2007 DIRECTOR'S REPORT BUSINESS REVIEW (Theese pages are under development:)

Marketplace | Performance | Financial Matters | CSR

Business Review
Financial Matters

Exchange Rates
A significant proportion of BBA's earnings are generated in US dollars. The movements in this exchange rate since 2004 are shown in the table below:

The average dollar rate used to translate our earnings has remained relatively stable over the last three years. However the spot rate which is used to translate the dollar assets and liabilities at 31 December 2006 was significantly weaker at $1.96. This has reduced the value of our dollar assets and liabilities compared to 31 December 2005 when the spot rate was $1.72. If the recent US dollar weakness continues throughout 2007 and the rate remains at circa $1.96 the translated value of the Group's 2006 pre tax profits would be some £4 million lower.

Share Based Payments
The impact of share based payments for continuing operations during the year was to increase profits by £1.6 million compared to a charge of £3.0 million in 2005. The movement was principally caused by a reduction in the Company's share price prior to an award vesting in March. Compared to the prior year the improvement benefited the results of Flight Support by £2.6 million, Aftermarket Services and Systems by £1.7 million and central overhead by £0.3 million.

Restructuring Costs and Amortisation of Acquired Intangibles
Restructuring costs and amortisation of acquired intangibles for continuing operations amounted to £8.0 million (2005 (Including non-recurring items): £23.8 million). Further details of these amounts can be found in note 2 to the Consolidated Financial Statements.

Discontinued Operation
There was a significant after tax loss for the discontinued operations of £76.2 million. This includes the results of Fiberweb until the date of the demerger on 17 November and the results of Becorit until its sale on 1 December for £27.8 million. An analysis of these results is shown on the table (below) and includes the costs of the demerger, restructuring charges and asset impairment adjustments associated with the demerger of Fiberweb, as disclosed in the information sent to the shareholders prior to the demerger being completed.

Acquisitions
The Group acquired four aviation businesses during the year and took a further 40% share in the base at Athens (taking our share to 91%) for a total consideration of £49.6 million. We acquired two bases to further expand our business aviation network and also added Ontic and Arnoni. These businesses, which are detailed on page 36 of the Directors' Report, have contributed approximately £36 million of turnover in 2006. The fair market value of the assets acquired was £19.8 million, debt acquired was £0.5 million, and the resulting goodwill was £35.9 million.

Disposals
During the year the Company disposed of Becorit, the railway friction business, for a consideration of £27.8 million resulting in a profit on disposal of £16.5 million.

Interest
The net interest charge was £24.6 million (2005: £20.9 million) with the increase mostly relating to higher US interest rates, which has been offset in part by the inclusion in the prior period of a £2.6 million charge in respect of a dividend on preference shares that were redeemed in June 2005. Interest cover was 4.2 times (2005: 4.0 times). Assuming that Fiberweb had been demerged on 1 January 2006 interest costs would have been approximately £17.0 million and interest cover 6.0 times.

Tax and Dividends
The normalised tax rate for continuing operations was 29.9% (2005: 25.4 %) with the increase in the rate reflecting a significant shift in the mix of profits to the USA with the demerger of Fiberweb and the inclusion in the prior period of a release of a provision for a potential tax exposure in the UK, which was no longer required. There is expected to be some upward pressure on the rate in the short to medium term due to the limited opportunities available for tax planning and the potential lack of tax capacity in the UK.

At the time of our interim results announced on 31 August 2006 the Board explained that in the light of the demerger of Fiberweb it had decided to rebase future dividend payments. The interim dividend for 2006 was maintained at 3.5p (2005: 3.5p) and the Board is now recommending a final dividend of 5.0p (2005: 8.3p) bringing the total dividend for the year to 8.5p (2005: 11.8p). The rebased total dividend for the year is estimated at 7.1p.

Pensions
The overall value of our scheme assets has fallen to £477 million (2005: £500 million), whilst liabilities have fallen further to £498 million (2005: £565 million). This has resulted in a net deficit of £21 million at the end of the year compared to £65 million at the end of 2005. The deficit can be broken down between UK schemes £11 million and overseas schemes £10 million. Following an actuarial valuation of the UK schemes in 2004, the Company made a special contribution of £5 million during 2005 and 2006 and a further contribution of £3.6 million will be made in 2007, after which the situation will be reviewed again. Following the demerger of Fiberweb the Company agreed to settle the Section 75 debt arising of £12 million. This contribution was made in January 2007 and is likely to result in the eradication of the deficit in the UK schemes on an IAS19 basis.

In 2006 the Company benefited from a curtailment gain of £1.6 million in respect of its UK pension scheme associated with the departure of Fiberweb employees from the scheme as at the date of merger. This item has been accounted for in unallocated central overhead of continuing operations in the segmental analysis as it relates to the reduction of a future liability for BBA Aviation plc.

Cash Flow and Debt
Cash flow from operating activities was £118.8 million, significantly lower than the prior year of £174.0 million, due principally to the lower underlying operating profits from Fiberweb and the cash cost of the demerger and associated restructuring initiatives. There was a free cash inflow of £3.1 million compared to £86.3 million in 2005 which reflected higher capital expenditure of £91.8 million (2005: £73.3 million) together with the lower cash flow from operating activities. Assuming that Fiberweb had been demerged on 1 January 2006, free cash flow for continuing operations would have been approximately £55.0 million.

Net debt was £356.9 million, significantly lower than at the end of 2005 (£527.1 million). The lower debt resulted from the transfer of £173.1 million of debt to Fiberweb prior to its demerger and the balance to the impact of exchange rates on the translation of our dollar debt which reduced net debt by £77.1 million. This was offset by a net cash outflow of £76.1 million in the period.

Gross capital expenditure increased to £91.8 million (2005: £73.3 million) and represents 1.3 times depreciation (2005: 0.9 times). Aviation expenditure amounted to £47.0 million (2005: £39.9 million) with Flight Support accounting for the majority of the expenditure (£29.4 million) principally relating to investment in our FBO facilities in Boston, Teeterboro and Paris and in the start up of our new commercial handling operation at Bangkok airport.

A significant proportion of our debt is held in US dollars as a hedge against our US dollar assets. The weakening of the US dollar against sterling has had a significant beneficial impact on the translated value of our dollar debt. A profile by currency is shown in the table below:

The Group has a syndicated multi-currency loan for £550 million that will expire in 2009. We currently have headroom of approximately £110 million and have the flexibility to capitalise on investment opportunities as they arise.

The Group policy with respect to cash deposits is to only have deposits with pre-approved banks with credit ratings of A1/P1 and with limits on the amount deposited with each institution dependent on their credit rating. Deposits are generally for short-term maturity (less than three months).

Financial Risk Management and Treasury Policies
The main financial risks of the Group relate to funding and liquidity, interest rate fluctuations and currency exposures. A central Treasury department that reports directly to the Group Finance Director and operates according to objectives, policies and authorities approved by the Board, performs the management of these risks. The overall policy objective is to use financial instruments to manage financial risks arising from the underlying business activities and therefore the Group does not undertake speculative transactions for which there is no underlying financial exposure. More details are set out in note 17 to the Consolidated Financial Statements.

Funding and liquidity
The Group's operations are financed by a combination of retained profits, equity and borrowings. Borrowings are generally raised at Group level from banks and then lent to operating subsidiaries on commercial terms. The Group maintains sufficient available committed borrowing facilities to meet any forecasted funding requirements.

At the end of 2006, the Group had committed bank facilities of £550 million of which £78 million was undrawn. In addition, the Group maintains uncommitted facilities for daily working capital fluctuation purposes. At the end of 2006 the undrawn amount of these uncommitted facilities totalled £19 million.

Interest rate risk management
The interest rate exposure arising from the Group's borrowing and deposit activity is managed by using a combination of fixed and variable rate debt instruments and interest rate swaps. The Group's policy with respect to interest rate is to fix portions of debt for varying periods based upon our debt maturity profile and an assessment of interest rate trends. At the end of 2006 approximately 38 per cent of the Group's total borrowings were fixed at weighted average interest rates of 4.5 per cent for varying terms up to three years.

Currency risk management
The Group's policy is to hedge all significant transactional currency exposures through the use of forward currency contracts. It is also the Group's policy to hedge overseas capital employed, including recognised goodwill, between 50 and 85 per cent by means of currency loans and currency swaps.