 177
- "Other assets" (Euro 786 thousand, down by Euro 245 thousand from 2011), include the net book value of electronic
equipment as well as the net residual value of furniture, furnishings, vehicles and other property in use.
Below is a statement of the changes in intangible and tangible assets between 31 December 2011 and 31 October 2012.
Meridiana fly - Financial Statements at 31 October 2012 - 178
Summary of changes in tangible and intangible assets
(€/000)
Assets 31.12 31.10 31.12 31.10 31.12 Write-Down 31.10 31.12 31.10
Intangible 2011 2012 2011 2012 2011 Write-ups 2012 2011 2012
Goodwill 56,371 - - 56,371 - - - - - (28,187) (28,187) 56,371 28,184
Start-up and expansion costs 5,505 - - 5,505 (5,484) (8) - (5,492) - - - 21 13
Development costs 464 - - 464 (464) - - (464) - - - - -
Concessions, licenses, trademarks and similar rights 7,723 158 - 7,881 (7,063) (309) - (7,372) - - - 660 509
Other intangible assets 1,694 - - 1,694 (1,180) (372) - (1,552) - - - 514 142
Total 71,757 158 - 71,915 (14,191) (689) - (14,880) - (28,187) (28,187) 57,566 28,848
(€/000)
Fleet 31.12 31.10 31.12 31.10 31.12 Write-Down 31.10 31.12 31.10
2011 2012 2011 2012 2011 Write-ups 2012 2011 2012
Aircraft 211,480 51 - 211,531 (178,662) (1,593) - (180,255) (24,810) - (24,810) 8,008 6,466
Maintenance 37,645 5,410 - 43,055 (23,519) (2,297) - (25,816) - - - 14,126 17,239
Rotable material 39,112 679 (27) 39,764 (32,381) (1,450) 26 (33,805) (573) - (573) 6,158 5,386
Total 288,237 6,140 (27) 294,350 (234,562) (5,340) 26 (239,876) (25,383) - (25,383) 28,292 29,091
(€/000)
Other property, plant 31.12 31.10 31.12 31.10 31.12 Write-Down 31.10 31.12 31.10
and equipment 2011 2012 2011 2012 2011 Write-ups 2012 2011 2012
Equipment on leased aircraft 37,715 229 (2,182) 35,762 (33,771) (2,324) 2,182 (33,913) - - - 3,944 1,849
Land, buildings and works on leased property 9,930 - - 9,930 (3,191) (168) - (3,359) (855) - (855) 5,884 5,716
Plant and machinery 2,649 - - 2,649 (1,971) (136) - (2,107) - - - 678 542
Equipment 8,221 2 - 8,223 (7,175) (185) - (7,360) - - - 1,046 863
Other assets 13,932 190 (28) 14,094 (12,901) (435) 28 (13,308) - - - 1,031 786
Assets under construction - - - - - - - - - - - - -
Total 72,447 421 (2,210) 70,658 (59,009) (3,248) 2,210 (60,047) (855) - (855) 12,583 9,756
Historical cost Depreciation and amortization Write-down/Write-up Net book value
Increases Decreases Increases Decreases
Historical cost Depreciation and amortization Write-down/Write-up Net book value
Increases Decreases Increases Decreases
Historical cost Depreciation and amortization Write-down/Write-up Net book value
Increases Decreases Increases Decreases
Meridiana fly - Financial Statements at 31 October 2012 - 179
Ref 4 Deferred tax assets
This item amounted to Euro 400 thousand, decreasing by Euro 7,816 thousand compared to the corresponding item in the financial
statements at 31 December 2011, which amounted to Euro 8,216 thousand .
On the basis of the Business Plan, a significant amount was written-down from deferred tax assets for IRES purposes. In particular,
this write-down was recognized on the basis of the expected taxable incomes resulting from the Business Plan. In particular, the
prediction of lower taxable income during the Plan period and the high exposure of forecasted data to fluctuations of scenario
variables beyond the control of the Company are such that the achievement of taxable income is no longer likely; such likelihood, on
the other hand, constitutes an essential condition for the continued recognition of deferred tax assets recorded in previous years,
except for the amount of Euro 400 thousand to a large extent related to the IRAP share of temporary differences that are expected to
reverse in fiscal years in which the Company expects to achieve taxable income at least for IRAP purposes.
The changes in deferred tax assets in FY 2012 are summarised in the table below.
Reclassific
ation
€ '000
Deferred tax assets IRES (corporate tax)
Provisions for liabilities and charges 1,000 27.5% 275 -1,000 -275 0 0 -275 0 0 0 27.5% 0
Provision for doubtful receivables 0 27.5% 0 0 0 0 0 0 0 0 0 27.5% 0
Entertainment expenses and gifts 0 27.5% 0 0 0 0 0 0 0 0 0 27.5% 0
Trademark amortisation 56 27.5% 15 -33 -9 178 49 49 0 -9 200 27.5% 55
Unrealised foreign exchange gains and losses 0 27.5% 0 0 0 0 0 0 0 0 0 27.5% 0
Costs for capital increases (deducted from equity) 315 27.5% 87 -315 -87 0 0 0 -87 0 0 27.5% 0
Tax losses carries forward 26,356 27.5% 7,248 -26,356 -7,248 0 0 -7,248 0 0 0 27.5% 0
Other employee benefits 0 27.5% 0 0 0 0 0 0 0 0 0 27.5% 0
Depreciation repairable material not deducted 0 27.5% 0 0 0 0 0 0 0 0 0 27.5% 0
Total Deferred tax assets IRES (corporate
tax) 27,727 7,625 -27,705 -7,619 178 49 -7,474 -87 -9 200 55
Deferred tax assets IRAP (regional business tax)
Provisions for liabilities and charges 13,639 3.90% 532 -6,257 -244 0 0 -244 -244 7,381 3.90% 288
Write-down of Assets 855 3.90% 33 0 0 0 0 0 0 855 3.90% 33
Writ-down of inventory 57 3.90% 2 0 0 0 0 0 0 57 3.90% 2
Entertainment expenses and gifts 0 3.90% 0 0 0 0 0 0 0 0 3.90% 0
Trademark amortisation 178 3.90% 7 -107 -4 56 2 2 58 -4 127 3.90% 5
Listing costs (deducted from equity -IAS ) 0 3.90% 0 0 0 0 0 0 0 3.90% 0
Depreciation of repairable material not deducted 425 3.90% 17 0 0 0 0 0 0 425 3.90% 17
Total Deferred tax assets IRAP (Regional
Business Tax) 15,154 591 -6,365 -248 56 2 -242 -186 -4 8,845 345
Total 8,216 -7,867 51 -7,716 -273 -13 400
RateDeferred
tax assets
Amounts at 31.12.2011 Decreases Increases Amounts at 31.10.2012
Temporary
DifferencesRate
Deferred
tax assets Taxable Tax Taxable Tax
Changes in
the Income
Statement
Changes in
in
shareholder
s' equity
Temporary
Differences
The residual deferred tax assets primarily refer to IRAP for which the expected recovery in the coming years are sufficiently certain
in view of the historical and prospective future taxable income for the purposes of this tax.
Please refer to section 9.1 "Accounting standards and criteria" for a discussion on the effects on the measurement of deferred tax
assets, resulting from a failure to realize the future taxable income envisaged in the Plan.
It should be noted that the total amount of tax losses carried forward in future years included for IRES purposes amounted to
approximately Euro 195.9 million (excluding the loss in the current period to be determined in the next income tax return).
Ref 5 Equity investments
Inventories amounted to Euro 15,948 thousand against Euro 90,612 thousand at 31 December 2011, as per following table.
Meridiana fly - Financial Statements at 31 October 2012 - 180
31.10 31.12
2012 2011
Air Italy S.p.A. 14,761 86,901 (72,140)
Same Italy S.r.l. in liquidation 447 447 -
Wokita S.r.l. 8 1,286 (1,278)
Tot Investments in subsidiaries 15,216 88,634 (73,418)
Meridiana Maintenance S.p.A. 722 1,968 (1,246)
Meridiana express S.r.l. 10 10 -
Total investments in other companies 732 1,978 (1,246)
Total 15,948 90,612 (74,664)
€/000Change
This item had the following changes:
Net value adjustment of the investment in Air Italy Holding S.r.l. for Euro 75,490 thousand (inclusive also of the loss related to capital
contributions made during the year) as a result of impairment test carried out with the support of an expert appointed for the purpose,
on the basis of the requirements set forth by accounting standards and, in particular, IAS 36. In order to test for impairment the
carrying amount of the investment in the subsidiary Air Italy Holding S.r.l., the carrying amount included in addition to the value
recognized as investment before the impairment, equal to Euro 90,251 thousand, also the trade and financial receivables of the
Company vis-à-vis Air Italy Holding S.r.l. and the indirect subsidiary Air Italy S.p.A., for a total amount of receivables of Euro 17,159
thousand. The carrying amount so determined thus amounted - before impairment - to Euro 107,410 thousand.
The main assumptions used for the calculation of value in use and adopted by the expert, concerned the estimated cash flows of the
CGU during the period used for the calculation, the weighted average cost of capital and the rate of growth.
As described in the previous paragraph 2.24.13, on 26 February 2013, the Board of Directors approved the 2013-2017 Business
Plan. Based on this plan - also prepared on a stand-alone basis at the level of the subsidiary Air Italy Holding / Air Italy S.p.A. - the
appointed expert estimated the equity value of the investment using the Discounted Cash Flow (DCF) method, i.e. the discounting of
future positive and negative operating cash flows generated by the subsidiary until the end of its useful life, less the subsidiary's
financial position as at 31 October 2012 (Euro 52.5 million). The net operating cash flows estimated for this purpose were derived
from the above mentioned Business Plan according to the generally used "unlevered" approach, according to which cash flows are
calculated regardless of the company financial structure by subtracting the CGU net debt at the valuation date from the present
value of the cash flows.
The weighted average cost of capital used to discount the operating cash flows of the explicit period and to calculate the Residual
Value was determined at 13.3% (11.87% at 31 December 2011), based on the same parameters described in section 4.6 Ref.1
Intangible assets of the notes to the consolidated financial statements.
With reference to the rate g used to calculate the Terminal Value, the expert factored in a recovery in demand in the long term, also
based on the forecasts provided by third-party sources about these trends, also specifically considered with reference to the market
in which the Group operates. Based on these considerations and information, the expert determined a growth rate g equal to 2%.
With regard to the cash flow for the periods after the explicit period (residual value), the cash flows were determined by forecasting
an unlimited capitalization of normalized (sustainable) operating cash flows calculated based on the expected cash flow for the last
year of the explicit forecast period (2017). In this regard it should be noted that the expert decided to use the cash flow of the last
year of the explicit period as it was deemed representative of the company's ability to maintain such cash flow over time.
The results obtained from the application of this methodology for the analysed entity are shown in the following table.
Thousands of Euro 31 October 2012
- Present value of cash flows 14,188.00
- Discounted terminal value 70,208.50
Meridiana fly - Financial Statements at 31 October 2012 - 181
- Enterprise Value 84,396.50
- Net financial position -52,476.00
- Value in use (Equity Value) 31,920.50
In light of the above findings a permanent loss arose in the carrying amount of the investment in Air Italy Holding S.r.l., determined
as follows:
Investment in Air Italy Holding
carrying amount 107,410.00 Value in use (Equity Value) 31,920.50 Impairment 75,489.50
In light of these considerations, the expert carried out a sensitivity analysis to verify the change in the value of the investment in Air
Italy Holding economic capital to changes in the discount rate (weighted average cost of capital, WACC) and the growth rate (g):
EUR/M
WACC
12.30% 12.80% 13.30% 13.80% 14.30%
G
row
th R
ate
1.00% 35.2 30.2 25.6 21.4 17.5
1.50% 38.9 33.5 28.6 24.1 20.0
2.00% 43.0 37.2 31.9 27.1 22.7
2.50% 47.6 41.2 35.5 30.3 25.6
3.00% 52.6 45.7 39.5 33.9 28.8
The above sensitivity analyses show a significant variation of the "value in use" to changes in the WACC and g. In this regard it
should therefore be noted that the adoption of different levels of these parameters would result in the recognition of additional asset
write-downs and further needs for capital support by Meridiana S.p.A. and AKFED.
Please refer to Section 2.23 above Ref 2 for a discussion on the risks related to the impairment evaluation process, given the
conditions in which the Company and the Group are currently operating.
Value adjustment of the investment in Meridiana Maintenance for Euro 1,246 thousand to take account of the estimated fair value of
the investment based on an appraisal conducted in May 2012 by an expert appointed by the directors of Meridiana Maintenance
parent company (i.e. Meridiana S.p.A.).
Value adjustment for impairment of the investment in Wokita S.r.l. for a total of Euro 1,529 thousand (inclusive of capital
contributions made during the year) as a result of write-down and alignment to the shareholders' equity. As specified in paragraph
2.9 of the Management Report, in the 10 months of 2012 Wokita recorded total sales of approximately Euro 0.5 million and a net
loss of Euro 79 thousand.
The weak performance achieved derives from strong competition in the outgoing tourism market, adversely affected by the general
stagnation in consumption and the general crisis, with reduced margins for the various operators.
In order to cope with this negative scenario, the Group decided to strategically review the business model of the subsidiary Wokita
refocusing its activity towards the role of incoming tour operator focused on the Sardinia market and targeting customers in Northern
Europe, Scandinavia and the Baltic countries, with a view to developing low season businesses and countering the typical
seasonality of the Sardinia market.
Meridiana fly - Financial Statements at 31 October 2012 - 182
The definition of this strategy, despite having already been outlined it its main aspects, is still ongoing also requiring certain
preliminary actions and more detailed feasibility studies in the commercial area. Therefore the business model review process is still
being defined and implemented, as well as the consequent business plan. In the light of this situation, the value of the investment
was aligned to the corresponding shareholders' equity.
The financial performance of the subsidiaries is illustrated in the previous section 2.9, to which the reader should refer for more details. Ref 6 Other non-current assets
"Other non-current assets" amounted to Euro 13,573 thousand compared to Euro 17,420 thousand at 31 December 2011, down by
Euro 3,847 thousand as a result of refunds, adjustments and write-offs of security deposits agreed with Aircraft lessors following the
early surrender of aircraft.
They mainly consist of security deposits to aircraft lessors and other security deposits to other suppliers (Euro 8,953 thousand), as
well as the restricted deposit at Intesa Sanpaolo S.p.A. for the issuance of guarantees in favour of aircraft lessors (2,541 thousand)
and other non-current trade receivables for credit extended to customers (Euro 2,079 thousand).
Current assets
Current assets at 31 October 2012 amounted to Euro 146,746 thousand, down by Euro 23,312 thousand compared to Euro 123,434
thousand at 31 December 2011.
Ref 7 Inventories
Inventories amounted to Euro 621 thousand (Euro 730 thousand at 31 December 2011). Inventories are made up of catering and
office supplies.
These inventories are physically located at a number of warehouses directly managed by the Group (Olbia airport) and other
operational sites (e.g. with the affiliate Geasar and third party warehouses).
Ref 8 Trade receivables and other current assets
"Trade receivables and other current assets" amounted to Euro130,840 thousand, up by Euro 15,652 from Euro 115,189 thousand
at 31 December 2011. The changes are shown in the table below.
31.10 31.12
2012 2011
Trade receivables 85,274 82,290 2,984
Provision for doubtful receivables (17,113) (14,332) (2,781)
Total trade receivables 68,161 67,958 203
Contributions receivable for territorial continuity 24,287 18,469 5,818
Receivable for solidarity contracts - 8,303 (8,303)
Receivable for CO2 allowances 372 - 372
Receivables for advances given under temporary redundancy procedure (CIGS) 18,742 3,051 15,691
Accrued income and prepaid expenses 4,812 9,901 (5,089)
Advances to suppliers 5,707 5,077 630
Current portion of AIRBUS receivable - 328 (328)
Other current assets 9,841 3,185 6,656
Provision for doubtful receivables -other debtors (1,082) (1,083) 1
Total current assets 62,679 47,231 15,448
Total trade receivables and other current assets 130,840 115,189 15,651
€/000Change
Trade receivables consist primarily of receivables from tour operators, private clients, airlines and agencies. They are adjusted by
the provision for doubtful receivables; the table below shows the changes in this item starting from the financial statements at 31
December 2011:
Meridiana fly - Financial Statements at 31 October 2012 - 183
€/000
31.12.2011 Provisions Utilisations
Foreign
exchange
adjustments
31.10.2012
Provision for doubtful trade receivables (14,332) (3,800) 1,024 (5) (17,113)
Provision for doubtful receivables -other debtors (1,083) - 1 - (1,082)
Provision for doubtful receivables (15,415) (3,800) 1,025 (5) (18,195)
"Trade receivables" include amounts due from related parties which are described in detail in Section 9.11- Related Party
Transactions.
Given pending litigation - with particular reference to the most significant disputes - the Directors considered that the allocations to
the provision for doubtful receivables reflected in these separate financial statements are appropriate and adequate to represent the
risk of write-off of receivables due from counterparties. (See also Section 2.15).
It should be noted, however, that guarantees were issued by commercial partners in favour of Meridiana fly Group made up of
security deposits (Euro 719 thousand) and sureties (Euro 4,156 thousand) for the fulfilment of contractual obligations on sales
activities.
The item "Receivables for solidarity contract" represented the residual receivables from public social security institutions in
accordance with the procedure laid down in Meridiana fly solidarity contracts whose benefits expired in September 2010; the item
went down to zero during the period as a result of payments received (Euro 7,280 thousand) and the recognition of a non-recurring
loss (Euro 674 thousand) for the final determination of the amount of these claims with the relevant Institutions.
"Receivables for Temporary Redundancy (CIGS) Advances" for Euro 18,472 thousand refer to amounts advanced on a monthly
basis to employees under the temporary redundancy arrangement (CIGS both "zero hours" and "rotation") following the
reorganization procedure initiated in September 2011 by the parent Meridiana fly, for which reimbursement is due from INPS and the
Special Aviation Fund. In the first ten months of 2012 receivables from INPS were offset on the DM10 form for Euro 1,444 thousand
after specific INPS authorization . With regard to the Special Fund pursuant to Law 291/04, in the ten months of 2012 the Company
received payments for Euro 3,877 thousand against the advance payment made to employees under the CIGS procedure. After the
closing date of 31 October 2012, additional receivables from INPS were offset on the DM10 form for Euro 3,510 thousand and Euro
13,691 thousand were received by the Special Fund pursuant to Law 291/04 against the advance payments made to employees
under the CIGS procedure.
"Receivables for territorial continuity contributions" of Euro 24,287 thousand relate to receivables from the National Civil Aviation
Authority and the Autonomous Region of Sardinia for contributions for territorial continuity with Sardinia and Sicily, due for the
periods from 2007 to 31 October 2012. In the first ten months of 2012, Euro 4,420 thousand were collected from the Civil Aviation
Authority as partial to repayment of the amounts due in relation to the territorial continuity regime with Sardinia and Sicily for various
periods between 2007 and 2009. With regard to the receivables from the Civil Aviation Authority it should be noted that after the end
of the financial year, approximately Euro 8.6 million were collected.
"Accrued income and prepaid expenses" amounted to Euro 4,812 thousand (Euro 9,901 thousand at 31 December 2011) and mainly
relate to prepaid operating costs such as aircraft rental, maintenance, insurance, software rental and marketing costs for the portion
pertaining to future years.
The "Current portion of Airbus receivable" (Euro 328 thousand at 31 December 2011), which related to short-term receivables for the
purchase of aviation goods and services by Airbus, went down to zero during the period.
The item "Other current assets", amounting to Euro 9,841 thousand mainly includes receivables from the parent Meridiana S.p.A.
from the sale of tax losses under the "fiscal consolidation regime" (Euro 3.3 million), income tax receivables (Euro 0.8 million),
receivables from intermediaries for sales with credit cards (Euro 1.1 million), receivables from employees for various advances (Euro
0.6 million) and other miscellaneous receivables.
Meridiana fly - Financial Statements at 31 October 2012 - 184
Ref 9 Current financial assets
"Current financial assets" amounted to Euro 10,129 thousand compared to Euro 5,115 thousand at 31 December 2011.
They refer to security deposits to aircraft lessors reclassified as current assets to reflect the surrender of aircraft in the short term
(Euro 1,501 thousand), the loan to Meridiana S.p.A. with repayment due in 2013 and payment of interest at market rates (Euro 4,005
thousand) and short-term loans made to the subsidiaries Air Italy Holding / Air Italy (Euro 4,623 thousand).
Ref 10 Cash and cash equivalents
Cash and cash equivalents at 31 October 2012 amounted to Euro 5,156 thousand compared to Euro 2,401 thousand at 31
December 2011. At the end of October, Euro 1,155 thousand on bank current accounts were subject to seizure for actions brought
by third parties in relation to legal disputes.
Ref 11 Shareholders' Equity
At 31 October 2012 Meridiana fly S.p.A. share capital was fully paid up and amounted to Euro 46,100,833.59, represented by
106,374,003 ordinary shares, with no par value.
The Company's shareholders equity was a negative Euro 104,474 thousand which caused the Company to fall within the case
provided under Article 2447 of the Italian Civil Code (reduction of the share capital below the legal minimum).
In this regard, the Board of Directors on 26 February 2013 decided to authorize the President of the Board of Directors and the Chief
Executive Officer, acting severally, to convene the extraordinary Shareholders' Meeting on 29 April 2013 for the adoption of the
measures referred to in the mentioned article 2447 of the Italian Civil Code.
The changes in Shareholders' equity in FY 2012 reflected the payments for the capital increase (Euro 17,529 thousand), net of the
expenses directly related to this transaction (Euro 1,625 thousand), the operating loss for the period of Euro 190,434 thousand, as
well as actuarial gains arising from the application of IAS 19 to employee termination benefits (TFR) and similar items (Euro 664
thousand).
For additional details on shareholders' equity, please refer to section 9.6 - Analysis of changes in equity.
Non-current liabilities
Non-current liabilities at 31 October 2012 amounted to Euro 88,448 thousand, up by Euro 46,444 thousand compared to the value
recorded at 31 December 2011 (Euro 42,005 thousand).
Ref 12 Long-term borrowings
"Long-term borrowings", amounting to Euro 69,712 thousand (compared to Euro 11,972 thousand at 31 December 2011), are
detailed in the following table.
31.10 31.12
2012 2011
Mortgage loan 337 956 (619)
Loans from Meridiana S.p.A. 69,375 11,016 58,359
Total long-term borrowings 69,712 11,972 57,740
€/000Change
The mortgage loan taken out in 2003 with Banca Profilo decreased by Euro 619 thousand as a result of the repayment of the half-
yearly instalments of the mortgage in January and July 2012. This loan is secured by a mortgage on the property in Milan, Via
Bugatti, for Euro 10 million.
The plan for the repayment of the mortgage is shown in the following table.
Meridiana fly - Financial Statements at 31 October 2012 - 185
Repayment of principal per year € / 000
2011
2013 634
2014 337
Total 971
The "long-term borrowings" include the non-current payable to Meridiana S.p.A. for an interest bearing loan expiring in 36 months for
a total of Euro 69,375 thousand ( Euro 57.5 million for the first ten months of 2012, plus accrued interest) .
It should be noted that a portion of the interest-bearing loan from Meridiana for Euro 12,500 thousand disbursed during the year was
used for Euro 10,000 thousand on 30 June 2012 for the partial subscription of the capital increase in accordance with the minimum
underwriting commitments undertaken by Meridiana (see Section 2.13.4)
The Company has no borrowings exceeding 5 years.
Ref 13 Trade payables and other non-current liabilities
This item, which amounted to Euro 2,425 thousand at the end of 2011, had a zero balance at 31 October 2012.
It referred to the portion of payable maturing over 12 months due to the former Air Italy Holding shareholders by way of Earn-out on
the purchase price, recognized pursuant to the terms established by the agreements for the business combination with Air Italy; after
the agreements of 15 January 2013, this amount was considered as a current liability at 31 October 2012.
14 ref-provisions for post-employment benefits (TFR) and other defined benefit plans
This item amounted to Euro 12,662 thousand, recording a decrease of Euro 281 thousand compared to the figure at 31 December
2011 The breakdown is as follows:
31.10 31.12
2012 2011
Post-employment benefits provision 11,888 11,267 621
Provision for subsidised tickets 774 1,676 (902)
Total 12,662 12,943 (281)
€/000Change
This item comprises the "post-employment benefit provision" (TFR) for the termination of employment contracts, and the "subsidised
tickets provision" on the routes operated by the Company granted to retired former employees of Meridiana (and their spouses) with
at least ten years of service and having retired while employed by the Company.
Both of these liabilities are considered "defined-benefit plans" and therefore are determined at year-end by using actuarial methods
in accordance with the provisions of IAS 19.
The assessment of the post-employment benefit provision, in accordance with IAS 19, resulted in a liability at 31 October 2012 of €
11,888 thousand.
This assessment was made taking into account the rules on post-employment benefit provision established by Law no. 296 of 27
December 2006.
The table shows the changes, during the year, in the "post-employment benefit provision" in comparison with the 2011 financial
statements.
Meridiana fly - Financial Statements at 31 October 2012 - 186
€/000 2012 2011
Net liability at 1 January 11,267 11,777
Other adjustments to initial provision - -
Current cost for the year - -
Net interest expense (income) 432 471
Actuarial (Gains) losses 212 (301)
Cost for the year 644 170
(services paid) (23) (680)
Net final liability 11,888 11,267
The table below shows the changes in the "subsidised tickets provision" occurred during the year:
€/000 2012 2011
Net liability at 1 January 1,676 1,488
Current cost for the year 45 27
Net interest expense (income) 65 63
Actuarial (Gains) losses (963) 208
(services paid) (49) (110)
Net final liability 774 1,676
For both the liabilities mentioned above, actuarial net losses were recognized in the comprehensive income statement for an amount
of Euro 751 thousand before tax.
The main assumptions underlying the actuarial calculations were the following:
- technical demographic basis according to statistical tables by independent sources, split by sex;
- probability of advance payment request of the post-employment benefit at a rate of approximately 4-5% for a maximum of
70% of the benefits accrued;
- retirement age as provided for by the most current legislation;
- for employees in temporary redundancy (CIGS), annual probability of payment of the provision due to turnover equal to
20% for employees at least 55 years old and 10% for the others;
- discount rate to calculate present value of 2.89% per annum;
- average annual inflation rate of 2%
- salary growth rate around 1.8% per annum;
- with respect to subsidised tickets, reduction of the propensity to fly at an elderly age, with an annual 3% reduction of the
cost up to the age of 80
Ref 15 Provisions for non-current liabilities and charges
Provisions for non-current liabilities and charges amounted to Euro 5,547 thousand (Euro 10,628 at 31 December 2011 ), down by
Euro 5,081 thousand compared to figures at 31 December 2011.
They consist of the maintenance provision for the reconditioning ( phase-out) of Airbus aircraft under operating lease and the
reorganization provisions for INPS contributions to be paid by the company for the temporary redundancy procedure (CIGS) started
in September 2011.
The changes in this item, based on opening balances from the separate financial statements as at 31 December 2011, are shown in
the table below.
Meridiana fly - Financial Statements at 31 October 2012 - 187
€/00031.12.2011 Provisions Utilisations Change in scope Other changes 31.10.2012
Reconditioning provision for leased Airbus 9,034 - - - (4,776) 4,258
Provision for restructuring 1,594 - - - (305) 1,289
Tax provision - - - -
Total non-current provisions for liabilities
and charges
10,628 - - - (5,081) 5,547
The other changes of Euro 5,081 thousand refer to the reclassification to "current" provisions for liabilities and charges of the
provisions set aside for the phase-out of aircraft under operating lease and the amounts due to INPS for use of the temporary
redundancy fund (CIGS).
Ref 16 Deferred tax liabilities
Deferred tax liabilities amounted to Euro 527 thousand, decreasing by Euro 2,433 thousand compared to the corresponding item at
31 December 2011, amounting to Euro 2,961 thousand.
More specifically, these are mainly deferred tax liabilities relating to negative temporary differences associated primarily with the
mismatch between the carrying amounts and the corresponding tax base of the owned MD-82 fleet and the adjustment of the post-
employment benefit provision (TFR) in accordance with IAS 19.
The changes in deferred tax liabilities are summarised in the table below.
Reclassific
ation
€ '000
Deferred tax liabilities IRES (corporate tax)
post-employment benefit (TFR) 719 27.5% 198 0 0 0 0 0 0 719 27.5% 198
Write-up of assets -no tax effect 9,342 27.5% 2,569 -9,342 -2,569 0 0 -2,569 0 0 0 27.5% 0
Write-down of assets - no tax effect -564 27.5% -155 564 155 0 0 155 0 0 0 27.5% 0
Reversal of previously deducted FTA funds 0 27.5% 0 0 0 0 0 0 0 0 0 27.5% 0
Investments in subsidiaries at fair value 0 27.5% 0 0 0 0 0 0 0 0 0 27.5% 0
Effect of IAS 17 9 27.5% 3 -9 -3 0 0 -3 0 0 0 27.5% 0
Assets and liabilities in foreign currency 0 27.5% 0 0 0 0 0 0 0 0 0 27.5% 0
Total Deferred taxes IRES (corporate tax) 9,506 2,614 -8,788 -2,417 0 0 -2,417 0 0 719 198
Deferred tax liabilities IRAP (regional business tax)
Write-up of assets -no tax effect 9,446 0 368 -431 -17 0 0 -17 9,015 0 352
Write-down of assets - no tax effect -564 0 -22 0 0 0 0 0 -564 0 -22
Total Deferred taxes IRAP (Regional
Business Tax) 8,882 346 -431 -17 0 0 -17 0 0 8,451 330
Total 2,961 -9,218 -2,433 0 0 -2,433 0 0 9,170 0 527
RateDeferred
Taxes
Amounts at 31.12.2011 Decreases Increases Amounts at 31.10.2012
Temporary
DifferencesRate
Deferred
TaxesTaxable Tax Taxable Tax
Changes in
the Income
Statement
Changes in
in
shareholder
s' equity
Temporary
Differences
Current liabilities
Current liabilities at 31 October 2012 amounted to Euro 260,390 thousand, up by Euro 33,663 thousand compared to 31 December
2011 (Euro 226,727 thousand).
Ref 17 Short-term borrowings
Short-term borrowings at 31 October 2012 amounted to Euro 7,666 thousand decreasing from the Euro 8,874 at 31 December 2011.
This item includes a cash stand-by revolving credit line granted by a syndicate of banks and subject to financial covenants, which is
currently being renegotiated along with other banking relationships, as described in the Management Report .
The loan in question is measured using the amortized cost method to take into account the costs associated with the negotiation and
signing of the above Agreement.
Ref 18 Current portion of long-term borrowings
Meridiana fly - Financial Statements at 31 October 2012 - 188
The current portion of long-term borrowings amounted to Euro 15,464 thousand, up by Euro 221 thousand compared to the figure at
31 December 2011.
This item includes (i) the current portion of the mortgage loan with Banca Profilo for Euro 634 thousand, (ii) the bank syndicated loan
with maturity 36 months amounting to Euro 14,830 thousand (net of expenses recorded at amortized cost) with an original maturity
at December 2013 recognised as current portion, in accordance with IAS 1 par.65 for failure to comply with the financial covenants
at year-end 2011 and at September 30, 2012 with extension of all loans to 28 February 2013 in accordance with the agreements
entered into with banks during the year.
Ref 19 Provisions for current liabilities and charges
The "Provisions for current liabilities and charges" amounted to Euro 22,553 thousand, decreasing by Euro 18 thousand compared
to the figure at 31 December 2011 (Euro 22,571 thousand)
The changes are shown in the table below.
€/00031.12.2011 Provisions Utilisations Change in scope Other changes 31.10.2012
Provision for litigation 18,008 6,472 (5,962) - (312) 18,206
Provision for onerous contracts - 3,095 (2,494) 2,568 3,169
Reconditioning provision for leased Airbus 2,082 - (2,188) - 591 485
Reconditioning provision for leased MD
aircraft 1,486 - (1,312) - - 174
Provision for restructuring 468 - (254) - 305 519
Provisions for other risks 527 - - - (527) -
Total current provisions for liabilities and
charges
22,571 9,567 (12,210) - 2,625 22,553
These provisions increased for allocations made for Euro 9,567 thousand in relation to litigation and onerous aircraft lease contracts
in accordance with IAS 37; the latter, amounting to Euro 3,095 thousand, was recognized by calculating all lease costs after the
balance sheet date and up to the sale, which took place in January 2013, as operating losses were incurred in the use of the
mentioned aircraft during this period.
The other changes included the reclassification from "non-current" provisions for liabilities and charges of portions due within 12
months, the reclassification of phase-out provisions to the "onerous" aircraft lease contracts provision, as well as surplus phase-out
provisions being reversed to the income statement.
Referring to section 9.1.2 above "Accounting standards, measurement criteria and use of estimates in the preparation of financial
statements" for a discussion on the estimating nature of the process for assessing the adequacy of the provisions for liabilities and
charges and the inherent resulting uncertainties, it was considered - also based on the opinions of independent legal support - that
the provisions for liabilities and charges resulting from the financial statements at 31 October 2012 are adequate and reflect the
liabilities of the Company in accordance with IAS 37.
Ref 20 Trade payables and other current liabilities
Trade payables and other current liabilities amounted to Euro 214,341 thousand, up by Euro 36,180 thousand compared to 31
December 2011, as shown below.
Meridiana fly - Financial Statements at 31 October 2012 - 189
31.10 31.12
2012 2011
Trade payables 173,977 138,802 35,175
Payables for pre-paid/invoiced tickets and taxes 21,238 22,621 (1,383)
Due to social security institutions 1,769 3,122 (1,353)
Taxes payable 2,971 1,931 1,040
Payables to former Air Italy Holding shareholders for Earn-out 3,764 750 3,014
Liability for Security deposits 719 567 152
Accrued liabilities and deferred income 411 563 (152)
Advances 1,106 - 1,106
Other payables 8,386 9,805 (1,419)
Total trade payables and other current liabilities 214,341 178,161 36,180
€/000Change
"Trade payables" include amounts due to related parties which are described in detail in Section 9.11 - Related Party Transactions.
"Payables for pre-paid/pre-invoiced tickets and taxes" refer to scheduled flights sold and cashed in still to be carried out, as well as
pre-sales of charter flights to tour operators to be carried out after the end of the 2012 financial year.
"Tax payables" refer to a large extent to amounts due for withholding taxes and VAT.
"Payables to Former Air Italy Holding shareholders for Earn-out" refer to the Earn-out payable pursuant to the agreements related to
the acquisition of Air Italy Holding and those of 15 January 2013.
"Security deposits received" are connected to the sums received as guarantee for charter activities by various Tour operators .
The item "Other payables" refers primarily to amounts due to employees for holidays not taken and additional monthly payments,
deposits received as collateral, payments due to directors and statutory auditors and other minor payables.
At 31 October 2012 the company had received enforceable injunctions for approximately Euro 0.5 million for supplies not yet paid. Ref 21 Current financial liabilities
Current financial liabilities amounted to Euro 365 thousand, as per the following table.
31.10 31.12
2012 2011
Hedging derivatives 196 192 4
Other current financial liabilities 169 1,685 (1,516)
Total current financial liabilities 365 1,877 (1,512)
€/000Change
The item consists of (i) payable for "fair value" measurement of Hedging derivatives to cover interest rate fluctuations for Euro 196
thousand, (ii) other trade payables for which payment extension has been granted against the issue of financial bills for Euro 169
thousand.
Analysis of income statement results Ref 22 Revenues from sales
Sales revenues amounted to Euro 408,655 thousand compared to Euro 540,282 thousand in the first ten months of 2011 pro forma
(Euro 599,390 thousand in the 2011 financial statements), down by Euro 131,627 thousand (-24.4%) in comparable terms.
The above-mentioned decrease in core revenues resulted from the decision to reduce operating activities following the optimization
of the integrated network and the cut in heavy loss rotations, given the economic situation characterized by extremely demand.
This item includes revenues from direct flights (line / charter), boarding fees, income from code-sharing, ACMI revenues, ancillary
revenues and other income from traffic; this item also includes the "income from prepaid tickets" arising from the estimate of income
Meridiana fly - Financial Statements at 31 October 2012 - 190
related to the non-use of tickets issued, made on the basis of evidence of non-use or non-redemption by passengers, in order
ensure full recognition of revenues in accordance with the accrual basis.
In particular, sales revenues include ACMI and ad-hoc charter revenues that allowed to partly offset the drop in demand and
optimize the use of production capacity.
Ref 23 Other revenues
"Other revenues" amounted to Euro 24,616 thousand compared to Euro 20,854 thousand in pro forma 2011, down Euro 3,762
thousand, as summarized in the following table.
Financial Year Financial Year
€/000 2012 2011 pro-forma
Operating grants 17,383 15,913 1,470
Other income from Meridiana group companies 4,352 2,528 1,824
Freight income on aircraft and rotable material - 128 (128)
Net income from CO2 allowances 372 - 372
Other income and non recurring gains 2,509 2,285 224
Total 24,616 20,854 3,762
Change
This item includes "operating grants" for Euro 17,383 thousand which consist of revenues from operations under the territorial
continuity regime in Sardinia and Sicily.
This item also includes other income from related parties for services provided to Meridiana Group companies which are analysed in
more detail in section 9.11; they amounted to Euro 4,352 thousand posting an increase mainly due to increased ACMI activity
carried out in favour of Air Italy.
Ref 24 Fuel
The cost of fuel, amounting to Euro 119,114 thousand compared to Euro 169,009 thousand in 2011 pro-forma, recorded an impact
on revenues of 29.1% (31.3% in 2011 pro-forma and 31.4% in 2011 ). It should be emphasized, however, that the average price of
Jet Fuel increased approximately 10.7% over the same period of the previous year.
Ref 25 Materials and maintenance services
The costs of materials and maintenance services amounted to Euro 62,998 thousand compared to Euro 81,662 thousand in 2011
pro-forma, down Euro 18,664 thousand in line with the reduction in activities. The impact on sales revenues stood at 15.4% against
15.1% in pro-forma 2011 (16% in 2011).
They mainly consist of the costs for ordinary maintenance operations on aircraft ("Net Aircraft Maintenance"), maintenance of
engines as well as maintenance costs periodically advanced to lessors in accordance with the contracts ("maintenance reserves"),
charges for on board “Catering" services. This item also includes other variable maintenance expenses that change according to
activity levels (e.g. flight hours / cycles).
Meridiana fly - Financial Statements at 31 October 2012 - 191
Financial Year Financial Year
€/000 2012 2011 pro-forma
Maintenance, freight and catering services from Meridiana group companies 29,870 18,617 11,253
Maintenance reserves 14,328 16,398 (2,070)
Net Aircraft Maintenance 8,045 23,285 (15,240)
Fees engines revisions and other aeronautical materials 2,496 8,299 (5,803)
Material for catering and meals 6,383 8,768 (2,385)
Freight engines and rotable materials 1,033 4,004 (2,971)
Technical assistance and breakdowns 5 - 5
Other materials and maintenance services 838 2,291 (1,453)
Total 62,998 81,662 (18,664)
Change
The cost of the catering service is any case declining due to lower activity (flight hours and number of movements) and the number
of carried passengers.
Ref 26 Operating Leases
Aircraft operating leases amounted to Euro 42,808 thousand compared to Euro 45,796 thousand in pro-forma 2011, posting a
decrease in absolute terms of Euro 2,988 thousand.
The impact on sales revenues was 10.5% compared to 8.5% in 2011 pro forma (9.1% in 2011).
Despite the smaller number of aircraft under operating lease and the renegotiation of certain lease contracts according to more
favourable terms, the appreciation of the U.S. dollar (+8.48%) had an adverse impact, a non-recurring charge was recognized by
way of penalty for early delivery of an Airbus A330 agreed with the lessor ILFC amounting to Euro 1.5 million (USD 1.95 million), in
addition to the delay in the actual delivery of another Airbus A330 being phased-out for maintenance work under the contract (impact
non included in the July-October 2012 period).
Commitments for future lease payments for the Airbus fleet, on the basis of current contract terms and conditions are shown in the
following table:
€/'000
Future minimum payments due under operating leases 40,041 75,696 3,702 119,439
Total 40,041 75,696 3,702 119,439
Over five yearsWithin 12
months
Between one and
five yearsTotal
Ref 27 Selling expenses
Selling expenses, consisting of brokerage fees and other brokerage costs on the various distribution channels, amounted to Euro
19,364 thousand compared to Euro 23,243 thousand in 2011 pro forma, down by Euro 3,879 thousand.
The impact on sales revenues was 4.7% compared to 4.3% in 2011 pro forma (approximately 4% in 2011).
Ref 28 Other operating costs and wet leases
Wet leases and operating costs amounted to Euro 158,283 thousand compared to Euro 171,407 thousand in pro-forma 2011, down
by Euro 13,124 thousand, in line with the decrease in operating activities, as per following table.
Meridiana fly - Financial Statements at 31 October 2012 - 192
Financial Year Financial Year
€/000 2012 2011 pro-forma
Handling 80,988 104,420 (23,432)
Route charges 27,679 33,149 (5,470)
Code sharing and Blocked space ( seats purchased from other carriers ) 1,232 4,381 (3,149)
Wet lease 6,452 8,319 (1,867)
Handling and wet lease from Meridiana group companies 37,508 9,850 27,658
Passenger assistance and damage reimbursement 199 587 (388)
Others 4,225 10,701 (6,476)
Total 158,283 171,407 (13,124)
Change
Their impact on sales revenues stood at 38.7% against 31.7% in pro forma 2011 (32.3% in the 2011)
Wet Lease costs are mainly linked to the acquisition of flight capacity in particular for the territorial continuity regime with Sicily.
In the period there was a significant increase (+400% of the tariff) in "terminal navigation fees" with effect 1 July 2012 applied in Italy
by ENAV (Air Traffic Control) for the control of the airspace; the tariff increase resulted in higher costs for the Company during the
period from July to October 2012 for approximately Euro 3.2 million.
Ref 29 Other operating costs and other services
"Other operating costs and other services" amounted to Euro 25,526 thousand compared to Euro 21,602 thousand in pro-forma
2011; their percentage weight on revenue was 6.2% compared to 4% in pro-forma 2011 (5.3% in 2011).
This item includes the costs for consulting and collaboration services, advertising and promotion, insurance, utilities, leases, other
rentals, data processing services and IT support and various other services as well as various non-recurring losses.
They include, however, the non-recurring cost for the settlement of the dispute with the maintenance provider SRT for Euro 2.5
million.
Ref 30 Staff costs
Staff costs amounted to Euro 57,739 thousand compared to Euro 90,041 thousand in pro-forma 2011, with a significant saving of
Euro 32,302 thousand (-35.9%).
The impact on sales revenues stood at 14.1% against 16.7% in pro-forma 2011 (18% in 2011).
Staff costs include all spending recorded in the payroll staff, including merit-based pay rises, promotions, inflation-based increases,
holidays not taken, other amounts accrued as required by laws and the collective contracts.
The savings on labour costs are in particular related to the benefits from the temporary redundancy procedure (CIGS) used in 2012
(about 617 FTE employees under this procedure) and the more efficient use of personnel allowed by the new Meridiana fly labour
contract.
This item includes non-recurring reorganization costs (settlements agreements with Personnel) of approximately Euro 1.3 million and
the non-recurring loss of Euro 0.7 million for the final determination of the receivable for the implementation of solidarity contracts for
the staff expired in September 2010.
Ref 31 Depreciation and amortization
Depreciation and amortization amounted to Euro 37,464 thousand compared to Euro 10,384 thousand in pro-forma 2011; the
comparative figures for 2011 are shown in the table below.
Meridiana fly - Financial Statements at 31 October 2012 - 193
Financial Year Financial Year
€/000 2012 2011
Amortisation of intangible assets 689 640 49
Depreciation of tangible assets 8,588 11,464 (2,876)
Impairment of goodwill 28,187 - 28,187
Total amortisation, depreciation and write-downs 37,464 12,104 25,360
Change
In particular, the goodwill impairment loss resulting from the impairment test is commented on in Section 9.5 - Ref. 1 "Intangible
assets".
Ref 32 Allocation to the provision for liabilities and charges
This item amounted to Euro 7,432 thousand compared to Euro 12,180 thousand in pro forma 2011.
This item includes, among others, provisions allocated for Euro 6,481 thousand for ongoing litigation with passengers, employees,
suppliers and other counterparties on the basis of an assessment of such litigation. In addition a provision was allocated for contract
losses (aircraft lease contracts) classified as "onerous" pursuant to IAS 37, for approximately Euro 3,095 million recognized to take
into account the loss from the use of the aircraft before its surrender in January 2013, partially offset by the use of (surplus) phase-
out provisions for Euro 1.6 million, as a result of the early surrender of a number of aircraft with limited phase-out costs.
Overall, in the course of the financial year the excess risks reversed to the income statement amounted to Euro 2,144 thousand.
Ref 33 Other adjustment provisions
The item "Other adjustment provisions" amounted to Euro 3,800 thousand compared to Euro 1,984 thousand in pro forma 2011
(Euro 2,821 thousand in FY 2011).
This item includes the additional write-downs recognized on doubtful accounts based on historical experience and detailed analysis
of each doubtful position, net of surplus provisions allocated to cover receivables written off during the financial year.
The higher charge for the period was due to the deterioration in the creditworthiness of some trade counterparties (in particular Tour
Operators).
Ref 34 Net financial income (expenses)
The balance of "Net financial expenses" amounted to Euro 6,397 thousand compared to Euro 3,205 thousand in pro-forma 2011
(Euro 5,537 thousand in 2011), resulting in an increase in these costs of Euro 3,192 thousand.
The above amount is primarily the result of net foreign exchange losses (Euro 0.6 million), net interest and other financial charges
(Euro 2.3 million), various fees on sureties and bank charges (Euro 1.5 million), as well as the interest cost resulting from actuarial
valuation of post-employment benefit provisions and other benefits (Euro 0.5 million) and other minor items.
The details of this item are shown below.
Meridiana fly - Financial Statements at 31 October 2012 - 194
Financial income
Financial Year Financial Year
€/000 2012 2011 pro-forma
Bank interest income 23 53 (30)
Foreign exchange gains 1,928 4,037 (2,109)
Interest income on loans to Meridiana group companies 211 107 104
Other income 99 37 62
Total 2,261 4,234 (1,973)
Financial expense
Financial Year Financial Year
€/000 2012 2011 pro-forma
Provision to cover losses in subsidiaries 4 - 4
Interest costs, post-employment benefits and subsidized tickets 498 445 53
Interest cost on other liabilities 518 - 518
Interest expenses on bank loans 1,139 1,255 (116)
Interest expense on loan from Meridiana 859 14 845
Charges on bank current accounts 269 288 (19)
Foreign exchange losses 2,570 4,046 (1,476)
Losses on derivatives 82 203 (121)
Interest expense on mortgage 41 41 -
Bank loans waiver fee 300 188 112
Commissions on sureties 414 403 11
Commission on sureties from Meridiana 493 494 (1)
Non-recurring gains (losses) - (88) 88
Other 1,471 150 1,321
Total 8,658 7,439 1,219
Change
Change
Ref 35 Impairment of financial assets
This item, not included in 2011, amounted to Euro 80,840 thousand, and consisted of:
• write-down of the carrying amount of the investment in Air Italy Holding (Euro 75,490 thousand) as a result of the
impairment test carried out by an appointed expert, on the basis of the Business Plan of the subsidiary on a stand-alone
basis;
• write-down of security deposits (Euro 2,576 thousand) as a result of the agreements for the early surrender of 8 aircraft in
January 2013 which provide for a substantial setoff with payables and surrender charges;
• write-down of the carrying amount of the investment in Meridiana Maintenance (Euro 1,246 thousand) based on latest
available appraisal prepared in May 2012 by an expert appointed by Meridiana S.p.A.;
• write-down of the carrying amount of the investment in Wokita (Euro 1,529 thousand), inclusive of the capital contribution
made during the year for Euro 250 thousand, with alignment to its equity value; the write-down resulted from the revision of
Wokita business model, not yet implemented, and the consistently negative results delivered in recent years.
Please refer to Section 9.5 - Ref 5 "Investments" for details on the assets impairment carried out, in particular on Air Italy Holding.
Ref 36 Income taxes for the period
Taxes for the period show a balance of Euro 1,940 thousand compared to a balance of Euro 689 thousand in pro-forma 2011
(positive balance of Euro 811 thousand in 2011), consisting of:
• value adjustment for IRES purposes, of deferred tax assets (in particular those relating to tax losses), net of the deferred tax
liabilities reversed as a result of lower expected future income in the new Business Plan (net charge of Euro 5,057
thousand);
Meridiana fly - Financial Statements at 31 October 2012 - 195
• income from group tax consolidation (Euro 3,453 thousand) recognized after the payment of taxes for the year 2011 and
resulting from the sale of Meridiana fly losses; it should be noted that this benefit is not going to be repeated in future years
given that Meridiana fly is no longer part of the Meridiana Group tax consolidation;
• non-recurring losses and adjustments from previous years (Euro 111 thousand);
• reversals of net deferred tax assets/liabilities for the IRAP component (Euro 225 thousand).
.
Financial Year Financial Year
€/000 2012 2011
Current IRAP - 341 (341)
Non-recurring gains/losses on taxes from prior years 111 (116) 227
Income from tax consolidation (3,453) (62) (3,391)
IRES net deferred tax assets/liabilities 5,057 (1,117) 6,174
IRAP net deferred tax assets/liabilities 225 143 82
Total 1,940 (811) 2,751
Change
In 2012 no current taxes were allocated as a result of the loss incurred in the period.
It should be noted that, after the closing of the tax assessments on the periods 2006-2010 (see Section 2.13.11) Meridiana fly still
has significant tax losses carried forward for a total amount of approximately Euro 195.9 million (excluding tax loss expected for the
year 2012).
There are no tables related to the reconciliation between actual and theoretical tax charge as there is no actual tax charge for the
period.
9.6. Analysis of changes in shareholders' equity
At 31 October 2012 Meridiana fly S.p.A share capital amounted to Euro 46,100,833.59 and consisted of 106.374.003 ordinary
shares, with no par value; all the ordinary shares have equal rights and obligations in accordance with the Italian Civil Code.
The share capital was increased following the subscription of new shares offered through a rights issue, already commented on in
detail in Section 2.13.4 to which we refer for additional details.
The changes in shareholders' equity, in the separate financial statements during the year 2012, largely reflected the loss for the
period of Euro 190,434 thousand, as well as the cash capital contributions received from the market following the implementation of
the first phase of the rights issue for Euro 7,529 thousand, net of expenses directly related to this transaction amounting to Euro
1,625 thousand, and the recognition of an additional cash payment by Meridiana of Euro 10,000 thousand in accordance with the
commitments made (so-called "Underwriting Commitment").
In addition, "comprehensive income" includes actuarial net gains arising from the actuarial calculation of post-employment benefits
(TFR) in accordance with IAS 19 for a total of Euro 664 thousand, net of tax.
Following the capital contributions received between 2011 and 2012, there are residual reserves for future capital increases
"earmarked" for the controlling shareholders, in particular for use in the second phase of the capital increase through the exercise of
warrants by May 2013 for a total of Euro 58,063 thousand. As a result of shareholders' agreements entered into on 15 January 2013
(see Section 2.24.10), these reserves are currently earmarked solely for Meridiana S.p.A.
In view of the changes discussed above and the shareholders' resolution approving the 2011 financial statements, which has
brought forward the loss for the year of Euro 104,831 thousand, the net shareholders' equity as at 31 October 2012 was negative for
Euro 104,474 thousand and composed as follows:
Meridiana fly - Financial Statements at 31 October 2012 - 196
• Share Capital Euro 46,101 thousand;
• Share premium reserve of Euro 152,105 thousand;
• Other reserves of Euro 54,886 thousand;
• Losses carried forward for Euro 167,134 thousand;
• Operating loss of Euro 190,434 thousand.
The loss per share in 2012 was therefore Euro 1.79.
The following table shows the breakdown of shareholders' equity according to possible utilisations.
Amounts in Euro/000 Amount
Possible
uses
Available
portion
Distributable
amount Summary of uses
Nature / Description in the two previous years
to cover losses for other reasons
Share capital 46,101 B - - - -
Capital reserves
Payments for future capital increase 58,063 A 58,063 - - -
Share premium reserve 152,105 A, B, C 152,105 152,105 - -
Profit reserves:
Legal reserve - B - - - -
Statutory reserve - B, C - - - -
Other reserves (3,177) - - - -
Losses carried forward (167,133) - - - -
Total 85,959 210,168 152,105 - -
Key:
A: for capital increase
B: to cover losses
C: for distribution to shareholders
9.7. Financial and capital management
As shown in the consolidated cash flow statement, which illustrated the changes in cash and cash equivalents with the indirect
method, FY 2012 was characterized by an increase in cash, net of current bank loans (similar to bank overdrafts), for Euro 3,963
thousand.
Financial Year Financial Year
2012 2011
€/000
Net Cash and cash equivalents at the beginning of period (6,474) 4,458
Cash and cash equivalents 2,401 11,800
Current bank loans (8,874) (7,342)
Net Cash and cash equivalents at end of period (2,510) (6,474)
Cash and cash equivalents 5,156 2,401
Current bank loans (7,666) (8,874)
Meridiana fly - Financial Statements at 31 October 2012 - 197
The main changes in cash flows are analysed below.
- Cash flows absorbed by operating activities
In the financial year, operations resulted in a net negative change of Euro 55,980 thousand, which was due, in particular, to an
operating loss before taxes, which resulted in a very negative impact on cash flow despite the adjustments related to non-cash
changes such as amortisation, depreciation and write-downs and positive change in net working capital.
- Cash flows absorbed by investing activities
This area resulted in a decrease of Euro 9,020 thousand, in particular due to capital expenditure in tangible assets, while non-current
financial assets decreased also due to reimbursements and offsetting of security deposits.
- Cash flows generated from financing activities
The cash flows generated from financing activities amounted to Euro 51,434 thousand, largely arising from new loans granted by the
shareholder Meridiana S.p.A. for Euro 58,359 thousand.
- Cash flow generated from share capital transactions
Positive cash flows were generated for Euro 17,529 thousand due to payments for capital increase by the market (Euro 7,529
thousand) and the parent Meridiana (Euro 10,000 thousand) in fulfilment of the commitments made during the year.
9.8. Net financial position
The net financial position at 31 October 2012 was negative for Euro 79,423 thousand. The changes in financial debt of Euro 31,649
thousand reported in the separate financial statements at 31 December 2011 are highlighted below.
€/000 31.10.2012 31.12.2011 Change
A Cash and deposits with bank (1) 5,156 2,401 2,755
B. Derivative Instruments included in cash equivalents (1) - - -
C. Cash and cash equivalents (A) + (B) 5,156 2,401 2,755
D. Current financial receivables 8,628 3,917 4,711
E. Current Bank loans(1) (2) 7,666 8,874 (1,208)
F. Current portion of long-term borrowings 15,464 15,244 220
G. Other current financial liabilities 365 1,877 (1,512)
H. Current financial debt (E) + (F) + (G) 23,495 25,995 (2,500)
I. Net current financial debt (H) - (D) - (C) 9,711 19,677 (9,966)
J. Long-term borrowings from banks 337 956 (619)
K Bonds issued - - -
L. Other non-current financial liabilities 69,375 11,016 58,359
M Non-current financial debt (J) + (K) + (L) 69,712 11,972 57,740
N Net financial debt (I) + (M) 79,423 31,649 47,774
Reconciliation with statement of cash flow and statement of financial position:
(1) Net cash and cash equivalents (2,510) (6,473) 3,963
(2) Current borrowings from banks 7,666 8,874 (1,208)
C - Cash and cash equivalents
Meridiana fly - Financial Statements at 31 October 2012 - 198
Cash and cash equivalents at 31 October 2012 amounted to Euro 5,156 thousand and consisted of cash on hand and positive
balances on bank current accounts. At the end of October 2012, Euro 1,155 thousand on bank current accounts were subject to
seizure for actions brought by third parties in relation to legal disputes.
D - Current financial receivables
This item amounting to Euro 8,628 thousand, includes (i) the financing to Meridiana for Euro 4,005 thousand due in 2013 with
interest accruing at market rates, and (ii) interest bearing loans amounting to Euro 4,623 thousand disbursed to companies of the
Air Italy group (in particular Euro 1063 thousand to Air Italy S.p.A. and Euro 3,560 thousand to Air Italy Holding S.r.l.).
I - Current financial debt
Amounted to Euro 23,495 thousand and it consisted of: (i) Due to banks for short-term revolving loans for Euro 7,666 thousand, (ii)
current portion of non-current debt amounting to Euro 15,464 thousand, consisting of the current portion of the mortgage loan for
Euro 634 thousand and bank syndicated loan expiring in 36 months for Euro 14,830 thousand (net of expenses recognized using the
amortized cost method) originally expiring December 2013 and recognized as current portion due to non-compliance with
contractually agreed financial covenants which resulted in operation of the acceleration clause, and (iii) other current financial
payables of Euro 365 thousand, including payable of Euro 196 thousand for fair value measurement of hedges on interest rates
fluctuations (interest rate swap ) and Euro 169 thousand secured by promissory notes issued as guarantee for the rescheduling of
some trade payables.
O - Non-Current financial debt
Non-current financial debt of Euro 69,712 thousand consisting of (i) long term borrowings from banks of Euro 337, represented by
the over 12 months portion of the mortgage loan taken out with Banca Profilo for the purchase of the property located in Milan; (ii )
medium term loans disbursed by Meridiana S.p.A for overall Euro 63,975 thousand, including accrued interest.
As at 31 October 2012, the total credit lines granted by banks as cash and guarantee facilities amounted to approximately Euro 72.5
million.
9.9. Guarantees, commitments and other contingent liabilities
Sureties and other guarantees given
At 31 October 2012 the guarantees given to third parties by banks on behalf of the Group amounted to approximately Euro 38.8
million. These bank sureties mainly refer to guarantees issued in favour of Cartasì, ENAC for tender participation on the routes
under territorial continuity, aircraft lessors, oil companies, handling and airport management companies and other suppliers of
materials, operational and financial services.
At 31 October 2012, a surety issued by an insurance company in favour of the Ministry of Defence to guarantee the 2012 transport
contract of Euro 2.4 million, and a deposit pledged in favour of a bank for a total of USD 4.2 million, were outstanding.
A first mortgage of the value of Euro 10 million is recorded on the Company's property in Via Bugatti 15, Milan, in favour of Banca
Profilo as collateral for the mortgage loan granted by the bank for the purchase of the said property.
At the end of FY 2012 there are outstanding bills for a total of Euro 169 thousand as guarantee for the rescheduling of trade
payables in 2012.
Commitments and other agreements
Meridiana fly - Financial Statements at 31 October 2012 - 199
At 31 October 2012, the company had commitments for operating leases on Airbus aircraft for Euro 119.4 million, taking into account
all future contractual maturities.
The annual commitments for real estate leases amounted to approximately Euro 2.0 million.
It should also be noted that outsourcing agreements with Meridiana Maintenance for the provision of exclusive maintenance services
determine a financial commitment which varies according to the maintenance activities carried out.
Contingent liabilities
With regard to ongoing disputes and the situation concerning these proceedings, as outlined in section 2.15 - Significant litigation,
although the Company may be required to pay higher amounts than those allocated to the provision for liabilities and charges, it is
not possible to reasonably predict the outcome of the proceedings and assess the likelihood of additional charges against the
company.
9.10. Segment reporting
With reference to IFRS 8 on segment reporting, the operating segments that are deemed necessary by the management for the
purposes of assessing operating performance and make consequential decisions, are currently identified in the Company as a
whole, which is considered as a stand-alone cash generating unit (CGU).
It should be noted that, even after the completion of the acquisition of Air Italy, Meridiana fly is now a single business unit that cannot
be "split" in various CGUs; in addition, the subsidiary Air Italy is managed in a fully integrated manner with Meridiana fly and the two
companies share the management and the strategies.
In this respect, it should be noted that a distinction, for the purposes of the impairment test, between scheduled and charter
activities, between activities with and without the constraints of territorial continuity, between medium and long haul flights, would not
be consistent with the Directors' strategic vision and would be characterized by the absence of autonomy in the formulation of
competitive strategy. In addition, it should be noted that the joint management of resources (human, material and financial
resources) would make it impossible to identify autonomous cash flows attributable to the individual operating units, especially in
light of the internal organisation adopted by management for the new post-combination entity; this organisation, in fact, expressly
provides that activities carried out respond to a single central structure, which is responsible for defining management guidelines
applicable across the various business functions.
Therefore there are no production units within the aviation business carried out by the Company such as to represent independent
decisions making systems with respect to the entity and therefore to be identified in distinct reporting segments pursuant to IFRS 8.
Therefore, in these notes to the separate financial statements, there are no data or tables presented for distinct business segments
at a more detailed level than that of the entire Company.
9.11. Related party transactions
With respect to related party transactions - as defined by IAS 24 concerning financial statement disclosure on related party
transactions, adopted in accordance with the procedure referred to in Article 6 of EC Regulation 1606/2002 - carried out by the
Company, the information on transactions with related parties is provided below.
Pursuant to the provisions of Article 2391-bis of the Italian Civil Code and the Related Party Transactions Regulation, a Related
Party Transactions Committee is in place, composed of three independent non-executive directors as well as a Related Party
Transactions Procedure (in force since 1 January 2011).
Meridiana fly - Financial Statements at 31 October 2012 - 200
The Related Party Transaction Procedure defines the guidelines and criteria for analysing and performing transactions with related
parties; it also defines the roles, responsibilities and operating procedures to ensure, for such transactions, adequate transparency
as well as procedural and substantial fairness. The Related Party Transaction Procedure has been published on the Company's
website www.meridianafly.com., to which the reader should refer for details.
Following the implementation of the capital increase and restoration of the float, at 31 October 2012 Meridiana fly S.p.A. was held by
Meridiana S.p.A. with a share of 51.2%. Meridiana fly was subject to joint control of Meridiana (51.2%) and the three new
shareholders (Marchin Investments, Pathfinder and Zain Holding, with a total of 38.7%). After the agreement of 15 January 2013
Meridiana has exclusive control of Meridiana fly with 89.91% of the share capital.
Transactions carried out with related parties mainly concern the provision of services and financial transactions with the parent
Meridiana, the Issuer's subsidiaries (Sameitaly in liquidation, Wokita and Air Italy Holding / Air Italy), with other associates or
affiliates ( in particular Meridiana Maintenance, Geasar, Alisarda), as well as other companies related to the AKFED group.
These transactions fall within the ordinary management of the Company, are made on an arm's length basis, i.e. at the conditions
that would be applied between two independent parties and are performed in the interest of the Company.
Related party transactions at 31 October 2012, as well as some details on the main commercial and operational relationships with
related parties are summarised in the tables below.
Meridiana fly - Financial Statements at 31 October 2012 - 201
Assets and liabilities with related parties 396
Wokita
S.r.l.%
€/000
Absolute
value%
Absolute
value%
Absolute
value% Absolute value %
Absolute
value% Absolute value %
Absolute
value%
Absolute
value%
Absolute
value%
Current financial assets 10,129 - 0.0% 4,005 39.5% - 0.0% - 0.0% - 0.0% - 0.0% 1,063 10.5% - 0.0% - 0.0%
Trade receivables and other current assets 130,840 417 0.3% 3,475 2.7% 13 0.0% 11 0.0% 70 0.1% 2,867 2.2% 12,536 9.6% 525 0.4% 347 0.3%
Long-term borrowings 69,712 - 0.0% 69,375 99.5% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%
Trade payables and other current liabilities 214,341 13,498 6.3% 46 0.0% 215 0.1% 1,374 0.6% 39 0.0% 24,850 11.6% 14,365 6.7% 1,338 0.6% 316 0.1%
€/000
Absolute
value%
Absolute
value%
Absolute
value%
Absolute
value% Absolute value %
Absolute
value% Absolute value %
Absolute
value%
Absolute
value%
Absolute
value%
Current financial assets - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% 3,560 35.1% 8,628 85.2%
Trade receivables and other current assets 151 0.1% 19 0.0% 2 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% 20,433 15.6%
Long-term borrowings - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% 69,375 99.5%
Trade payables and other current liabilities - 0.0% - 0.0% - 0.0% 565 0.3% 214 0.1% 2,635 1.2% 565 0.3% 24 0.0% - 0.0% 60,043 28.0%
Revenues and expenses with related parties
€/000
Absolute
value%
Absolute
value%
Absolute
value% Absolute value %
Absolute
value% Absolute value %
Absolute
value%
Absolute
value%
Absolute
value%
Other revenues 24,616 355 1.4% 85 0.3% 13 0.1% 14 0.1% 6 0.0% 927 3.8% 2,509 10.2% 432 1.8% 11 0.0%
Materials and maintenance services (62,998) (261) 0.4% - 0.0% - 0.0% - 0.0% - 0.0% (29,609) 47.0% - 0.0% - 0.0% - 0.0%
Selling expenses (19,364) (19) 0.1% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% (110) 0.6% (2,449) 12.6% (39) 0.2%
Other operating costs and wet leases (158,283) (9,338) 5.9% - 0.0% - 0.0% (41) 0.0% - 0.0% - 0.0% (28,129) 17.8% - 0.0% - 0.0%
Sundry costs and other services (25,526) (346) 1.4% (168) 0.7% (541) 2.1% (154) 0.6% - 0.0% (43) 0.2% (445) 1.7% (221) 0.9% - 0.0%
Net financial income (expense) (6,397) - 0.0% (1,264) 19.8% - 0.0% - 0.0% - 0.0% - 0.0% 63 -1.0% - 0.0% - 0.0%
€/000
Absolute
value%
Absolute
value%
Absolute
value%
Absolute
value% Absolute value %
Absolute
value% Absolute value %
Absolute
value%
Absolute
value%
Other revenues 359 1.5% 8 0.0% 17 0.1% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% 4,736 19.2%
Materials and maintenance services - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% (29,870) 47.4%
Selling expenses - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% (2,617) 13.5%
Other operating costs and wet leases - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% (37,508) 23.7%
Sundry costs and other services - 0.0% - 0.0% - 0.0% - 0.0% (524) 2.1% - 0.0% - 0.0% (242) 0.9% - 0.0% (2,684) 10.5%
Net financial income (expense) - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% 60 -0.9% (1,141) 17.8%
Cash flows with related parties
€/000
Absolute
value%
Absolute
value%
Absolute
value% Absolute value %
Absolute
value% Absolute value %
Absolute
value%
Absolute
value%
Absolute
value%
Cash flows from operating activities (55,981) (5,373) 9.6% (3,304) 5.9% (326) 0.6% 27 0.0% (21) 0.0% (26,566) 47.5% (4,949) 8.8% (2,253) 4.0% 175 -0.3%
Cash flows from investing activities (9,019) - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%
Cash flows from financing activities 51,434 - 0.0% 58,359 113.5% - 0.0% - 0.0% - 0.0% - 0.0% (1,063) -2.1% - 0.0% - 0.0%
Cash flows from share capital transactions 17,529 - 0.0% 10,000 57.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%
€/000
Absolute
value%
Absolute
value%
Absolute
value%
Absolute
value% Absolute value %
Absolute
value% Absolute value %
Absolute
value%
Absolute
value%
Absolute
value%
Cash flows from operating activities 1,581 -2.8% 312 -0.6% 21 0.0% 565 -1.0% (310) 0.6% 2,110 -3.8% 452 -0.8% (242) 0.4% - 0.0% (38,102) 68.1%
Cash flows from investing activities - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%
Cash flows from financing activities - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% (3,560) -6.9% 53,736 104.5%
Cash flows from share capital transactions - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% - 0.0% 10,000 57.0%
Pathfinder S.r.l.
Pathfinder S.r.l.
Meridiana Maintenance
S.p.A.
Meridiana Maintenance
S.p.A.Wokita S.r.l.
Air Italy S.p.A.Same Italy S.r.l. in
liquidation
DALF Business
Service S.r.l.
DALF Business
Service S.r.l.
Air Italy S.p.A.Same Italy S.r.l. in
liquidation
Air Italy Holding
S.r.l.
Air Italy Holding
S.r.l.
Total related parties
Total related parties
Pathfinder S.r.l. Total related partiesDALF Business
Service S.r.l.
Air Italy S.p.A.Same Italy S.r.l. in
liquidation
Meridiana Maintenance
S.p.A.
Air Italy Holding
S.r.l.AKFED Finaircraft Air Uganda Zain Holding S.r.l. BVR & Partners
Total Financial
year 2012
Wokita S.r.l.Meridiana S.p.A. Alisarda S.r.l. Cortesa S.r.l. Eccelsa S.r.l.
Finaircraft Air Uganda Zain Holding S.r.l. BVR & PartnersMarchin
Investments B.V.
Total Financial
year 2012
Geasar S.p.A. Meridiana S.p.A. Alisarda S.r.l. Cortesa S.r.l.
AKFED
Marchin
Investments B.V.
Geasar S.p.A.
Eccelsa S.r.l.
AKFED Finaircraft Air Uganda Zain Holding S.r.l. BVR & Partners
Total as at
31.10.2012
Geasar S.p.A. Meridiana S.p.A. Alisarda S.r.l. Cortesa S.r.l.
Marchin
Investments B.V.
Eccelsa S.r.l.
Meridiana fly - Financial Statements at 31 October 2012 - 202
• Receivables / Payables
The main items include:
Meridiana
Other current financial assets at 31 October 2012 involving Meridiana S.p.A. amount to Euro 4,005 thousand and mainly refer to loans
to Meridiana carrying interest at market rates. Non-current payables to Meridiana for Euro 69,375 thousand relate to interest bearing
medium term loans.
Air Italy
The receivables accrued for Euro 12,536 thousand, and payables of Euro 14,365 thousand mainly relate to ACMI contracts ("Aircraft",
"Crew", "Maintenance" and "Insurance") both "active" (where Meridiana fly is the carrier, for example a few rotations in the Caribbean
region, Brazil, Africa and the Indian Ocean) and "passive" (where Air Italy is the carrier, for example, for a few rotations in Africa and
the Indian Ocean). There are current loans in place granted to Air Italy earning interest at market rates for a total of Euro 1,063
thousand.
Air Italy Holding
The receivables of Euro 3,560 thousand relate to current loans carrying interest at market rates.
Former Air Italy Holding shareholders (Marchin Investments, Pathfinder and Zain Holding)
Payables at 31 October 2012 to the three former Air Italy Holding shareholders refer to the "Earn-out on Air Italy Acquisition, for the
variable part, equal to 50% of market proceeds resulting from the subscription of the capital increase (first phase completed in April
2012), and broken down as follows:
• Euro 2,635 thousand in favour of Marchin Investments B.V. of which Giuseppe Gentile is the sole shareholder and sole
director;
• Euro 565 thousand in favour of Pathfinder Corporation S.r.l., of which Alessandro Notari is the sole shareholder;
• Euro 565 thousand in favour of Zain Holding S.r.l. (which is traceable to Lawyer Borgognoni Vimercati).
Geasar
Receivables at 31 October 2012 from Geasar for Euro 417 thousand concern charges for advertising, administrative (payroll) and
computer services, while payables of Euro 13,498 thousand concern airport services at Olbia airport.
Meridiana Maintenance
At year end, the receivables from the company of Euro 2,867 thousand concerned charges for legal, administrative and IT services,
charge-backs of operating expenses incurred on its behalf; payables of Euro 24,850 thousand concern to the global maintenance
service provided on aircraft at various levels according to an established schedule.
Other Related parties
Other receivables and payables to related companies are mainly trade receivables- payables, accrued for services rendered or
received with the various related companies as per their existing relationships, which are described in a subsequent section.
• Revenues/costs for purchase and supply of services
Revenues at 31 October 2012 from related parties amounted to Euro 4,736 thousand, mainly due to the billing of flights to Air Italy
under ACMI arrangements, charges for staff services to the various subsidiaries (e.g. global service , Payroll management services,
administrative, tax and legal services), and charge-backs of different services.
Meridiana fly - Financial Statements at 31 October 2012 - 203
Operating costs amounted to a total of Euro 72,679 thousand, mainly relating to maintenance activities provided by Meridiana
Maintenance, handling and other services at Olbia airport provided by GEASAR, ACMI operated by Air Italy, fees payable to
Sameitaly for its activities as general agency, property leases to Alisarda for the Olbia offices.
Financial income and expenses include costs with related parties for Euro 1,141 thousand, largely due to interest on loans and fees
on guarantees issued by Meridiana.
The financial and capital relations entertained by Meridiana fly in 2012 are described below.
Relations with Meridiana
Relations with the parent Meridiana mainly concern commitments relating to the subscription and payment of the capital increases,
as well as financial arrangements (cash borrowings and guarantees on Meridiana fly's loans to Meridiana fly's Lending Banks).
Meridiana charges Meridiana fly with the fees for the guarantees given to third parties on behalf of Meridiana fly, as well as for other
minor services performed in favour of the latter.
Revenue generating transactions with Meridiana concern the provision of administrative management services, payroll services and
other general services, as well as receivables for loans resulting from trade receivables converted in financial receivables.
Relations with AKFED
AKFED has transferred to the subsidiary Meridiana S.p.A. - in the form of loans and / or advances on future capital increase - the
funding necessary to financially support of Meridiana fly and its subsidiaries. An agreement is in place with AKFED for the provision
of consulting services in the field of air transport by Meridiana fly.
Transactions with Air Italy
1. Air transport agreements
In 2012 Meridiana fly relations with Air Italy related to their air transport activities. In particular, these relations involved in practice:
(a) FIM (" Flight Interruption Manifest ") contract. A bilateral agreement is effective whereby the companies agree operating and
billing rules for passengers and luggage re-routing due to unintentional causes (e.g. confusion, cancellations, other operational
events, etc..). These transactions may be either active or passive, depending on who is taking charge of the activity;
(b) ACMI contracts (" Aircraft "," Crew "," Maintenance "and" Insurance "). It is a form of aircraft leasing, which may be passive
(leasing of third party aircraft) or active (leasing of aircraft to third parties) and provides for the payment of a fee that includes the
costs of the aircraft, crew, maintenance and insurance. In 2012 several ACMI contracts, both active and passive, were entered into
with Air Italy;
(c) " Charter " agreements Meridiana fly sold "allotments" to Air Italy on individual flights or on a series of flights in relation to
temporary needs;
(d) "Interline" Agreement This agreement is in place between the two carriers, whereby companies may buy / sell each other tickets
for scheduled flights with defined reservation and pricing systems. It is a typical agreement in force between the majority of airlines;
(e) "Long Term Wet Lease" contract, which provides for the lease of a long-haul aircraft to Air Italy according to the needs and
operating plans of the company, notified from time to time over a period of twelve months in Wet Lease mode (i.e. similar to ACMI),
with operating and commercial expenses charged to Air Italy.
2. Commercial and administrative agreements
Meridiana fly - Financial Statements at 31 October 2012 - 204
As a result of the reorganization of sales and administrative activities, arrangements have been defined for the supply of the
following services to Air Italy:
- call centre /contact centre ,Customer Support and commercial back-office;
- revenue accounting (scheduled flights)
- ICT support
- centralized services for purchases, contracts and insurance.
3. Secondment of staff
There are staff secondment agreements in place with Air Italy, both passive and active, in order to optimize the use of resources and
promote synergies in the general interest of the group.
Relations with Geasar
Supply relations with Geasar (a company controlled by Meridiana S.p.A) concern the following activities:
1. advertising and commercial services;
2. payroll services;
3. IT services.
Purchasing relations concern the following activities carried out by Geasar:
1. handling / catering services for aircraft and passengers at Olbia airport ;
2. use of offices and other spaces (e.g., VIP lounges) at Olbia airport;
3. provision of advertising space at Olbia airport.
Relations with Meridiana Maintenance
Purchasing transactions with Meridiana Maintenance (a subsidiary of Meridiana and 16.38% owned by Meridiana fly) cover
maintenance services, technical management and other services related to the management of special service agreements relating
to the fleet of Meridiana fly.
Meridiana fly provides the following services:
1. administrative, legal and corporate services;
2. payroll services and human resources management;
3. other "global services"
Relations with Finaircraft
Relations with this company, wholly owned by AKFED, concern ancillary management services.
Relations with Air Uganda, Air Burkina, Air Mali
Relation with these airlines, controlled by AKFED concern ancillary management services .
Relations with Alisarda
Services provided by Alisarda (a subsidiary of Meridiana) concern the leasing of offices and equipment at the Olbia Headquarters
and other spaces at the Olbia airport; Meridiana fly, on the other and, provides various administrative services.
Relations with Cortesa
Meridiana fly - Financial Statements at 31 October 2012 - 205
Services provided by Cortesa (a subsidiary of Geasar) are related to the canteen services at the Olbia Headquarters and the use of
airport parking, while Meridiana provides payroll services.
Relations with Eccelsa
Transactions with Eccelsa (a subsidiary of Geasar) concern the provision of administrative payroll services to Eccelsa.
Relations with BVR
The firm Borgognoni-Vimercati-Romano & Partners (BVR) has contracts in place for the provision of legal advisory services to
Meridiana fly which resulted in a charge to the income statement for the first ten months of 2012 of Euro 524 thousand.
9.12. List of equity investments
Pursuant to Consob Regulation no. 11971 art. 126, investments in unlisted companies accounting for more than 10% of the shares
with voting rights as at 31 October 2012, are listed here.
In addition. with regard to direct investees, the most recent economic and financial data available are provided below.
Company Name Registered OfficeShareholders'
equity (€/000)
Most recent
result (€ / 000)
Book value (€
/ 000)
Air Italy Holding S.r.l. (1) Gallarate (VA) 13,446 (815) -
Wokita S.r.l. Olbia 12 (527) 1,347
Sameitaly S.r.l Olbia 545 (108) 4,316
Meridiana Maintenance S.p.A. (2) Olbia 12,541 1,108 722
MERIDIANA EXPRESS S.R.L. (2) (3) Olbia 6 (2) 10
Air Italy Brasil S.A.(4) Rio de Janeiro-Brasil NA NA 17
(1) data from last financial statements approved at 31 October 2011
(2) data from last financial statements approved at 31 December 2011
(3) company incorporated 9 March 2010, currently inoperative
(4) company currently inoperative
9.13. Remuneration paid to Directors, Statutory Auditors and key management personnel
Pursuant to the new Article 84 -quater of Consob Regulation no. 11971/99, a specific remuneration report will be prepared on the
remuneration of members of administrative and control bodies, general managers and other managers with strategic responsibilities
which will be made available to the public in the manner and within the time provided by art. 123-bis of Legislative Decree no.
58/1998.
Therefore the aggregate remunerations cumulatively accrued in 2012 in favour of the members of the Board of Directors and the
Board of Statutory Auditors are provided below.
Board of Directors 911 61 972
Board Of Statutory Auditors 149 - 149
Total 1,060 61 1,121
€/000 Remuneration for the office Other remuneration Total
Meridiana fly - Financial Statements at 31 October 2012 - 206
The remuneration for the office also includes remuneration for positions held in the various committees (Audit and Risk,
Remuneration and Appointments, Transactions with Related Parties) for a total of Euro 61 thousand.
The Company has no share-based incentive plans for directors, key managers or other employees (stock options or similar).
At 31 October 2012 there were no non-competition agreements in force with Directors or key management personnel for which a
defined consideration had been set.
As at 31 October 2012 there are no agreements in place with the directors providing for benefits in the event of resignation or
dismissal without just cause or if their employment is terminated due to a takeover bid.
9.14. Fees paid to the Independent Auditors
In compliance with the provisions of art. 149- duodecies of Consob Issuers Regulation, the fees paid for FY 2012 to the independent
auditors Deloitte & Touche SpA in charge of auditing the companies accounts, broken down between auditing services provided to
the Company and other type of services provided to the same Company, divided by type, are detailed below. There are no other
services provided by entities belonging to its network.
Fees Financial Year
Type of service Service provider Recipient 2012
Euro '000
Independent Auditor Deloitte & Touche S.p.A. Parent Company 236
Certification services (1) Deloitte & Touche S.p.A. Parent Company 165
Other services (2) Deloitte & Touche S.p.A. Parent Company 3
Total 404
(1) Report on forecast prepared by the Board of Directors and included in paragraph 13.3 of
Information Document
(2) Certification of Tax Returns
9.15. Disclosure concerning financial risks
The section below provides a general analysis of the main financial risks identified and managed by the Company. The Company is exposed to the following financial risks associated with its operations:
credit risk: which includes the possibility of default by a counterparty or the possibility of deterioration of the creditworthiness
assigned to counterparties;
market risk: resulting from exposure to fluctuating interest and exchange rates;
liquidity risk: the risk of available financial resources being insufficient and lack of access to the credit market
The quantitative data reported below have no predictive value. In particular, the sensitivity analyses on market risks cannot reflect
the complexity and the connected reactions of the markets that may derive from any assumed change.
As required by IFRS 7, below we detail the financial assets and liabilities at 31 October 2012 identified for the purposes of this
analysis.
Meridiana fly - Financial Statements at 31 October 2012 - 207
31.10
2012
Other non-current assets 13,573
Long term financial assets 13,573
Trade receivables and other current assets 130,840
Current financial assets 10,129
Current financial assets 140,969
Total financial assets 154,542
Long-term borrowings 69,712
Future interest 5,603
Non-current financial liabilities 75,315
Current loans 7,666
Current portion of long-term borrowings 15,464
Trade payables and other current liabilities 214,341
Current financial liabilities 365
Current financial liabilities 237,836
Total financial liabilities 313,151
€/000
Credit risk
The maximum theoretical credit risk is represented by the accounting value of financial assets, current and non-current, realised as
part of sales to third parties or to provide guarantees to third parties. The Company currently generates most of its turnover through
the sales of scheduled flights and seats on charter flights, with the consequence that its ordinary customer base mainly consists of
private entities, tour operators and travel agencies. The risk of non-collection of receivables is addressed contractually by requiring
payment in advance of actual flight dates and guarantees or performance deposits guaranteeing fulfilment of contractual obligations.
At operating level, compliance with the terms of payment is constantly monitored. It should be noted that the tour operator industry
has recently undergone a consolidation process, which involved a reduction in the number of operators, resulting in situations of
customer concentration. The Company also adopts a very restrictive policy with regard to late payments, selecting and evaluating its
customers on the basis of their reliability and financial as well as commercial soundness.
The Company also provides adequate impairment on individual positions corresponding to problem loans, doubtful loans and non-
performing loans; it also write-down debt on an overall basis, taking into account historical experience or statistical data.
The tables below provide information about the Company's exposure to credit risk at 31 October 2012.
Meridiana fly - Financial Statements at 31 October 2012 - 208
€/000
Between 0
and 30 days
Between 30
and 60 days
Between 60
and 90 days
Between 90
and 120 days
Over 120
days
30.06.2012
Breakdown of trade receivables not yet expired:
Trade receivables 16,110 9,981 3,377 1,667 5,130 36,265
Breakdown of trade receivables past due:
Trade receivables 3,678 6,857 2,234 6,284 29,956 49,009
Total 19,788 16,838 5,611 7,951 35,086 85,274
Provision for doubtful receivables (17,113)
Total 68,161
Trade receivables past due by over 120 days include trade payables in litigation
With respect to loans overdue by more than 120 days that are not covered by the provision for doubtful receivables, taking into
account historical experience, the progress of litigation and legal opinions relating to them as well as the existence of guarantees
issued by customers, the credit risk is considered to be mitigated.
Market Risk
Foreign exchange risk
The Company is exposed to the risks arising from fluctuations in exchange rates, as outlined in paragraph 2.23 to which the reader
is referred for details. Overall, the main business in foreign currency is transacted in USD, which represent nearly 8.5% of trade
receivables and 18.8% of trade payables at year end. In financial terms, the costs of goods and services denominated in or linked to
the USD account for approximately 39% of total operating costs of the Company.
€/000 Euro USD Other Tot
Trade receivables 78,001 7,273 - 85,274
Provision for doubtful receivables (15,715) (1,398) - (17,113)
Other non-current assets 4,964 8,609 - 13,573
Total current and non-current loans (92,842) - - (92,842)
Trade payables (139,637) (32,728) (1,612) (173,977)
Net exposure (165,229) (18,244) (1,612) (185,085)
31.10.2012
As regards the management of risks arising from changes in exchange rates, it should be remembered that:
• The cost of airline tickets for scheduled flights contains a variable fuel surcharge component that is charged to the customer.
• The charter contracts entered into by the Company with tour operators provide the option to adjust prices
according to the EUR/ USD exchange rate based on scheduled flights.
Price Risk
In 2012 no specific hedging contracts were entered into to hedge against changes in fuel prices. However, the fluctuation of fuel
prices was mainly hedged indirectly through the price adjustments provided under the terms of charter contracts and by adjusting the
Fuel surcharge charged to scheduled flights customers.
Meridiana fly - Financial Statements at 31 October 2012 - 209
The use of derivative instruments is governed by policies approved by the Board of Directors, consistent with risk management
strategies.
Derivative hedging instruments, in keeping with the provisions of IAS 39, are accounted for in accordance with the methods laid
down for hedge accounting only when:
at the start of the hedge there is a formal designation and documentation of the hedging relationship;
- the hedge is highly effective;
- the effectiveness can be reliably demonstrated.
When a financial instrument is designated as a hedge of exposure to the variability of cash flows of the hedged transactions (cash
flow hedge; e.g. hedging the variability of cash flows of expected future transactions against the effect of fluctuations in exchange
rates), the gains and losses deriving from the fair value changes of the hedging instrument are accounted for directly in
shareholders’ equity for the effective part (any ineffective part is instead accounted for immediately in the income statement under
the item gains/(losses) on derivatives).
The amounts recognized in equity are subsequently reflected in the income statement for the period in which the contracts and
expected transactions are manifested in the income statement.
If an instrument is designated for hedging exposure to changes in the fair value of the hedged instruments (e.g. hedging against the
changes in the fair value of loans at a floating rate and receivables and payables in foreign currencies), it is recognized at fair value
with the effects booked to the income statement; accordingly, the hedged instruments are adjusted to reflect the fair value changes
associated with the hedged risk.
Changes in the fair value of derivatives that do not meet the conditions to qualify as hedges are recognized in profit or loss.
Interest rate risk
The Company has some floating rate liabilities in place and is therefore exposed to the risks associated with rising interest rates. At
31 October 2012 the Company has set up contracts to hedge changes in interest rates, in particular through IRS - Interest rate
swaps - for a portion of the bank floating rate loans as per the following table:
Liquidity risk
Liquidity risk is represented by the inability to secure enough financial resources at economic conditions to cover all the obligations
falling due.
A schedule presenting the time frame of the financial liabilities of the Company at 31 October 2012, based on non-discounted
contractual payments is presented below.
Type Hedging purpose Counterparty CurrencyFair value at 31.10.2012
in € / 000
Notional amount in
€/000
Derivatives with negative fair value (financial liabilities)
IRS - Interest
Rate Swap
Fixing of interest rate on
bank debt 36 months
Banca
Nazionale
Lavoro EUR 03/02/2011 23/12/2013 (197) 7,500
Total financial liabilities (197)
Hedged underlying amount
Maturity of derivative contract Description
Hedge of interest rate fluctuation
on Banking Facility 36 months
EURIBOR 3M +4%
Meridiana fly - Financial Statements at 31 October 2012 - 210
Value Cash flows 6 months Over
€/000 book contractual or less 6-12 months 1-2 years 2-5 years 5 years 5 years
Non-derivative financial liabilities
Current loans (7,666) (7,550) (7,550) - - - - -
Current portion of long-term borrowings (15,464) (15,634) - (297) (15,337) - - -
Long-term borrowings (69,712) (69,712) (337) - (11,159) (58,216) - -
Trade payables and other current liabilities (214,341) (214,341) (126,652) (74,462) - - - -
Current financial liabilities (365) (365) (365) - - - - -
Interest on loans - (5,603) (1,327) (1,227) (1,658) (1,391) - -
Derivative financial assets/liabilities
Derivative instruments to hedge jet fuel:
Cash-in - - - - - - - -
Cash-out (196) (196) (98) (98) - - - -
Total (307,744) (313,401) (136,328) (76,084) (28,154) (59,607) - -
* Contractual cash flows do not include payables in litigation and liabilities for prepaid tickets and accrued liabilities and deferred income
At 31 October 2012, there are no past due tax or social security payables. In addition, there are no past due payables to employees.
At 31 October 2012, Meridiana fly S.p.A. overdue payables to suppliers amounted to Euro 71.4 million, of which Euro 14.4 million by
more than one year, for the most part subject of dispute or rescheduling, while overdue payables to related parties amounted to Euro
42.2 million.
There were no suspensions in supplies. There were no demands for payment on overdue debts, except for those within the ordinary
course of business.
€/000
Between 0
and 30 days
Between 30 and
60 days
Between 60
and 90 days
Between 90
and 120 days
Over 120
days
31.10.2012
Breakdown of trade payables not yet
expired:
Trade payables 37,612 17,225 4,751 337 516 60,439
Breakdown of trade payablespast due:
Trade payables (*) 26,241 16,665 9,267 10,175 51,190 113,538
Total 63,853 33,890 14,018 10,512 51,706 173,977
* Trade payables past due by over 120 days include trade payables in litigation
At 31 October 2012 the company had received enforceable injunctions for approximately Euro 0.5 million for supplies not yet paid.
As a result of commitments made by Meridiana major Shareholder, as better described in Section 2.24.11 above, it is believed that
liquidity risk has been mitigated even considering the uncertain outlook discussed in Section 2.26.
9.16. Other information
Pursuant to Consob communication no. DEM/6064293 of 28 July 2006 it is hereby stated that in the first ten months of 2012 no
atypical or unusual transactions were carried out as defined by the above Communication.
No purchases or sales of own shares were made, directly or indirectly, during the period. At 31 October 2012, Meridiana fly and the
other companies of the Meridiana fly Group do not hold own shares.
Taking into account the shares comprising the share capital at 31 October 2012, the net loss per share amounts to Euro 1.79.
Meridiana fly - Financial Statements at 31 October 2012 - 211
These financial statements were authorized for publication by the Board of Directors of the Company at its meeting in Milan on 26
February 2013 and will be disclosed to the public, together with the report of the Independent Auditors and Statutory Auditors in the
manners prescribed by law.
Milan, 26 February 2013
On behalf of the Board of Directors:
The President
Marco Rigotti
Meridiana fly - Financial Statements at 31 October 2012 - 212
10. CERTIFICATION OF THE FINANCIAL STATEMENTS PURSUANT TO
ART. 154-bis of Legislative Decree. 58/98.
1. The undersigned Roberto Scaramella, in his capacity as Chief Executive Officer, and Maurizio Cancellieri, in his capacity as
Financial Reporting Officer
of Meridiana fly S.p.A, also considering the requirements of Article 154-bis, sections 3 and 4 of
Italian Legislative Decree no. 58 of 24 February 1998,
- hereby certify the adequacy, in relation to business characteristics, and
- the effective application of administrative and accounting procedures in preparing the consolidated financial statements
during the financial year ended on 31 October 2012
2. In this regard there were no significant issues.
3. It is further certified that the financial statements at 31 October 2012:
were prepared in compliance with applicable international accounting standards endorsed by the European Union pursuant to
regulation (EC) no. 1606/2002 of the European Parliament and the Council, dated 19 July 2002,
b) correspond to the underlying documentary and accounting books and records;
c) are suitable, to his knowledge, to provide a true and fair view of the assets and liabilities, business status, and financial position of
the Issuer and of all the companies included in the scope of consolidation.
The management report includes a reliable analysis of the operating performance and results as well as of the financial situation of
the Issuer and the companies included in the scope of consolidation, together with a description of the main risks and uncertainties
to which they are exposed.
Milan, 26 February 2013
Roberto Scaramella Maurizio Cancellieri
Chief Executive Officer Financial Reporting Officer
Meridiana fly - Financial Statements at 31 October 2012 - 213
11. INDEPENDENT AUDITORS' REPORT ON THE SEPARATE FINANCIAL
STATEMENTS AT 31 OCTOBER 2012
1. INDEPENDENT AUDITORS 'REPORT ON THE SEPARATE FINANCIAL STATEMENTS AT
31 OCTOBER 2012
INDEPENDENT AUDITORS' REPORT ON THE SEPARATE FINANCIAL STATEMENTS
PURSUANT TO ARTICLES 14 AND 16 OF LEGISLATIVE DECREE NO.39 OF 27.1.2010
To the Shareholders of MERIDIANA FLY S.p.A.
We conducted our audit of the separate financial statements, consisting of the statements of
financial position, the statement of comprehensive income and changes in equity, the statement
of cash flows and the related notes, of Meridiana fly S.p.A.(hereinafter the "Company") for the 10
month financial year ended 31 October 2012.
The responsibility for preparing the financial statements in accordance with International
Financial Reporting Standards endorsed by the European Union, as well as the regulations issued
to implement article 9 of Legislative Decree no. 38/2005 rests with the Directors of Meridiana fly
S.p.A..
It is our responsibility to express an opinion on these financial statements based on our audit.
Our examination was conducted in accordance with the standards and criteria for carrying out an
audit as recommended by CONSOB.
In accordance with such standards and criteria, the audit was planned and performed with a view
to obtain the evidence necessary to ascertain whether the separate financial statements are free
of material misstatement and are fairly presented when taken as a whole.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the separate financial statements. An audit also includes assessing the adequacy and correctness
of the accounting principles used and the reasonableness of estimates made by the Directors.
We believe that our audit provides a reasonable basis for expressing our opinion.
For the opinion on the separate financial statements of the prior year, which are presented for
comparative purposes, reference is made to our report issued on 27 April 2012.
In our opinion, the separate financial statements of Meridiana fly S.p.A for the 10 month period
ended 31 October 2012 comply with the International Financial Reporting Standards as adopted
by the European Union, as well as the regulations issued to implement article 9 of Legislative
Decree no. 38/2005; the financial statements were drawn up clearly and give a true and fair view
of the financial position, results of operations and cash flows of Meridiana fly S.p.A. for the year
ended on that date.
For a better understanding of the separate financial statements as at 31 October 2012, we draw
your attention to the following information given in the Management Report and in the notes:
Meridiana fly - Financial Statements at 31 October 2012 - 214
a. the separate financial statements at 31 October 2012 show a comprehensive loss of Euro 189.8
million and negative shareholders' equity of euro 104.5 million, while net financial debt amounted
to Euro 79.4 million.
Due to the significant loss reported in the period, the Company falls within the cases provided for
by article 2447 of the Italian Civil Code.
In this regard, the Board of Directors on 26 February 2013 decided to authorize the President of
the Board of Directors and the Chief Executive Officer, acting severally, to convene the
extraordinary Shareholders' Meeting on 29 April 2013 for the adoption of the measures referred
to in the mentioned article 2447 of the Italian Civil Code.
In the management report, the Directors described the main causes of such a loss, including the
significant fall in demand, the unfavourable exchange rate Euro/U.S. Dollar, the recognition of
significant impairment losses on corporate assets and non-recurring charges.
However, as from the month of October 2012, in order to cope with the strained financial
situation evidenced by the full use of the available credit lines and the increase in overdue
payables to trade and fiscal counterparties, Meridiana S.p.A. -Supported by AKFED S.A.
("AK.FED"), a financial institution controlled by the same major shareholder of Meridiana S.p.A.-
provided new loans higher than those previously committed - for a total of Euro 50 million.
Given this situation, the Directors indicated that, as a result of the change in the Company's
shareholding structure – following which on 15 January 2013 Meridiana S.p.A., supported by
AKFED, bought the shares held by Air Italy Holding S.r.l. former shareholders, thus becoming the
owner of shares representing about 89.9% of the Company's capital - and the simultaneous
appointment of a new Chief Executive Officer, on 26 February 2013 the Board of Directors
approved a new 2013-2017 Business Plan (the "Business Plan" or the "Plan"), which envisages a
numbers of actions, some of which have already been undertaken as from December 2012, to
address the decline in demand - such as the reduction of the fleet and the extension of
temporary redundancy agreements (CIGS) - and provides for the reduction and optimization of
overheads, the reorganization of operating, maintenance and commercial processes as well as a
gradual modernization of the fleet.
At the same meeting, the Board of Directors also approved a monthly budget until 31 October
2013 (the "Budget"), on the basis of which the Directors have verified the applicability of the
going concern assumption in the preparation of the separate and consolidated financial
statements at 31 October 2012.
In this regard, in section 2.26 of the Management Report "Business Outlook" and in section 9.1.3.
''Going Concern" of the notes, the Directors indicate that for the purposes of implementing the
Budget and the Business Plan, the priority is that the Company and its subsidiary Air Italy get
back the operating license necessary to carry out the activity in the air transport business, which
on 11 January 2013 had been suspended by the National Civil Aviation Authority thus causing the
activity to be carried out on the basis of temporary licenses.
In this respect the Directors specified that discussions are already ongoing with the Aviation
Authority in order to plan the necessary procedures for the obtainment of the permanent
operating license for both airlines.
Meridiana fly - Financial Statements at 31 October 2012 - 215
The Directors also specified that the achievement of the objectives contained in the Business Plan
and the Budget, which is essential to achieving financial and equity balance in the short term and
income balance in the medium term, is significantly dependent on (i) the evolution of
uncontrollable external factors, including in particular the trend in demand, the Euro / U.S. Dollar
exchange rate, the cost of fuel, (ii) the effective implementation of measures envisaged in the
Business Plan including the rationalization of the network and the fleet, of operating costs and
overheads, including staff costs, (iii) achieving an overall debt rescheduling agreement with the
lending banks, as there is currently a risk that lenders request the immediate repayment of
outstanding debt, especially in respect of Air Italy uncommitted credit lines amounting to Euro
26.9 million, not completely mitigated by guarantees provided by Meridiana and AKFED, and (iv)
the evolution of litigation, counterparties' solvency, credit conditions granted by suppliers and the
management of overdue trade payables.
The Directors finally indicated that, Based on the forecasts of the 2013Budget, in the early months
of next year the Company will again be in the condition of having to rely on the equity support
provided by Meridiana S.p.A. and AKFED in order to preserve the financial and equity balance that
is typical of a going concern.
In this regard, the Directors, while noting that the company can count on total commitments of
Euro 184.5 million, do not have, however, other formal commitments with regard to the capital
support that will be necessary over a twelve month period as from the date of these financial
statements, such period having been adopted as reference horizon by the Directors for the
purposes of verifying the going concern assumption; nevertheless, the Directors believe that
Meridiana S.p.A. and AKFED will continue to support the Company and the Group in accordance
with the needs that will emerge from a more precise analysis of current results.
From another perspective, the Directors indicated that scenario variables beyond the control of
the Company and the Group moving along trends other than those assumed in the Budget and in
the Business Plan, as well as the ineffectiveness of the measures envisaged in the plan itself or the
occurrence of non-recurring charges may determine a final loss in 2013 higher than expected and,
consequently, the need to resort to additional financial and equity commitments by Meridiana
S.p.A. and AKFED, even before the end of the year, in order to satisfy the going concern
assumption.
The directors also report that these circumstances could result in the recognition of additional
impairment of asset following an update of the impairment test conducted on 31 October 2012,
as more fully described in item b. of this paragraph, and further needs for capital support by
Meridiana S.p.A. and AKFED.
Considering all of the above circumstances, the Directors pointed out that there is a significant
uncertainty that may cast doubts as to the ability of the Company to continue operating as a going
concern.
Nevertheless, the Directors, after making the necessary checks and assessing the uncertainties
described above, indicated that they have a reasonable expectation that the Company has
adequate resources to continue operating in the foreseeable future, based on (i) the already
mentioned commitment by Meridiana S.p.A. and AKFED, to be paid in the form and manner
described in greater detail in the management report in section 2.24.14 "New Meridiana / AKFED
commitments for the going concern" which the Directors consider adequate for carrying out a
Meridiana fly - Financial Statements at 31 October 2012 - 216
capital increase for an amount sufficient to ensure the reinstatement of an adequate level of
capitalization, also taking into account the expected loss for the current financial year until
October 2013, and (ii) the fact that any financial and equity requirements greater than those
estimated, including in the event of failure to reach an agreement with the banks for a
renegotiation of credit lines, could be met through the use of other sources of funds, including by
requesting additional financial support to Meridiana S.p.A. and AKFED as done in the recent past.
Consequently the Directors considered it appropriate to prepare the separate financial
statements at 31 October 2012 on the going concern basis.
b. At 31 October 2012, the separate financial statements included Goodwill, amounting to Euro
28.2 million (Euro 56.4 million at 31 December 2011), and the Investments, including the carrying
amount of the investment in Air Italy Holding S.r.l., for Euro 14.8 million (Euro 86.9 million at 31
December 2011).
In the notes the Directors explained that both the Goodwill and the carrying amount of the
investment in Air Italy Holding were tested for impairment with the support of an expert
appointed for the purpose.
The outcome of these tests, conducted according to the unlevered discounted cash flow method,
showed an overall impairment loss of Euro 103.8 million, of which Euro 28.2 million relating to
Goodwill and Euro 75.5 million related to the investment in Air Italy Holding S.r.l.
In addition, the directors pointed out that the value in use of the cash generating unit -
considered both as a whole, with reference to the only cash generating unit identified by the
Directors at the consolidated level and separately, on the basis of the legal segregation existing
between the Company and its subsidiary Air Italy Holding Srl -is largely represented by the
terminal value, which shows significant variability to changes in uncontrollable scenario variables.
The Directors indicated that actual developments of the Group performance, other than those
provided for in the Plan, the implementation of which, as already mentioned, depends on
scenario variables that cannot be controlled, could lead to further write-downs of goodwill with
the possible effects on the Company and the Group equity which would lead to the emergence of
additional needs for the capital support by Meridiana S.p.A. and AKFED.
The responsibility for preparing the management report and the corporate governance and
ownership structure report, the latter being published in the "Investor Relations-Corporate
Governance" section of Meridiana fly S.p.A. website, in compliance with laws and regulations,
rests with the Directors of Meridiana fly S.p.A. It is our responsibility to express an opinion on the
consistency of the management report and the information referred to in paragraph 1, letters c),
d), f), l), m) and paragraph 2, letter b) of article 123-bis of Legislative Decree no. 58/1998. and
presented in the corporate governance and ownership structure report, along with the separate
financial statements, as required by law. To this end we have performed the procedures required
by auditing standard 001 issued by the Consiglio Nazionale dei Dottori Commercialisti e degli
Esperti Contabili (Italian National Council of Certified Accountants) and recommended by
CONSOB. In our opinion, the management report and the information referred to in paragraph 1,
letter c). d), f). l). m) and paragraph 2, letter b) of article 123-bis of Legislative Decree no.
58/1998. and presented in the corporate governance and ownership structure report, are
consistent with the separate financial statements of Meridiana fly for the financial year ended 31
October 2012.
Meridiana fly - Financial Statements at 31 October 2012 - 217
DELOITTE & TOUCHE S.p.A.
Lorenzo Rossi
Partner
Milan, 28 February 2013