Risk management policy

Risk management in BAA seeks to enable the identification, evaluation and continuous management of the threats to the achievement of BAA's purpose, vision, objective and strategy. The primary goal is to embed the awareness of risk at all levels of the organisation, in such a way that every business decision is risk-informed. Particular emphasis is given to safety and security, environmental, commercial, financial, reputational and legal risks with the framework delivering a balanced control of risk, using formal risk management processes.

A key element of the risk-management process is BAA's risk-profiling methodology. This determines the threats to the achievement of business objectives in terms of likelihood and consequence at both inherent and residual level, after taking account of mitigating and controlling actions. Details are maintained in a hierarchy of risk registers used as the basis for regular review of risk management at executive and Board level. The risk registers are also used to inform decisions relating to the purchase of insurance cover.

The assurance process is supported by a Board-approved risk policy, by regular risk strategy presentations to the Executive Committee and by the managing director of each business unit and head of each function making formal representations to the chief executive at the year-end. The operation of the process and the individual registers are subject to review by BAA's internal audit function.

The principal corporate risks are:

Safety and Security Risks
Safety and security risk in operations is regarded as the most important risk to manage throughout the Group. The Group mitigates this risk by adopting and enforcing vigorous policies and procedures supported by professional training and by investment in leading-edge security technology. In addition, in periods of heightened security awareness, BAA works closely with Government agencies, police and the armed forces to raise security measures to a level commensurate with the raised threat environment.

Assurance is provided through management reporting processes and a specialist compliance audit, reporting directly to the Health, Safety, Security and Environment Committee.

Regulatory environment, legal and reputational risks:
CAA Regulation
The Group's operations at Heathrow, Gatwick and Stansted airports are subject to regulatory review by the CAA every five years. The risk of an adverse outcome from the five-yearly review is mitigated as far as possible by a dedicated project team which ensures full compliance with formal regulatory requirements, establishes a sound and trusting relationship with the regulator and advises the Executive Committee on regulatory matters.

Competition Rules
The penalties for failing to comply with the 1998 Competition Act and relevant EU law are recognised as key risks to manage within the Group given its dominant position in UK airports. Clear policy direction, which includes compulsory awareness training and close support from the internal legal department, has reduced the likelihood of the Group breaching these regulations.

Capacity Shortfall
Failure to secure necessary planning permissions would lead to the Group having insufficient capacity to meet the expected demands of the industry. This would cause increased congestion and declining passenger service. The Group mitigates this risk through extensive consultation with community groups and authorities at a local level and active participation in Government consultations and other advisory groups.

Existing planning approvals provide for approximate passenger traffic growth at Stansted to 25 million, Gatwick to 40 million and at Heathrow (including Terminal 5) to 90 million.

The White Paper has clarified the Government's policies regarding airport expansion in the UK. However, it is critical that the Group manages airport development after the White Paper in a way that does not lead to a loss of public or political confidence in BAA. To mitigate this risk, separate dedicated project teams (with relevant expertise and disciplines) have been established to work closely with airport management, local communities and other relevant parties.

Commercial and financial risks:
Capital Projects
Failure to control key project costs and delivery could damage financial standing. The Group mitigates this risk through rigorous adherence to a tried-and-tested project process and by systems of project reviews before approval, during construction and after project completion. In addition, specific additional controls for Heathrow T5 have been introduced, including the strengthening of the project management team and the commitment of dedicated specialist internal-audit and risk-management resources to reinforce assurance to the Board. All projects include an allowance for risk and opportunity.

Changes in Demand
The risk of unanticipated long-term changes in demand for air travel could lead to misaligned operational capacity within the Group. Since it is not possible to identify the timing or period of such an effect, the Group carries out evaluations through a series of scenario-planning exercises. In the current environment, particular emphasis has been given to contingency planning to ensure the Group reacts effectively to changes resulting from the current geopolitical situation.

Industrial Relations
The risk of industrial action by key staff that affects critical services, curtails operations, and has an adverse financial and reputational impact on the Group is recognised. In August, BAA established a Joint National Forum with its trade unions to discuss pay and employment conditions as well as a wide range of business and policy issues.

Treasury
The Board approves prudent treasury policies and senior management directly control day-to-day treasury operations. The Board delegates certain of its responsibility to the Board Treasury Committee in relation to debt-raising activities. The Financing Decision Group, a sub-committee of the Executive Committee, is the primary forum for discussing and approving all day-to-day treasury strategy and policy matters and for submitting proposals to the Board.

Treasury operates on a centralised non-speculative risk basis. The Treasury function is not permitted to speculate in financial instruments. Its purpose is to identify, mitigate and hedge residual treasury-related financial risks inherent to the Group's business operations. To achieve this, the Group enters into forward-starting interest rate swaps and foreign exchange spot and forward/swap transactions to protect against interest rate and currency risk.
 
The primary treasury-related financial risks faced by the Group are the focus of treasury policies covering:

Interest Rates
To maintain a mix of fixed and floating rate debt within Board-approved parameters of a minimum of 70% fixed rate on existing and forecast debt. The level of fixed rate debt borrowings at the year end was 86%.

Foreign Currency
To seek to mitigate the effects of structural currency exposures by matching overseas investments with borrowings denominated in the same currency, either directly or by using derivatives. BAA uses foreign currency forward contracts to hedge capital expenditure in foreign currency once a project is certain to go ahead. At 31 March 2004, there were no significant unmatched exposures.

Funding and Liquidity
To ensure continuity of funding and flexibility, ensuring debt maturities are spread over a range of dates, thereby ensuring that the Group is not exposed to excessive refinancing risk in any one year. The maturity profile of debt outstanding at 31 March 2004 is set out in Note 19 of our Annual Report 2003/04 (This link will launch a 2,275KB PDF in a new window) on page 70.

Covenants
To standardise covenants wherever possible. Covenants are monitored on an ongoing basis with formal testing each quarter-end reported to the Audit and Assurance Committee. BAA continues to comply with all borrowing obligations and financial covenants.

Counterparty Credit
The Group's exposure to credit-related losses, in the event of non-performance by counterparties to financial instruments, is mitigated by limiting exposure to any one party or instrument.