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Note 19: Impairment of goodwill

Goodwill impairment review is carried out at the level of a ‘cash-generating unit’, defined as the smallest identifiable group of assets, liabilities and associated goodwill that generates cash inflows that are largely independent of the Group’s other cash flows from other assets or groups of assets. On this basis, the impairment review has been conducted on two cash-generating units identified as containing an element of goodwill. An impairment review was performed on the goodwill associated with the network airline operations, including passenger and cargo operations out of all operated airports as well as all related ancillary operations. A separate impairment review has been conducted on the operations of OpenSkies, for the additional goodwill arising on the acquisition of L’Avion in July 2008 (note 6).

Goodwill is reviewed for impairment annually by comparison of the carrying value of the cash-generating unit to the recoverable amount. If the carrying value exceeds the recoverable amount, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and the recoverable amount.

a  Goodwill analysed by cash-generating units

  Group
£ million 2009 2008
Network airline operations 40 40
OpenSkies 5  
Carrying value of goodwill before impairment charges 45 40
Impairment of OpenSkies goodwill (5)  
Carrying value of goodwill 40 40

Network airline operations

The recoverable amount of the network airline operations has been measured based on its value in use, based on the discounted cash flow model; cash flow projections are based on the business plan approved by the Board covering a five-year period. Cash flows beyond the five-year period are projected to increase in line with UK long-term growth assumptions. This growth rate reflects the planned expansion of the Group as a result of the introduction into service of committed aircraft such as the Airbus A380 and Boeing 787. The pre-tax discount rate applied to the cash flow projections are derived from the Group’s post-tax weighted average cost of capital, adjusted for the risks specific to the market.

No impairment charge has arisen as a result of the impairment review performed on the network airline operations.

OpenSkies

The recoverable amount of the OpenSkies cash-generating unit has been measured on its value-in-use, based on the discounted cash flow model; cash flow projections are based on the business plan approved by the Board covering a five-year period. Cash flows beyond the five-year period are projected to increase in line with EU long-term growth assumption. The pre-tax discount rate applied to the cash flow projections are derived from OpenSkies’ post-tax weighted average cost of capital, adjusted for the risks specific to the market.

The operating margins of both cash-generating units are based on the estimated effects of planned business efficiency and business change programmes, approved and enacted at the balance sheet date. These are adjusted for the volatile trading conditions that have impacted the airline over the past three years. The trading environment is subject to both regulatory and competitive pressures that can have a material effect on the operating performance of the business.

An impairment charge of £5 million has been recognised in the consolidated income statement against the goodwill of OpenSkies as a result of the impairment review performed.

The key assumptions used in the value-in-use calculations for both the network airline operations and OpenSkies are:

  2009 2008
Pre-tax discount rate (derived from the long-term weighted average cost of capital) 8.90% 8.90%
Long-term growth rate 2.50% 2.50%
Operating margin range (6.6)% – 10.0% 7%
Fuel price range per barrel $60 – $75 $85

b  Key assumptions used in goodwill impairment review

Sensitivity of cash-generating units’ recoverable amounts to changes in key assumptions.

The following table demonstrates the excess of the recoverable amount over the carrying amount of each cash-generating unit.

  2009
£ million Network airline Total
Goodwill 40 40
Excess of recoverable amount over carrying amount 400 400
  2008
£ million Network airline Total
Goodwill 40 40
Excess of recoverable amount over carrying amount 600 600

Network airline operations

The network airline unit’s recoverable amount exceeds its carrying amount by £400 million. Based on sensitivity analysis, it is estimated that if there were an adverse change in the long-term operating margin by 2 per cent, the recoverable amount of the network airline unit would equal its carrying amount. An increase in the discount rate of 0.9 per cent would result in the value-in-use of the network airline unit being equal to its carrying amount.

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