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Report of the Remuneration Committee

The Company is operating in very challenging market conditions, with significant pressure on its revenues. Although the Company is making every effort to manage its controllable costs, the Company made a significant loss for 2008/09.

The Remuneration Committee has considered how to restructure its remuneration arrangements in the current economic environment, while also recognising that it is very important to incentivise and retain management to drive the business forward. It is worth noting that the Company has significantly reduced headcount at senior management levels and is demanding higher levels of performance from those who remain. It is also seeking to recruit top talent from outside the organisation.

The Committee has weighed these factors carefully and has decided that it wishes to make some changes to the annual bonus for 2009/10 and to the performance conditions applying to Performance Share awards to be granted in 2009. These changes (which have been discussed with the ABI, Risk Metrics and some major investors) are described below.

Remuneration package

The package for the executive directors for 2008/09 consisted of a basic salary, benefits-in-kind (including private healthcare, a car and fuel and non-contractual travel concessions), pension, an annual bonus scheme (including a deferred element payable in shares) and participation in the Performance Share Plan. The proportion of performance-related variable remuneration, through the bonus scheme and awards under the Performance Share Plan, was approximately 60 per cent of total target remuneration (excluding pension arrangements). The package for the executive directors for 2009/10 will be the same other than in relation to the annual bonus scheme as described below. As a result, the proportion of performance-related variable remuneration, through the bonus scheme and awards under the Performance Share Plan, has exceptionally fallen to approximately 50 per cent of total target remuneration (excluding pension arrangements).

Expected value of the elements of the package

  Chief Executive Chief Financial Officer
Salary 37.14% 37.64%
On-target bonus 27.84% 23.52%
Expected value of LTIP 29.71% 30.11%
Pension 4.45% 7.70%
Benefits 0.86% 1.03%
Total 100.00% 100.00%

The Committee assesses remuneration packages on a total remuneration basis, taking into account the value of each of the individual elements of the package. The policy in relation to base salaries aims to target base salaries at around the market median. The strategy for incentive pay is intended to increase the expected value to make the package more market-competitive for executive directors, but to retain as its aim the achievement of a market median value, subject to the achievement of stretching targets. Between them, the elements of the remuneration package provide a good balance between the achievement of short and longer-term goals linked to the creation of shareholder value.

Basic salary

The basic salary reflects the level of responsibility of the executive director, his or her market value and individual performance. The Committee’s objective is to offer basic salaries around the market median level. In reviewing basic salary, independent external advice is taken on salaries for comparable jobs in similar companies from the survey sources referred to previously. The Committee has regard to the performance of the individuals and the pay and employment conditions elsewhere in the Company when determining annual salary increases.

The current base salaries for the executive directors, which took effect from July 1, 2008, are:

Willie Walsh £735,000 (2007: £700,000)
Keith Williams £440,000 (2007: £415,000)

Salary increases of 5 per cent for the Chief Executive and 6 per cent for the Chief Financial Officer were awarded in July 2008 after comparison with the median salary ranges for their respective positions and were in line with the increases for other senior executives in the Company (average 5.1 per cent). The average pay award for managers generally was 4 per cent. The five bargaining groups representing non-management grades received a pay award of RPI (4.0 per cent) in February 2008 with additional incremental salary increases adding a further 1.7 per cent on average to the Company’s employee costs for these groups (although these are weighted towards the pilot and cabin crew groups). In addition, all bargaining groups except cabin crew received a further 0.6 per cent to reflect the change of review date from October to February (1.2 per cent paid over two years).

As a result of market conditions, the Company has indicated that there will be no increase in base salary levels in 2009/10. This is in line with the Company-wide objective of no increases in base pay throughout the organisation.

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