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Report of the Remuneration Committee

Annual bonus

The amount of annual bonus available for distribution to senior executives generally for 2008/09 was subject to a maximum limit of 100 per cent of salary. For the executive directors, the maximum limit for the Chief Executive was 150 per cent and 125 per cent for the Chief Financial Officer.

The annual bonus for executive directors was based one third on operating margin, one third on customer recommendation and one third on punctuality. These were judged by the Committee to be the major drivers for the business, reflecting three of the Company’s Key Performance Indicators. Unlike previous years, these measures operated independently, however, no bonus was payable on the customer recommendation or punctuality measures unless the Company reported a pre-tax profit. Where threshold performance on these Company-wide targets was not achieved, the executive directors were potentially able to earn up to 15 per cent of salary in the case of the Chief Executive and 12.5 per cent of salary in the case of the Chief Financial Officer in recognition of their personal contribution. The Committee retained discretion to prevent any bonus payments if the Company’s performance was judged by it to be inadequate.

Half of any bonus payable as a result of achieving any of the Company-wide targets would be payable in the form of deferred shares (under the British Airways Deferred Share Plan) which would vest after three years, normally subject to continued employment over that period. On vesting, executives would receive the benefit of any dividends paid over the deferral period.

The Company failed to achieve its operating margin target for the year. By contrast, the stretch targets for the customer recommendation and the punctuality elements of the annual bonus were both exceeded. As the Company did not achieve a pre-tax profit for the year, nothing was payable in respect of these elements of the annual bonus. In the light of economic conditions, the Company has decided not to make any payment under the personal contribution element of the annual bonus scheme.

The Committee recognises that the Company is expecting to make a loss in 2009/10 but wishes to provide some degree of incentive to the executives to manage the business in difficult circumstances. In the light of current economic conditions and taking into account the views of investors and the Chief Executive, the Committee has decided that the bonus maximum for 2009/10 should be reduced by half and that any award would only be payable in deferred shares under the British Airways Deferred Share Plan. The Committee has determined that the annual bonus should be based on three measures with one half of the total award based on achievement of financial plan for the year, one quarter based on customer recommendation and one quarter based on punctuality. All targets will be challenging.

The two non-financial measures are two of the Company’s Key Performance Indicators and are more fully described in our Key Performance Indicators. The customer recommendation measure is based on the percentage of customers who say that they are ‘extremely likely’ or ‘very likely’ to recommend British Airways. Punctuality is measured on the basis of the percentage of British Airways’ flights that are prepared for departure and ‘Ready to Go’ at three minutes before the scheduled departure time. For both customer recommendation and punctuality, the Committee has set a sliding scale around the targets for the year, with significant stretch required above the target to earn full payment. In relation to the element of the bonus relating to the financial plan, payment will begin once the financial plan has been achieved with a sliding scale so that full payment requires performance significantly better than plan. A total maximum of 75 per cent of base salary for the Chief Executive and 62.5 per cent of base salary for the Chief Financial Officer would be available if the Company achieved the maximum performance on all of the three measures. The personal contribution element has been removed from this year’s plan such that if nothing is earned on the Company measures, no bonus will be paid. The Committee also retains discretion to prevent any bonus payments for customer recommendation and/or punctuality if, in its opinion, the financial performance of the Company has not been satisfactory in the circumstances.

Long-term incentive arrangements

British Airways Performance Share Plan 2005

The British Airways Performance Share Plan (PSP) is the long-term incentive plan awarded to key senior executives of the Company, those most directly involved in shaping and delivering the medium to long-term business goals of the Company. The plan was approved by shareholders at the annual general meeting in 2005. The PSP consists of an award of the Company’s shares which vests subject to the achievement of pre-defined performance conditions (see below) in full or in part at the third anniversary of award. No payment is required from individuals when the shares are awarded or when they vest. The Remuneration Committee supervises the operation of the PSP. Awards worth up to 150 per cent of an executive’s base salary can be granted under the PSP. For the 2008 award, both the Chief Executive and the Chief Financial Officer received this level of award. Other members of the Management Board received awards equivalent to 100 per cent of their respective base salaries. The Committee considers that maintaining these award levels is appropriate for the 2009 awards, taking account of the fact that award levels are not high by FTSE 100 market standards, that the annual bonus has been scaled back and that the overall remuneration packages for the two executive directors are not high by market standards.

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