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

Marketplace | Performance | Financial Matters | CSR

Directors' Report
Business Review-Marketplace

Sales by market
BBA Aviation principally provides services to the Business and General Aviation market with nearly two thirds of our sales in this sector. We also service the Commercial Aviation market, principally flight support, and have a limited presence in the military market.

Business and General Aviation
Despite historically high crude oil costs and a related rise in average retail Jet fuel prices to more than $5.00 per gallon, Business Aviation continued to experience robust growth in 2006. Following a temporary softening in flying hours in early 2006 as retail fuel prices peaked, business aircraft utilisation recovered and remained strong for the balance of the year. We anticipate organic expansion of flying activity of around 5% to 6% per annum in the short to medium term.

An industry record of over 1,000 turbine powered business aircraft were delivered during the year and forward-looking forecasts from leading OEMs (Honeywell/ Rolls-Royce) project more than 12,000 new business jets will enter service globally over the next 10 years. Demand will be driven by the continued growth of traditional corporate flight departments and fractional operations, the popularity and accessibility of jet card programmes, the strong interest in the new class of very light jet aircraft (VLJ's) and the potential impact of security issues on the commercial airlines.

VLJ's will start to enter the market during 2007. These jets typically weigh less than 10,000 pounds, carry three to four passengers and have a range of between 1,100 and 1,300 nautical miles. The cost of these aircraft starts at $1.5 million and there are currently approximately 3,500 on order with the market leader being Eclipse which has an orderbook for some 2,500 aircraft of which 500 are expected to be delivered during 2007. Other key suppliers to this market are Adams, Cessna, Embraer and Honda. This is clearly another important and positive trend that will provide significant impetus to the overall growth of the business aviation market.

Signature, our business and general aviation flight support business, has experienced a significant increase in competition for the acquisition of other locations due to the recent strong interest that private equity companies and other organisations have shown in investing in "infrastructure" assets. Despite this recent development we believe that we can continue to develop our leading network by acquisition, particularly of smaller chains and individual locations in the USA. We will also continue our expansion in Europe and the rest of the world where, to date, competition for these assets has been less intense.

Overall the business aviation market remains highly fragmented and we will play our part in its continued consolidation.

Commercial Aviation
The Commercial Flight Support market overcame the effect of historically high fuel prices to continue its steady recovery with several major carriers emerging from bankruptcy protection and others positioning to consolidate, refocus and grow operations. As a result the pricing environment has become marginally more favourable although the market remains highly competitive.

The trend for the major carriers to outsource fuelling and ground handling services has continued for the last two years. North American carriers are seeking to reduce operating costs further and this has created new outsourcing opportunities for ASIG in higher skill/higher margin activities such as ground support equipment maintenance (GSE). Airport authorities are now following these trends with outsourcing of facility and mechanical maintenance contracts.

We expect this market to grow at around 5% per annum in the short to medium term.

Will we be successful in these markets?

BBA Aviation is ideally placed to exploit these attractive market opportunities:

• We are the market leader in a number of markets in which we operate
• Signature is the world's leading FBO network with 81 worldwide locations
• ASIG is the largest independent refueller in the USA and the UK and number two globally
• The ERO business has market leading positions on a number of the programmes in which it participates
• We dominate engine parts distribution on a number of product lines and have the largest portfolio of parts under licence from the OEMs
• There are significant barriers to entry
• The average lease term of our FBO network in the USA is 16 years
• We are authorised by the OEMs for Engine overhauls on 80% of business and general aviation engines now in service
• We license from OEMs over 3,500 parts and assemblies
• We have a successful record of acquiring and integrating new businesses. In the last five years BBA Aviation has spent over £200 million on 25 businesses. The markets in which we operate are highly fragmented and ripe for further consolidation
• We have a management team with many years experience in the industry.

Strategy
Our strategy is to maintain a balanced portfolio of aviation services and aftermarket businesses which have clear barriers to entry, a focus on the business and general aviation sector, producing above average growth rates and attractive financial returns. The key elements of this strategy are to:

• Develop and expand flight support locations and services globally
• Secure new aftermarket licences from OEMs
• Expand component and repair capability to support ERO, landing gear and licensing opportunities
• Target new OEM authorisations for ERO and increase margins by continuing to improve productivity
• Fully exploit the synergies across our businesses
• Continuously improve operational performance and productivity

Principal Risks and Uncertainties
BBA Aviation is ultimately exposed to the amount of flying activity undertaken principally by business and general aviation aircraft and to a lesser extent by commercial and military aircraft. The number of hours flown directly impacts our flight support organisation but also over the longer term our aftermarket services businesses. The key risks that impact the level of flying activity are:

• Terrorist attacks and threats of attacks together with recent international conflicts have impacted regional and international air travel. There can be no absolute assurance that we will avoid adverse consequences of any future attacks or threats, notwithstanding the preventative measures that we undertake in co-operation with airport authorities and other government agencies
• A return to $80 per barrel for crude and a corresponding rise in Jet fuel prices for a prolonged period could again slow flying hours
• General economic conditions and business and consumer confidence also impact the overall level of activity in our markets

The Group has significant operations in the USA with approximately 60% of pre tax profits being denominated in US dollars. Although we are seeking to expand our operations in Europe and the rest of the world the reality is that 66% of all business and general aviation aircraft are located in North America and it will remain the dominant market in the years ahead. Consequently our financial performance in sterling terms is subject to the effects of fluctuations in foreign exchange rates, in particular the rate of exchange between US dollar and sterling.

The Group has a number of contingent liabilities that might impact its future performance. These are analysed in note 28 to the Consolidated Financial Statements.

Retaining our key management is of critical importance to the Group. To aid this, work is in hand to improve our performance and talent management processes and give sharper focus to our overall compensation and benefits offering to these people.