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Note 34: Share options

The Group operates share-based payment schemes as part of the total remuneration package provided to employees – these schemes comprise both share option schemes where employees acquire shares at a grant price and share award plans whereby shares are issued to employees at no cost, subject to the achievement by the Group of specified performance targets. Details of the performance criteria to be met for each of the schemes, and details of the awards to the directors, are set out in the report of the Remuneration Committee.

a  Share Option Plan 1999

The British Airways Share Option Plan granted options to qualifying employees based on performance at an option price which was not less than the market price of the share at the date of the grant (or the nominal value if shares are to be subscribed and this value is greater than the market value). The options are subject to a three-year vesting period. Upon vesting, options may be exercised at any time until the 10th anniversary of the date of grant with the exception of grants made during the year ending March 31, 2005, when there will be a single re-test after a further year which will measure performance of the Group over the four-year period from the date of grant. No further grants of options under the Share Option Plan will be made other than those during the year ending March 31, 2006, in relation to performance during the year ending March 31, 2005 (for which there will be no re-testing).

b  Long Term Incentive Plan

The Long Term Incentive Plan (LTIP) awarded options to senior executives conditional upon the Company’s achievement of a performance condition measured over three financial years. If granted, all options are immediately exercisable for seven years and no payment is due upon exercise of the options. No further awards under the LTIP have been made since June 16, 2004.

c  Performance Share Plan

In 2005 the Group introduced a Performance Share Plan (PSP) for senior executives. Options over shares are awarded conditional on the achievement of a variety of performance conditions and will vest after three years subject to the executive remaining employed by the Group. A further award will be made that will vest based 100 per cent on meeting Total Shareholder Return (TSR) performance conditions over the following three financial years. No payment is due upon exercise of the options. Executives awarded shares under the PSP will be expected to retain no fewer than 50 per cent of the shares (net of tax) which vest from the new schemes until they have built up a shareholding equivalent to 100 per cent of basic salary.

d  Deferred Share Plan

In 2006 the Group introduced a Deferred Share Plan (DSP) granted to qualifying employees based on performance and service tests. It will be awarded when a bonus is triggered subject to the employee remaining in employment with the Group for three years after the grant date. The relevant management population will receive a percentage of their bonus in cash and the remaining percentage in shares through the DSP. The maximum deferral is 50 per cent.

e  Share options summary

  Group and Company
  Deferred Share Plan   Performance Share Plan   Long Term Incentive Plan   Share Option Plan
  Number of shares
000s
Weighted average fair value
£
  Number of shares
000s
Weighted average fair value
£
  Number of shares
000s
Weighted average fair value
£
  Number of shares
000s
Weighted average exercise price
£
Weighted average fair value
£
Outstanding at April 1, 2007* 830     2,643     1,483     19,340 2.74  
Granted in the year       1,444 2.61              
Exercised during the year**/***             (157)     (1,530) 2.71  
Expired / cancelled (43)     (191)     (44)     (896) 2.73  
Outstanding at April 1, 2008* 787     3,896     1,282     16,914 2.75  
Granted in the year 710 2.74   2,573 2.15              
Exercised during the year**/*** (269)     (454)     (183)     (69) 1.64  
Expired / cancelled (187)     (1,476)           (2,765) 2.83  
Outstanding at April 1, 2009 1,041     4,539     1,099     14,080 2.74  

Options exercisable:
                       
At March 31, 2009             1,099     14,080 2.74  
At March 31, 2008 7 4.84         1,282     11,413 2.74  

* Included within this balance are options over 3,875,252 (2008: 5,235,228) shares that have not been recognised in accordance with IFRS 2 as the options were granted on or before November 7, 2002. These options have not been subsequently modified and therefore do not need to be accounted for in accordance with IFRS 2.

** The weighted average share price at the date of exercise for the Share Option Plan exercised is £2.36 (2008: £4.19).

*** Part of the exercise of share options during the year was met through shares previously held by British Airways Employees Benefits Trust (Jersey) Limited.

Range of exercise prices 2009 for Share Option Plan

  Options outstanding   Options exercisable
Range of exercise prices Number of shares
000s
Weighted average remaining life
(years)
Weighted average exercise price
£
  Number of shares
000s
Weighted average exercise price
£
£1.57 – £2.61 2,168 3.88 1.66   2,168 1.66
£2.62 – £3.20 8,830 5.78 2.70   8,830 2.70
£3.21 – £3.94 3,082 1.41 3.61   3,082 3.61
At March 31, 2009 14,080 4.53 2.74   14,080 2.74

Range of exercise prices 2008 for Share Option Plan

  Options outstanding   Options exercisable
Range of exercise prices Number of shares
000s
Weighted average remaining life
(years)
Weighted average exercise price
£
  Number of shares
000s
Weighted average exercise price
£
£1.57 – £2.61 2,784 4.82 1.67   2,784 1.67
£2.62 – £3.20 10,073 6.79 2.70   4,572 2.62
£3.21 – £3.94 4,057 2.40 3.61   4,057 3.61
At March 31, 2008 16,914 5.41 2.75   11,413 2.74

For all outstanding share option schemes as at March 31, 2009, the weighted average remaining contractual life is four years (2008: five years). For options granted during the year the weighted average option life was three years (2008: three years).

The fair value of equity-settled share options granted is estimated as at the date of grant using a binomial lattice or Monte-Carlo model, taking into account the term and conditions upon which the options were granted. The following table lists the inputs to the models for the PSP options granted in the year:

  2009 2008
Expected share price volatility (per cent) 24 24
Historical volatility (per cent) 35 24
Expected comparator group volatility (per cent) 21-98 19-96
Expected comparator correlation (per cent) 41 28
Expected life of options (years) 3 3
Weighted average share price (£) 1.88 3.82

The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. Volatility was calculated with reference to the Group’s weekly share price volatility. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome. The fair value of the PSP also takes into account a market condition of total shareholder returns as compared to strategic competitors. No other features of options granted were incorporated into the measurement of fair value.

The share-based payments charge has been recorded in the income statement as follows:

  2009 2008
Employee costs 1 3

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