kpmg's disclosures hanbook 2005 - accounting and financial reporting in the global airline...

KPMG INTERNATIONAL

KPMG’s DisclosuresHandbook:

Accounting andFinancial Reportingin the Global AirlineIndustry

TRANSPORT

KPMG’s Global Airline practiceKPMG International is the coordinating entity for a global network of professional service

firms that provide audit, tax and advisory services with an industry focus. The aim of

KPMG member firms is to turn knowledge into value for the benefit of their clients,

people and the capital markets. With nearly 100,000 people worldwide, member firms

provide audit, tax and advisory services to 731 cities in 144 countries. Through its

member firms, KPMG has invested extensively in developing a high-quality airline

team. KPMG’s understanding of the industry is both current and forward looking,

thanks to KPMG’s member firms’ global experience, knowledge sharing, industry

training and the use of professionals with direct experience in the airline industry.

KPMG member firms serve the market leaders within the airline sector. They provide

external audit services to 26 percent of passenger airlines in the top 50 airline companies

ranked by revenue. They also provide other services to over 60 percent of these

airlines. KPMG’s strength lies in its professionals and their knowledge and experience

gathered from working with a large and diverse client base. KPMG’s industry experience

helps the team understand both your business priorities and the strategic issues

facing your company.

KPMG’s Global Airline practice’s presence in many major international markets, combined

with industry knowledge, positions KPMG well to assist you in recognizing and

making the most of opportunities, as well as implementing changes necessitated by

industry developments.

For more information on KPMG’s Global Airline practice, please contact:

Martin SheppardHead of Aviation

+61 2 9335 8221

[email protected]

Dr. Ashley SteelGlobal Chair – Transport

+44 20 7311 6633

[email protected]

Alternatively, visit KPMG’s website at kpmg.com

With thanks to KPMG’s Transport practice in Australia.

Authors

Julian McPherson

Malcolm Ramsay

Special thanks to

Rachel Gadiel

Charmaine Hopkins

Rachel Riley

Sharon Smith

Introduction

In this, the first volume of KPMG’s Airline Accounting and FinancialReporting Handbook, KPMG has focused on airlines reporting under U.S.reporting standards and airlines that are transitioning to reporting underInternational Financial Reporting Standards (IFRS). This handbook looksat some of the key accounting and reporting issues in the passengerairline industry.

For companies listed on the main

European, and a number of Asia-Pacific

exchanges, there has been a

fundamental change in the basis of

financial reporting in 2005. Since

September 1, 2005 these companies’

financial statements have been prepared

under IFRS. Management has been

working through the impact of adopting

IFRS and disclosing changes to

stakeholders through 2005. CFOs face

the challenge of explaining company

performance on a new basis – with

greater emphasis on measurement of

items at fair values rather than historic

cost – giving rise to greater volatility and

less certainty in financial results. In our

experience, items not required to be

recognized in the financial statements

under legacy Generally Accepted

Accounting Principles (GAAP) are now

required to be recognized under IFRS.

Such items include derivatives, share-

based payment plans and the recognition

of the surplus or deficit position of

defined benefit post-employment plans.

KPMG’s Global Airline practice provides

an analysis of the disclosures of critical

accounting policies by airlines. Not

surprisingly, the financial reports

surveyed highlight that revenue

recognition is a key area of disclosure.

This handbook looks at example

accounting policies across U.S. GAAP,

IFRS and legacy GAAPs of a selection of

major airlines. There are signs of

convergence between IFRS and U.S.

reporters in areas such as accounting for

frequent-flyer schemes, however differing

fact patterns and interpretations of the

requirements in IFRS and U.S. GAAP

continue to result in differences in the

application of these standards. The

upcoming and proposed guidance issued

by the International Accounting Standards

Board (IASB) indicates that IFRS, like

existing U.S. regulations, will require

enhanced disclosures about the key

sources of estimation and uncertainty at

the balance-sheet date that may impact

the carrying amounts of assets and

liabilities over the next reporting period.

Risks and cautionary factors have been

disclosed by airlines reporting in the U.S.

for a number of years. This handbook

analyzes and compares the risk factors

disclosed in a sample of the Securities

and Exchange Commission (SEC) filings

of passenger airlines listed on the U.S.

exchanges.

In order to highlight key financial

reporting trends and issues impacting

airlines, KPMG’s Global Airline practice

has surveyed the 2005 public financial

regulatory filings (annual and interim

reports, 10-Ks, 20Fs and IFRS conversion

releases) of 23 of the world’s airlines that

currently, or will in the near future, report

under either U.S. GAAP or IFRS. The

focus of KPMG’s disclosure survey was:

(1) critical accounting policies (2)

disclosures around transition from

previous GAAP to IFRS; and

(3) disclosure of risk factors. KPMG

reviewed samples of disclosures made

by the following airlines.

Air France – KLM Group

Alitalia – Linee Aeree Italiane S.p.A

AMR Corp/American Airlines Inc

British Airways plc

Cathay Pacific Airways Ltd

Continental Airlines Inc

Delta Air Lines Inc

Deutsche Lufthansa AG

easyJet plc

Iberia Lineas Aereas de Espara, S.A

Japan Airlines Corporation

JetBlue Airways Corporation

Annual report and 20F – March 31,2005 French GAAP, U.S. GAAP1 andSeptember 30, 2005 half year underIFRS as adopted by the European Union

Annual report – December 31, 2005IFRS as adopted by the European Union

10k – December 31, 2005 U.S. GAAP

Annual report and 20F – March 31, 2005UK GAAP, U.S. GAAP1 and IFRS asadopted by the European Union financialinformation release for year endedMarch 31, 2005 (issued July 2005)

Annual report – December 31, 2005Hong Kong Accounting and FinancialReporting Standards



Annual report – December 31, 2005IFRS as adopted by the European Union

Annual report – September 30, 2005UK GAAP and IFRS as adopted by theEuropean Union financial informationrelease for the year ended September30, 2005 (issued January 2006)

Annual report – December 31, 2004

Annual report – March 31, 2005Japanese GAAP


IFRS as adopted by the EuropeanUnion, U.S. GAAP1

IFRS as adopted by the European Union

U.S. GAAP

IFRS as adopted by the EuropeanUnion, U.S. GAAP1

Hong Kong Accounting and FinancialReporting Standards (IFRS based)

U.S. GAAP

U.S. GAAP




Japanese GAAP

U.S. GAAP

Airline Regulatory filing surveyed andreporting GAAP

GAAP under which 2006financial regulatory filing

will be prepared

KPMG’s Global Airline practice has taken

direct extracts from various airline

accounting policies. These extracts have

been taken from the relevant publicly

available regulatory report noted above.

No comment is made by KPMG’s Airline

practice in regard to the adequacy or

otherwise of these policies, rather the

examples used are to demonstrate

current accounting disclosure practice

and to facilitate discussion on key airline

accounting issues as identified by

airlines.

This handbook is not a comparison of

U.S. GAAP and IFRS but rather a

comparison of financial accounting

policies and reporting disclosures made

by airlines reporting under U.S. GAAP

and those transitioning to reporting

under IFRS.

Northwest Airlines Corporation

Qantas Airways Limited

Ryanair Holdings plc

SAS Group

Singapore Airlines Limited

South African Airways

Southwest Airlines Co.

Swiss International Airlines (Group)

United Airlines – UAL Corporation

U.S. Airways – America West HoldingsCorporation

Virgin Blue Holdings Limited


December 31, 2005 half year, IFRS

Annual report and 20F– March 31, 2005Irish, UK GAAP and U.S. GAAP1 and IFRSas adopted by the European Unionexplanation of the financial impact for theyear ended March 31, 2005 (issuedAugust 2005)

Annual report – December 31, 2005 IFRSas adopted by the European Union

Annual report – March 31, 2005 SingaporeFinancial Reporting Standards

Annual report – March 31, 2005 SouthAfrican GAAP


Half-year report – June 30, 2005 IFRS



Annual report – September 30, 2005,Australian GAAP

U.S. GAAP

IFRS

IFRS as adopted by the European Union, U.S. GAAP1


Singapore Financial ReportingStandards (IFRS based)

South African GAAP (IFRS based)

U.S. GAAP

IFRS

U.S. GAAP

U.S. GAAP

Australian equivalents to IFRS

Airline Regulatory filing surveyed and reporting GAAP

GAAP under which 2006financial regulatory filing

will be prepared

1 Securities and Exchange Commission (SEC) Foreign Private Issuer in the U.S.

vi KPMG’s Disc losures Handbook: Account ing and F inanc ia l Report ing in the Globa l A i r l ine Industr y

Forewords

We are pleased to present KPMG’s first Disclosures Handbook for theglobal airline industry. With the current industry focus on reducingcosts in times of record oil prices and continued global conflict, at notime has it been more important to have transparency in the reportingpractices of airlines.

]There has been a fundamental shift in the basis of reporting in the past 18 months with many global airlinesconverting to IFRS. The next move forward is no doubt the continued harmonization of IFRS and U.S. GAAP. Thishandbook takes a first look at how IFRS and U.S. GAAP disclosures and accounting policies line up. Whilst theresult of convergence to date is encouraging in some areas, divergence still remains in other areas such asmaintenance accounting and in some aspects of derivatives accounting.

It is interesting to note the extensive critical accounting policy disclosures that U.S. regulators require. This isan area that until now has had little focus in annual reports elsewhere in the world. Future IFRS requirementsmay see expanded disclosures from airlines in this area and these disclosures will be worthy of review.

The impact of the transition to IFRS has varied considerably between airlines, with approximately U.S.$3.5 billionof net assets being wiped off the opening balance sheets of the airlines surveyed. Almost more importantly,the assets and liabilities recognized under IFRS are often subject to volatile fair value movements, which weexpect will impact the balance sheet and income statement of these airlines on an ongoing basis.

It is still early days in the accounting standard convergence process. We expect a clearer picture will emergeas airlines complete their first full sets of IFRS financial statements during 2006. However, more direct dialogueis required with standard-setting bodies to ensure that the airline industry perspective is understood. Airlinesare truly global businesses and on the ‘front line’ in terms of the impact of changes to global regulations. Henceit is essential that their circumstances are taken into account. We hope you find this handbook a useful referencepoint when contemplating airline specific accounting treatments.

Martin Sheppard

Head of Aviation

KPMG in Australia

Dr. Ashley Steel

Global Chair, Transport

KPMG LLP UK

This publication provides an excellent and timely point of reference as many airlines are reviewing their disclosures.IFRS has moved on from determining and reporting transition impacts to ‘live’ business as usual reportingunder the new GAAP, which will provide a challenge to CFOs reporting to stakeholders. KPMG’s Airline Practicehas worked with the IATA Accounting Working Group to assist airlines with accounting and reporting issuesthrough a series of Airline Accounting Guidelines (AAG) over the last 10 years, with the most recent AAGissued in June 2005 covering foreign currency translation and hedging. This continued relationship hasenhanced accounting and reporting in the airline industry.

John Vierdag

Chairman – IATA Accounting Working Group

International Air Transport Association

Executive summary 11 Critical accounting policies 3

1.1 Revenue recognition 31.1.1 Passenger and freight revenue 3

1.1.2 Frequent flyer accounting 6

1.2 Property, plant and equipment 111.2.1 Aircraft cost 11

1.2.2 Maintenance accounting 15

1.2.3 Airport landing and gate slots 18

1.2.4 Depreciation and residual values 20

1.2.5 Impairment testing 23

1.3 Aircraft leasing 271.3.1 Sale and leaseback transactions 27

1.4 Financial instruments 291.4.1 Hedge accounting 29

1.4.2 Embedded derivatives 34

2 Airline risk factors 353 Analysis of transition to IFRS in 2005 47Appendix – Aircraft useful lives, depreciation rates 50and residual values KPMG’s Global Airline practice contacts 54

Executive summary

The airline industry has faced increasingly complex accountingrequirements with transition to IFRS and changes in U.S. GAAPreporting over the past few years.

KPMG’s Disc losures Handbook: Account ing and F inanc ia l Report ing in the Globa l A i r l ine Industr y 1

The U.S. has experienced significant

changes with the introduction of the

Sarbanes-Oxley legislation and reporting

under Section 404, with many U.S.

foreign private issuers reporting under

this framework for the first time this

coming year. The risk of ‘getting it wrong’

from an accounting or internal control

perspective has never been higher and

regulators in many countries have been

more active and willing to challenge

accounting treatments.

The transition to IFRS by European and

certain Asia-Pacific carriers has set

airlines on a path toward harmonization

of financial reporting. The reporting

KPMG has surveyed, demonstrates that

global airlines transitioning to IFRS have

made similar adjustments in their

financial statements. KPMG’s survey also

highlights that IFRS transition

adjustments have been significant in

terms of their size and nature on the

balance sheet and the income statement

in the areas of recognition and

measurement of financial instruments,

property, plant and equipment, revenue

recognition and accounting for post-

employment benefits.

Looking ahead, KPMG’s Global Airline

practice believes that the ongoing

transition to IFRS, and the increasing

trend to a fair value measurement basis,

is likely to lead to greater volatility for

airlines. Typically, airlines are exposed to

changes in fuel price, foreign exchange

rates and interest rates. Accounting for

hedging activities is burdensome and will

usually lead to some volatility in the profit

and loss, particularly when hedge

accounting requirements are not met and

therefore the fair value of the derivative

is marked to market through the profit or

loss. Companies in the airline industry

generally have higher cashflow volatilities

and higher asset bases compared to

many other industries, which leave them

vulnerable to asset impairment if there

are sudden demand shocks. The range

and impact of the risk factors KPMG has

reviewed highlights the potential for

volatility in results.

The nature of IFRS transition adjustments

KPMG has reviewed illustrates a trend

toward harmonization of accounting

policies between airlines, which should

enable greater comparability for

stakeholders when reviewing the

reporting of different airlines. However,

KPMG’s survey also shows that differing

accounting policy choices remain under

IFRS, both on transition and on an

ongoing basis, which suggests some

differences in the basis of accounting will

continue. Divergent interpretations of

accounting standards, along with

different airline fact patterns, will often

result in differences in the application

of IFRS.

2 KPMG’s Disc losures Handbook: Account ing and F inanc ia l Report ing in the Globa l A i r l ine Industr y

The goal of one set of harmonized

accounting standards is moving forward

slowly with the increasing collaboration

of the U.S. Financial Accounting Standard

Board (FASB) and IASB with a view to

convergence of IFRS and U.S. GAAP. The

‘roadmap’ set out in the agreement

between these standard-setters includes

a series of steps that require completion

prior to the SEC agreeing to eliminate its

reconciliation requirement for SEC

foreign private issuers that report under

IFRS. Convergence topics on the

FASB/IASB agenda include; accounting

for revenue, intangible assets, leasing

and financial instruments. It is no

coincidence that these topics are the

critical accounting policies highlighted by

airlines in their reporting and discussed in

this survey.

As a result of the work of the IASB and

FASB, divergence in significant airline

accounting policies is likely to be reduced

gradually. For example, the IASB is

reviewing the choices for the capitalization

of borrowing costs which may more

closely align IFRS with U.S. GAAP, whilst

the FASB is reviewing maintenance

accounting which may reduce some, if

not all, of the discrepancies with IFRS.

The overall message it would seem is

that in this phase of almost continual

transition and convergence of U.S. GAAP

and IFRS, the need for engagement and

communication between airlines and

standard-setters has never been greater.

1 Critical accounting policies


1.1 Revenue recognition1.1.1 Passenger and freight

revenue Perhaps the most critical accounting

policy for all airlines is revenue

recognition, with the industry generally

generating thin profit margins. Airline

revenue recognition extends from core

passenger and freight revenue to

accounting for complex loyalty or

frequent flyer programs.

The general accounting practice

for passenger and freight revenue

recognition is that revenue received is

deferred and classified as a liability on

the balance sheet until the passenger

or freight is actually uplifted at which

time the revenue is recognized in profit

and loss.

This recognition principle results in

estimation being required to determine

when to recognize unavailed revenue

which occurs where tickets are not used

(also known as ’breakage’). Judgements

and assumptions underpinning estimates

of when to recognize unavailed revenue

can have a significant impact on results.

For this reason, the majority of U.S.

airlines surveyed highlight this as an area

of significant judgement in their financial

statements.

4 KPMG’s Ai r l ine Risk and Account ing Pol ic ies and Disc losures Handbook

Passenger ticket and cargo waybill sales, net of discounts, are recorded as current liabilities in the ’sale in

advance of carriage’ account until recognised as revenue when the transportation service is provided.

Commission costs are recognised at the same time as the revenue to which they relate and are charged

to cost of sales. Unused tickets are recognised as revenue using estimates regarding the timing of

recognition based on the terms and conditions of the ticket and historical trends. Other revenue is

recognised at the time the service is provided.


Passenger and cargo sales are recognised as operating revenue when the transportation is provided. The

value of unused tickets and air waybills is included in current liabilities as sales in advance of carriage and

recognised as revenue if unused after two years and one year respectively.

Singapore Financial Reporting Standards

…Tickets sold for passenger air travel are initially referred to as “Air traffic liability”. Passenger revenue is

recognized and air traffic liability is reduced when the service is provided (i.e., when the flight takes place).

“Air traffic liability” represents tickets sold for future travel dates and estimated future refunds and

exchanges of tickets sold for past travel dates. The balance in “Air traffic liability” fluctuates throughout the

year based on seasonal travel patterns and fare sale activity. The Company's “Air travel liability” balance at

December 31, 2005 was $649 million, compared to $529 million as of December 31, 2004…

Events and circumstances outside of historical fare sale activity or historical Customer travel patterns, as

noted, can result in actual refunds, exchanges, or forfeited tickets differing significantly from estimates. The

company evaluates its estimates within a narrow range of acceptable amounts. If actual refunds, exchanges

or forfeiture experience results in an amount outside of this range, estimates and assumptions are reviewed

and adjustments to “Air traffic liability” and to “Passenger revenue” are recorded, as necessary. Additional

factors that may affect estimated refunds and exchanges include, but may not be limited to, the Company's

refund and exchange policy, the mix of refundable and non-refundable fares, and promotional fare activity.

The company's estimation techniques have been consistently applied from year to year; however, as with

any estimates, actual refund, exchange, and forfeiture activity may vary from estimated amounts…

U.S. GAAP (currency quoted in U.S. dollars)

Sample of accounting policies

British

Airways

Reporting GAAP:

Singapore

Airlines

Reporting GAAP:

Southwest

Airlines

Reporting GAAP:

KPMG’s Ai r l ine Risk and Account ing Pol ic ies and Disc losures Handbook 5

Key considerations in applyingthe sample accounting policies The financial reports surveyed highlight

key assumptions and judgements which

impact passenger and freight revenue

recognition. These include determining:

• when and how unavailed revenue

recognized on the balance sheet

should be released to profit and loss

• the amount of expenses to be netted

against revenues rather than being

recognised as a cost of sale; and

• the disclosure of changes in customer

behaviour or ticket conditions between

reporting periods which result in

one-off amounts of revenue being

recognized.

In practical terms, implementation of

an appropriate revenue recognition

accounting policy and underlying

methodology will be dependent on

available historical data, sophistication of

revenue accounting systems and the

availability of data to determine breakage

rates. For example, whether breakage

data is available by ticket type, route

(leisure routes may have different

breakage rates than business routes) and

inter-line tickets (where a passenger

ticket is sold by one airline but the

passenger is flown by another airline).

The sample accounting policies show

that methods vary from detailed

statistical and historical trend analysis to

time based recognition. In either

instance, the underlying ticket terms and

conditions are key in determining an

appropriate accounting policy.

Whilst an accounting policy of offsetting

expenses incurred in generating revenue,

such as commissions, taxes and other

levies, does not impact net profit or loss,

it impacts non-GAAP financial performance

measures such as unit cost per seat mile

ratios that receive close attention from

analysts and finance providers.

The disclosure of one-off changes to

estimates is guided by the relevant

reporting GAAP. A number of airlines in

the survey have reported these changes

as they occur. The materiality of the

change in estimate is likely to guide the

extent of the disclosure.

Survey findings All airlines surveyed defer passenger and

freight revenue until the customer or

cargo is uplifted. There are a variety of

disclosures dealing with accounting for

unavailed revenue. The U.S. airlines

surveyed state that they recognize

unavailed revenue based on estimates

that are underpinned by historic trends,

adjusting for ticket usage patterns,

refunds, exchanges and inter-line

adjustments. Generally, other airlines

state only that unavailed revenue is

recognized on a ’systematic basis’.

Singapore Airlines is the only airline that

states specifically that passenger

unavailed revenue is recognized on a

time expiry basis if the ticket remains

unused for more than two years.


1.1.2 Frequent flyeraccounting

Customer loyalty programs or ’frequent

flyer’ programs are now a core product

offering for most multiple-class airlines

and a growing number of low cost

carriers to differentiate from competitors

and capture higher yielding business

customers. Frequent flyer programs offer

passengers the opportunity to earn

points or ’miles’, which can be redeemed

in exchange for free flights or other

products. Points or miles are principally

earned in two ways:

• Earned points – points earned through

travel on an airline or an airline’s

partners’ qualifying flights.

• Sold points – points sold to third

parties such as credit card providers,

hotels and car rental companies. These

third parties reward their customers

with points when they purchase or

use their products. Cash is received

by the airline from the third party upon

issue of the points by the airline.

There are two principle methods of

accounting for frequent flyer programs in

the airline industry:

• ’Incremental cost’ method. Revenue

from sold points is recognized

immediately and passenger revenue

for flights on which passengers earn

points is recognised in accordance

with the airline’s revenue recognition

policy (see 1.1.1). A provision is then

recognized based on the marginal or

incremental cost per point (i.e. the

cost of fuel, meals, insurance and

ticketing costs) to the airline of point

redemption. The provision is

extinguished when the passenger

utilizes or ’burns’ the points.

• ’Deferred revenue’ method. Revenue

from sold points is deferred on the

balance sheet and recognized in the

profit or loss when the award points

are redeemed. For earned points, a

portion of the passenger revenue is

deferred as a liability in the balance

sheet and only recognised as revenue

when the points are redeemed. No

associated provisions are required.

Revenue and cost recognition profiles are

profoundly different under the two

methodologies. Airlines reporting under

U.S. GAAP and many airlines that have

transitioned to IFRS apply the ‘deferred

revenue’ method for sold points. The

majority of airlines continue to account

for earned points using the ‘incremental

cost’ method. Most U.S. airlines discuss

accounting under both methodologies

and provide a summary of both

methodologies. The Qantas disclosure

summarizes the accounting position

under IFRS. The International Financial

Reporting Interpretations Committee

(IFRIC), the interpretation body for IFRS,

is currently looking at loyalty program

accounting and the appropriate revenue

recognition. As IFRS converges with U.S.

GAAP, it will be interesting to see the

outcome of the IFRIC’s review.


Frequent Flyer Accounting. United’s Mileage Plus frequent flyer program awards mileage credits to passengers

who fly on United, Ted, United Express, the Star Alliance carriers and certain other airlines that participate in the

program. Additionally, United sells mileage credits to participating airline partners in the Mileage Plus program

and ULS sells mileage credits to non-airline business partners. In any case, the outstanding miles may be

redeemed for travel on United, or any airline that participates in the program (in which case, United pays a

designated amount to reimburse the transporting carrier). The Company has an obligation to provide this future

travel; therefore, we recognize a liability and corresponding expense for mileage earned by passengers who flew

on United, Ted, United Express, Star Alliance partners, or one of the Mileage Plus airline partners. For miles

earned by members through non-airline business partners, a portion of revenue from the sale of mileage is

deferred and recognized when the transportation is provided.

At December 31, 2005, our estimated outstanding number of awards to be issued against earned and

outstanding mileage credits was approximately 10.1 million, compared to 10.2 million for December 31, 2004.

We currently estimate that approximately 8.3 million of these awards will ultimately be redeemed and,

accordingly, have recorded a liability of $923 million, which includes the deferred revenue from the sale of miles

to non-airline business partners. We utilize a number of estimates in accounting for the Mileage Plus program

that require management judgment as discussed below.

Members may not reach the threshold necessary for a free ticket award and outstanding miles may not always

be redeemed for free travel. Therefore, based on historical data and other information, we estimate how many

miles will never be used for an award and exclude those miles from our estimate of the Company’s liability. We

also estimate the average number of miles that will be used to redeem an award, which can vary depending

upon member choices from alternative award categories. If average actual miles used per award redeemed are

more or less than previously estimated, we must subsequently adjust the liability and corresponding expense.

A hypothetical 1% change in our estimate of breakage, currently estimated at 18%, has approximately a U.S.

$3.5 million effect on the liability.


United Airlines


When a travel award level is attained by a Mileage Plus member, we record a liability for the estimated incremental

cost to United of providing the related future travel, based on expected redemption. For award redemptions

expected to occur on United, United’s incremental costs are estimated to include variable items such as fuel,

meals, insurance and ticketing costs, for what would otherwise be a vacant seat. The estimate of incremental

costs does not include any indirect costs or contribution to overhead or profit. A change to these cost estimates,

such as a significant change in jet fuel prices, could have a significant impact on our liability in the year of change

as well as in future years, since underlying variable cost factors can differ significantly from period to period. A

hypothetical 1% change in the cost of jet fuel has approximately a U.S. $783 thousand effect on the liability.

In 2005, 1.9 million Mileage Plus travel awards were used on United, as compared to 1.7 million awards used in

2004, and 2.0 million in 2003. This number represents the number of awards for which travel was actually

provided and not the number of available seats that were allocated to award travel. These awards represented

6.6 percent of United’s total revenue passenger miles in 2005, 7.4% in 2004 and 9.0% in 2003. Passenger

preference for Saver awards, which have stringent seat inventory level limitations but require the use of fewer

miles to redeem the award, keeps the potential displacement of revenue passengers on United by award travel

at a lower level than would be the case for less restrictive awards. Total miles redeemed for travel on United in

2005, including travel awards and class-of-service upgrades, represented U.S. 79% of the total miles redeemed,

of which 70% were used for travel within the US and Canada…


The Qantas Group receives revenue from the sale to third parties of rights to have Qantas award points

allocated to members of the Qantas Frequent Flyer Program. This revenue is deferred and recognised in

the Income Statement when the points are redeemed and passengers uplifted. Members of the Qantas

Frequent Flyer Program also accumulate points by travelling on qualifying Qantas and partner airline

services. The obligation to provide travel rewards to members arising from these points is provided for as

points are accumulated, net of estimated points that will not be redeemed. The provision is based on the

incremental cost (being the cost of meals, fuel and passenger expenses) of providing the travel rewards.

The provision is reduced as members redeem awards or if their entitlements expire.

IFRS


Reporting GAAP:

Qantas

Reporting GAAP:

Key considerations in applyingthe sample accounting policiesThe financial reports surveyed emphasise

that frequent flyer accounting involves a

high level of estimation and judgement.

The reports surveyed make reference to

a number of estimates that form the

basis of accounting for these schemes,

as outlined below.

Application of the ’incremental cost’

method

• Displacement of fare-paying

passengers – to support use of the

‘incremental cost’ method, it is

important for airlines to analyse the

level of displacement of fare-paying

passengers to demonstrate that

frequent flyers are utilising a seat that

would otherwise be vacant. This is a

key assumption in enabling the airline

to raise a provision for the points

when a ticket is sold, versus deferring

a portion of a ticket value attributable

to the points. Most of the U.S. airlines

surveyed note that displacement of

revenue passengers is kept to a

minimal level through management of

load factors, frequent flyer inventory,

frequent flyer travel ’black out’ periods

and this is illustrated through the the

low ratio of points usage to revenue

passenger miles (see table on page 9).


• Estimation of the incremental cost of

fulfilling the award. Airlines estimate

the marginal or incremental cost of a

point. The incremental cost may differ

depending on whether the points are

expected to be redeemed on its own

airline or other airlines or providers of

services. When points are purchased

from other airlines or providers of

services to satisfy redemptions, they

are accrued at the contractual rate of

expected redemption on those carriers

and service providers. When the

points are redeemed by flying on that

airline or a partner airline the liability is

utilized.

Application of both ’incremental cost’ and

’deferred’ method

• Estimation of breakage rates (i.e.

points awarded which will not be

utilised) will depend on point expiry

time limits and are usually determined

by reference to historical rates of point

utilisation.

• Assessment of the threshold at which

an accrual for points is recognized.

Some airlines such as American, Delta

and United Airlines do not accrue a

liability until a frequent flyer member

reaches the minimum threshold

mileage to claim a free flight.

Application of the ’deferred revenue’

method

• Estimation of the revenue per point –

this is relevant where airlines have

adopted ‘deferred revenue’ accounting

for earned points. When applying this

methodology to earned points, an

airline must estimate the portion of

revenue paid for a ticket that relates to

the frequent flyer points earned when

the ticket is purchased.

This portion of revenue is then

deferred in the balance sheet and

recognised as revenue when the

points are utilised.

• Proportion of cash earned on sold

points – where cash is received from

third parties on the sale of points, how

much revenue (if any) can be

recognized on sale with the remainder

(usually the whole or vast majority of

value) recognized on uplift.

Survey findings One of the distinct trends the survey

highlights is the move towards adoption

of the ‘deferred revenue’ method for sold

points for non-U.S. airlines. Cathay

Pacific, British Airways and Qantas have

transitioned from ‘incremental cost’ to

‘deferred revenue’ accounting for sold

points in the 2005 reporting period, the

latter two on adoption of IFRS in 2005.

All airlines surveyed that report under

U.S. GAAP adopt a ‘deferred revenue’

approach for sold points and the

‘incremental cost’ method for earned

points. All other airlines surveyed adopt

the ‘incremental cost’ method for earned

points.

The level of disclosures in relation to the

measurement of provisions under the

‘incremental cost’ method varies. JetBlue

state that in estimating their provision for

such incremental costs ‘we currently

assume that 90 percent of earned

awards will be redeemed and that 30

percent of our outstanding points will

ultimately result in awards’.

American Airlines’ 10k states, “in making

the estimate of free travel awards,

American has excluded mileage in

inactive accounts, mileage related to

accounts that have not yet reached the

lowest level of free travel award, and

mileage in active accounts that have

reached the lowest level of free travel

award but which are not expected to ever

be redeemed for free travel …”

A number of U.S. airlines and U.S. GAAP

filers disclose the portion of ‘Revenue

Passenger Miles’ relating to frequent

flyer award flights as part of their

rationale that there is minimal passenger

displacement from award flights. These

disclosures are summarised on page 9.


Airline2005 2004 2003 2002

American Airlines1 7.2% 7.5% 7.8% N/D

America West2 1.7% 1.7% 1.7% N/D

British Airways 3.2% 4.0% 4.4% N/D

Continental Airlines4 7.0% 5.6% N/D N/D

Delta Airlines4 9.0% 8.0% 9.0% 9.0%

Northwest Airlines4 7.3% 6.9% 7.5% 7.8%

Southwest Airlines5 6.6% 7.1% 7.5% 6.8%

United Airlines4 6.4% 7.4% 9.0% 7.8%

N/D = Not disclosed

1 = of passengers boarded

2 = Average awards redeemed as a percentage of revenue passenger miles in each year

3 = Frequent flyer revenue passenger kilometres (RPK) as a percentage of total RPKs)

4 = Award flights as a percentage of revenue passenger miles in each year

5 = of revenue passengers carried


1.2 Property, plant andequipment

1.2.1 Aircraft cost The airline industry has contended with

several significant events in recent times

that have led to major losses, bankruptcy

or bankruptcy protection of a number of

major airlines. This has included the

terrorist attacks in New York and London,

SARS, the Iraq war, Bali bombings and

avian flu. These events have impacted the

secondary aircraft market and

consequently the valuation of aircraft

assets in financial statements.

Aircraft and aircraft-related assets are

high-cost assets. The list price of a new

wide-bodied aircraft may be in the

hundreds of millions of dollars.

Accounting for such high value and

complex assets involves consideration of

several factors.

Foremost of these is the determination

of what costs are capitalized as part of

the cost of the aircraft. Generally all costs

incurred in bringing the aircraft into

working condition should be capitalized.

This will include purchase-right payments

and may also include capitalized

borrowing costs where the funds are

borrowed specifically (or a notional

allocation of general indebtness) for an

aircraft that is deemed to be a ‘qualifying’

asset. Under IFRS there is a choice as to

whether borrowing costs relating to a

‘qualifying’ asset are expensed, whereas

U.S. GAAP requires such borrowing costs

to be capitalized. (This principle is the

subject of review by the IASB with the

potential for the option to expense

borrowing costs being eliminated).

IFRS requires major component parts of

assets to be capitalized and appropriate

depreciation policies applied to each

identified component. Typically, this might

involve separately identifying and

depreciating components such as

airframes, engines, cost of major

inspections, modifications, seats, in-flight

entertainment, landing gear, rotables

and repairables.

A common feature of aircraft purchase

contracts are the offering of manufacturer

or engine ’credits’ to airlines as an

incentive to purchase a manufacturer’s

aircraft or engine. These credits are in-

substance rebates or discounts from the

purchase price of the asset and are

typically deducted from the acquisition

cost of the asset capitalized on the

balance sheet.


Tangible fixed assets are stated at cost less accumulated depreciation…

… An element of the cost of a new aircraft is attributed to prepaid maintenance of its engines and airframe…

The cost of new Airbus aircraft comprises the invoiced price of the aircraft from the supplier less the

estimated value of other assets received by easyJet for no consideration in connection with the

transaction to purchase aircraft. Principal assets received for no consideration in connection with the

acquisition of aircraft include the following:

• Cash – The cash received is recognised as an asset in the balance sheet. The corresponding credits are

treated as a discount and are spread equally across each of the 120 Airbus aircraft to be delivered.

• Aircraft spares – These are capitalised in the balance sheet at their list price and are then depreciated

according to easyJet’s stated accounting policies for spares. The corresponding credits are then spread

equally across the cost of each of the 120 Airbus aircraft to be delivered.

Advance payments and option payments made in respect of aircraft purchase commitments and options

to acquire aircraft where the balance is expected to be funded by mortgage financing are recorded at cost.

On acquisition of the related aircraft, these payments are included as part of the cost of aircraft and are

depreciated from that date…

easyJet’s disclosure of anticipated accounting policies under IFRS as adopted by the European Union

released in January 2006

Items of property, plant and equipment are initially recorded at cost, being the fair value of the consideration

provided plus incidental costs directly attributable to the acquisition…

Major modifications to aircraft and the costs associated with placing the aircraft into service are capitalised

as part of the cost of the asset to which they relate. The cost of major inspections of aircraft and engines is

capitalised and depreciated over the scheduled usage period to the next major inspection event. All other

aircraft maintenance costs are expensed as incurred. Manpower costs in relation to employees that are

dedicated to major modifications to aircraft are capitalised as part of the cost of the modification to which

they relate. Borrowing costs associated with the acquisition of qualifying assets such as aircraft and the

acquisition, construction or production of significant items of other property, plant and equipment are

capitalised as part of the cost of the asset to which they relate.

IFRS

Special rule for the opening balance sheet

In the context of the initial application of the IFRS and in accordance with the option offered by IFRS 1, the

Group valued the fair value of its fleet at April 1, 2004 and used this valuation as the “assumed cost”.

This treatment thus allows the Group to have all of its fleet accounted for at fair value, given that market

value was used when valuing the acquisition balance sheet for the acquisition of the KLM group in the

same period (May 1, 2004).

The valuations were conducted by independent experts.


easyJet

Reporting GAAP:

Qantas

Reporting GAAP:

Air France–KLM


Principles applicable since April 1, 2004

Property, plant and equipment are recorded at the historical acquisition or manufacturing cost, less total

amortizations and any depreciation for loss of value.

The financial interest on the capital used to finance the investments during the period prior to operation

are an integral part of the historical cost. Insofar as investment installments are not financed by specific

loans, the Group uses the average interest rate on the current unallocated loans at the end of the period

in question.

Maintenance costs are booked as expenses for the period, with the exception of programs that extend the

useful life of the asset or increase its value, which are then capitalized (maintenance on airframes and

engines excluding parts with limited useful lives).

Flight equipment

The acquisition price of aircraft equipment is denominated in foreign currencies. It is converted at the

payment price or, if applicable, at the hedging price assigned to it. Manufacturers’ discounts if any are

deducted from the value of the asset in question.

Aircraft are depreciated using the straight-line method over their average estimated useful life. Since April

1, 2004, this period has been set at 20 years without residual value except in special cases.

Given a market in which transactions are denominated in U.S. dollars, and the useful life set on average at

20 years, no residual value on the date of entry into service is determined on the acquisition date.

The accounting standard recommends an annual review of the residual value and the amortization

schedule. During the operating cycle, in developing fleet replacement plans, the Group reviews whether

the amortizable base or the useful life should be adapted and, if necessary, determines whether a residual

value should be recognized.

Any airframes and engines (excluding parts with a limited useful life) are isolated from the aircraft

acquisition price and amortized over the current duration until the next scheduled major maintenance

event.

Aircraft parts are recorded in the consolidated balance sheet as fixed assets. The amortization period varies

from 3 to 20 years depending on the technical properties of each item.



Reporting GAAP:

Key considerations in applyingthe sample accounting policies Outlined below are the key factors that

impact the accounting for aircraft cost:

• The level of component parts which

are identified and capitalized and the

useful lives and residual values of

these components. (Useful lives,

depreciation rates and residual values

are considered in further detail in

section 1.2.4.)

• The elements of costs to be

capitalized into the aircraft. Costs

capitalized under IFRS are not always

the same as those permitted under

U.S. GAAP, for example, under IFRS

interest costs are either capitalised or

expensed whereas under U.S. GAAP

interest costs must be capitalised

where the company has deemed an

aircraft to be a qualifying asset. Also,

hedging gains or losses on progress

payments are generally included in the

determination of the cost of the

aircraft and where IFRS and U.S.

GAAP differ on accounting for

derivatives, it may impact the costs

that can be capitalized.

The treatment of credits received from

aircraft or engine suppliers to incentivise

the purchase of aircraft. These credits

come in various forms including

guaranteed trade-in values, spare parts

support, marketing support, training

support or introduction cost support. The

financial statements of airlines surveyed

indicates that the vast majority of these

rebates are offset against the cost

capitalized in respect of the aircraft and

not recognized as revenue in the profit

or loss.

• Accounting for modifications to

aircraft. Modifications may require

capitalization depending on their

nature.

• Accounting for maintenance

expenditure. Airlines must distinguish

between one-off maintenance repairs

which restore an asset to its normal

condition, for example, repairs arising

from birdstrike damage which should

be expensed, as opposed to major

maintenance expenditure or

expenditure which replaces

components of an aircraft. For

example, a new type of business class

seat or more efficient fuel delivery

system which would be capitalizable

as an asset. (This is discussed in more

detail in section 1.2.2.)

Survey findingsThe nature of costs disclosed by airlines

as capitalized as part of the cost of the

aircraft were generally consistent.

The accounting for manufacturers’

credits/discounts were not disclosed by

most airlines surveyed, however when

the accounting policy was disclosed such

as by easyJet, they were deducted from

the initial cost of the asset.

Where aircraft were purchased through a

series of progress payments, the interest

attributed to these payments was

generally capitalized as a cost of the

underlying aircraft asset.

The level of disclosure in respect of

accounting for component parts of an

aircraft and associated depreciation

policies is summarized in section 1.2.4.



1.2.2 Maintenanceaccounting

Airlines are required to conduct varying

levels of aircraft maintenance which

involve significantly different labor and

materials inputs.

Maintenance requirements depend on

the age and type of aircraft and the route

network over which they operate.

Technological changes mean that ‘new

generation’ aircraft have maintenance

profiles different to older aircraft.

Fleet maintenance requirements may

involve short cycle engineering checks,

for example, component checks, monthly

checks, annual airframe checks, periodic

heavy maintenance (eg. ’C’ checks and

’D’ checks) and engine checks. With ‘new

generation’ aircraft changing historic

maintenance profiles, the fact pattern of

the airline’s actual system of

maintenance is crucial.

The survey highlighted that airlines adopt

varying accounting policies for

maintenance. Routine ’day-to-day’

maintenance is usually expensed. Heavy

or major cyclical maintenance is

accounted for in three different ways

(depending on the reporting GAAP):

expensed as incurred; capitalized as a

component part of the aircraft’s cost and

depreciated over the period to the next

major maintenance ’event’; or provided

for in advance based on the expected

cost of maintenance. Power-by-the-hour

maintenance agreements are becoming

more prevalent, with the accounting for

these depending on the substance of the

agreement and whether the aircraft is

owned or leased.

The accounting policy adopted is

somewhat dependent on the GAAP

under which the airline reports. IFRS

prohibits creating a provision for major

maintenance in advance for owned

aircraft. Instead (using aircraft as an

example) IFRS requires that major

inspection costs are recognized as a

component of the cost of aircraft asset

and depreciated over the period to the

next heavy maintenance ‘event.’

U.S. GAAP allows any of the three

options of expensing major maintenance:

expensing as incurred, capitalization as a

component part of the aircraft or creation

of provisions for expected costs in

advance. However, the FASB is currently

reviewing the option to create a provision

in advance for expected maintenance

costs, with the current preferred option

to expense as incurred. Under both IFRS

and U.S. GAAP routine servicing and

maintenance costs must be expensed

as incurred.


Major overhaul expenditure, including replacement spares and labour costs, is capitalised and amortised over

the average expected life between major overhauls. All other replacement spares and other costs relating to

maintenance of fleet assets are charged to the income statement on consumption or as incurred respectively.


Routine maintenance, airframe and engine overhauls are charged to expense as incurred or when the asset is

inducted at the vendor for service, except engine overhaul costs covered by power-by-the-hour type

agreements, which are accrued on the basis of hours flown. Modification that enhance the operating

performance or extend the useful lives of airframes or engines are capitalized and amortized over the remaining

estimated useful life of the asset.

U.S. GAAP

With respect to the group’s operating lease agreements, where the group has a commitment to maintain the

aircraft, provision is made during the lease term for the obligation based on estimated future costs of major

airframe and certain engine maintenance checks by making appropriate charges to the profit and loss account

calculated by reference to the number of hours or cycles operated during the year. All other maintenance costs

are expensed as incurred.

Irish and UK GAAP with no difference noted in the subsequent IFRS release in August 2005

Maintenance and repairs, including the cost of minor replacements, are charged to maintenance expense as

incurred, except for costs incurred under our power by the hour engine maintenance agreements, which are

expensed based upon the number of hours flown…

U.S. GAAP

Maintenance and repair costs for owned and leased flight equipment are charged to operating expense as incurred.

AWA historically recorded the cost of major scheduled airframe, engine and certain component overhauls as

capitalized assets that were subsequently amortized over the periods benefited, (referred to as the deferral

method). U.S. Airways Group charges maintenance and repair costs for owned and leased flight equipment to

operating expense as incurred. In 2005, AWA changed its accounting policy from the deferral method to the direct

expense method. While the deferral method is permitted under accounting principles generally accepted in the

United States of America, U.S. Airway Group and AWA believe that the direct expense method is preferable and

the predominant method used in the airline industry. The effect of this change in accounting for aircraft

maintenance and repairs is recorded as a cumulative effect of a change in accounting principle.

U.S. GAAP


British Airways

Reporting GAAP:

Northwest

Airlines

Reporting GAAP:

Ryanair

Reporting GAAP:

United Airlines

Reporting GAAP:

U.S. Airways

Reporting GAAP:

Key considerations in applyingthe sample accounting policies The financial reports surveyed show that

capitalization of heavy maintenance or

providing for maintenance in advance

requires significant levels of judgment on

the part of management due to the

estimation involved. Where maintenance

is capitalized, in our experience

management typically consider:

• What maintenance events are

capitalized? What defines ’major

maintenance’ – is it by type of check

or measured by a quantitative

threshold? What constitutes major

maintenance for airframes and for

engines?

• What constitutes a major cyclical

maintenance expense versus

’abnormal’ maintenance?

• How are costs measured? The

measurement of costs may be clear

if it is based on an actual invoices

provided by a third party, but how are

costs attributed if an airline undertakes

its own maintenance?

• How are power-by-the-hour contracts

accounted for? Straight forward

power-by-the-hour costs are expensed

but often top-up or refund

arrangements embedded in the

contracts may mean that by-the-hour

arrangements are in substance

maintenance prepayments and

therefore require different accounting.

• How are maintenance costs for aircraft

subject to an operating lease

accounted for? Typically aircraft

operating leases include requirements

to undertake maintenance in line with

manufacturers’ recommendations and

some airlines provide for maintenance

on a flying hour basis.

• How is the useful life for capitalized

maintenance determined? It may be

difficult to establish accurate periods

for maintenance depreciation given

different aircraft utilization/cycles.

Survey findings Airlines reporting under IFRS, or

transitioning to IFRS account for major

maintenance as a component of the

aircraft and capitalize and depreciate the

maintenance cost over the period until

the next maintenance ‘event’. Almost all

airlines surveyed that have transitioned to

IFRS including British Airways, Air France

– KLM and Qantas have moved from a

policy of expensing all maintenance to

capitalizing heavy maintenance.

Of the airlines surveyed, accounting for

maintenance and repairs under ’power-by-

the-hour’ contracts generally were

accrued and expensed on the basis of

hours flown.

Airlines surveyed that report under U.S.

GAAP either capitalized or expensed

maintenance costs. A limited sample of

the airlines surveyed disclosed the

treatment of maintenance costs on

different fleet types.



Route acquisition costs and airport operating and gate lease rights represent the purchase price attributable

to route authorities (including international airport take-off and landing slots), domestic airport take-off and

landing slots and airport gate leasehold rights acquired. Indefinite-lived intangible assets (route acquisition

costs) are tested for impairment annually on December 31, rather than amortized, in accordance with

Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142).

Airport operating and gate lease rights are being amortized on a straight-line basis over 25 years to a zero

residual value.

U.S. GAAP

Landing rights acquired from other airlines either directly or as a result of a business combination are

capitalised at cost (or at fair value if acquired through a business combination) and amortised over a period

not exceeding 20 years. The carrying value is reviewed for impairment if events or changes in circumstances

indicate the carrying value may not be recoverable.


Routes represent the right to fly between cities in different countries. Routes are indefinite – lived intangible

assets and are not amortized. We perform a test for impairment of our routes in the fourth quarter of each

year.

Airport operating rights represent gate space and slots (the right to schedule an arrival or departure within

designated hours at a particular airport). Airport operating rights are amortized over the stated term of the

related lease or 20 years…

U.S. GAAP

Airport landing slots are stated at cost less any accumulated impairment losses. Airport landing slots are

allocated to cash generating units and are not amortised as they are considered to have an indefinite useful

life and are tested annually for impairment.

IFRS


American

Airlines

Reporting GAAP:

British Airways

Reporting GAAP:

Continental

Reporting GAAP:

Qantas

Reporting GAAP:

1.2.3 Airport landing andgate slots

As global air traffic continues to grow,

space at airports is becoming

increasingly constrained. This has

resulted in airlines trading airport landing

and gate slots in an informal ’secondary

market’, particularly at key international

hubs such as London Heathrow. The cost

of acquiring landing slots or airport

operating rights is generally capitalized as

an intangible asset by airlines reporting

under IFRS and U.S. GAAP.

Key considerations in applyingthe sample accounting policies The financial reports surveyed highlight

that accounting for landing slots or

operating rights is dependent on the

underlying rights and length of access

that the slots or rights provide. Under

both U.S. GAAP and IFRS intangible

assets with an indefinite useful life are

not amortized, but rather are assessed

for impairment annually and when there

are indicators of impairment at reporting

date.

Survey findingsThe accounting policies of the airlines

surveyed were mixed. The majority of

non-U.S. airlines surveyed made no

specific disclosures in relation to aircraft

landing slots.

Several airlines surveyed had capitalized

acquired landing slots as indefinite life

intangible assets. A number of the U.S.

airlines surveyed had capitalized airport-

operating rights and amortized them over

a period of 20-25 years.

The impairment testing of intangible

assets is considered in section 1.2.5.



1.2.4 Depreciation andresidual values

Two of the most basic but important

accounting estimates airline management

make is the useful lives and residual

values of aircraft. These estimates

determine effective depreciation rates.

Useful lives and residual values of

existing aircraft fleets are increasingly

being impacted by ‘new generation’

aircraft. These aircraft have reduced

operating costs and are adversely

impacting the values of older aircraft in

the secondary market. When decisions

are made to retire aircraft earlier than

anticipated, accelerated depreciation may

need to be applied prospectively to

reduce the carrying value of aircraft.

Aircraft-related, asset depreciation

policies and residual value assumptions

vary across airlines. This may cause

significant differences in periodical

profitability and impact the comparability

of businesses within the industry.

Tangible assets are depreciated on a straight line basis every year using depreciation rates intended to

reflect the remaining useful life of the assets.

More specifically, the following rates of depreciation are charged on the fleet – depreciation is in line with

normal practice in the air transport industry:

The recoverability of the value of tangible assets is checked using the method laid down by IAS 36 as

described under “Impairment of assets”.

The depreciable amount of a tangible asset consists of its initial book value net of its residual value. IAS 16

defines residual value as an estimate of the amount the business expects to recover through the sale of the

asset, net of disposal costs, assuming the asset is already in the condition expected for it at the end of its

useful life.

The Alitalia Group has adopted a certain percentage of the initial historic cost of its aircraft as their residual

value as follows:

Useful life is intended as the period of time during which an asset is expected to be available for use by

the business. The Alitalia Group extends the useful life of those aircraft which, having undergone their third

heavy maintenance, show a lag between the depreciation period of the aircraft and the period of the

cyclical maintenance…


Alitalia

Long haul aircraft (B777, B767, MD11) 20 years 5%

Short-medium haul aircraft (A321, A320, A319, MD80, ERJ145) 18 years 5.5%

Turboprop aircraft (ATR 72) 14 years 7.14%

10% For B777, B767, MD11, A321, A320, A319, ERJ145

5% For MD80, ATR72

0 For ATR42


…Where the individual components of a complex tangible asset have different useful lives, they are recorded

separately so that they can be depreciated over their useful lives using a component approach. In particular,

aircraft have been broken down into the following components:

• heavy maintenance (i.e. D-check, IL inspection);

• airframe;

• engine.

The component approach is also used to separate the value of land and buildings. Only buildings are depreciated.

Assets held under finance leases are depreciated based on their estimated useful lives in the same manner

as owned assets…


The provision for depreciation of operating equipment and property is computed on the straight-line method

applied to each unit of property, except that major rotable parts, avionics and assemblies are depreciated on

a group basis. The depreciable lives used for the principal depreciable asset classifications are:

Effective January 1, 2005, in order to more accurately reflect the expected useful life of its aircraft, the

Company changed its estimate of the depreciable lives of its Boeing 737-800, Boeing 757-200 and McDonnell

Douglas MD-80 aircraft from 25 to 30 years. As a result of this change, Depreciation and amortization

expense was reduced by approximately U.S. $108 million for the year ended December 31, 2005.

Residual values for aircraft, engines, major rotable parts, avionics and assemblies are generally five to ten

percent, except when guaranteed by a third party for a different amount.

Equipment and property under capital leases are amortized over the term of the leases or, in the case

of certain aircraft, over their expected useful lives. Lease terms vary but are generally ten to 25 years for

aircraft and seven to 40 years for other leased equipment and property.



Reporting GAAP:

American

Airlines

Reporting GAAP:

Depreciable Life

American jet aircraft and engines 20-30 years

Major rotable parts, avionics and assemblies Life of equipment to which applicable

Improvements to leased flight equipment Term of lease

Buildings and improvements (principally on leased land) 5-30 years or term of lease, including

estimated renewal options when

renewal is economically compelled at

key airports

Furniture, fixtures and other equipment 3-10 years

Capitalized software 3-10 years

Key considerations in applyingthe sample accounting policies Determining an appropriate depreciation

rate and associated aircraft residual value

is dependent on a number of factors

including:

• intended life of the fleet type being

operated by the airline

• estimate of the economic life from the

manufacturer

• fleet deployment plans including

timing of fleet replacements

• changes in technology

• repairs and maintenance policies

• aircraft operating cycles (long-haul

aircraft may have a different

depreciation profile to high cycle short

haul aircraft)

• prevailing market prices and the trend

in price of second hand and

replacement aircraft

• legal constraints on registration

• aircraft-related fixed asset depreciation

rates, for example, rotables and

repairables may reflect the airline’s

ability to use common components

across different aircraft types.

Survey findingsDepreciation and residual value accounting

policy assumptions are mixed. Generally

aircraft assets are depreciated over 15 to

25 years to residual values of between

0 to 20 percent. The straight-line method

of depreciation is the most commonly

used. Airline disclosures demonstrate

that a small change in estimate can have

a large impact on profit or loss. Appendix 1

shows that there is significant divergence

depreciation assumptions. In our experience

this is likely to reflect the different flying

patterns of each airline as well as differing

management views on this matter.

Appendix 1 summarizes the individual

asset type, useful lives, depreciation rates

and residual values of the airlines surveyed.


1.2.5 Impairment testing The airline industry is highly capital

intensive. The majority of airlines have

hundreds of millions to billions of U.S.

dollars of tangible assets capitalized on

their balance sheet representing aircraft

and related infrastructure and support

assets.

Whilst capital investment is high,

earnings have historically been volatile.

The airline industry is vulnerable to

economic recession and external demand

shocks such as those caused by terrorist

acts, pandemics or overseas conflicts.

The latest challenge being record high

fuel prices. The industry, in particular the

U.S., has lost billions of dollars over the

past five years. Achieving an acceptable

return on capital is a constant challenge.

The directors and management of airlines

not meeting required returns on capital or

sufficient levels of profitability are likely

to be regularly reviewing the carrying

value of aircraft assets. Both IFRS and

U.S. GAAP require that a review for

impairment be undertaken if events

indicate that asset-carrying amounts may

not be recoverable, and this be done at

least annually.



Pursuant to IAS 36 "Impairment of Assets", the Group reviews annually the book values of tangible and

intangible assets in order to assess whether there is any indication showing that the value of these assets

could change. If such an indication exists, the recoverable value of the assets is estimated in order to

determine the amount, if any, of the loss of value. The recoverable value is the higher of two values: the

fair value minus selling costs and its useful value.

When it is not possible to estimate the recoverable value of an asset considered separately, it is attached

to other assets.

The Group determined that the smallest level at which assets could be tested were the cash-generating

units (CGU) corresponding to the Group’s business sectors.

When the recoverable value of a CGU is less than its book value, a depreciation is recognized. This

depreciation is allocated first to the balance sheet value of the goodwill. The remainder is allocated to the

other assets composing the CGU prorated on the basis of their book value.

The recoverable value of the CGUs is determined by using a discount rate corresponding to the weighted

average cost of the Group’s capital, which was 7.5% for fiscal 2004/05.


We record impairment losses on long-lived assets used in operations, primarily property and equipment

and airport operating rights, when events and circumstances indicate that the assets might be impaired

and the undiscounted cash flows estimated to be generated by those assets are less than the carrying

amount of those items. Our cash flow estimates are based on historical results adjusted to reflect our best

estimate of future market and operating conditions. The net carrying value of assets not recoverable is

reduced to fair value. Our estimates of fair value represent our best estimate based on industry trends and

reference to market rates and transactions.

We recognized fleet impairment losses in 2003 which were partially the result of the September 11, 2001

terrorist attacks and the related aftermath. These events resulted in a re-evaluation of our operating and

fleet plans, resulting in the grounding of certain older aircraft types or acceleration of the dates on which

the related aircraft were to be removed from service. The grounding or acceleration of aircraft retirement

dates resulted in reduced estimates of future cash flows. We recorded an impairment charge of $65 million

to reflect decreases in the fair value of our owned MD-80s and spare parts inventory for permanently

grounded fleets. We estimated the fair value of these aircraft and related inventory based on industry trends

and, where available, reference to market rates and transactions. All other long-lived assets, principally our

other fleet types and airport operating rights, were determined to be recoverable based on our estimates

of future cash flows. There were no impairment losses recorded during 2004 and 2005.

We also perform annual impairment tests on our routes, which are indefinite life intangible assets. These

tests are based on estimates of discounted future cash flows, using assumptions consistent with those

used for aircraft and airport operating rights impairment tests. We determined that we did not have any

impairment of our routes at December 31, 2005.

Air France –

KLM

Reporting GAAP:

Continental



We provide an allowance for spare parts inventory obsolescence over the remaining useful life of the

related aircraft, plus allowances for spare parts currently identified as excess. These allowances are based

on our estimates and industry trends, which are subject to change and, where available, reference to

market rates and transactions. The estimates are more sensitive when we near the end of a fleet life or

when we remove entire fleets from service sooner than originally planned.

We regularly review the estimated useful lives and salvage values for our aircraft and spare parts.


…All goodwill was for the first time subjected to a regular recoverability test under IAS 36 in financial year

2005. The tests have been performed at the level of the smallest cash generating unit (‘CGU’) on the basis

of the value in use. The goodwill originating from the acquisition of Air Dolomiti S.p.A and of the Eurowings

group has in this connection been tested as the smallest independent cash generating unit at the level of

Lufthansa AG and it regional partners.

The following table provides an overview of the goodwill tested and the assumptions included in the

respective recoverability tests.

The assumptions used for the recoverability tests are based on external sources in the planning period. In

some cases, risk reductions have been effected in order to allow for special regional features and market

share trends specific to the respective company. In case revenue growth of the LSG Sky Chefs USA group

should stagnate at 0 percent at the end of the planning period, this would result in an additional

impairment of €78m under ceteris-paribus conditions.

IFRS as adopted by the European Union (currency quoted in Euros)


Reporting GAAP:

Lufthansa

Reporting GAAP:

CGU Lufthansa BizJet LSG Sky LSG Sky

AG and International Chefs USA Chefs Korea

regional partners GroupSegment Passenger Maintenance Catering Catering

businessCarrying amount of goodwill €249m €20m €557m €65mImpairment – €20m €280m –Revenue growth p.a. planning period 2.5% to 6.4% 2.5% to 4.6% -8.5% to 0.2% 4.7% to 5.1%EBITDA margin planning period 8.1% to 9.9% 9.2% to 9.4% -2.8% to 8.6% 4.7% to 5.1%Rate of investment planning period 3.5% to 5.7% 0.6% to 1.3% 2% 1.0% to 1.9%Planning period 3 years 3 years 4 years 3 yearsRevenue growth p.a. after the end of the planning period 2.5% 2.5% 2% 5%EBITDA margin after the end of the planning period 9.9% 9.1% 9.6% 25.3%Rate of investment after the end of the planning period 5.7% 0.9% 2% 1%Discount rate 9.8% 9.5% 9.8% 9.8%

Key considerations in applyingthe sample accounting policies • Both IFRS and U.S. GAAP embody the

concept that impairment testing

should be performed on the smallest

group of assets that work together to

generate independent cash flows, ie

(CGUs).

• Determining the appropriate asset

group to use as a basis for impairment

testing requires significant judgment.

The disclosure of asset groups is

limited in the reports surveyed, with

only Lufthansa identifying the actual

CGU’s tested. It appears that airlines

have assessed asset groups

on a number of different bases including:

• Assessing that all aircraft assets

should be grouped for impairment

testing (based on economic

interdependencies).

• Grouping assets on an aircraft fleet

type basis.

• Considering impairment on an

individual aircraft asset basis.

• Allocating aircraft assets to

individual routes or route groups.

Different airlines’ circumstances will be

the critical factor in applying this in

practice.

Survey findingsMany U.S. airlines have booked impairment

charges in relation to aircraft assets.

U.S. airlines generally disclose that asset

impairment is undertaken on an aircraft

type basis.

The majority of non-U.S. airlines surveyed

were silent as to the basis on which

impairment testing is undertaken,

including the assets grouped for

impairment testing. No non-U.S. airlines

reported any impairment charges, other

than Lufthansa (see sample accounting

policy on page 25).


We assess the impairment of long-lived assets and intangible assets whenever events or changes in

circumstances indicate that the carrying value may not be recoverable. Factors which could trigger an

impairment review include the following: significant changes in the matter of use of the assets; significant

underperformance relative to historical or projected future operating results; or significant negative industry

or economic trends. An impairment has occurred when the future undiscounted cash flows estimated to

be generated by those assets are less than the carrying amount of those items. Cash flow estimates are

based on historical results adjusted to reflect management’s best estimate of future market and operating

conditions. The net carrying value of assets not recoverable is reduced to fair value. Estimates of fair value

represent management’s best estimate based on appraisals, industry trends and reference to market rates

and transactions. Changes in industry capacity and demand for air transportation can significantly impact

the fair value of aircraft and related assets.

U.S. GAAP


U.S. Airways

Reporting GAAP:

1.3 Aircraft leasing 1.3.1 Sale and leaseback

transactionsVarying financing structures (some of

which are tax driven) are put in place to

help enable airlines to finance aircraft

orders from manufacturers and refinance

existing aircraft. These transactions may

occur prior to or post delivery. If the

financing is structured as a sale and

leaseback, then the lease arrangement

may be classified as a finance or

operating lease. However, the key

accounting considerations generally

remain the same irrespective of the

classification of the lease. They include:

timing of recognition of gain or loss on

sale (ie at the point of sale or deferred

over the life of the lease), whether the

aircraft and/or related deposits and

capitalized costs can be derecognized

from the balance sheet; whether there is

a requirement to consolidate any special

purpose leasing entities and the cashflow

disclosures required.

Key considerations in applyingthe sample accounting policies In KPMG’s experience there are a number

of issues in analyzing and accounting for

lease transactions. These include:

• Has there been a sale of the aircraft?

An analysis of whether the risks and

benefits have been transferred to the

lessor is required. One of the primary

risks of aircraft financing is who bears

the residual aircraft value risk.

• At what date was there a sale? This

impacts not only the timing of any

profit recognition and balance sheet

impact but also cashflow statement

disclosures as a sale pre-delivery may

remove the final delivery payment to

the aircraft manufacturer from an

airline’s cash flow statement as it is

made by the lessor. If there is an

intention to sell the aircraft prior to

delivery the classification of the

security deposits also requires

consideration.


…easyJet enters into sale and leaseback transactions whereby it sells to a third party rights to acquire

aircraft. On delivery of the aircraft, easyJet subsequently leases the aircraft back, by way of operating

lease. Any profit on the disposal, where the price that the aircraft is sold for is not considered to be fair

value, is deferred and amortised over the lease term of the asset. Purchase rights (being the amount of pre

delivery deposits paid) for aircraft that are expected to be sold and leased back to lessors are considered to

be monetary assets. These are disclosed separately from fixed assets…


…During 2005, we entered into sale and leaseback transactions for six EMBRAER 190 aircraft acquired

during the year. Gains associated with sale and leaseback operating leases have been deferred and are

being recognized on a straight-line basis over the lease term as a reduction to aircraft rent expense…

U.S. GAAP

Leases where the lessor effectively retains substantially all the risks and benefits of ownership of the

leased assets are classified as operating leases. Operating lease payments are recognised as an expense

in the profit and loss accounts on a straight-line basis over the lease term.

Gains or losses arising from sale and operating leaseback of aircraft are determined based on fair values.

Differences between sale proceeds and fair values are deferred and amortized over the minimum lease terms…

Singapore Financial Reporting Standards


easyJet

Reporting GAAP:

JetBlue

Reporting GAAP:

Singapore

Airlines

Reporting GAAP:


• Are the sale proceeds at fair value?

Aircraft fair values are often difficult to

determine owing to the significant

discounts to list prices given to large

aircraft orders. Assessments of fair

values are often complicated by the

capitalization of interest costs, hedging

gains or losses and other costs into

the cost of the aircraft by airlines.

When these costs are totaled do they

represent an appropriate fair value to

be analyzed against the lessor’s upfront

payment in a sale and leaseback?

When the transaction involves older

aircraft this determination of appropriate

fair values is more complex as these

may lack recent relevant sales

information.

Whilst third party ’desktop’ valuations

are a useful starting point to assess

the fair value of an aircraft, other

important factors to be considered

include: analysis of the nature of costs

capitalized into the aircraft value;

benchmarking of lease rates; and

understanding the economic rationale

for any gain or loss on disposal.

Under IFRS gains or losses on sale

and operating leasebacks, if deemed

at fair value, are recognized in the

profit and loss account immediately

whereas they are generally amortized

over the life of the lease under U.S.

GAAP where there is on-going

involvement in the asset.

Survey findingsThe method of determining fair values is

not disclosed by airlines so it is difficult to

determine how this is analyzed, particularly

for newer aircraft types, that do not have

a track record of open market sales.

The treatment of leaseback transactions

in the cashflow statement is clear.

However some airlines have made

disclosures where non cash financing

transactions have taken place – a

requirement under IFRS and U.S. GAAP.

There may be further disclosures around

aircraft financing as the first annual

reports prepared under IFRS are

published.


1.4 Financialinstruments

1.4.1 Hedge accounting Airlines, in common with other entities,

are exposed to fluctuations in foreign

exchange rates, interest rates and

commodity prices.

In order to manage or limit exposure to

changes in rates or prices, many airlines

undertake hedging activities. These

activities typically involve the use of

derivative financial instruments to provide

certainty over the future price or rate that

will be paid for an existing or forecast

transaction. Whilst principles for accounting

for financial instruments are broadly similar

under both IFRS and U.S. GAAP, differences

in detail result in disparities in accounting.

The U.S. GAAP standard on the recognition

and measurement of financial instruments

and hedge accounting (FAS 133) has

been effective for several years. The IFRS

standard providing similar guidance, IAS

39 ‘Financial Instruments: Recognition

and Measurement’, is being applied by

airlines reporting under IFRS for the first

time from January 1, 2005 onwards.

The financial report disclosures relating to

hedge accounting vary according to the

hedging activities airlines undertake. Two

extracts of hedge activities accounting

policies are set out below; one airline

reporting under U.S. GAAP and one

under IFRS.

The Company utilizes financial derivative instruments primarily to manage its risk associated with changing

jet fuel prices, and accounts for them under Statement of Financial Accounting Standards No. 133,

“Accounting for Derivative Instruments and Hedging Activities”, as amended (SFAS 133). See “Qualitative

and Quantitative Disclosures about Market Risk” for more information on these risk management activities

and see Note 10 to the Consolidated Financial Statements for more information on SFAS 133, the

Company’s fuel hedging program, and financial derivative instruments.

SFAS 133 requires that all derivatives be marked to market (fair value) and recorded on the Consolidated

Balance Sheet. At December 31, 2005, the Company was a party to over 400 financial derivative

instruments, related to fuel hedging, for year 2006 and beyond. The fair value of the Company’s fuel

hedging financial derivative instruments recorded on the Company’s Consolidated Balance Sheet as of

December 31, 2005, was $1.7 billion, compared to $796 million at December 31, 2004. The large increase

in fair value primarily was due to the dramatic increase in energy prices throughout 2005, and the Company’s

addition of derivative instruments to increase its hedge positions in future years. Changes in the fair values

of these instruments can vary dramatically, as was evident during 2005, based on changes in the underlying

commodity prices. Market price changes can be driven by factors such as supply and demand, inventory

levels, weather events, refinery capacity, political agendas, and general economic conditions, among other

items. The financial derivative instruments utilized by the Company primarily are a combination of collars,

purchased call options, and fixed price swap agreements. The Company does not purchase or hold any

derivative instruments for trading purposes.

The Company enters into financial derivative instruments with third party institutions in “over-the-counter”

markets. Since the majority of the Company’s financial derivative instruments are not traded on a market

exchange, the Company estimates their fair values. Depending on the type of instrument, the values are

determined by the use of present value methods or standard option value models with assumptions about

commodity prices based on those observed in underlying markets. Also, since there is not a reliable

forward market for jet fuel, the Company must estimate the future prices of jet fuel in order to measure


Southwest

Airlines


the effectiveness of the hedging instruments in offsetting changes to those prices, as require by SFAS 133.

Forward jet fuel prices are estimated through the observation of similar commodity futures prices (such as

crude oil, heating oil, and unleaded gasoline) and adjusted based on historical variations to those like commodities.

Fair values for financial derivative instruments and forward jet fuel prices are both estimated prior to the

time that the financial derivative instruments settle, and the time that jet fuel is purchased and consumed,

respectively. However, once settlement of the financial derivative instruments occurs and the hedged jet

fuel is purchased and consumed, all values and prices are known and are recognized in the financial

statements. Based on these actual results once all values and prices become known, the Company’s

estimates have proved to be materially accurate.

Estimating the fair value of these fuel hedging derivatives and forward prices for jet fuel will also result in

changes in their values from period to period and thus determine how they are accounted for under SFAS

133. To the extent that the total change in the estimated fair value of a fuel hedging instrument differs from

the change in the estimated price of the associated jet fuel to be purchased, both on a cumulative and

period-to-period basis, ineffectiveness of the fuel hedge can result, as defined by SFAS 133. This could

result in the immediate recording of noncash charges or income, even though the derivative instrument

may not expire until a future period. Likewise, if a cash flow hedge ceases to qualify for hedge accounting,

those periodic changes in the fair value of derivative instruments are recorded to “Other gains and losses”

in the income statement in the period of the change.

Ineffectiveness is inherent in hedging jet fuel with derivative positions based in other crude oil-related

commodities, especially considering the recent volatility in the prices of refined products. In addition, given

the magnitude of the Company’s fuel hedge portfolio total market value, ineffectiveness can be highly

material to financial results. Due to the volatility in markets for crude oil and related products, the Company

is unable to predict the amount of ineffectiveness each period, including the loss of hedge accounting,

which could be determined on a derivative by derivative basis or in the aggregate. This may result in

increased volatility in the Company’s results. Prior to 2005, the Company had not experienced significant

ineffectiveness in its fuel hedges accounted for under SFAS 133, in relation to the fair value of the

underlying financial derivative instruments. The significant increase in the amount of hedge ineffectiveness

and unrealized gains on derivative contracts settling in future periods recorded during 2005 was due to a

number of factors. These factors included: the recent significant increase in energy prices, the number of

derivative positions the Company holds, significant weather events that have affected refinery capacity and

the production of refined products, and the volatility of the different types of products the Company uses

in hedging. The number of instances in which the Company has discontinued hedge accounting for specific

hedges had increased recently, primarily due to the foregoing reasons. In these cases, the Company had

determined that the hedges will not regain effectiveness in the time period remaining until settlement and

therefore must discontinue special hedge accounting, as defined by SFAS 133. When this happens, any

changes in fair value of the derivative instruments are marked to market through earnings in the period

of change.



As the fair value of the Company’s hedge positions increases in amount, there is a higher degree of probability

that there will be continued and correspondingly higher variability recorded in the income statement and

that the amount of hedge ineffectiveness and unrealized gains or losses recorded in future periods will be

material. This is primarily due to the fact that small differences in the correlation of crude oil-related

products are leveraged over large dollar volumes.

SFAS 133 is a complex accounting standard with stringent requirements, including the documentation of a

Company hedging strategy, statistical analysis to qualify a commodity for hedge accounting both on a

historical and a prospective basis, and strict contemporaneous documentation that is required at the time

each hedge is executed by the Company. As required by SFAS 133, the Company assesses the effectiveness

of each of its individual hedges on a quarterly basis. The Company also examines the effectiveness of its

entire hedging program on a quarterly basis utilizing statistical analysis. This analysis involves utilizing

regression and other statistical analyses that compare changes in the price of jet fuel to changes in the

prices of the commodities used for hedging purposes (crude oil, heating oil, and unleaded gasoline).

The Company continually looks for better and more accurate methodologies in forecasting future cash

flows relating to its jet fuel hedging program. These estimates are used in the measurement of

effectiveness for the Company’s fuel hedges, as required by SFAS 133. Any changes to the Company’s

methodology for estimating future cash flows (i.e, jet fuel prices) will be applied prospectively, in

accordance with SFAS 133. While the Company would expect that a change in the methodology for

estimating future cash flows would result in more effective hedges over the long-term, such a change

could result in more ineffectiveness, as defined, in the short-term, due to the prospective nature of

enacting the change…


Qantas is subject to foreign currency, interest rate, fuel price and credit risks. Derivative financial

instruments are used to hedge these risks. Qantas policy is not to enter, issue or hold derivative financial

instruments for speculative trading purposes.

Derivative financial instruments are recognised at fair value both initially and on an ongoing basis. The

method of recognising gains and losses resulting from movements in market prices depends on whether

the derivative is a designated hedging instrument, and if so, the nature of the item being hedged. The

Qantas Group designates certain derivatives as either; (1) hedges of the fair value of recognised assets or

liabilities or a firm commitment (fair value hedge); or (2) hedges of highly probable forecast transactions

(cash flow hedges). Gains and losses on derivative financial instruments qualifying for hedge accounting

are recognised in the same income statement category as the underlying hedged instrument.

Qantas documents at the inception of the transaction the relationship between hedging instruments and

hedged items, as well as its risk management objective and strategy for undertaking each transaction.

Qantas also documents its assessment, both at hedge inception and on an ongoing basis, of whether the

hedging instruments that are used in hedge transactions have been and will continue to be highly effective.


Reporting GAAP:

Qantas


Fair Value Hedge

Changes in the fair value of derivative financial instruments that are designated and qualify as fair value

hedges are recorded in the Income Statement, together with any changes in the fair value of the hedged

asset or liability that are attributable to the hedged risk.

Cash Flow Hedge

The effective portion of changes in the fair value of derivative financial instruments that are designated and

qualify as cash flow hedges is recognised in Equity in the Hedge Reserve. Amounts accumulated in the

Hedge Reserve are recognised in the Income Statement in the periods when the hedged item will affect

profit or loss (ie. when the underlying income or expense is recognised). Where the hedged item is of a

capital nature, amounts accumulated in the hedge reserve are transferred from equity and included in the

measurement of the initial cost or carrying amount of the asset or liability.

When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation

of the hedge relationship but the hedged forecast transaction is still expected to occur, the cumulative gain

or loss at that point remains in equity and is recognised in accordance with the above policy when the

transaction occurs. If the underlying hedged transaction is no longer expected to take place, the cumulative

unrealized gain or loss recognised in equity in respect of the hedging instrument is recognised immediately

in the Income Statement.

Derivatives That Do Not Qualify For Hedge Accounting

From time to time certain derivative financial instruments do not qualify for hedge accounting. Changes in

the fair value of any derivative instrument, or part of a derivative instrument, that does not qualify for

hedge accounting are recognised immediately in the income statement in Other Expenses ($18.8 million

net gain in the six months to 31 December 2005).

Fair Value Calculations

The fair value of financial instruments traded in active markets is based on quoted market prices at the

balance sheet date. The fair value of financial instruments that are not traded in an active market are

determined using valuation techniques consistent with accepted market practice. The Qantas Group uses a

variety of methods and input assumptions that are based on market conditions existing at balance date.

The fair value of derivative financial instruments includes the present value of estimated future cash flows.

IFRS (currency quoted in Australian dollars)


Reporting GAAP:

Key considerations in applyingthe sample accounting policies The financial reports surveyed show the

high level of complexity associated with

meeting onerous hedge accounting

requirements, particularly jet fuel

hedging. Both IFRS and U.S. GAAP

require detailed documentation and

hedge effectiveness testing requirements

to be met before hedge accounting can

be applied. Key requirements include:

• Ensuring hedge documentation is in

place for all hedges at inception and

throughout the life of the hedge.

• Ensuring that hedge documentation

clearly sets out the hedged item,

hedging instrument, risk management

objective, strategy and how the entity

will test for effectiveness both

prospectively and retrospectively.

• As a result of the requirement to

hedge commodity price risk in its

entirety, it is not possible to designate

a component of jet fuel hedge (eg

crude oil) as a hedged risk. Neither

U.S. GAAP nor IFRS mandate an

approach to determining hedge

effectiveness on a prospective or

retrospective basis. Typically the

methods used to assess hedge

effectiveness on a prospective and

retrospective basis are: regression

analysis, variance reduction or dollar

offset hedge tests (which under both

GAAP’s needs to be in the 80-125

percent effectiveness range). When

using statistical tests, key estimates

such as length of data sets, prices and

hedge ratios require consideration.

Survey findings Most airlines surveyed hedge jet fuel

along with foreign exchange and interest

rates. Airlines communicate the impact of

hedge accounting in various ways. British

Airways, for example, discloses the

impact of fuel hedge ineffectiveness as a

separate line item in its income statement.

Many of the U.S. carriers provide detailed

reconciliations of the impact of hedge

accounting on, for example, fuel costs.

In the key area of hedge effectiveness

testing, few airlines provide disclosure of

the details of the methodology used

other than the type, for example,

regression testing. There is little

disclosure of the key assumptions used

in testing effectiveness.

Some airlines in the U.S. have noted that

in 2005, for the first time they are

experiencing significant hedge

ineffectiveness. This is primarily based on

the record high, and highly volatile fuel

prices experienced. This has continued

well into 2006 and is likely to be a key

consideration for airlines when reporting.

At the time of publication, many European

and Asia-Pacific airlines had not finalized

and issued their first annual reports under

IFRS. It remains to be seen how the level

of disclosure around hedge accounting

under IAS 39 compares with the detailed

disclosures in the financial reports shown

under FAS 133.



1.4.2 Embedded derivativesAirlines enter into numerous complex

contracts with aircraft manufacturers,

maintenance and parts suppliers and in

certain circumstances these contracts

may contain embedded derivatives.

Key considerationsA key factor in determining the need to

separate an embedded derivative is how

closely related a derivative is to the host

contract. One of the likely areas where

embedded derivatives may occur is

where contracts are denominated in a

currency that is not the functional

currency of either the airline or of the

other party to the contract. In such cases,

the embedded derivative would

potentially require separation and

measurement at fair value. No separation

of an embedded derivative is required

when the contract currency is routinely

denominated or the currency commonly

used in the economic environment in

which the transaction takes place.

In the airline industry it is common place

for contracts to be denominated in U.S.

dollars even where the dollar is not the

functional currency of any of the

contracting parties. Common examples

include fuel purchases, jet aircraft and

aircraft spares purchases, inter-airline

settlements and elements of airframe

and engine maintenance.

Survey findings None of the airlines reporting under IFRS,

or transitioning to IFRS, made any

disclosure about the impact of, or

accounting for, embedded derivatives.

There were no separate disclosures by

the U.S. GAAP reporters surveyed.

No separate airline accounting policies were noted in the surveyed airlines.


Airline risk factors

Risk factorsThis section of the handbook highlights

the significant business risk factors

disclosed by airlines in SEC filings. These

risks are described in domestic and

foreign SEC registrants’ annual financial

reports. Risks include increasing

competition, economic, political, security

and business specific risks as well as

financial exposures. These risks or

cautionary factors are included in order to

alert stakeholders to the possible impact

of risk factors on a company’s financial

development. KPMG surveyed the most

recent relevant SEC regulatory filings of

11 SEC airlines and considered their

quantitative and qualitative disclosures

about risks.

The table on page 36 summarizes the

principle risks disclosed by each airline.

Our commentary and a sample of

disclosures related to these risks are

set out after the table.



Increasing cost of jet fuel

Geopolitical risk

Competition

Regulation

Economic conditions

High levels of debt

Labor costs and employee retirement obligations

Insurance costs

Security costs

Risk in international operations

Changes in interest rates

Failure of technology

Significant operating losses

Airline bankruptcies

Liquidity risks

Safety

Dependence on key personnel

Reliance on suppliers

Service interruptions at major hubs

Early retirements

Aircraft utilization

3 3 3 3 3 3 3 3 3 3 3

3 3 3 3 3 3 3 3 3 3 3

3 3 3 3 3 3 3 3 3 3

3 3 3 3 3 3 3 3 3 3 3

3 3 3 3 3 3 3 3 3

3 3 3 3 3 3 3 3

3 3 3 3 3 3 3 3 3 3

3 3 3 3 3 3 3 3

3 3

3 3 3 3 3

3 3 3 3

3 3 3 3 3 3 3 3

3 3 3 3 3

3 3 3

3 3 3 3 3 3 3

3 3 3 3

3 3 3 3 3

3 3 3 3 3 3

3 3

3 3 3 3

3

Airlines

U.S

. Airw

ays

JetB

lue

Airw

ays

Con

tinen

tal

Airl

ines

Am

eric

an A

irlin

es

Uni

ted

Airl

ines

Nor

th W

est

Airl

ines

Del

ta

Sout

hwes

tA

irlin

es

Air

Fran

ce –

KLM

Ryan

air

Brit

ish

Airw

ays

Risk factors


“Our business is dependent on the price and availability of aircraft fuel.

Continued periods of historically high fuel costs, significant disruptions in the

supply of aircraft fuel or significant further increases in fuel costs could have a

significant negative impact on our operating results.

Our operating results are significantly impacted by changes in the availability or price

of aircraft fuel. Fuel prices increased substantially in 2004 compared with 2003 and

continued to increase through 2005 and into 2006. Due to the competitive nature of

the airline industry, we generally have not been able to increase our fares or

otherwise increase revenues sufficiently to offset the rise of fuel prices in the past

and we may not be able to do so in the future. Although we are currently able to

obtain adequate supplies of aircraft fuel, it is impossible to predict the future

availability or price of aircraft fuel. In addition, from time to time we enter into

hedging arrangements to protect against rising fuel costs. Our ability to hedge in

future, however, may be limited.” – U.S. Airways

“Risk Factors Relating to Terrorist Attacks and International Hostilities.

Reservations of Ryanair’s flights to London dropped materially for a number of days

in the immediate aftermath of the terrorist attacks in London on July 7, 2005 and

failed attacks on July 21, 2005. In fiscal 2005, flights into and out of London accounted

for 15.4 million, or 56%, of passengers travelling on the Company’s network. As in

the past, the Company reacted to these acts of terrorism by initiating system-wide

fare sales to stimulate demand for air travel. Future acts of terrorism, particularly in

London, or other markets that are significant to Ryanair, could have a material

adverse effect on the Company’s profitability or financial condition should the

public’s willingness to travel to and from those markets be reduced as a result.”

– Ryanair

”The airline industry is fiercely competitive and fares are at historically low levels.

Service over almost all of our routes is highly competitive and fares remain at historically

low levels. We face vigorous, and in some cases, increasing competition from major

domestic airlines, national, regional, all-cargo and charter carriers, foreign air carriers,

LCCs, and, particularly on shorter segments, ground and rail transportation. We also face

increasing and significant competition from marketing/operational alliances formed by our

competitors. In addition, the competitive landscape we face would be altered

substantially by industry consolidation, including merger, equity investment and joint

venture transactions. The percentage of routes on which we compete with carriers

having substantially lower operating costs than ours has grown significantly over the past

decade, and we now compete with LCCs on 75 percent of our domestic network.

Increasing costs of jet fuel

Jet fuel is one of the largest and most

volatile expenses that all airlines are

exposed to. The rise in global oil prices

has led to jet fuel cost increases of up

to 30 percent of total airline costs and

is now expected by many airlines to be

the largest single cost in 2006 where

historically this has been labor. Airline’s

exposure to volatile fuel prices can be

managed to some extent by hedging,

supply agreements and passing on

increased costs through passenger fuel

surcharges.

Geopolitical risks

Geopolitical risks are outside the

control of airlines. The mitigation

strategy of most airlines has been to

significantly increase mandatory and

voluntary airline security spending and

obtaining insurance from the

commercial market and in some

jurisdictions, governments. In some

markets, insurers are looking to limit

coverage to certain types of attacks.

Competition

Legacy airlines in virtually all major

regions have been increasingly

impacted by competition from low cost

carriers (LCCs). LCCs typically have

substantially lower cost bases than

legacy airlines through lower labour

costs, simplified operations and lower

infrastructure costs. Competition from

LCCs has driven passenger fares down

and LCC’s have taken market share,

focusing on high frequency point to

point operations versus the more

traditional hub model.

Sample risk disclosuresKPMG comment


Certain alliances have been granted immunity from anti-trust regulations by governmental

authorities for specific areas of cooperation, such as joint pricing decisions. To the extent

alliances formed by our competitors can undertake activities that are not available to us,

our ability to effectively compete may be hindered.

Pricing decisions are significantly affected by competition from other airlines. Fare

discounting by competitors has historically had a negative effect on our financial results

because we must generally match competitors’ fares, since failing to match would result

in even less revenue. More recently, we have faced increased competition from carriers

with simplified fare structures, which are generally preferred by travelers. Any fare

reduction or fare simplification initiative may not be offset by increases in passenger

traffic, a reduction in costs or changes in the mix of traffic that would improve yields.

Moreover, decisions by our competitors that increase – or reduce – overall industry

capacity, or capacity dedicated to a particular domestic or foreign region, market or route,

can have a material impact on related fare levels.” – American Airlines

“Changes in international, regional and local regulation and legislation could

significantly increase our costs of operations or reduce our revenue.

Our operations are subject to a high degree of international, European and national

regulation covering most aspects of our operation, including traffic rights, fare

setting, operating standards (the most important of which relate to safety, security

and aircraft noise), airport access and slot availability.

Additional laws and regulations and additional or increased taxes, airport and

navigation rates and charges have been proposed from time to time that could

significantly increase our cost of operations or reduce our revenues. The ability of

European carriers to operate international routes is subject to change because the

applicable arrangements between European and foreign governments may be

amended from time to time, or because appropriate slots are not available. Laws or

regulations enacted in the future may adversely affect our business.”

– Air France – KLM

”Our business is affected by many changing economic and other conditions

beyond our control and our results of operations tend to be volatile.

Our business, and that of the rest of the airline industry is affected by many changing

conditions largely outside of our control, including among others:

• actual or potential changes in international, national, regional and local economic,

business and financial conditions, including recession, inflation and higher interest

rates, war, terrorist attacks or political instability;

• changes in consumer preferences perceptions, spending patterns or demographic

trends;

• actual or potential disruptions to the air traffic control system;

Regulation

The airline industry is highly regulated

in terms of rights of access to markets

and the ‘freedoms’ an airline may have.

Bilateral agreements, based on the

domocile of carriers, currently

dominate however, new ’open skies’

agreements are in place in some

markets and are on the way in others.

Also, airlines often operate out of near

monopoly airports which can over short

periods significantly increase the

charges airlines face. This combined

with other aeronautical charges, which

airlines have limited ability to negotiate,

result in this area being of risk to airlines.

Economic conditions

The demand for passenger airlines is

often linked directly to GDP growth.

Macro economic changes appear to

correlate to passenger numbers.

Therefore this is a key airline risk area.



• increases in, costs of safety, security and environmental measures;

• outbreaks of diseases that affect travel behavior or

• weather and natural disasters…”– American Airlines

“We have a significant amount of fixed obligations and we will incur significantly

more fixed obligations, which could harm our ability to meet our growth strategy

and impair our ability to service our fixed obligations.

As of December 31, 2005, our debt of $2.33 billion accounted for 71.9% of our total

capitalization. Most of our long-term and short-term debt has floating interest rates.

In addition to long-term debt, we have a significant amount of other fixed obligations

under lease related to our aircraft, airport terminal space, other airport facilities and

office space. As of December 31, 2005, future minimum lease payments under

noncancelable leases and other financing obligations were approximately $786

million for 2006 through 2010 and an aggregate of $1.95 billion for the years thereafter.

We have commenced construction of a new terminal at JFK with PANYNJ. The

minimum payments under this lease will be accounted for as a financing obligation

and have been included above.

As of December 31, 2005, we had commitments of approximately $6.44 billion to

purchase 192 additional aircraft and other flight equipment over the next seven years,

including estimated amounts for contractual price escalations. We will incur

additional debt and other fixed obligations as we take delivery of new aircraft and

other equipment and continue to expand into new markets. We typically finance our

aircraft through either secured debt or lease financing. Although we believe that debt

and/or lease financing should be available for our aircraft deliveries, we cannot assure

you that we will be able to secure such financing on terms acceptable to us or at all.

Our high level of debt and other fixed obligations could:

• impact our ability to obtain additional financing to support capital expansion plans

and for working capital and other purposes on acceptable terms or at all;

• divert substantial cash flows from our operations and expansion plans in order to

service our fixed obligations;

• require us to incur significantly more interest or rent expense than we currently

do, since most of our debt has floating interest rates and five of our aircraft

leases have variable-rate rent; and

• place us at a possible competitive disadvantage compared to less leveraged

competitors and competitors that have better access to capital resources.

Our ability to make scheduled payments on our debt and other fixed obligations will

depend on our future operating performance and cash flow, which in turn will depend

on prevailing economic and political conditions and financial, competitive, regulatory,

business and other factors, many of which are beyond our control. We have no lines

of credit, other than two short-term borrowing facilities for certain aircraft predelivery

deposits. We are dependent upon our operating cash flows to fund our operation and

to make scheduled payments on our debt and other fixed obligations. We cannot

High levels of debt

The airline industry is characterized by

high fixed costs or obligations that

leave airlines vulnerable to changes in

demand, such as occurred post the

terrorist attacks of September, 2001

and pandemics such as SARS in Asia.

Other issues may cause significant

increases in costs over short periods,

including jet fuel, and the ability of

airlines to service fixed costs and

attract and service capital.



assure you that we will be able to generate sufficient cash flow from our operations

to pay our debt and other fixed obligations as they become due, and if we fail to do

so our business could be harmed. If we are unable to make payments on our debt

and other fixed obligations, we could be forced to renegotiate those obligations or

obtain additional equity or debt financing. To the extent we finance our activities with

additional debt, we may become subject to financial and other covenants that may

restrict our ability to pursue our growth strategy. We cannot assure you that our

renegotiation efforts would be successful or timely or that we could refinance our

obligations on acceptable terms, if at all.” – JetBlue

(currency quoted in U.S. dollars)

“Union disputes, employee strikes and other labor-related disruptions may

adversely affect our operations.

Our business plan includes assumptions about labor costs going forward. Currently,

the labor costs of both AWA and U.S. Airways are very competitive and very similar;

however, we cannot assure that labor costs going forward will remain competitive,

either because our agreements may become amendable or because competitors may

significantly reduce their labor costs. Approximately 80% of the employees within

U.S. Airways Group are represented for collective bargaining purposes by labor unions.

In the United States, prior to the merger these employees were organized into nine

labor groups represented by five different unions at U.S. Airways, seven labor groups

represented by four different unions at AWA, four labor groups represented by

four different unions at Piedmont, and four labor groups represented by four

different unions at PSA. There are additional unionized groups of U.S. Airways

employees abroad.

Relations between air carriers and labour unions in the United States are governed

by the Railway Labor Act (the “RLA”). Under the RLA, collective bargaining agreements

generally contain “amendable dates” rather than expirations dates, and the RLA

requires that a carrier maintain the existing terms and conditions of employment

following the amendable date through a multi-stage and usually lengthy series of

bargaining processes overseen by the National Mediation Board. This process continues

until either the parties have reached agreement on a new collective bargaining agreement,

or the parties have been released to “self-help” by the National Mediation Board.

Although in most circumstances the RLA prohibits strikes, after release by the

National Mediation Board carriers and unions are free to engage in self-help measures

such as strikes and lock-outs. None of the U.S. Airways labor agreements becomes

amendable until December 31, 2009. Of the AWA labor agreements, three are

currently amendable, and a fourth becomes amendable in 2006.

There is the potential for litigation to arise in the context of the labor integration

process. Unions may bring court actions or grievance arbitrations, and may seek to

compel airlines to engage in the bargaining processes where the airline believes it

has no such obligation. There is a risk that one or more unions may pursue such

Labor disputes and employee

retirement obligations

A significant cost issues for many

legacy airlines is the funding of post

employment plans and labour

agreements. A number of airlines have

significant post employment plan

liabilities. Major U.S., European and

Asian airlines are seeking to reduce

costs through restructuring labour or

post employment plans. This is either

through Chapter 11 proceedings in the

U.S. or other restructuring. The risk of

industrial unrest or financial stress of

funding these agreements is common.



judicial or arbitral avenues in the context of the merger, and, if successful, could

create additional costs that we did not anticipate. There is also a risk that disgruntled

employees, either with or without union involvement, could engage in illegal slow-

downs, work stoppages, partial work stoppages, sick-outs or other action short of a

full strike that could individually or collectively harm the operation of the airline and

impair its financial performance.” – U.S. Airways

“Insurance costs increased significantly after September 11, 2001, and may

increase in the future, and the amount of available insurance coverage may be

further limited as a result of similar events.

Following the terrorist attacks on September 11, 2001, insurance premiums for

airlines increased significantly, especially for risks relating to terrorism. In addition, in

the immediate aftermath of September 11, 2001, insurance companies renegotiated

insurance coverage for certain risks relating to war and other hostilities, charging

substantially higher rates and limiting coverage to a uniform amount of $50 million.

As a result, the European Commission authorized European governments to offer

coverage to airlines, at a charge, for loss amounts that exceeded the insurance

coverage available in the market for war and other hostilities. In the event of further

terrorist attacks or acts of war, government support similar or comparable to the

coverage that was made available in the immediate aftermath of September 11,

2001 may not be made available, insurance premiums may be increased further or

insurance may be made available only with additional limitations on coverage. Any

failure to obtain adequate insurance coverage or insurance coverage at financially

acceptable terms in the future would materially adversely affect our business,

financial condition and results of operations.” – Air France – KLM

(currency quoted in Euros)

“Additional security requirements may increase our costs and decrease our traffic.

Since September 11, 2001, the Department of Homeland Security (“DHS”) and TSA

have implemented numerous security measures that affect airline operations and

costs, and are likely to implement additional measures in the future. Most recently,

DHS has begun to implement the U.S.-VISIT program (a program of fingerprinting

and photographing foreign visa holders), announced that it will implement greater

use of passenger data for evaluating security measures to be taken with respect to

individual passengers, expanded the use of federal air marshals on our flights (thus

displacing additional revenue passengers and causing increased customer

complaints from displaced passengers), begun investigating a requirement to install

aircraft security systems (such as active devices on commercial aircraft as

countermeasures against portable surface to air missiles) and expanded cargo and

baggage screening. DHS has also required certain flights to be cancelled on short

notice for security reasons, and has required certain airports to remain at higher

security levels than other locations.

Insurance costs

Whilst insurance costs have receded

from post September 11 highs, the

availability of appropriate insurance at

an acceptable premium remains a key

risk.

Security costs

In response to new regulation and

passenger concerns, many major

airlines have spent hundreds of millions

on additional security costs over the

last 5 years. With every new regulation,

comes a cost implication. Even if these

costs are recovered, they increase

costs which the passenger ultimately

pays for. Only three airlines highlighted

this risk, which may indicate that

airlines believe that the financial burden

of security may have peaked and that it

is a cost that passengers are willing to

pay for.



In addition, foreign governments also have begun to institute additional security

measures at foreign airports we serve, out of their own security concerns or in

response to security measures imposed by the U.S.

A large part of the costs of these security measures is borne by the airlines and

their passengers, and we believe that these and other security measures have the

effect of decreasing the demand for air travel and the attractiveness of air

transportation as compared to other modes of transportation in general. Security

measures imposed by the U.S. and foreign governments after September 11, 2001

have increased our costs and therefore adversely affected our financial results, and

additional measures taken in the future may result in similar adverse effects… ”

– Continental

“Our international operations could be adversely affected by numerous events,

circumstances or government actions beyond our control.

Our current international activities and prospects could be adversely affected by

factors such as reversals or delays in the opening of foreign markets, exchange

controls, currency and political risks, taxation and changes in international

government regulation of our operations, including the inability to obtain or retain

needed route authorities and/or slots.” – American Airlines

“We are exposed to changes in interest rates.

We had $6.4 billion of debt and capital lease obligations that were accruing interest

as of December 31, 2005 and $1.9 billion of total balance sheet cash, cash

equivalents, and short term investments as of December 31, 2005. Of this

indebtedness, 66% bears interest at floating rates. An increase in interest rates

would have an overall negative impact on our earnings as increased interest expense

would only be partially offset by increased interest income.”– North West


“We could be adversely affected by a failure or disruption of our computer,

communications or other technology systems.

We are increasingly dependent on technology to operate our business. The

computer and communications systems on which we rely could be disrupted due to

events beyond our control including natural disasters, power failures, terrorist

attacks, equipment failures, software failures and computer viruses and hackers. We

have taken certain steps to help reduce the risk of some (but not all) of these

potential disruptions. There can be no assurance however, that the measures we

have taken are adequate to prevent or remedy disruptions or failures of these

systems. Any substantial or repeated failures of these systems could impact our

operations and customer service, result in the loss of important data, loss of

revenues, increased costs, and generally harm our business.

Risk in international operations

This risk is similar in nature to other

regulatory risks noted, however it is

wider in terms of non airline specific

risks, for example highlighting foreign

exchange risk.

Changes in interest rates

As airlines are generally significant

users of debt financing, interest rate

risk is an important management issue.

The risk of exposure to both fixed and

floating rates can be managed to some

extent by hedging activities.

Failure of technology

Legacy airlines have traditionally built

proprietary systems to meet

organisational IT needs. Over the last

ten years third party software providers

have provided IT solutions for the

airline industry and there has been

significant outsourcing activity. The

importance of the internet in providing

the distribution channel for low cost

carriers and now legacy airlines make

these systems key.



Moreover, a catastrophic failure of certain of our vital systems (which we believe is a

remote possibility) could limit our ability to operate our flights for an indefinite period

of time, which would have a material adverse impact on our operations and our

business.” – American Airlines

“We continue to experience significant losses.

Since September 11, 2001, we have incurred significant losses. We reported a net

loss of $68 million in 2005 and expect to incur a significant loss for the first quarter

of 2006 under current market conditions. Losses of the magnitude incurred by us

since September 11, 2001 are not sustainable if they continue. These losses are

primarily attributable to decreased yields on passenger revenue since September 11,

2001 and record high fuel prices. Passenger revenue per available seat mile for our

mainline operations was 5.8% lower for the year ended December 31, 2005 versus

2000 (the last full year before the September 11, 2001 terrorist attacks).

We have been able to implement some fare increases on certain domestic and

international routes during 2005, but these increases have not fully offset the

substantial increase in fuel prices. Our ability to raise our fares is limited due to the

substantial price competition in the airline industry, especially in U.S. domestic markets.

We cannot predict when or if yields will increase. Further, we cannot predict the

long-term impact of any changes in fare structures, most importantly in relation to

business fares, booking patterns, low-cost competitor growth, increased usage of

regional jets, customers’ directly booking on the internet, competitor bankruptcies

and other changes in industry structure and conduct, but any of these factors could

have a material adverse effect on our results of operations, financial condition or

liquidity.” – Continental Airlines


“The airline industry has incurred significant losses resulting in airline

restructurings and bankruptcies, which could result in changes in our industry.

In 2005, the domestic airline industry reported its fifth consecutive year of losses,

which is causing fundamental and permanent changes in the industry. These losses

have resulted in airlines renegotiating or attempting to renegotiate labor contracts,

reconfiguring flight schedules, furloughing or terminating employees, as well as

consideration of other efficiency and cost-cutting measures. Despite these actions,

several airlines, including Delta Air Lines and Northwest Airlines in September 2005,

have sought reorganization under Chapter 11 of the U.S. Bankruptcy Code permitting

them to reduce labor rates, restructure debt, terminate pension plans and generally

reduce their cost structure. In the fall of 2005, U.S. Airways, which had been in

bankruptcy, and American West completed a merger, which may enable the

combined entity to have lower costs and a more rationalized route structure and

therefore be better able to compete. It is foreseeable that further airline reorganizations,

Significant operating losses

A key risk identified by some U.S.

airlines which have consistently posted

losses in recent years.

Airline bankruptcies

Several of the largest U.S. airlines have

spent time, or are currently in, Chapter

11. The ability of these carriers to

restructure and reduce costs to better

complete with competitors has been

highlighted as a key risk.



bankruptcies or consolidations may occur, the effects of which we are unable to

predict. We cannot assure you that the occurrence of these events, or potential

changes resulting from these events, will not harm our business or the industry. –

JetBlue

“We have substantial liquidity needs and face significant liquidity pressure.

At December 31, 2005, our cash and cash equivalents and short-term investments

were $2.0 billion. This amount reflects the net proceeds from our sale of ASA to

SkyWest and the net proceeds from our borrowings under our post-petition

financing agreements (“Post-Petition Financing Agreements”), which consist of a

Secured Super-Priority Debtor-in-Possession Credit Facility from a syndicate of

lenders (the “DIP Credit Facility”) and a modification agreement with American

Express Travel Related Services Company, Inc (“Amex”) and American Express Bank,

F.S.B that modified existing agreements with Amex under which Amex purchases

SkyMiles from us (the “Amex Post-Petition Facility”).

We have substantial liquidity needs in the operation of our business and face

significant liquidity challenges due to historically high aircraft fuel prices, low

passenger mile yields, credit card processor holdbacks and cash reserves and other

cost pressures. Accordingly, we believe that our cash and cash equivalents and

short-term investments will remain under pressure during 2006 and thereafter.

Because substantially all of our assets are encumbered and our Post-Petition

Financing Agreements contain restrictions against additional borrowing, we believe

we will not be able to obtain any material amount of additional debt financing during

our Chapter 11 proceedings.” – Delta Airlines


“We are at risk of losses and adverse publicity stemming from any accident

involving our aircraft.

If one of our aircraft were to crash or be involved in an accident, we could be

exposed to significant tort liability. The insurance we carry to cover damages arising

from any future accidents may be inadequate. In the event that our insurance is not

adequate, we may be forced to bear substantial losses from an accident. In addition,

any accident involving an aircraft that we operate or is operated by an airline that is

one of our codeshare partners could create a public perception that our aircraft are

not safe or reliable, which could harm our reputation, result in air travelers being

reluctant to fly on our aircraft and harm our business.” – Delta Airlines

Liquidity issues

Substantial indebtedness, either pre

Chapter 11 or as a consequence of

Chapter 11 is a significant issue in

terms of an airlines’ ability to raise

further capital. Many U.S. carriers have

restrictions due to substantially all

remaining assets being encumbered.

This issue is not restricted to the U.S.,

with it being flagged by European

carriers as well.

Safety

Airline safety has always been a key

industry issue. Risk disclosures are

limited to a minority of airlines

surveyed.



“Dependence on key personnel.

The Company’s success depends to a significant extent upon the efforts and abilities

of its senior management team, including Michael O’Leary, the Chief Executive of

Ryanair, and key financial, commercial, operating and maintenance personnel. Mr

O’Leary’s current contract may be terminated by either party upon 12 months’ notice.

See “Item 6. Directors, Senior Management and Employees – Compensation of

Directors and Senior management – Employment Agreements”. The Company’s

success also depends on the ability of its executive officers and other members of

senior management to operate and manage effectively both independently and as a

group. Although the Company’s employment agreements with Mr. O’Leary and its

other senior executives contain non-competition and non-disclosure provisions, there

can be no assurance that these provisions will be enforceable in whole or in part.

Competition for highly qualified personnel is intense, and the loss of any executive

officer, senior manager or other key employee could have a material adverse effect

upon the Company’s business, operating results and financial condition.” – Ryanair

“Supplier failure.

The Group is dependent on third parties, e.g. fuel suppliers, caterers, IT, for important

aspects of its operation. It is essential that critical supplies should be maintained; if

this were not so, operations would be disrupted and the business and results would

suffer.” – British Airways

“Interruptions or disruptions in service at one of our hub airports cold have a

material adverse impact on our operations.

We operate principally through primary hubs in Charlotte, Philadelphia and Phoenix

and secondary hubs/focus cities in Pittsburgh, Las Vegas, New York, Washington, D.C.

and Boston. A majority of our flights either originate or fly into one of these locations.

A significant interruption or disruption in service at one of our hubs could result in

the cancellation or delay of a significant portion of our flights and, as a result, could

have a severe impact on our business, operations and financial performance.”

– U.S. Airways

“The retirement of a significant number of our pilots prior to their normal

retirement age of 60 could require significant contributions to our defined

benefit pension plan for pilots, significantly disrupt our operations and

negatively impact our revenue.

Under our defined benefit pension plan for pilots (“Pilot Plan”), Delta pilots who

retire can elect to receive 50% of the present value of their accrued pension benefit

in a lump sum in connection with their retirement and the remaining 50% of their

accrued pension benefit as an annuity after retirement. In recent years, our pilots

have retired prior to their normal retirement age of 60 at greater than historical levels

due to (1) a perceived risk of rising interest rates, which could reduce the amount of

Dependence on key personnel

This risk factor is not a specific airline

issue. The value of a capable senior

management team is an intangible that

is difficult to quantify. It is interesting to

note that labor cost percentages are

now debt covenants for some airlines.

Reliance on suppliers

Airlines, like all businesses, are

dependent on their suppliers to enable

delivery of their own services. Failure

of suppliers can cause major disruptions

and financial loss.

Services interuptions at hubs

Virtually all airlines operate from a small

number of key airports or hubs through

which their flights originate. Disruptions

at these hubs may have a major impact

on those airlines operations.

Early retirements

Early retirement of employees is an

increasingly common feature where

airlines are in financial distress.

Employees take early retirement in

order to crystallise the benefits they

have accrued under post employment

plans and avoid the risk of a potential

reduction in benefits in the event of the

airlines bankruptcy.



their lump sum pension benefit; and/or (2) concerns about their ability to receive a

lump sum pension benefit if a notice of intent to terminate the Pilot Plan is issued

during a restructuring under Chapter 11 of the Bankruptcy Code. While the Pilot Plan

is currently prohibited from making the lump sum payments, it is currently projected

that the lump sum feature would become available in October 2006 if the Pilot Plan

is not subject to termination proceedings prior to that date. If a significant number of

pilot early retirements occurs in the near future, the resulting lump sum payments,

combined with other factors, could trigger a requirement to make contributions to

the Pilot Plan in excess of amounts currently estimated. The amount of any

additional contribution depends on factors that are not currently known and,

therefore, cannot be reasonably estimated at this time. An additional contribution

could have a material adverse impact on our liquidity.

A significant number of pilot early retirements in the near future could also disrupt

our operations and have a material adverse impact on our revenues because there

may not be enough pilots to operate certain aircraft types for a period of time, the

duration of which cannot be determined. We and ALPA had agreed to certain

provisions that helped mitigate the effect of pilot early retirements on our operations

over the past eighteen months, but these provisions expired on December 31, 2005.

As of January 31, 2006, approximately 1,700 of our 5,900 pilots on the active roster

are at or over age 50 and thus were eligible to retire at the beginning of February

2006.”– Delta Airlines

“We rely on maintaining a high daily aircraft utilization rate to keep our costs

low, which makes us especially vulnerable to delays.

One of our key competitive strengths is to maintain a high daily aircraft utilization

rate, which is the amount of time that our aircraft spend in the air carrying passengers.

High daily aircraft utilization allows us to generate more revenue from our aircraft

and is achieved in part by reducing turnaround times at airports so we can fly more

hours on average in a day. The expansion of our business to include a new fleet

type, new destinations, more frequent flights on current routes and expanded

facilities could increase the risk of delays. Aircraft utilization is reduced by delays and

cancellations from various factors, many of which are beyond our control, including

adverse weather conditions, security requirements, air traffic congestion and

unscheduled maintenance. Reduced aircraft utilization may limit our ability to achieve

and maintain profitability as well as lead to customer dissatisfaction.”

– JetBlue

Aircraft utilization

A dependence on high aircraft

utilization as a risk factor has only been

recognized by one low-cost carrier and

highlights the importance of high asset

utilization to the business model and

future profitability.

Sample risk disclosures


Analysis of transition to IFRSin 2005Introduction For companies listed on the main

European and a number of Asia-Pacific

stock exchanges, there has been a

fundamental change in the basis of

financial reporting for the 2005 year.

Since January 1, 2005, depending on the

jurisdiction within which the airlines

operate, certain airlines have been

required to prepare their financial

statements under IFRS or equivalents

thereof. Set out in this section of the

handbook is an analysis of the impact of

the transition to IFRS of the surveyed

airlines based on public filings. At the

time of writing this handbook, airlines

with March 31, 2006 financial year ends

had not yet issued their annual report.

Air France Alitalia1 British Cathay easyJet Qantas Ryanair Virgin Blue

– KLM Airways Pacific2

U.S.$m1 U.S.$m1 U.S.$m1 U.S.$m1 U.S.$m1 U.S.$m1 U.S.$m1 U.S.$m1

April 1 04 Jan 1 04 April 1 04 Oct 1 04 July 1 04 April 1 04 April 1 04

4,998.3 1,590.9 4,031.7 3,999.5 1,430.6 4,074.4 1,790.7 460.6

(24.6) 26.0 (2,188.2) (0.7) (37.4) (5.3)

(910.6) (5.5) 38.8

(307.9) (32.2) (467.9)

137.5 (49.8) (28.2)

280.2 13.4

(103.4) (173.3) (7.8) (7.2) 5.5

(100.9)

83.9 (36.5)

(11.1) 2.8

(5.5)

(106.9)

(3.8)

(21.6)

301.5 (9.8)

(2.5) (0.6)

(840.5) 210.5 (2,562.5) (32.2) 4.9 (539.0) (2.5) 1.7

883.1 100.1 515.9 13.7 4 245.9 166.1 4

Airline 2

Transition date

Shareholder’s equity (pre-IFRS)

IFRS/IAS standard

IAS 19 Employee benefits

IFRS 1 First-time adoption

of IFRSs

IAS 18 Revenue

IAS 16 Property, plant

and equipment

IAS 21 Changes in foreign

exchange rates

IAS 12 Income taxes

IAS 27/28 Scope of consolidation

IAS 17 Leases

IFRS 2 Share-based payments

IFRS 3 Goodwill arising on

business combinations

IFRS 5 Assets held for resale

IAS 28 Associates

IAS 20 Government grants

IAS 38 Intangible assets

Deferred tax on

IFRS adjustments

Other

Total impact on transition

IAS 39/32 Financial instruments3

Impact of transition to IFRS on total equity

1 The $U.S.D impact has been calculated by applying a KPMG sourced rate at transition date to the figures stated in the airline financial report.2 A number of airlines, such as Singapore Airlines, Cathay Pacific and South African Airways have GAAPs which are progressively adopting equivalents to IFRS.

Whilst these changes are not all reflected in the table above, they are included in the commentary below. Iberia has not been included in the table as the fullopening balance sheet information was not available, and they are not included in the commentary below.

3 IAS 39 Financial Instruments: Recognition and Measurement and IAS 32 Financial Instruments: Disclosure and Presentation have been adopted in thefinancial year following transition in accordance with the transition exemptions of IFRS 1 “First-time adoption of International Financial Reporting Standards”.

4 Information not available at time of publication.

IAS 19 – Employee benefits IFRS requires post-retirement employment

defined benefits such as pension plans to

be recognised on the balance sheet. One

area of IAS 19 that had, and we anticipate

will continue to have, a significant impact

on airlines financial statements has been

the recognition of the ‘funded status’ of

post-employment defined benefit plans.

On transition to IFRS, airlines were

required to determine whether defined

benefit plans were in a deficit or surplus

position by measuring the present value

of defined benefit obligation

(incorporating all cumulative actuarial

gains and losses to the extent recognised

by the entity) and the fair value of the

associated plan assets. The net position

(surplus or deficit) was then recognized

on the balance sheet as an asset or a

liability, depending on the funding status

of the plan. While not an airline specific

issue, many legacy airlines have

significant defined benefit and other post

employment programs. Air France – KLM,

Qantas Airways, British Airways, Ryanair

and Alitalia have all recognized

adjustments on transition to IFRS.

British Airways and easyJet have also

recognized an annual leave provision on

transition to IFRS. Alitalia recognized a

provision for staff airline tickets as a long-

term benefit. It was the only airline to

disclose this provision as an IFRS

adjustment.

IFRS 1 – First time adoption of IFRSAir France – KLM opted to revalue the Air

France portion of its aircraft fleet to fair

value on transition to IFRS. This resulted

in a U.S.$588.2 million adjustment to reduce

equity on transition. Similarly, Alitalia has

chosen to adopt the fair value method for

its ATR42 aircraft (the amount of the

adjustment has not been specified).

IAS 18 – RevenueAirlines receive revenue from the sale of

frequent flyer points or miles to third

parties under frequent flyer programs.

Under many legacy GAAPs, revenue

received from the sale of these points to

third parties was recognized when the

sale was made. Cathay Pacific, British

Airways and Qantas have transitioned

from immediate revenue recognition on

sale of points, to deferred revenue

accounting, the latter two on adoption of

IFRS in 2005. See handbook section 1.1.2

for analysis of this accounting policy. Air

France – KLM generated a gain on

exchange of summer and winter landing

slots. Under French GAAP the group

recognised the gain as revenue

immediately whereas under IFRS, the

group considered that the transfer of the

risks and benefits inherent in ownership

of the slots was not yet complete.

Therefore the recognition of the gain on

the exchange was deferred as a liability

on balance sheet.

IAS 16 – Property, plant andequipmentWhen an asset is made up of several

components which have a cost that is

significant in relation to the overall cost of

the item IAS 16 requires that these

components be capitalised and depreciated.

Components which may be separately

identified include airframes, engines,

modifications, heavy maintenance, seats,

landing gear etc. One of the frequent

adjustments made on transition to IFRS

has been to capitalize major aircraft

maintenance and engine overhaul costs

and depreciate them over the period to

the next inspection or overhaul. Airlines

that have changed their accounting for

heavy maintenance on transition to IFRS

include Qantas, British Airways, Alitalia,

Singapore Airlines (on a prospective

basis), South African Airways and SAS

Group. Other airlines such as Air France –

KLM and Ryanair had already adopted

this accounting treatment historically. Air

France – KLM has made an adjustment

for rebates on fixed assets which were

recognized as income under French

GAAP. This reduced assets and equity by

U.S.$30.8 million.

IAS 21 – The effects of changesin foreign exchange ratesUnder UK GAAP certain U.S. dollar

denominated assets and liabilities had

been treated as a foreign operation

(branch) by British Airways and easyJet

with the U.S. dollar as their functional

currency. As a result exchange

movements on re-translation of assets

and liabilities had been taken to reserves

rather than through the Income

Statement. IAS 21 provides additional

criteria to allow the functional currency to

be determined and therefore certain

aircraft owing companies have ceased to

be U.S. dollar branches under IAS 21 and

have been reassessed as having UK

Sterling functional currencies. Exchange

movements on monetary items are now

taken to the profit and loss.

IAS 12 – Income taxes Adjustments have been made by airlines

including British Airways, easyJet,

Qantas and Virgin Blue to tax effect their

IFRS adjustments. Air France – KLM has

recognized a deferred tax liability for the

realisable gain that will arise when its

perpetual subordinated loan securities

are redeemed. There is also a small

adjustment for the deferred tax on the

undistributed reserves of equity affiliates.



Deferred tax on IFRS adjustmentsAir France, Alitalia and the SAS Group

have separately disclosed the tax effect of

IFRS transition adjustments. Other

airlines have disclosed the impact of IFRS

adjustments net of tax.

IAS 27 – Consolidated andseparate financial statementsAir France – KLM has consolidated

entities under IFRS which had not been

consolidated under French GAAP. IAS 27

requires an entity be consolidated when

the power to control the entity is

demonstrated. Accordingly, Air France

Parthairs Leasing (AFPL) has been fully

consolidated on transition to IFRS.

IAS 17 – LeasesThe application of the lease classification

criteria in IAS 17 resulted in Alitalia

reclassifying 20 of its MD80 aircraft from

finance leases to operating leases.

Qantas have reclassified a number of

aircraft from operating leases to finance

leases on transition. Air France – KLM

also reclassified 13 aircraft from operating

lease to finance leases. Qantas made

an additional adjustment to recognize

contracted rental escalations on a

straight-line basis.

IFRS 2 – Share-based paymentThe fair value of share based

entitlements granted to employees is

recognized as an expense spread over

the period during which employees

become entitled to the equity instrument.

IFRS 3 – Business combinations easyJet elected not to restate business

combinations and as a result ceased

amortisation of U.S.$561.1 million of

goodwill. The goodwill will be subject to

annual impairment testing. This election

was taken by most airlines, with goodwill

balances effectively frozen at transition

date with amortization of goodwill no

longer recognized as an expense in the

profit or loss.

IAS 23 – Borrowing costs Air France – KLM has retrospectively

applied an adjustment to capitalise

borrowing costs relating to qualifying

assets.

IAS 38 – Intangible assets Adjustments made by Alitalia relate to

deferred start-up, expansion and training

costs as well as the cessation of

amortization of goodwill.

IAS 39 – Financial instruments:Recognition and Measurementand IAS 32 FinancialInstruments: Disclosure andPresentation Common measurement differences

related to:

• recognition of all derivative financial

instruments at fair value on balance

sheet (all airlines where relevant)

• recognition of finance charges based

on the effective interest method

(Alitalia, Qantas, Ryanair, SAS Group)

• reclassification of convertible

instruments between debt and equity

(Alitalia)

• creation of hedge accounting reserves

in equity in relation to cashflow

hedges (Alitalia, Ryanair, Qantas,

Singapore Airlines, SAS Group)

• adjustments to investments classified

as available-for-sale (Alitalia, Qantas,

Singapore Airlines, SAS Group)

• the movement in the intrinsic value of

zero cost option collars are taken to

equity reserves and the time value to

the profit or loss (easyJet, Qantas).

Appendix

Useful lives, depreciation rates and residual values disclosed byairlines

Set out in this Appendix are the useful

lives, depreciation rates and residual

values in relation to aircraft and aircraft

related assets.

Unless otherwise noted, the method of

depreciation used is on a straight line

basis. Some airlines have used estimated

cycles to determine the useful life of the

aircraft and note that the useful life may

change if the cycle assumptions are

revised.


Assetcategory

Airline Asset category Useful life(years)

Annualdepreciationrate

Residualvalue

Aircraft Air France – KLM Aircraft 20 * nilAlitalia Long haul (B777, B767, MD11) 20 5% 10%aAlitalia Short-medium haul aircraft (A321, A320,

A319, MD80, ERJ145) 18 5.5% 5 - 10%Alitalia Turboprop aircraft (ATR 72) 14 7.14% 0%Alitalia Heavy maintenance 5.5 to 8 * *American Airlines Jet aircraft and engines 20 to 30 * 5 - 10%British Airways Boeing 747 - 400 and 777 - 200 * 3.7%1 *British Airways Boeing 767 - 300 and 757 - 200 * 4.7%1 *British Airways Airbus 321, A320, A319, Boeing 737 - 400 * 4.9%1 *British Airways Embraer RJ145, British Aerospace 146 * 4.8%1 *Cathay Pacific Passenger aircraft * * 0 - 10%Cathay Pacific Freighter aircraft 20 * 0 - 20%Continental Airlines Jet aircraft and simulators 20 to 27 * 15%Delta Owned flight equipment 10 to 25 * 5 - 40%easyJet Aircraft 7 * *easyJet Aircraft improvements 3 to 7 * *easyJet Aircraft pre-paid maintenance 3 to 7 * *Iberia Airlines Aircraft cells 22 * *Iberia Airlines Aircraft components 4 to 7 * *Japan Airlines Aircraft Useful life of * *

aircraft type2


Assetcategory



Residualvalue

AircraftJetblue Airways Aircraft 25 * 20%Jetblue Airways Aircraft parts fleet life * 10%Lufthansa New aircraft 12 * 15%Qantas Jet aircraft and engines 20 * 0 - 20%Qantas Non-jet aircraft and engines 10 to 20 * 0 - 20%Qantas Major aircraft inspections Inspection life * *Ryanair Boeing 737 - 200 20 * €500,000Ryanair Boeing 737 - 800 23 * 15%Ryanair Embedded maintenance Period to

next check(8-12 B737-800) * nil

SAS Group Aircraft 20 * 10%Singapore Airlines New passenger aircraft 15 * 10%Singapore Airlines New freighter aircraft 15 * 20%Singapore Airlines Training aircraft 5 * 20%Singapore Airlines Used freighter aircraft 15 less age

of aircraft * 20%Singapore Airlines Used passenger aircraft 15 years less

age of aircraft * 10%South African Passenger aircraft * 4% *Southwest Airlines Aircraft and engines 23 to 25 * 15%United Airlines Aircraft 25 to 30 * *Virgin Blue Airframe, engines and landing gear * 10-25% *Swiss Airlines Aircraft 10 to 15 * 5% - 20%

Heavy maintenance 3 to 5 * *Improvements to leased aircraft Term of lease

up to 10 years * *U.S. Airways Passenger aircraft 5 to 25 * *

Engines Lufthansa Spare engines 5 to 20 * *SAS Group Reserve engines 20 * 10%SAS Group Engine components 8 * *Singapore Airlines Spare engines 15 * 10%Swiss Airlines Spare engines 10 to 15 * *

Useful lives, depreciation rates and residual values disclosed byairlines continued


Assetcategory



Residualvalue

Rotables, repairables and spare parts

Air France – KLM Spare parts 3 to 20 * *American Airlines Major rotable parts, avionics and life of *

assemblies equipment * 5-10%to which applicable

U.S. Airways Rotables and repairables 5 to 25 *Continental Rotable spare parts 25 to 30 * *easyJet Aircraft spares 10 * 10%Iberia Airlines Spare parts - repairable 8 to 10 * nilIberia Airlines Spare parts - rotating 18 * 10Japan Airlines Spare parts 8 to 273 * 10-20%Qantas Aircraft spare parts 15 to 20 * 0-20%Singapore Airlines Spare parts 15 * nilSouthwest Airlines Aircraft parts Fleet life * 4%Virgin Blue Rotables and maintenance parts (used) N/D * 4%

Flight Alitalia Flight simulators and electronic equipment 5 20% *simulators Air France - KLM Flight simulators 10 to 20 20% *

Iberia Airlines Flight simulators 12 to 14 * *Singapore Airlines Flight simulators 10 * *Swiss Airlines Simulators 10 * *U.S. Airways Property and equipment - ground 3 to 12 * *

Flight and Term orground useful lifeequipment Continental Airlines Flight and ground equipment (6 years) * nil

Continental Airlines Food service equipment 6 to 10 *Continental Airlines Surface transportation/ground equipment 6 * nilDelta Airlines Ground property and equipment 3 to 10 * *Japan Airlines Ground property and equipment 2 to 65 * *Japan Airlines Flight equipment 8 to 27 * *Jetblue Airways In-flight entertainment systems 12 * nilJetblue Airways Property and equipment - ground 3 to 10 * nilJetblue Airways Flight equipment leasehold improvement Lease term * nilNorthwest Airlines Flight equipment 4 to 25 * *SAS Group Workshop and aircraft servicing

equipment 5 * *


1 Effective annual depreciation rate.2 Straight-line method used for all categories except Boeing 747 and DC 10's, where declining-balance method is used.3 Declining balance method is used.* Not disclosed.

Assetcategory



Residualvalue

Fixtures, fittings and otherequipment Air France - KLM Fixtures and fittings 8 to 15 * *

American Airlines Fixtures, fittings and other equipment 3 to 10 * *British Airways Equipment 3 to 25 * *Cathay Pacific Other equipment 3 to 7 * nileasyJet Furniture, fittings and equipment 3 * *Iberia Airlines Furniture and fittings 10 * *Iberia Airlines Land transport items 7 to 10 * *Iberia Airlines Machinery, fixtures and tools 10 to 15 * *Lufthansa Office and factory equipment 3 to 10 * *Northwest Airlines Other property and equipment 3 to 32 * *SAS Group Other equipment and vehicles 3 to 5 * *Singapore Airlines Other 1 to 12 * nilSouth African Containers * 5% *Virgin Blue Leasehold improvements * 20-40% *Air France - KLM Equipment and tooling 5 to 15 * *

Computer American Airlines Capitalized software 3 to 10 * *equipment Cathay Software development < 4 years * *

Continental Airlines Computer software 3 to 10 * *easyJet Hardware and software 3 * *Iberia Airlines Data processing equipment 4 to 7 * *Japan Airlines Software 5 to 7 * *Virgin Blue Computer equipment * 33.30% *Alitalia Plant, machinery, equipment and fittings 10 10% *

Plant and Continental Airlines Maintenance and engineering equipment 8 * *equipment Lufthansa Plant and machinery 10 * *

United Airlines Property, plant and equipment 3 to 15 * *Virgin Blue Plant and equipment * 20% *

KPMG’s Global Airline practice contacts


Martin SheppardAustraliaHead of Aviation+61 2 9335 [email protected]

Dr Ashley SteelUnited KingdomGlobal Chair – Transport+44 20 7311 [email protected]

ArgentinaNorbeto Cors+54 11 4316 [email protected]

BelgiumPatrick de Poorter+32 9 241 [email protected]

BrazilManuel Fernandes+55 21 3231 [email protected]

CanadaSteve Beatty+1 416 777 [email protected]

Czech RepublicStanislav Cervenan+420 222 123 [email protected]

DenmarkSoeren Thorup Soerensen+45 3818 [email protected]

EgyptHossam Fahmy+20 2 536 [email protected]

FinlandSolveig Tornroos-Huhtamaki+358 9 6939 [email protected]

FrancePhilippe Arnaud+33 1 5377 [email protected]

GermanyUlrich Maas+49 30 2068 [email protected]

Hong KongAndrew Weir+852 2826 [email protected]

HungaryAndrea Sartori+36 1 887 [email protected]

IrelandSean O’Keefe+353 1 410 [email protected]

ItalyMarco Giordano+39 06 80 96 13 [email protected]

IndiaManish Mohnot+91 22 2491 3030 [email protected]

JapanToshio Ikeda+81 3 3266 [email protected]

KoreaPeter C Kim+82 2 2112 [email protected]

MexicoHector A Ramirez+52 55 5246 [email protected]

NetherlandsHerman van Meel+31 20 656 [email protected]

New ZealandPaul Herrod+64 9 3675 [email protected]

NorwayAage Seldal+47 5157 [email protected]

PeruJessica Oblitas+51 1 9792 [email protected]

PortugalSattar Sikander+351 210 110 [email protected]

RussiaRichard Glasspool+7 095 937 [email protected]

SingaporeWah Yeow Tan+65 6213 [email protected]

South AfricaTshidi Mokgabudi+27 11 647 [email protected]

SpainMiguel Angel Ibanez+34 91 5550 [email protected]

SwedenRoland Nilsson+46 8 723 [email protected]

SwitzerlandRoger Neininger+41 1 249 21 [email protected]

TaiwanBeryl Lin+886 2 2715 [email protected]

ThailandJohn Sim+66 2 677 [email protected]

United StatesChris Xystros+1 757 616 [email protected]

Notes


kpmg.com

© 2006 KPMG International. KPMG Internationalis a Swiss cooperative that serves as acoordinating entity for a network of independentfirms operating under the KPMG name. KPMGInternational provides no services to clients. Eachmember firm of KPMG International is a legallydistinct and separate entity and each describesitself as such. All rights reserved. Printed inAustralia. KPMG and the KPMG logo areregistered trademarks of KPMG International, aSwiss cooperative. May 2006. VIC9838IM.

Liability limited by a scheme approved underProfessional Standards Legislation.

The information contained herein is of a general nature and is not intended to address thecircumstances of any particular individual or entity. Although we endeavor to provide accurate andtimely information, there can be no guarantee that such information is accurate as of the date it isreceived or that it will continue to be accurate in the future. No one should act on such informationwithout appropriate professional advice after a thorough examination of the particular situation.

KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independentfirms operating under the KPMG name. KPMG International provides no audit or other client services. Such services are provided solely by member firms of KPMG International (including sublicensees andsubsidiaries) in their respective geographic areas. KPMG International and its member firms are legallydistinct and separate entities. They are not and nothing contained herein shall be construed to place theseentities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm hasany authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any othermember firm, nor does KPMG International have any such authority to obligate or bind any member firm, inany manner whatsoever.

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