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The principal financial risks to which the Group is exposed are: foreign currency exchange rate risk; interest rate risk; and commodity price risk. The Board has approved policies for the management of these risks.

In accordance with the option allowed by IFRS 1 'First time adoption of IFRS', the Group has adopted IAS 32 and IAS 39 'Financial Instruments' prospectively from January 1, 2005, and consequently information for 2005 is provided on this basis. For 2004, information has been provided on the previously published basis under UK GAAP.

Risk management policies and hedging activities

Foreign currency exchange rate risk -

The Group has significant cash flows (most significantly US dollars, followed by the Euro) denominated in currencies other than the functional currency of the relevant trading entity. To manage its exposures to changes in values of future foreign currency cash flows, so as to maintain relatively stable long-term foreign exchange rates on settled transactions, the Group enters into derivative forward foreign currency transactions. For accounting purposes, these derivative contracts are not designated as hedging instruments.

The Group also has exposures to the fair values of non-derivative financial instruments denominated in foreign currencies. To manage the risk of changes in these fair values, the Group enters into derivative forward foreign exchange contracts, which are designated as fair value hedges for accounting purposes.

The Group regards its interests in overseas subsidiary companies as long-term investments. The Group aims to match its translational exposures by matching the currencies of assets and liabilities. Where appropriate, foreign currency financial liabilities may be designated as hedges of the net investment.

Interest rate risk -

The Group's interest rate risk is primarily in relation to its fixed rate borrowings (fair value risk) and floating rate borrowings (cash flow risk). Interest rate derivatives are used to manage the overall interest rate profile within the Group policy, which is to maintain a higher proportion of net debt at fixed rates of interest having regard to the prevailing interest rate outlook. These are designated as either fair value or cash flow hedges as appropriate.

Commodity risk -

The Group has exposures to the price of jet fuel and base metals arising from business operations. To minimise its cash flow exposures to changes in commodity prices, the Group enters into derivative commodity transactions. For accounting purposes, these derivative contracts are not designated as hedging instruments.

Other price risk -

The Group's cash equivalent balances represent investments in money market instruments, with a term of up to one month. The Group does not consider that these are subject to significant price risk.

Liquidity risk -

The Group's policy is to hold financial investments and maintain undrawn commited facilities at a level sufficent to ensure that the Group has available funds to to meet its medium-term capital and funding obligations and to meet any unforseen obligations and opportunities. The Group holds cash and short-term investments, which together with the undrawn commited facilities, enable the Group to manage its liquidity risk.

Credit risk -

The Group is exposed to credit risk to the extent of non-payment by either its customers or the counterparties of its financial instruments. The Group has credit policies covering both trading and financial exposures. At the balance sheet date, there were no significant concentrations of credit risk. The maximum exposure to credit risk at the balance sheet date is represented by the carrying value of each financial asset, including derivative financial instruments.

Derivative financial instruments

The nominal amounts and fair values of derivative financial instruments are as follows, analysed by year of expected maturity:

	2005 Fair value
	Expected maturity
	Notional amount £m	Within one year £m	Between one and two years £m	Between two and five years £m	After five years £m		Assets £m	Liabilities £m
December 31, 2005
Foreign exchange contracts
Fair value hedges	(280)	—	—	(105)	(175)		5	—
Non-hedge accounted	6,158	2,055	1,883	2,220	—		359	(136)
Interest rate contracts
Fair value hedges	1,104	—	313	109	682		69	—
Cash flow hedges	124	124	—	—	—		—	—
Non-hedge accounted	115	—	28	63	24		—	(7)
Commodity contracts
Non-hedge accounted	102	46	33	23	—		31	—
	7,323	2,225	2,257	2,310	531		464	(143)

As described above, all derivative financial instruments are entered into for risk management purposes, although these may not be designated into hedging relationships for accounting purposes.

Derivative financial instruments related to foreign exchange risks are denominated in the following currencies:

	2005 Currencies purchased forward
	Sterling £m	US dollar £m	Euro £m	Other £m	Total £m
Currencies sold forward:
Sterling	—	522	—	17	539
US dollar	6,534	—	293	289	7,116
Euro	—	—	—	176	176
Other	7	25	31	8	71

Other derivative financial instruments are denominated in the following currencies:

	2005 £m
Sterling	24
US dollar	558
Euro	813
Other	50

Fair values of financial instruments

The fair value of a financial instrument is the price at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. Fair values have been determined with reference to available market information at the balance sheet date, using the methodologies discussed below.

The carrying amounts and fair values of the Group's financial instruments are as follows:

	2005
	Book value £m	Fair value £m
Assets
Unlisted non-current investments	52	52
Cash at bank and in hand	338	338
Short-term deposits and investments	1,456	1,456
Trade receivables	963	963
Other financial assets:
Derivative financial assets	464	464
Other non-derivative financial assets	258	258
Liabilities
Trade payables	(1,538)	(1,538)
Borrowings – current	(75)	(74)
Borrowings – non-current	(1,458)	(1,530)
Other financial liabilities:
Derivative financial liabilities	(143)	(143)
Financial risk and revenue sharing partnerships	(423)	(454)
B Shares	(7)	(7)
Other non-derivative financial liabilities	(246)	(246)

Unlisted fixed asset investments -

These primarily comprise Floating Rate Convertible Loan Stock. The conversion conditions are such that fair value approximates to the book value.

Trade receivables, trade payables, short-term investments and cash and cash equivalents -

Fair values are assumed to approximate to cost either due to the short-term maturity of the instruments or because the interest rate of the investments is reset after periods not exceeding six months.

Borrowings, other financial assets and other financial liabilities -

Where available, market values have been used to determine fair values. Where market values are not available, fair values have been estimated by discounting expected future cash flows using prevailing interest rate curves. Amounts denominated in foreign curencies are valued at the exchange rate prevailing at the balance sheet date.

The currency profile of derivative financial instruments is analysed above. The non-derivative financial instruments above are denominated in the following currencies:

	2005
	Sterling £m	US dollar £m	Euro £m	Other £m	Total £m
Assets
Unlisted non-current investments	46	—	2	4	52
Cash at bank and in hand	111	67	87	73	338
Short-term deposits and investments	986	377	84	9	1,456
Trade receivables	194	633	74	62	963
Other non-derivative financial assets	84	122	19	33	258
Liabilities
Trade payables	(731)	(550)	(130)	(127)	(1,538)
Borrowings – current	(8)	(11)	(1)	(55)	(75)
Borrowings – non-current	(213)	(361)	(882)	(2)	(1,458)
Other financial liabilities:
Financial risk and revenue sharing partnerships	—	(325)	(98)	—	(423)
B Shares	(7)	—	—	—	(7)
Other non-derivative financial liabilities	(178)	(36)	(10)	(22)	(246)

The Group's actual currency exposures after taking account of derivative foreign currency contracts, which are not designated as hedging instruments for accounting purposes are as follows:

	2005
Functional currency of Group operation	Sterling £m	US dollar £m	Euro £m	Other £m	Total £m
Sterling	—	(2)	1	2	1
US dollar	1	—	4	1	6
Euro	1	—	—	—	1
Other	2	6	5	13	26

Interest rate risk

In respect of income earning financial assets and interest bearing financial liabilities, the following table indicates their effective interest rates and the periods in which they reprice. The value shown is the carrying amount.

1. Interest on the short-term investments are at fixed rates. The weighted average interest rate on the sterling securities is 4.87 per cent. The periods in which they reprice is shown in the table above.
2. Cash at bank and in hand comprises bank balances and demand deposits and earns interest at rates based on daily bank deposit rates.
3. Short-term deposits are deposits placed on money markets for periods up to three months and earn interest at the respective short-term deposit rates.
4. Floating rate financial liabilities comprise borrowings bearing interest at rates fixed in advance for periods ranging from one to six months based on the applicable LIBOR rate.

Some of the Group's borrowings are subject to the Group meeting certain obligations, including customary financial covenants. If the Group fails to meet its obligation these arrangements give rights to the lenders, upon agreement, to accelerate repayment of the facilities. There are no rating triggers contained in any of the Group's facilities that could require the Group to accelerate or repay any facility for a given movement in the Group's credit rating.

Maturity analysis

The maturity analysis of the Group's interest bearing financial liabilities is as follows:

	2005 £m
In one year or less or on demand	75
In more than one year but not more than two years	49
In more than two years but not more than five years	365
In more than five years	1,044
	1,533

In addition, the Group has undrawn committed borrowing facilities available as follows:

	2005 £m
Expiring within one year	—
Expiring in one to two years	—
Expiring thereafter	250
	250

Comparative information for 2004

This is provided on the previously published basis under UK GAAP.

Funding and interest rates

	2004
	Sterling £m	US dollar £m	Euro £m	Other £m	Total £m
Financial assets
Cash at bank and in hand1	200	418	45	95	758
Short-term deposits2	652	34	3	5	694
Government securities and corporate bonds3	34	2	—	—	36
Unlisted fixed asset investments4	47	3	2	5	57
Debtors – amounts falling due after one year4	41	36	13	19	109
	974	493	63	124	1,654
Financial liabilities5
Floating-rate borrowings6	(714)	(180)	(8)	(5)	(907)
Fixed-rate borrowings	(508)	(87)	—	(65)	(660)
Borrowings on which no interest is paid7	—	—	—	(1)	(1)
Other creditors – amounts falling due after one year4	(42)	(31)	(1)	(12)	(86)
	(1,264)	(298)	(9)	(83)	(1,654)

1. Cash at bank and in hand comprises bank balances and deposits placed on money markets overnight.
2. Short-term deposits are deposits placed on money markets for periods ranging from two nights up to one month.
3. Interest on the securities and bonds are at fixed rates. The weighted average interest rate on the sterling securities is 5.8 per cent. The weighted average time for these securities is 2.5 years.
4. These amounts do not incur or accrue interest.
5. Financial liabilities are stated after taking into account the various interest rate and currency swaps entered into by the Group.
6. Floating-rate financial liabilities comprise borrowings bearing interest at rates fixed in advance for periods ranging from one to six months based on the applicable LIBOR rate.
7. The weighted average period for borrowings on which no interest is paid is five years.

The analysis of fixed-rate borrowings is as follows:

	2004
	Total £m	Weighted average interest rate at which fixed %	Weighted average period for which rate is fixed Months
Currency
Sterling	508	6.9	15
US dollar	87	6.5	43
Other	65	5.4	15

The maturity profile of the Group's financial liabilities is as follows:

	2004 £m
In one year or less, or on demand	204
In more than one year but not more than two years	117
In more than two years but not more than five years	372
In more than five years	961
	1,654

Borrowing facilities

The Group has various borrowing facilities available to it. The undrawn committed facilities available at December 31, 2004 were as follows:

	2004 £m
Expiring within one year	—
Expiring in one to two years	—
Expiring thereafter	250
	250

 

Exchange risk management

The table below shows the Group's currency exposures at December 31, 2004 on currency transactions that give rise to the net currency gains and losses recognised in the profit and loss account. Such exposures comprise the net monetary assets and liabilities of the Group at December 31, 2004 that are not denominated in the functional currency of the operating company involved. The exposures are stated after taking into account the effects of currency swaps and forward foreign exchange contracts.

	2004 Net foreign currency monetary assets/(liabilities)
Functional currency of Group operation	Sterling £m	US dollar £m	Euro £m	Other £m
Sterling	—	—	1	—
US dollar	—	—	—	1
Euro	—	1	—	—
Other	1	4	(1)	4

Fair values of financial assets and financial liabilities

The estimated fair value of the Group's financial instruments are summarised below:

	2004
	Book value £m	Fair value £m
Unlisted non-current fixed asset investments	57	57
Cash at bank and in hand	758	758
Short-term deposits and investments	730	730
Short-term debt	(204)	(211)
Long-term debt	(1,364)	(1,569)
Other creditors – amounts falling due after one year	(86)	(82)
Debtors – amounts falling due after one year	109	104
Derivatives used to hedge the interest, currency and commodity exposure of the business:
Jet fuel swaps	—	9
Interest rate swaps	23	129
Forward foreign currency contracts	—	986
Forward purchase of shares to meet share option commitments	—	40

Where available, market values have been used to determine current values. Where market values are not available, fair values have been calculated by discounting expected future cash flows at prevailing interest and exchange rates.

Cash at bank and in hand, short-term deposits and short-term borrowings:

The book value approximates to fair value either due to the short-term maturity of the instruments or because the interest rate of investments is reset after periods not greater than six months.

Derivatives:

The fair value of derivatives is the estimated amount, based on current market rates, which the Group would expect to pay or receive were it to terminate the derivatives at the balance sheet date.

Hedges of future transactions

As described in the Finance Director's review the Group's policy is to hedge the following exposures:

Interest rate risk -

using interest swaps

Currency exposures on future forecast sales -

using forward foreign currency contracts, currency swaps and currency options

Commodity price risk -

using jet fuel swaps

Gains and losses on instruments used for hedging are dealt with as outlined in the accounting policies.

Unrecognised gains and losses on instruments used for hedging, and the movements therein, are as follows:

	2004
	Gains £m	(Losses) £m	Total net gains/(losses) £m
Unrecognised gains and losses on hedges at January 1, 2004	980	(234)	746
Gains and losses arising in previous year that were recognised in 2004	(280)	90	(190)
Gains and losses arising in previous year that were not recognised in 2004	700	(144)	556
Gains and losses arising in 2004 that were not recognised in 2004	618	(33)	585
Unrecognised gains and losses on hedges at December 31, 2004 of which:	1318	(177)	1141
Gains and losses expected to be recognised in 2005	564	(123)	441
Gains and losses expected to be recognised thereafter	754	(54)	700

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