International Consolidated Airlines : Annual report and accounts 2018

INTERNATIONAL AIRLINES GROUP

CONTENTS

Strategic Report

• 2Our highlights

• 3Chairman's letter

• 4Our network

• 6Chief Executive Officer's review

• 11Question and answers with the Chief Executive Officer

• 12Business model and strategy

• 14Our strategic priorities and key performance indicators

• 18British Airways

• 20Iberia

• 22Vueling

• 23Aer Lingus

• 24LEVEL

• 25IAG Platform

• 27Avios

• 28IAG Cargo

• 29Digital

• 30Risk management and principal risk factors

• 37Financial overview

• 38Financial review

• 49Regulatory environment

• 51Sustainability

Corporate Governance

• 72Chairman's introduction to corporate governance

• 74Board of Directors

• 76Corporate governance

• 88Report of the Audit and Compliance Committee

• 91Report of the Nominations Committee

• 94Report of the Safety Committee

• 95Report of the Remuneration Committee

Financial Statements

• 116Consolidated income statement

• 117Consolidated statement of other comprehensive income

• 118Consolidated balance sheet

• 119Consolidated cash flow statement

• 120Consolidated statement of changes in equity

• 122Notes to the consolidated financial statements

• 172Group investments

Statement of Directors' Responsibilities Independent Auditors' Report

Additional Information

• 183Alternative performance measures

• 186Glossary

• 188Operating and financial statistics

IBCShareholder information

Management Report

IAG is required to prepare a Management Report in accordance with Article 262 of the Spanish Companies Act and Article 49 of the Spanish Commercial Code. Pursuant to this legislation, this management report must contain a fair review of the progress of the business and the performance of the company, together with a description of the principal risks and uncertainties that it faces. In the preparation of this report, IAG has taken into consideration the guide published in 2013 by the Spanish National Securities Market Commission (CNMV) which establishes a number of recommendations for the preparation of management reports of listed companies.

The Management Report is composed by the following sections:

• 12 Business model and strategy

• 14 Our strategic priorities and key performance indicators

• 25 IAG Platform

• 30 Risk management and principal risk factors

• 37 Financial overview

• 38 Financial review

• 49 Regulatory environment

• 51 Sustainability

The Annual Corporate Governance Report is part of this Management Report but has been prepared separately.

This report has been file with the CNMV, together with the required statistical annex, in accordance with the CNMV Circular 2/2018, dated June 12. The Annual Corporate Governance Report and the statistical annex are also available on the company's website (www.iairgroup.com). The Non-Financial Information Statement in response to the requirements of Law 11/2018, of December 28, (amending the Commercial Code, the revised Capital Companies Law approved by Legislative Royal Decree 1/2010, of July 2, 2010 and Audit Law 22/2015, of July 20, 2015), is part of this Management Report and is available on the Company's website (www.iairgroup.com).

"IAG continues todeliverin a changing industry. We are responding to consumer needs,deliveron our financial targets, operate with sustainability at our heart and leverage technology to support our vision. We're confident that we will continue todeliverfor our customers and shareholders while investing in the future of our people and airlines. IAG is built to succeed and we hope you'll join us on our journey as we move towards greater achievements together."

Willie Walsh

Chief Executive Officer

Our highlights

Operating profit before exceptional items (€m)1

+€280 millionvly

• 2018 2017 2016

DividendsShare buybackSpecial dividend

Value returned to shareholders3+25%vly

2018

2017 2016

Return on Invested Capital1

IAG Platform

INTERNATIONAL AIRLINES GROUP

16.6%+0.9pts

Our financial performance
Statutory results	2018	20171	Versus last year
Total revenue	€ 24,406m	€ 22,880m	6.7%
Operating profit after exceptional items	€ 3,678m	€ 2,662m	38.2%
Profit after tax and exceptional items	€ 2,897m	€ 2,009m	44.2%
Basic earnings per share	142.7€c	95.2 €c	49.9%
Cash and interest-bearing deposits	€ 6,274m	€ 6,676m	(6.0%)
Interest-bearing long-term borrowings	€ 7,509m	€ 7,331m	2.4%
Alternative performance measures2	2018	20171	Versus last year
Profit after tax before exceptional items	€ 2,481m	€ 2,231m	11.2%
Adjusted earnings per share	117.7€c	102.2 €c	15.1%
Adjusted net debt	€ 8,355m	€ 7,759m	7.7%
Adjusted net debt to EBITDAR	1.6	1.5	0.1 pts

• 1 2017 figures restated for new accounting standards IFRS 15 'Revenue from contracts with customers' and IFRS 9 'Financial instruments'.

• 2 Alternative performance measure calculations page 183.

• 3 Presented in the year they were proposed

• 4 Excluding LEVEL

For definitions see Glossary page 186.

2

INTERNATIONAL AIRLINES GROUP

Annual Report and Accounts 2018

CHAIRMAN'S LETTER

A business model built for sustainable growth

Antonio Vázquez

"I'm delighted to welcome you to our latest Annual Report which charts another year of high achievement for all our operating airlines in an increasingly testing economic environment."

Corporate Governance

Chairman

Financial Statements

2018 was another year of strong growth for our business, despite significant economic and political challenges.

To report operating profits of €3,230 million before exceptional items (up by 9.5%) on revenues of €24.4 billion is a significant achievement at a time when oil prices were volatile and the geo-political environment uncertain.

Difficulties lie ahead on both these fronts, but we remain confident we have the right strategy, supported by a unique business model and a robust governance structure, to continue pursuing long-term growth.

Forecasts from the International Air Transport Association make good reading. They predict our industry's net profits will increase to $35.5 billion this year - the tenth consecutive year of profit for the industry, and, more importantly, the fifth in a row where returns will exceed the cost of capital, creating value for investors.

In some sectors, that wouldn't make a headline. In the airline industry, given its history, it is big news.

It matches our own vocation to deliver consistent returns to shareholders. We were delighted to return some €1 billion in dividends and share buy backs in 2018, for the second year running.

Brexit is certainly one of the biggest challenges we face. However, we remain confident a comprehensive air transportagreement between the UK and EU will be reached which allows flights to continue as normal.

Liberalisation in Europe has delivered so much, benefitting around 1 billion consumers and sustaining thousands of jobs each year. And IAG remains confident that its operating companies will comply with relevant ownership and control rules post Brexit.

Consolidation remains a prime motivation for IAG. It takes two different forms - full-blown M&A activity and, more frequently in recent times, acquiring distressed assets from airlines that fail. We have a business model ideally suited to pursuing both paths.

Joint business agreements are also crucial. We're very pleased that the agreement between British Airways, Iberia and LATAM received approval in Brazil, Uruguay and Colombia, promising real benefits for travellers between Europe and South America. Approval from the Chilean Free Competition Defence Court was also received in 2018, though this remains subject to final ruling by the Chilean Supreme Court following an appeal. These relationships have longevity. In February 2019 we celebrated the 20th anniversary of the oneworld alliance that includes both British Airways and Iberia.

This is IAG's eighth year. We remain a young company with a unique structure. To sustain our success we must apply thehighest standards of governance and the new UK Corporate Governance Code's determined aspirations are and will be a big focus for the Board. We're thinking deeply about how IAG - a parent company, overseeing a diversity of brands and cultures - can make a meaningful reality of the Code's demands, not least on stakeholder engagement.

We also remain firmly fixed on growing sustainably. We are on track to meet our 10 per cent carbon efficiency improvement target of 87.3gCO2/pkm by 2020 and are making big progress on reducing onboard waste.

More widely we are proud of the lead role we are playing in industry-wide action on carbon. Our sector is the first to agree a worldwide mechanism to reduce emissions and the global CORSIA offset and reduction programme, which we advocated for strongly, is an initiative few industries can match.

I hope in the following pages you can clearly see that IAG continues to grow and prosper, much of which is down to the terrific work done by people across the Group.

We are all conscious of the challenges we face, but very excited about the opportunities that lie ahead.

Antonio Vázquez

Chairman

Additional Information

www.iairgroup.com

3