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Note 18: Impairment of intangible assets that have an indefinite economic life

An annual impairment review is conducted on all intangible assets that have an indefinite economic life. The impairment review is carried out at the level of a ‘cash-generating unit’, defined as the smallest identifiable group of assets, liabilities and associated intangible assets that generate 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 intangible assets with indefinite economic lives. An impairment review was performed on 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.

The impairment review involves the comparison of the carrying value of the cash-generating unit to the recoverable amount. If the carrying value exceeds the recoverable amount, an impairment charge is recognised to the extent that the carrying value exceeds the recoverable amount.

a  Intangible assets that have an indefinite economic life, analysed by cash-generating units

At 31 March 2010

  Group
£ million Landing rights Goodwill Total
Network airline operations 163 40 203
OpenSkies 29   29

At 31 March 2009

  Group
£ million Landing rights Goodwill Total
Network airline operations 163 40 203
OpenSkies 30   30

Network airline operations

The recoverable amount of the network airline operations has been measured based on its value in use, using a 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. 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 assets.

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, using a 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 assets.

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. The trading environment is subject to both regulatory and competitive pressures that can have a material effect on the operating performance of the business.

During the prior year, an impairment charge of £5 million was recognised in the consolidated income statement against the goodwill of OpenSkies as a result of the impairment review performed. The impairment review performed at 31 March 2010 did not give rise to any further impairment charges.

b  Key assumptions used in impairment review

The key assumptions used in the value-in-use calculations are presented below. These assumptions apply to the network airline operations and OpenSkies in line with their respective business plans.

  2010 2009
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* (11.4)% – 8.6% (6.6)% – 10.0%
Fuel price range per barrel $74 – $79 $60 – $75

*Although forecast operating margins are more conservative than the prior year, revised forecasts indicate a faster return to profitability, thus increasing forecast cash generated.

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

  2010
£ million Network airline OpenSkies Total
Intangible assets 203 29 232
Excess of recoverable amount over carrying amount 1,400 200 1,600
2009
£ million Network airline OpenSkies Total
Intangible assets 203 30 233
Excess of recoverable amount over carrying amount 400   400

Network airline operations

The recoverable amount of the assets with network operations exceeds the carrying value by £1.4 billion (2009: £400 million). The calculation of the recoverable amount is impacted primarily by changes in the discount rate used and the forecast operating margin. If the discount rate were increased by 350 basis points (2009: 90 basis points) or the operating margin were to decrease by 25 per cent (2009: 2 per cent), the headroom would amount to £nil.

OpenSkies

The recoverable amount of the assets within OpenSkies exceeds the carrying value by £200 million (2009: £nil). The calculation of the recoverable amount is impacted primarily by changes in the discount rate and the forecast operating margin. Management believe that no reasonably possible change in either of the two key assumptions would cause the carrying value to exceed the recoverable amount.

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