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

Marketplace | Performance | Financial Matters | CSR

Business Review
Performance

Group
Revenue from continuing operations increased by 9% to £950.1 million with organic growth of 6%.

Underlying operating profit increased 24% to £102.8 million with a particularly strong performance from our Aftermarket Services and Systems businesses, which were the main driver behind the significant improvement in operating margins which increased to 10.8% (2005: 9.5%).

Statutory operating profit increased 60% to £94.8 million as a result of the increased underlying profit and a reduction in restructuring costs and non-recurring items for continuing operations. Restructuring costs, amortisation of acquired intangibles and non-recurring items were £8.0 million in 2006 compared to £23.8 million in 2005, with the prior year mostly relating to the closure of Millville.

Profit before tax increased to £70.2 million from £38.3 million.

Adjusted earnings per share were 11.4p (2005: 9.8p). Assuming that the interest benefit from the debt transferred to Fiberweb had been received from 1 January 2006 and the reduced consolidated number of shares at 31 December 2006 were used in the calculation, adjusted earnings per share would have been 14.6p.

There was a significant after tax loss for discontinued operations of £76.2 million. This includes the results of Fiberweb until the date of demerger on 17 November and the results of Becorit until its sale on 1 December. An analysis of these results is shown on the table in the financial section of this report 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 shareholders prior the demerger being completed.

There was an overall loss in the period of £10.2 million (2005: profit £75.3 million) due to the losses associated with the demerger of Fiberweb.

Cash flow from operating activities was £118.8 million, significantly lower than the prior year of £174.0 million due to the lower underlying operating profits from Fiberweb and the cash costs 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 the 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 the continuing businesses would have been approximately £55.0 million. The Group invested £49.6 million on Aviation acquisitions during the period (2005: £28.0 million) to enter the components licensing market, expand our business aviation network and add to our portfolio of landing gear businesses. The Group also raised £27.8 million from disposing of Becorit, the rail friction business based in Germany.

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.

Flight Support

† Underlying operating profit as a percentage of segment assets plus goodwill previously amortised or written-off less segment liabilities.

Flight Support operations showed good progress overall with sales and operating profits well ahead of the prior year. Total sales grew to £556.4m, an 8% increase over 2005. Organic growth was 2%, which was impacted by the poor de-icing seasons at the start and end of the year. Underlying operating profits increased by 9% to £65.5m and operating margins were maintained at 11.8% (11.7%) despite the higher cost of fuel which effectively reduced margins by 0.4%. Strong operating cash flow of £56.3 million was generated and 89% of operating profit was converted into cash. The return on invested capital improved over the year to 13.2% (12.5%).

Signature

Revenue increased by 14.1% to £361.0 million (2005: £316.4 million). Exchange rates reduced the sales growth rate by almost 1%. Organic growth was 3% with the balance being accounted for by higher fuel prices 6% and acquisitions 4%. We continued to see good growth in fuel volumes from fractional operators with increases of almost 10% in the year. Fractional operators continue to expand their share of our total business and now account for nearly 30% of total revenue. Our non-fractional markets showed no growth over the year but finished the year strongly with growth in the last quarter of approximately 7% compared to the last quarter of 2005.

Throughout the year, Signature continued to invest in improving the quality and capacity of its FBOs to support the growing demand for business jet facilities, ramp and hangar space. New facilities were completed at Indianapolis and Chicago (Palwaukee) and work began in July on a new £5 million state of the art terminal and GSE maintenance facility at Boston Logan International Airport as part of Signature’s recent award of a 10 year lease extension at the airport.

The acquisition of the former Millionair FBO at Thermal, California, a major resort destination for business jet operators near Palm Springs; the former Air 1 FBO at St. Petersburg, Florida; and Le Terminal at Paris’ Le Bourget International Airport, along with the successful tender to commence FBO operations at Doncaster, UK, increased both the size and scale of Signature’s leading FBO network.

In total, Signature now has 81 locations, of which 46 are in the USA covering 34 of the top 50 US Metropolitan Areas, 15 of 30 top US hub airports and 24 of the reported top 50 fractional operations airports.

Signature also introduced a series of innovative new pricing and customer loyalty programmes during 2006. These are volume-based fuel incentives designed to maximise the value of the Signature network to all levels of business jet operators. Fleet Power™, Tenant Power™ and Net Power™ were successful in adding new customers and increasing volume among Signature’s existing customer base.

Outlook
The surge in business jet deliveries is creating a growing demand for flight support services. Signature with its unrivalled network of quality locations, existing infrastructure and portfolio of long-term lease agreements is well positioned to take advantage of this trend.

Asig

Total revenue at ASIG reduced slightly to £195.4 million (£198.0 million). This was primarily as a result of a weather related shortfall in de-icing activity, which reduced sales by approximately £7 million compared to the prior period, and impacted the organic sales growth rate by almost 4%. In addition, ASIG continued with its policy of withdrawing from uneconomic locations in Miami and Albany, which reduced revenue by a further £5 million. However, ASIG successfully introduced new higher margin services such as GSE maintenance and recorded a number of new business wins as well as being named the “Best Airport Operator” for a second consecutive year.

ASIG continued to grow its business globally. In Asia it commenced fuelling operations at Bangkok’s new Suvarnabhami International Airport under a 20 year licence agreement and was immediately successful in adding new fuelling contracts with British Airways, United Airlines, Singapore Airlines and Lufthansa. ASIG also expanded its operations in Europe with the addition of fuelling services at Austria’s Vienna International Airport and Durham Tees Valley Airport in the United Kingdom.

The increase in GSE maintenance was a product of a series of new business wins from a number of major airlines including Delta, USAirways, American and Jet Blue. Refuelling contracts were won with Southwest Airlines at Denver and SkyWest Airlines at Los Angeles. Our cabin cleaning business also continued to grow in 2006. ASIG was awarded a new five year agreement by British Airways to provide comprehensive cabin cleaning service at London Heathrow.

Outlook
The commercial aviation services market is expected to grow organically at circa 5% per annum whilst remaining price sensitive and competitive. We expect further consolidation in the industry, which will continue to drive outsourcing opportunities in the higher skill and higher margin areas, where ASIG is well positioned.

Aftermarket Services and Systems

Our Aviation Services and Systems businesses recovered strongly in 2006, supported in particular by a much better performance in Engine Repair and Overhaul. Total revenue grew to £393.7 million, a 9% increase over 2005. Sales for the current year were impacted by a change to a significant contract in Europe which reduced sales by approximately £24 million compared to the prior period as the contract was ammended to a consignment basis during the year. Adjusting for this change organic growth was 11%. Operating profits increased by 43% to £44.6 million (£31.3 million) and operating margins improved significantly to 11.3% (8.7%). This was partly due to the acquisition of Ontic in February 2006 but also to a significant improvement in engine repair as the impact of productivity initiatives and rationalisation activities began to come through. Our return on invested capital over the year (including goodwill previously written off to reserves) also showed an improvement at 9.0% (6.5%).

Engine Repair and Overhaul

Engine Repair and Overhaul (ERO) experienced a significant recovery in 2006. Organic revenue growth was 10% as our market share increased across a number of product lines. The order backlog at the end of the year was 25% higher than that in 2005 and positions ERO well for 2007.

A significant effort to increase productivity was made during the year and we delivered improvements in turn time, labour utilisation and quality. Facility rationalisations accomplished during the year brought decreased operating cost in Dallas by reducing three sites to two. A similar successful consolidation occurred through the relocation of the Bournemouth RTC to the H+S Aviation campus in Portsmouth UK reducing two sites to one. We anticipate continued improvements from these initiatives in 2007.

The recently launched capability for PW300/500 services yielded significant growth as demand for field service and “on-wing” inspections increased during the year. The mature Pratt and Whitney Canada programmes, such as JT15D, PT6 and PW100 likewise saw a rise in inputs to our heavy maintenance facilities as well as Regional Turbine Centres (RTCs). Improvements in the ALF502 programme and increase in TFE731 Core Zone Inspection (CZI) work scopes were major factors in the double-digit volume growth seen in the Honeywell programmes. The increased demand for Rolls-Royce Tay overhauls and the addition of the Tay 811-C to our product portfolio helped offset reductions associated with an ageing Rolls-Royce Spey engine market.

In addition the 2006 Rolls-Royce “Corporate-Care” agreement enabled Dallas Airmotive to increase its support of both engine and aircraft producers whose customers prefer an ongoing OEM maintenance programme.

Strong relationships with engine and airframe Original Equipment Manufacturers (OEMs) remain in the foreground of our business strategy. We have a balanced exposure to most of the main OEMs.

Outlook
The Business and General Aviation market is forecasting expansion in Very Light Jets and ERO is in negotiations with a number of OEMs to become a service provider in this new market sector. The market remains highly competitive yet evidence supports a continued favourable trend in BBA Aviation share and revenue growth. Leveraging both BBA’s component repair and overhaul facilities as well as logistics specialists, such as International Turbine Services (ITS) and Barrett Turbines, provides significant advantages that are particularly evident when comparing ERO to its competitors. With 21 distinct OEM authorisations, ERO stands ahead of its competitors with the broadest reach in capability and product services.

Component Repair and Overhaul (CRO)

Total revenue grew to £45.7 million, a 84% increase over 2005 with the addition of the Ontic acquisition and the impact of full year sales for International Governor Services (IGS), acquired in mid 2005. Organic growth was 3%.

The acquisition of Ontic in early 2006 and its integration into the broader CRO organisation will provide a catalyst for growth across the division. It will allow BBA Aviation to offer a broad range of product support services for components including entire engines, which is unmatched in the industry. It also provides an effective vehicle to transact these products through Ontic’s licensing model. The combined division has unparalleled knowledge and experience of the issues and support needs of legacy products and the proven ability to deliver the material and services necessary to support the large operational fleets that utilise this equipment.

IGS obtained AWARS (authorised warranty and repair station) status from Honeywell late in the year, which will allow them to repair a broader range of products. ITS and Barrett continued to augment their existing product lines by adding products like APUs (auxiliary power units) from Honeywell.

Outlook
The large operating base of Business and General Aviation aircraft and the robust projections for continued aircraft shipments over the next 10 years provide a strong business base for CRO. The legacy military aircraft that they support also provide a relatively stable base, requiring parts and service particularly with high levels of ongoing US military activity.

New product development for a number of large commercial aircraft and military transports and fighters will stress the capacity of the OEMs to support customers needs in the aftermarket which will result in increasing need to offload non-core or legacy products. There is little competition to the licensing skills that Ontic has established to acquire these types of products, which should result in significant growth opportunities for our CRO business and the Group.

APPH Group – Landing Gear and Hydraulics

Sales at £56.1 million were 24% higher than the prior year, with the acquisition of Arnoni at the start of the year contributing 15 percentage points of the increase, the balance of 9% being organic.

Overall markets were firm, with business aviation original equipment supply showing good growth. The military original equipment order book increased substantially during the year, reflecting the BAe Systems Hawk Trainer and Augusta Westland EH101 helicopter order successes. Spare parts sales, in all areas, showed an improvement over the previous year with repair and overhaul activity reflecting a similar trend. In the early part of 2006, we were awarded a contract with a value of $7.5 million, to design and develop the landing gear system for the Korean Helicopter Programme. In December, a contract was awarded to design, develop and manufacture the Eurocopter EC175 landing gear system, which has a potential contract value of circa $100 million over 20 years.

The division’s footprint also expanded during the year. On 1 January 2006, we acquired the assets of Arnoni Aviation for an initial consideration of $5 million. Arnoni Aviation is a world leader in the supply and repair of Raytheon Hawker 125 series sub-system components and rotables. On 5 February 2007, we announced the acquisition of CAP based in Wichita USA for an initial payment of $5.7 million. CAP specialises in the design and manufacture of hydraulic system components, electro mechanical positioning systems and access mechanisms used on a wide range of business aviation and light jet programmes.

Outlook
The markets in which we operate are currently strong and with the increase in our order book during 2006, APPH is well positioned for continued growth.

Oxford Training and Airport

Oxford Aviation Training (‘OAT’)
OAT recovered well during the year with sales up 20% to £18.5 million and a strong recovery in profitability as the demand for pilot training increased and we started to benefit from the new fair weather training facility located in Phoenix, USA.

The outlook for OAT is positive with airlines, such as BA, BMI and Thomas Cook continuing to recruit Oxford students. In 2006, Netjets have confirmed a sponsored scheme with OAT, moving OAT into the business jet training market.

We are also making plans to develop a more integrated approach to training which will broaden the services that OAT supplies to the market.

Oxford Airport
During 2006 the Airport was successful in its planning application to widen and strengthen the runway and install an Instrument Landing System (‘ILS’). The project is expected to be completed by the summer of 2007 and will cost approximately £5.5 million. On completion of the works, Oxford Airport will have a 1,300 metre long, 30 metre wide all weather runway, which will enable larger commercial aircraft to operate out of the Airport than is possible today and positions the Airport for expansion in the regional market. The airport upgrade will also make the Airport more attractive to business aviation users.