MATCHINGCAPACITY TO DEMANDThe longest and deepest recession inliving memory has meant we have had to move quickly to match our capacity to a rapid decline in demand. In February2010 we saw the first upturn in demandfor premium travel in 18 months. Withrecovery likely to be slow, we will continueto match our flying schedule to demandand to general economic activity as itpicks up.

British Airways 2009/10 Annual Report and Accounts 21

The markets we operate in

our business

22 British Airways 2009/10 Annual Report and Accounts

The markets we operate in

Whilst a number of major developedeconomies started to emerge fromrecession during the first half of ourfinancial year, the UK lagged behind. It eventually endured six consecutivequarters of negative growth, amounting to the longest and deepest recession inliving memory, before finally emergingfrom recession in the final three months of 2009. Momentum appears to have been maintained in early 2010,discounting the impact of the severewinter weather we suffered in January.

MARKETOVERVIEW

The global economic andfinancial crisis coupled withcontinued high fuel prices has accelerated consolidationin the airline industry. Manypassenger and cargo carriershave either gone bust or havebeen absorbed into otherairlines and, overall, the globalaviation market remains weak.

2009 saw the collapse ofSkyEurope, Flyglobespan andthe merger of Alitalia with AirOne, for example. In Asia, JALfiled for bankruptcy protection.

In Europe, we have announcedplans to merge with Iberia.Austrian Airlines, BrusselsAirlines and bmi have all beentaken over by Lufthansa. In theUS, Northwest has mergedwith Delta and United Airlinesand Continental Airlines haveannounced a merger to createthe worlds largest airline.

Global premium air travel demand in key markets, calendar year 2009

Premium demand

North Atlantic -12.2%Within Europe -25.1%Within Far East -19.8%Europe Far East -15.6%Europe Middle East -5.9%

Total market -15.8%

Source: IATA

The economic landscape Whilst there are now clear causes for optimism for the UK economy, anumber of persistent concerns remainand these may still delay a rebound in consumer confidence. Recovery in2010 is, therefore, likely to be slow,although momentum may build in 2011.

The US returned to positive growthone quarter earlier than the UK, and we saw economic activity grow at anunprecedented rate in the final threemonths of 2009 far faster andstronger than the rebound seen afterthe downturns of 1991 and 2001.

Emerging economies, and particularlythose in East Asia, have also bouncedback strongly on the back of a recovery in world trade, and massivegovernment support for the Chineseeconomy. Improving domestic demand in these countries, driven by bothconsumer spending and businessinvestment, should ensure the stronggrowth witnessed in China in recentyears continues.

Rising sovereign debt levels, however,pose a new threat to global economicsecurity. There are risks that the globalfinancial crisis, from which we are nowemerging, will evolve into a global fiscalcrisis and that national deficits, whichhave ballooned during recession, maycurtail future growth.

We are already seeing the start of thefiscal claw back in the UK, and growthhas become sufficiently strong in anumber of economies for monetarypolicy to begin returning to normal. Butworries about national debt have beenexacerbated by recent developments inDubai and Greece. The latters problemshave exposed the fiscal frailties of someother European countries, depressingthe outlook for the Eurozone despite its encouraging exit from recession inthe second half of 2009.

Impact on our industryDemand for global premium travelfinally returned to year on year growthin December 2009, some threemonths behind an upturn in generalglobal economic activity. It was the first such increase in 18 months.

Regionally, demand is picking up at verydifferent rates, however, reflecting thediffering pace of economic recovery inmajor economies. Emerging marketshave seen the strongest rebound ingrowth. The Far East and Middle Eastmarkets are now performing well, whilst the North Atlantic market hascome very close to recording growth.But premium demand within Europeremains depressed, thanks both torecession and significant structuralchanges in the airline sector.

Corporate responsibilityWhile recession is the overriding concernfor most customers, the environmentand corporate responsibility remain veryimportant issues to them. It is clear fromresearch that those companies with aclear and open commitment to behaveresponsibly and to manage theirenvironmental impact have a far greaterchance of building a trusted relationshipwith their customers.

Competition In response to the worsening economicconditions, the airline industry is in theprocess of change in a number of areas.

ConsolidationThe global economic and financial crisiscoupled with continued high fuel prices,has accelerated consolidation in theairline industry. Many passenger andcargo carriers have either gone bust orhave been absorbed into other airlinesand, overall, the global aviation marketremains weak.

2009 saw the collapse of SkyEurope,Flyglobespan and the merger of Alitaliawith Air One, for example. In Asia, JALfiled for bankruptcy protection.

In Europe, we have announced plans to merge with Iberia. Austrian Airlines,Brussels Airlines and bmi have all beentaken over by Lufthansa. In the US,Northwest has merged with Delta andUnited Airlines and Continental Airlineshave announced a merger to create the worlds largest airline.

Increased competitionMost of the markets in which weoperate are highly competitive. Levelsof competition vary, route by route.

British Airways 2009/10 Annual Report and Accounts 23o

ur business

On a few international routescompetition remains limited, withrestrictions placed on the number of flights that can be operated andregulations governing the fares that can be charged. At the other extremethere is a free market for flights withinEurope, allowing any European airlineto operate any route it chooses and to set its own fares.

In an effort to protect their airlines fromthe effects of the financial crisis andglobal recession, some governmentshave regrettably resorted to bailoutprogrammes. This has been particularlytrue in a number of major emergingmarkets, most notably in China and India.

Shorthaul marketOn shorthaul routes, we facecompetition in the air and on the ground.Train operators in the UK are taking abigger share of the air/rail travel marketsnow that infrastructure improvementshave cut journey times on key lines suchas the West Coast mainline. Eurostar,despite being severely disrupted bysnow and freezing weather in January,continues to grow and carried 1.2 percent more passengers in 2009, at a timewhen demand for flights from London toBrussels and to Paris fell by 14 per centand 3 per cent, respectively.

No frills airlines are continuing to grow,but have switched their priorities togrowth at continental airports. Whileseat capacity in London fell by 8 percent for full service airlines during2009, the no frills carriers cut theirseats on London routes by just 3 percent. Competition among these no frillscarriers at Gatwick is also expectedto intensify.

Longhaul marketDeregulation has had a significantimpact on our longhaul business. The first phase of the EU-US OpenSkies agreement, which took effect in summer 2008, has altered thecompetitive landscape on transatlanticroutes, especially at Heathrow.

US carriers Delta, Continental and US Airways have all commenced newservices from Heathrow and in 2009offered a total of 102 services perweek. New entrants and existingcarriers from the Middle East, Africaand India have also added capacity at Heathrow. Our own OpenSkiessubsidiary now operates direct services to the US from Paris.

Other important markets are also beingliberalised. The EU recently signed anopen skies deal with Canada. Similaragreements are expected to followwith other like-minded countries such

24 British Airways 2009/10 Annual Report and Accounts

The markets we operate in continued

1

In April 2009 we completed ourthird application to EU and UScompetition authorities to operate a joint business on North Atlanticroutes with our oneworld alliancepartners, American Airlines and Iberia.

We are seeking the same anti-trustimmunity to run this business as is already enjoyed by our majorcompetitors. Their respectivealliances, Star and Skyteam, arealready allowed to coordinateschedules and offer customers awide range of benefits and valuableservices. Other recent regulatorychanges have made these routes,and Heathrow in particular, far morecompetitive than in the past and we have argued that the movewould bring real benefits and choice to customers.

We received tentative approval for our joint business agreementfrom the US Department ofTransportation (DOT) in February2010 and we hope to receive finalapproval shortly. We have tabledcommitments to the EuropeanCommission to address competitionconcerns expressed in its Statementof Objections of September 2009.The commitments include makingdaily take-off and landing slot pairsavailable at Heathrow, Gatwickand/or New York JFK to allow other operators to compete with us on transatlantic routes.

as Australia, New Zealand and Brazil in the coming years.

A new generation of wide-body aircraft is also changing the competitivelandscape. The Airbus A380 is nowwell established at Heathrow, withthree airlines offering a total of 28departures a week during 2009 andadditional services confirmed for 2010.

Regulatory controls The airline industry is highly regulated.Almost everything we do f