JOURNEY ANNUAL REPORT & GROUP ACCOUNTS 2006/2007 SE/2007/83

Transcription

1 JOURNEY ANNUAL REPORT & GROUP ACCOUNTS 2006/2007 SE/2007/83

2 OUR AIRPORTS 1 Inverness Airport 2 Wick Airport 3 Kirkwall Airport 4 Sumburgh Airport 5 Stornoway Airport 6 Benbecula Airport 7 Barra Airport 8 Tiree Airport 9 Islay Airport 10 Campbeltown Airport 11 Dundee Airport (from 1 September 2007) OUR CONTENTS 2 OUR CHAIRMAN S STATEMENT 5 OUR BOARD OF DIRECTORS 6 OUR MANAGING DIRECTOR S STATEMENT 8 OUR AIRPORTS 10 INVERNESS 12 KIRKWALL, STORNOWAY & SUMBURGH 14 BARRA, BENBECULA, CAMPBELTOWN, ISLAY, TIREE & WICK 17 OUR STATISTICS 19 OUR GROUP ACCOUNTS 48 TARGETS FOR DEVELOPMENT & PERFORMANCE INDICATORS

3 Highlands and Islands Airports Limited was incorporated in Edinburgh on 4 March 1986 as a private limited company under the Companies Act On 1 April 1995, ownership of the company transferred from the UK Civil Aviation Authority to the Secretary of State for Scotland and subsequently to the Scottish Ministers. HIAL provides a safe and efficient group of airports in the Highlands and Islands of Scotland at: Barra; Benbecula; Campbeltown; Inverness; Islay: Kirkwall; Stornoway; Sumburgh; Tiree and Wick. These airports support vital business, social and welfare air links to otherwise remote communities. HIAL will assume responsibility for the operation of Dundee Airport from Dundee City Council on 1 September The airports are licensed for public use with the exception of Barra and Campbeltown which are licensed for ordinary use. HIAL receives subsidies from the Scottish Executive in accordance with Section 34 of the Civil Aviation Act 1982 and is sponsored by the Scottish Executive Transport Directorate. The 2006/07 Annual Report and Group Accounts have been submitted to the Scottish Ministers. 1 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

4 OUR CHAIRMAN S STATEMENT Air services play a central role in the economic and social life of the Highlands and Islands. Within this context we continued to focus on development and efficiency in the operation of our 10 airports. Our strategic objectives for the year were to provide safe and fit for purpose airports; achieve enhancements to the region s air network; and to provide value for money to our shareholder, the Scottish Ministers. The progress achieved on these objectives during the year is reflected in increases to traffic and income coupled with a reduction in the total revenue subsidy requirement from the Scottish Executive. Before addressing our performance for the year in detail I would like to pay tribute to my predecessor as chairman, Sandy Matheson, who retired at the end of February 2007 after six years in post. Sandy has a long and distinguished record in public service and brought his many skills to bear at HIAL. His contribution to HIAL s work and development was considerable; driven by a desire to see the company be efficient and outward looking. Supported by his colleagues at HIAL and the Scottish Executive, as well as our many stakeholders, he provided a clear vision for the company which has ensured that it has continued to rise to the challenges it faces and provided more positive outcomes for the region. This progressive agenda for change is one that we continue to follow and we thank Sandy for his excellent work. Likewise, I thank my fellow directors for their contributions and assistance since I joined the Board in April of this year. The commercial aviation environment remains a challenging one for operators but during the year we continued to work with existing and new airline customers to achieve a number of positive developments in the air network. Total passenger numbers at our airports increased by 7% to a record 1,232,782 in our sixth consecutive year of growth while aircraft movements rose by 9% to a record 101,223. This growth was partly due to new routes and additional frequency while the introduction of the Scottish Executive s Air Discount Scheme in May 2006 has made air travel more affordable to residents of the region s remoter communities and has stimulated traffic at our smaller airports. Subsidies received from the Scottish Minister for the year amounted to 22,198,000, made up of revenue of 14,197,000 and capital of 8,001,000. Revenue earned from traffic operations and other activities increased by 14% to 13,635,000. It was the second year in a row that our revenue subsidy requirement has reduced and it now stands at a five year low. This was achieved through the removal of the Inverness terminal PFI and associated charges last year, the increase to revenue earned and efficiencies achieved within the business. The trading profit for the period, after taxation, amounted to 1,276,000. This was partly due to a profit realised from a sale of non-operational land at Wick for commercial development. Our shareholder agreed that this income could be held as cash at the year end and used to fund future property development projects at our airports which will help to offset our subsidy requirement and support economic development activity in the region. Following our Scottish Executive funded acquisition of the Inverness terminal PFI concession company Inverness Air Terminal Limited in January 2006, we restructured the group and hived up the trade, assets and liabilities of IATL into HIAL from April 2006 to improve business efficiency and create clarity in operational terms. The Highlands and Islands Airports Pension Scheme (HPS), established as a defined benefit scheme in 2003, continued to perform well and showed a surplus on the FRS17 accounting basis. The company and scheme trustees remain determined to ensure that the integrity of HPS is maintained for all its members through effective management. Our responsibility for maintaining and, where appropriate, upgrading airport infrastructure required capital investment of 9,497,000 to be made in the year and included the following major works from our rolling capital programme. At Benbecula, improvements to the terminal building required to meet increased security and operational requirements were completed at a cost of 456,000. At Inverness, a project to provide additional aircraft parking to accommodate continued growth on the south apron was completed at a cost of 352,000. A long stay car park was built to improve facilities for passengers at a cost of 691,000. The north apron was strengthened to provide additional parking for larger aircraft at a cost of 1,433,000. A project to provide a dedicated airport radar service commenced at a cost of 696,000. As part of a company wide project to improve safety, areas of the airfield were ramped at a cost of 345,000. A replacement fire training simulator was purchased to facilitate the ongoing requirement for hot fire training, at a cost of 365,000. At Sumburgh, the 09/27 runway extension project was completed at a cost of 2,862,000 in the year giving a total cost to date of 9,740,000. The project has been developed by the Sumburgh Airport Strategic Partnership, which comprises Shetland Islands Council, Shetland Enterprise, Sumburgh Airport Consultative Committee and HIAL. The project attracted partnership funding during the year of 1,250,000 from the Scottish Executive, 852,000 from Shetland 2 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

5 Islands Council and 702,000 from the European Regional Development Fund via the Highlands and Islands Special Transitional Programme A new car park was built at Sumburgh to increase capacity at a cost of 333,000. Areas of the 09/27 runway were also resurfaced during the year at a cost of 927,000. At Wick, a water main was replaced and improved at a cost of 169,000. Future infrastructure requirements at Inverness, our largest airport, were set out in the airport master plan which was published in draft format for public consultation in December The largest single element within this plan is the need for additional terminal capacity to meet regulatory and commercial needs. Detailed planning work to inform a capital submission to the Scottish Executive s 2007 Spending Review is in train. In February 2007, it was confirmed that HIAL would assume operational and management responsibility for Dundee Airport from Dundee City Council, commencing in September Work started to ensure a smooth transition of the operation, including the provision of adequate additional subsidy to HIAL from the Scottish Executive to support the Dundee operation. HIAL, as a partner in the joint venture, participated in work to bring forward the first phase of development on Inverness Airport Business Park (IABP). The air connections provided by the airport and the location of IABP mean that it has a significant role to play in attracting inward investment and enabling business growth in the area in the years ahead. Preparatory work for a revised planning submission to The Highland Council was initiated and the first development site, for an airport hotel, was brought to the market, attracting a high level of interest. In the longer term IABP is planned to accommodate a high amenity, mixed use development comprising office, science park, light industrial, freight and aircraft maintenance accommodation for up to 5,000 jobs. It is therefore a project of strategic significance for the whole region. The regulatory, market and policy environments within which we operate continue to evolve and we played an active part in this process through close liaison with the Scottish and UK governments, our customers and stakeholders. The importance of air travel to our region s economic and social wellbeing was again recognised with the update to the 2003 UK Aviation White Paper published by the Department for Transport in December Meanwhile, the statutory regional transport partnerships for the Highlands and Islands and Shetland both published their first regional transport strategies in draft format. We participated in consultations on both and were encouraged by the importance placed upon aviation and airports in the region. We were also an active participant in and funding partner of work undertaken by The Highland Council to identify future development priorities and infrastructure needs on the A96 corridor between Inverness and Nairn. This area, served by Inverness Airport, is projected to accommodate major population growth and business development over the next 30 years and we were encouraged by the desire of the local authority and its partners to appropriately scope and support the delivery of development at the economic heart of our region. In light of the progress achieved on many fronts during the course of the year I would like to thank the many bodies and individuals with whom we have worked for their support, including the Scottish Ministers and the officials in our sponsor directorate at the Scottish Executive. The high level of engagement we receive from the public and private sectors is a critical factor in our ability to achieve our targets and is something we are committed to maintaining and developing. Finally, I would like to thank HIAL s employees for their central role in ensuring that we provide a safe and efficient group of airports which support the development of the region s economy and communities. We operate within what is an often rapidly changing environment and face many challenges on operational and strategic levels. However, the dedication and professionalism of our workforce has greatly assisted us in achieving our goals during the year and in ensuring that air connectivity makes our region a more attractive place in which to live, work and invest. David F Sutherland CBE Chairman 3 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

6 COMPANY OPERATING LOSS AND CAPITAL EXPENDITURE BY AIRPORT 2006/2007 Operating (Loss) Before Traffic Operating Subsidies plus Operations Revenue (Loss) Capital and Other Operating Before Capital Expenditure AIRPORTS Income Costs Subsidies Expenditure per Airport BARRA 176 (668) (492) (81) (573) BENBECULA 551 (2,300) (1,749) (492) (2,241) CAMPBELTOWN 221 (966) (745) - (745) INVERNESS 6,591 (8,471) (1,880) (4,230) (6,110) ISLAY 407 (1,164) (757) (41) (798) KIRKWALL 1,326 (3,497) (2,171) (35) (2,206) STORNOWAY 1,611 (3,576) (1,965) (99) (2,064) SUMBURGH 2,023 (5,615) (3,592) (4,240) (7,832) TIREE 161 (790) (629) (50) (679) WICK 568 (2,737) (2,169) (229) (2,398) 13,635 (29,784) (16,149) (9,497) (25,646) WORKING CAPITAL MOVEMENT 1,252 DEPRECIATION 465 TOTAL SUBSIDIES RECEIVABLE 23,929 4 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

7 OUR BOARD OF DIRECTORS David F Sutherland (CBE) Chairman 2 Sandy Matheson (OBE) Chairman (Retired 28 February 2007) 3 Inglis Lyon Managing Director 4 Charles A Goodlad Director 5 Grenville S Johnston (OBE TD DL CA) Director 6 Shona MacLennan Director 7 Linn Phipps Director 8 Jane Thornton Financial Controller & Company Secretary (Non Board Member) 8 5 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

8 OUR MANAGING DIRECTOR S STATEMENT During the year we sought to address a range of target areas covering both the outcomes we provide for our shareholder and the region and the way in which we manage our business. Our work was further influenced by commercial, regulatory and policy factors. Airport Regulation & Operations Regulatory compliance is a major driver of cost within the business and the requirements placed upon us as a licensed airport operator continue to increase. Our commitment is to provide a safe and fit for purpose group of airports. During the year the company has worked with the Safety Regulation Group at the UK Civil Aviation Authority to develop a Safety Management System covering our Air Navigation Service Provider accreditation to meet the EU Common Requirements Regulation. This is on target to be completed by December 2007 and includes the development of a hazard assessment matrix for all operational areas to enable further proactive management of risk and enhancement of control measures. In line with these requirements we continue to develop a series of key performance indicators and benchmarks for quality of service and safety. Our performance against these will be formally reported in future annual reports. To support this work we have strengthened our operational team with the creation of a new post of Director of Safety and Operations and reviewed our internal structure to ensure clear lines of responsibility and accountability for all aspects of our operations. In addition to the operation of our 10 airports, we have worked closely with the industry regulator in preparation for the transition of Dundee Airport to HIAL to ensure a smooth integration into our operating procedures and management structure. We have also maintained a regular dialogue with our airline customers and the wider community of airport users on service levels and requirements at a corporate and airport level, via our airport consultative committees. This included the annual consultation with users on our airport charges. I am committed to implementing, developing and improving our strategies, management systems and processes to ensure that all our aviation activities uphold the highest level of safety performance and meet the appropriate national, European and international standards. Environmental Management We are committed to managing our environmental performance in line with the sustainable development agenda for Scotland. Recognising the unique environmental, social and cultural heritage of the locations served by our airports, we aim to reduce the environmental impacts of our operations and achieve increased resource efficiency. This must be balanced with our statutory obligations as a licensed airport operator and the Scottish Ministers expressed policy of developing the role of air services in the region. During the year we have developed an Environmental Management System and its implementation this year will meet and where appropriate exceed requirements set out in current environmental legislation and the principles of the Green Government policy. We have allocated funding to introduce energy efficiency measures across our sites for the next three years while our capital projects incorporate sustainability measures where possible. At our busiest airport, Inverness, our move to stand alone radar provision includes the design of flight procedures which will minimise fuel burn and help reduce noise emissions. Air Network & Commercial Development Our aim of improving access to air services within the region saw us carry out extensive work with airlines. Positive results from this during the year included BA franchise partner Loganair introducing enhancements to its schedules across the region, Aer Arann introducing a new Dublin Inverness service, Eastern Airways introducing an Inverness Leeds Bradford/Southampton service, Ryanair introducing services between Liverpool and Nottingham East Midlands to Inverness, Flybe launching flights between Inverness and Belfast City and Atlantic Airways operating summer flights linking Sumburgh to the Faroes and London Stansted. Many of these initiatives benefited from support from the Scottish Executive s Air Route Development Fund which aims to encourage risk sharing between the airlines, airports and public sector. It is important to recognise that route development is achieved within a highly competitive market environment. The success of existing and new services depends upon utilisation and this is a constant challenge in a region with a relatively low population density. However, the demand for air travel within the region continues to increase and support our work with the airlines and partners to promote air access. The Air Discount Scheme has stimulated traffic on many qualifying Scottish domestic routes and encouraged the market to provide additional frequency on these services. In addition to commercial work with the airlines, we have continued to explore 6 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

9 means of developing new income streams to improve our business performance and reduce our reliance on subsidies. This is particularly important because of the continuing downward pressure on airport charges across the industry which means that our aviation income does not increase in direct proportion to passenger numbers increasing. Car parking, concessions, property rental and development are all areas where we are seeking to increase commercial returns for the business. A major example of this work is our involvement in the Inverness Airport Business Park joint venture which has a 25-year development plan and will provide a new income source for us. We have also reviewed our land holdings across our airports and identified a number of areas where non-operational land can be brought forward for development. At Stornoway, this has included seeking planning approval for a mixed development comprising private and affordable housing, business units and a hotel. At Wick, a site was sold in July 2006 for commercial development and the receipt from this will be used as seed capital for other property development projects. Human Resources The majority of our employees fulfil operational posts at the airports and we continued to invest in appropriate resourcing and training to the competency levels required by the industry regulators. I am disappointed to report that in the area of air traffic control we had a shortage of qualified controllers at Stornoway in the latter part of the year. We have increased our recruitment for qualified, part qualified and trainee air traffic control staff and continue to work on appropriate measures to meet air traffic control requirements at our airports in the future. On a more positive note, I am pleased to report that we received regulatory approval for our in-house maintenance of competency scheme for elements of Airport Fire Service training. This means that we are now able to provide the appropriate training within the company rather than having to use external providers. Great effort has gone into achieving this and my thanks for a successful outcome go to those concerned. As noted by the chairman, we continue to embrace a change agenda within the business to ensure that our performance meets the expectations of our shareholder and our wider community of stakeholders. This requires the support of all our employees and managing change effectively is a priority for us. Due to the 2% public sector pay cap applied to HIAL in the year, pay negotiations with the trades unions have been protracted. Following discussions with the Scottish Executive, HIAL intends to submit a business case to its shareholder for greater flexibility in pay negotiations for the current year, particularly in light of the efficiencies achieved within other areas of the business over the past two years. If possible, we hope to achieve the appropriate flexibility to recognise and reward performance more effectively. In conclusion, I believe that we continued to develop our business so that it best meets our regulatory, operational and strategic objectives, now and in the future. Demonstrating best business practice in how we work while delivering better outcomes for the region we serve were our priorities for the year and we have made significant progress in this. My thanks therefore go to the company s employees, my fellow directors, our shareholder, partners and stakeholders who have supported this work. Building upon the progress to date, our focus will remain the successful development of HIAL in the years ahead. Inglis E Lyon Managing Director 7 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

10 OUR AIRPORTS 8 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

11 BARRA PASSENGER TOTAL 10,083 CAMPBELTOWN PASSENGER TOTAL 9,479 KIRKWALL PASSENGER TOTAL 137,769 BENBECULA PASSENGER TOTAL 36,731 INVERNESS PASSENGER TOTAL 698,885 STORNOWAY PASSENGER TOTAL 126,058 TIREE PASSENGER TOTAL 7,570 ISLAY PASSENGER TOTAL 28,472 SUMBURGH PASSENGER TOTAL 145,044 WICK PASSENGER TOTAL 32,691 9 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

12 INVERNESS AIRPORT The introduction of new routes saw Inverness record its busiest year ever while the first full year with the terminal and associated income streams in HIAL s control resulted in a significant improvement in the airport s financial position. Capital investment to ensure that the airport facilities keep pace with growth trends continued with the upgrading of aircraft stands, new long stay car parking and the development of the airport s independent radar service. The airport accounted for 57% of passengers, 40% of aircraft movements and 48% of income earned at HIAL s airports during the year. Route Development Continuing demand for scheduled air services and the introduction of new routes resulted in a 5% increase in passengers to a record 698,885 total while aircraft movements rose by 6% to 41,005. It was the airport s eighth consecutive year of passenger growth and total throughput has doubled since New services introduced during the year were: Eastern Airways to Leeds Bradford in April and Southampton in October 2006; Aer Arran to Dublin in April 2006; Ryanair to Liverpool in November 2006 and Nottingham East Midlands in February 2007; and Flybe to Belfast City in December Flybe also took over BA Connect s London Gatwick service in March BA franchise partner Loganair increased the frequency of flights to Kirkwall, Sumburgh and Stornoway in summer 2006 but ceased to operate its service to Glasgow, New services to Newcastle with Eastern Airways and Benbecula with Highland Airways were launched during the year but were subsequently cancelled due to low passenger numbers. HIAL continued to discuss new route opportunities with airlines and direct links to Europe are a priority now that the airport offers a comprehensive range of UK domestic connections. The airport now offers more direct scheduled air links than ever before which benefit both business travel and tourism. Charter operators Newmarket Holidays and Thomson expanded their programmes from Inverness during summer Financial Performance Full control of the terminal and income from airport charges, concessions and car parking saw the airport s loss before subsidies reduced by 1,269,000 compared to the previous year. Reducing the operating loss and developing the airport to a break even financial position in the longer term were key aims for HIAL s purchase of the terminal PFI concession company in January 2006 and the progress made during the year was encouraging. The future development of non-aviation income streams will be particularly important to reducing and ultimately removing the need for revenue subsidy at the airport. Inverness Airport Business Park This 250 hectare development, in which HIAL is a joint venture partner, was considered by The Highland Council as part of the master plan for the A96 corridor during the year. With associated offsite infrastructure needs identified, master planning for IABP was carried out to support a revised outline planning application to the planning authority in autumn IABP brought its first site, for an airport hotel, to market which attracted a high degree of interest from developers and work is progressing with a shortlist of preferred bidders. Infrastructure Development More than 4 million was invested in airport facilities, including an expansion of the south apron and strengthening of the north apron to handle increases in scheduled and executive jet traffic and the creation of the airport s first long stay car park. A new fire training module was also installed to meet mandatory training requirements. This gas fired unit was designed to offer better environmental performance. Work also progressed on the development of the airport s standalone radar facility with a radar control room installed in the airport tower and radar controllers recruited and trained. The first phase of the service, utilising data feeds from the RAF radars at Kinloss and Lossiemouth, subsequently went live in July Following procurement of its own radar head, the airport will be self sufficient in radar provision by the end of ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

13 The airport s draft master plan was published for consultation in December 2006 and set out growth forecasts for Inverness to It demonstrated the phasing and infrastructure development that would be required to accommodate the projected growth to 1.8 million passengers per annum by 2030, in line with Department for Transport guidance. Proposals to develop a passenger rail halt serving the airport and IABP were developed by HITRANS with HIAL committing to part fund the capital works. This forms part of a wider plan to improve surface access to the airport in the years ahead. Customer Service The airport continued to focus on providing a high level of service to its customers and achieved Hospitality Assured accreditation for the fifth consecutive year in In February 2007 readers of independent travel journal Wanderlust voted the airport the best in Scotland and second best in the UK for friendliness, cleanliness and efficiency. HIAL also supported a bid to the Scottish Executive by HITRANS to improve bus services to the airport and funding for this was secured in March ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

14 KIRKWALL, STORNOWAY & SUMBURGH AIRPORTS All three airports saw increases to their passenger numbers during the year. Contributory factors were enhancements to scheduled services to Aberdeen, Edinburgh and Glasgow launched by BA franchise partner Loganair in summer 2007 and the establishment of the Scottish Executive s Air Discount Scheme (ADS) in May ADS is designed to promote access to affordable air services for people living in the region s remotest areas and provides a 40% discount on core fares on qualifying routes. Membership of the scheme in its first year exceeded 95% of the eligible population and ADS enabled HIAL to encourage operators to increase the frequency of flights between the islands and mainland. Kirkwall Airport Passenger traffic for the year at Kirkwall increased by 17% to a total of 137,769 while aircraft movements rose by 13% to 15,177. A new maintenance hangar for the Public Service Obligation inter-island air services operated by Loganair was commissioned at the airport in October The hangar was developed in partnership by Orkney Islands Council and HIAL. The facility provided a new operating base for Loganair s Islander aircraft which serve the outer isles. The building, which replaced an out of date hangar at the airport, was constructed with 750,000 of OIC funding and a 300,000 capital contribution from HIAL. The airport also provided the land for the project via a lease to the council. Stornoway Airport The airport recorded a 6% increase in passengers to a total of 126,058 while aircraft movements totaled 12,301, growth of 9% on the previous year. Eastern Airways introduced larger Jetstream 41 aircraft on its route to Aberdeen in March 2007, increasing the number of seats available on this link to north-east Scotland and improving passenger comfort. bmi ceased its scheduled service to Edinburgh in July 2006 to use the aircraft on other routes. Although this was a disappointing development, Loganair subsequently increased the frequency of its own services to the Scottish capital. HIAL progressed plans to bring forward land at the airport which is surplus to operational needs for alternative development. This is intended to include private and affordable housing, a hotel and business units. Preparatory design work was undertaken in advance of the replacement of the airport s airfield ground lighting system scheduled for 2007/08. The airport continued to discuss proposals for the development of the Lewis Wind Farm with the scheme s promoters in line with HIAL s statutory safeguarding duties. 12 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

15 Sumburgh Airport The airport s passengers increased by 6% to 145,044 and aircraft movements rose by 13% to a total of 12,673. June 2006 saw the first direct air link from Shetland to London launched by Faroese airline Atlantic Airways. The new summer service to London Stansted included a direct link to the Faroes and was a major boost for inbound tourism from the southeast of England. It also provided residents of the UK s most northerly islands with direct air access to London and a wide range of onward connections. A change in provider of search and rescue services for the Maritime and Coastguard Agency saw CHC Scotia establish an operating base at the airport and take a lease on hangarage to accommodate this. The extension to the airport s 09/27 main instrument runway became operational in July 2006 with the longer runway offering better performance for aircraft landing and talking off. The extension, the single largest capital project undertaken by HIAL, was completed on budget and ahead of programme by principal contractor Balfour Beatty Civil Engineering Limited while project management and design services were provided by Shetland Islands Council s Capital Programme Service. A total of almost 400,000 m 3 of material was required to extend both runway ends into the sea through land reclamation. This material was primarily extracted from the Wilsness Hill area of the airport site but included 72,000 tonnes of heavy rock armour imported by barge from Norway which was placed by autumn 2005 to secure the land reclamation. Once primary construction was completed the existing runway base and surface were extended and new airfield ground lighting and instrument landing systems installed in line with the new runway distances. Following the clearance of the Wilsness Hill site, the airport s car parking provision was increased by 380 spaces. The runway extension, started in April 2005, was the key aim of the Sumburgh Airport Strategic Partnership and was designed to deliver improved operational capacity for existing air services and facilitate the development of new air routes to Shetland. The partnership project was delivered with funding from HIAL, Scottish Executive, Shetland Islands Council and the European Regional Development Fund s Highlands and Islands Special Transitional Programme ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

16 BARRA, BENBECULA, CAMPBELTOWN, ISLAY, TIREE & WICK AIRPORTS These airports enabled a range of scheduled air services to operate which provide essential connectivity to otherwise remote communities for business, leisure and social welfare travel. Increases to the frequency of flights and the introduction of the ADS resulted in considerable passenger growth at many of the airports during the year. In December 2006 the Scottish Executive announced that the contract to provide the lifeline Public Service Obligation air services linking Barra, Campbeltown and Tiree to Glasgow had been awarded to Loganair and would run until March HIAL made the capital investment necessary to ensure that the airports continue to be fit for purpose to enable the operation of scheduled air services. Barra Airport Passengers increased by 7% to 10,083 while aircraft movements decreased by 2% to 1,307. Work to procure new fire appliances for the airport commenced as the current vehicles are reaching the end of their asset life. Benbecula Airport The airport recorded a 7% increase in passengers to 36,731 while aircraft movements totalled 4,552, a 2% increase on the previous year. The upgrading of the terminal building to meet Department for Transport security requirements and provide enhanced passenger comfort was completed during the year at a cost of 456,000. A small extension to the existing building was built to house a new departure area while minor internal reconfiguration accommodated new hold and cabin baggage x-ray screening facilities. The work also involved upgrades to the building s heating, ventilation and lighting systems which were redundant. Campbeltown Airport Total passengers decreased by 1% to 9,479 and aircraft movements increased by 50% to 3,787. The increase in movements was due to RAF cadet training carried out in July 2006 and the air show staged in the same month. Islay Airport Islay saw the largest percentage increase in passengers of all HIAL s airports in the year, up 26% to a total of 28,472, while aircraft movements increased by 13% to 2,591. In May 2006 Loganair introduced four additional rotations per week to Glasgow, including Sunday services. Combined with the impact of the ADS, this development provided a significant enhancement to the island s air services and resulted in higher passenger volumes. The airport opening hours were extended by HIAL to accommodate this and additional staff recruited to meet regulatory rescue and fire-fighting manning levels. Tiree Airport HIAL s smallest airport handled 10% more passengers in the year resulting in a total of 7,570 while aircraft movements decreased by 5% to a total of 846. More frequent use of larger Saab 340 aircraft by Loganair on the PSO route to Glasgow delivered additional capacity and resulted in the increase in passengers. Preparatory work was undertaken on the design of the runway rehabilitation which is scheduled for 2007/08. More than 11,000 visitors and 80 aircraft attended the two-day Mull of Kintyre Air Show. The weekend was organised by Kintyre and Argyll Events Limited, a partnership of HIAL, the council and local enterprise company which was formed to organise the previous air show in ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

17 Wick Airport The number of people flying through Wick in the year increased by 6% to 32,691 while there was a 3% drop in aircraft movements, which resulted in an annual total of 6,984. In April 2006 Loganair reintroduced scheduled flights between Wick and Kirkwall as part its summer schedules although this service was subsequently discontinued in the summer 2007 schedules. Eastern Airways introduced larger, 29-seat Jetstream 41 aircraft on its Aberdeen route in March 2007 which helped to stimulate traffic on this important business connection. The airport continued to handle a wide range of general aviation, helicopter and executive traffic during the year which accounted for more than half of its total aircraft movements. The airport s water main was replaced and upgraded at a cost of 169,000. The old main, which dated from the airport s days as an RAF base, was leaking extensively and had reached the end of its asset life. HIAL s policy of generating income from its property assets resulted in an area of land identified as surplus to future operational needs being sold in July 2006 for the development of a supermarket. Wick Airport was named top aerodrome in the 2006 awards organised by the Serco International Fire Training College after members of the airport fire service who attended IFTC in Teesside during the year achieved the highest average marks across all their exams. 15 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

18 16 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

19 STATISTICS PASSENGERS AND FREIGHT FOR YEAR ENDING 31 MARCH 2007 PASSENGERS FREIGHT TOTAL Terminal Transit Tonnes BARRA 10,083 +7% 10,035 +7% 48-41% 37-34% BENBECULA 36,731 +7% 36,007 +7% % % CAMPBELTOWN 9,479-1% 8,950-3% % % INVERNESS 698,885 +5% 684,150 +9% 14,735-62% 2,347 +8% ISLAY 28, % 28, % % % KIRKWALL 137, % 124, % 13,475 +7% 709-2% STORNOWAY 126,058 +6% 124,235 +6% 1, % 1,717 +1% SUMBURGH 145,044 +6% 135,706 +6% 9, % 1,036-2% TIREE 7, % 7, % 84-13% 60 +2% WICK 32,691 +6% 21, % 11,425-4% 8 +33% TOTAL 1,232,782 +7% 1,180,211 +9% 52,571-30% 6,818 +1% AIRCRAFT MOVEMENTS FOR YEAR ENDING 31 MARCH 2007 TOTAL Public Transport Positioning Other* Military Fixed Wing Rotary BARRA 1,307-2% 1,53-7% % % 0 BENBECULA 4,552 +2% 3,084 +4% 474-1% % % 45-60% CAMPBELTOWN 3, % 1,218-2% % 11-62% % 1, % INVERNESS 41,005 +6% 19,936-1% 1,365 +5% 1, % 17, % % ISLAY 2, % 1, % % % % % KIRKWALL 15, % 11,099-19% % % 3,235 +5% 4-86% STORNOWAY 12,301 +9% 8, % % 446-4% 3, % 92-60% SUMBURGH 12, % 6, % 1,077-18% 1, % 3, % 12-37% TIREE 846-5% 715-2% % 1-83% 90-36% 0 WICK 6,984-3% 2,758-2% % % 3,015 +5% % TOTAL 101,223 +9% 56,324 +6% 4,374-8% 4,716 +7% 33, % 2, % *Other includes business aviation flights, executive, fleet, freight/cargo, private & club, training, test, overflights and search & rescue. Where significant, the percentage changes over the previous year are shown. 17 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

20 18 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

21 OUR GROUP ACCOUNTS 20 Directors Report 23 Statement on Internal Control 25 Directors Responsibilities 26 Group Profit and Loss Account 26 Group Statement of Total Recognised Gains and Losses 27 Group Balance Sheet 28 Company Balance Sheet 29 Group Cash Flow Statement 30 Notes to the Accounts 45 Economic Regulation Statement 46 Group Five Year Summary 47 Independent Auditor s Report DIRECTORS David F Sutherland CBE CA, Chairman Inglis E Lyon, Managing Director Grenville S Johnston OBE TD JP CA Shona C MacLennan Charles Alexander Goodlad Linn Phipps COMPANY SECRETARY Jane Thornton CA REGISTERED OFFICE Inverness Airport Inverness IV2 7JB Registered in Scotland Number AUDITORS Ernst and Young LLP Barony House Stoneyfield Business Park Stoneyfield Inverness IV2 7PA 19 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

22 DIRECTORS REPORT THE DIRECTORS SUBMIT THEIR REPORT AND THE GROUP ACCOUNTS FOR THE YEAR ENDED 31 MARCH 2007 RESULTS AND DIVIDENDS The trading profit for the period, after taking account of taxation, amounted to 1,257,000. This profit resulted after a profit on disposal of a section of land at Wick Airport. The Directors recommend that no dividend be paid, leaving the full amount to be set against reserves. PRINCIPAL ACTIVITY The group s principal activity is to operate airports safely and efficiently through best business practice so that they contribute to the economic and social wellbeing of the Highlands and Islands. REVIEW OF THE BUSINESS AND FUTURE DEVELOPMENTS Subsidies from the Scottish Ministers received for the year ended 31 March 2007 totalled 22,198,000 made up of revenue of 14,197,000 and capital of 8,001,000. To improve efficiency of operations, the Directors restructured the group so that the trade, assets and liabilities (excluding inter-company loans) of Inverness Air Terminal Limited were hived up into Highlands and Islands Airports Limited. This transfer agreement was signed during the financial year but was effective at 1 April Passenger numbers, freight tonnage and aircraft movements increased by 7%, 1% and 9% respectively in the year. CAPITAL EXPENDITURE Investment in new fixed assets amounted to 9,497,000. Expenditure was incurred on major items as follows:- a) At Benbecula, improvements to the terminal building required to meet increased security and operational requirements were completed at a cost of 456,000. b) At Inverness, a project to extend the South Apron to provide additional aircraft parking to accommodate continued growth was completed at a cost of 352,000. A long stay car park was built to improve facilities for passengers at a cost of 691,000. The North Apron was strengthened to provide additional parking for larger aircraft at a cost of 1,433,000. A project to provide a dedicated airport RADAR service commenced at a cost of 696,000. As part of a company wide project to improve safety, areas of the airfield were ramped at a cost of 345,000. A replacement fire training simulator was purchased, to facilitate the ongoing requirement for hot fire training, at a cost of 365,000. c) At Sumburgh, the 09/27 runway extension project was completed at a cost of 2,862,000 in the year giving a total cost to date of 9,740,000. A new car park was built, to increase capacity, at a cost of 333,000. Areas of the 09/27 runway were also resurfaced during the year at a cost of 927,000. The 09/27 runway extension project has been developed by the Sumburgh Airport Strategic Partnership, which comprises Shetland Islands Council, Shetland Enterprise, Sumburgh Airport Consultative Committee and Highlands and Islands Airports Limited. The project attracted the following levels of funding during the year; 1,250,000 from the Scottish Executive, 852,000 from Shetland Islands Council and 702,000 from the European Regional Development Fund via the Highlands and Islands Special Transitional Programme d) At Wick, a water main was replaced and improved at a cost of 169,000. AIRPORT CONSULTATIVE COMMITTEES Airport Consultative Committees are maintained at each airport. These provide a forum for the discussion of all matters concerning the development or operation of the airport, which have an impact on the users of the airport and on people living and working in the surrounding area. Consultative Committees are a means of keeping all interested parties informed of matters affecting them, of providing an opportunity to reconcile differences of view and resolve difficulties. SAFETY The group is committed to ensuring, as far as is reasonably practicable, a high standard of health, safety and welfare for members of the public, all employees and others affected by its undertakings. CREDITOR PAYMENT POLICY AND PRACTICE It is company policy that payments to suppliers are made in accordance with terms and conditions agreed between the company and its suppliers, provided that all trading terms and conditions have been complied with. At 31 March 2007 the company had an average of 13 days purchases outstanding in trade creditors. HUMAN RESOURCES At the year-end the company employed 307 staff, an increase of three on the previous year total. Over the course of the year we recruited to fill 25 permanent posts plus a number of fixed term and part time positions. Staff turnover through retirement, resignation and death in service saw 22 people leave the company while promotions, re-grading and transfers resulted in 24 internal staff changes. 20 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

23 DIRECTORS REPORT To ensure that the company appropriately addresses the changing operational and regulatory environment within which it operates some internal restructuring was carried out and a number of new posts were created, including Director of Safety and Operations, Assistant Operations Manager and Inverness Assistant Airport Manager. Recruitment and training of radar qualified air traffic controllers was also undertaken at Inverness. TRAINING AND DEVELOPMENT We recognise that our staff play a vital role in successful business delivery. HIAL is committed to maintaining appropriate staffing levels and skills across the company to meet the needs of the business. Training and development strategies were reviewed to ensure that these are appropriate for developing and maintaining relevant skills and competencies across the company. In particular, a comprehensive programme of recruitment and training is in place to address future air traffic control resourcing in light of an industry-wide shortage of qualified personnel. HIAL also received regulatory approval for its in house maintenance of competency programme for airport fire service personnel with elements of their training now being delivered within the company rather than through external providers. Communication to staff flows through the management structure of the company on a regular basis. Steps were taken to improve internal communications with the introduction of a company weekly staff briefing note while an initial external assessment was taken with a view to working towards Investors in People reaccreditation for the company. EMPLOYMENT POLICIES The company recognises three Trades Unions (PCS, Prospect and T&G) and encourages all staff to be a member of the appropriate union. Joint management/ Trades Unions meetings are held at least quarterly. As a company HIAL promotes a positive and supportive working environment with equality of opportunity, supported by appropriate employment policies. This includes equality of opportunity for people with disabilities within the workplace from the initial recruitment stage through to development and career progression. HIAL offers flexible working and family friendly policies and supports these requests whenever this is operationally possible. HIAL also has employment policies, which meet statutory requirements and in the case of maternity, paternity and adoptive leave go beyond the statutory minimum. Changes in legislation saw the company s retirement age increased to 65 and alterations were made to the travel and subsistence policy to bring it into line with best business practice. Consultation commenced on proposed amendments to the company s pension scheme in order to address a series of administrative anomalies and to introduce greater flexibility with regard to early ill health retirements. POLITICAL AND CHARITABLE CONTRIBUTIONS No political contributions were made during the year. The company made charitable contributions of 250 each to the Crossroads (Inverness) Care Attendant Scheme and Highland Vision Services during the year. GOING CONCERN The company sets an annual budget which aims to balance income, expenditure and subsidy provisions set by government. Future operational and legislative requirements are addressed in a ten year corporate plan which includes provision for revenue and capital items such as major repairs to runways or new or replacement equipment. The subsidy provisions for the year to 31 March 2007 were originally set at 22.7 million and were increased during the year to 25.1 million million was drawn down during the year. The company has applied to carry forward million to meet future expenditure, predominantly on the Inverness RADAR project. The balance of 0.45 million was not drawn down from the Scottish Executive. The subsidy provisions have been set at 23.2 million for the year ending March This is considered by the Directors to be adequate to sustain the company as a going concern. AUDITORS Ernst & Young LLP were reappointed as auditors at the Annual General Meeting on 4 August A resolution to reappoint Ernst & Young LLP will be laid before the Annual General Meeting on 27 July DIRECTORS AND THEIR INTERESTS The Directors who served during the year to 31 March 2007 and subsequently are: Alex Matheson, Chairman (retired 28 February 2007) David F Sutherland, Chairman (appointed 1 April 2007) Inglis E Lyon, Managing Director Charles Alexander Goodlad, Director Grenville S Johnston, Director Shona C MacLennan, Director Linn Phipps, Director None of the Directors had an interest in the share capital of the Company. The Register of Directors Interests may be examined by prior arrangement with the Company Secretary during normal office hours at the Registered Office of the company. DIRECTORS INDEMNITY INSURANCE During the year the company purchased and maintained liability insurance for its Directors as permitted by section 309C of The Companies Act ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

24 DIRECTORS REPORT (Continued) DIRECTORS STATEMENT AS TO DISCLOSURE OF INFORMATION TO AUDITORS The Directors who were members of the Board at the time of approving the Directors report are listed on page 21. Having made enquiries of fellow Directors and of the company s auditors, each of these Directors confirms that: to the best of each Director s knowledge and belief, there is no information relevant to the preparation of their report of which the company s auditors are unaware; and each Director has taken all the steps a Director might reasonably be expected to have taken to be aware of relevant audit information and to establish that the company s auditors are aware of that information. By order of the board Jane Thornton CA Company Secretary 7 June ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

25 STATEMENT ON INTERNAL CONTROL SCOPE OF RESPONSIBILITY As Accountable Officer I have responsibility for maintaining a sound system of internal control that supports the achievement of the company s policies, aims and objectives agreed between the Board and the Scottish Ministers, whilst safeguarding the public funds and assets for which I am personally responsible, in accordance with the responsibilities assigned to me. The Scottish Public Finance Manual (SPFM) is issued by the Scottish Ministers to provide guidance to the Scottish Executive and other relevant bodies on the proper handling of public funds. It is mainly designed to ensure compliance with statutory and parliamentary requirements, promote value for money and high standards of propriety and secure effective accountability and good systems of internal control. As the company is a body sponsored by the Scottish Executive, guidance in the SPFM is applicable insofar as it is relevant and consistent with any statutory requirements. PURPOSE OF THE SYSTEM OF INTERNAL CONTROL The system of internal control is designed to manage rather than eliminate the risk of failure to achieve the company s policies, aims and objectives. It can therefore only provide reasonable and not absolute assurance of effectiveness. The system of internal control is based on an ongoing process designed to identify the principal risks to the achievement of the company s policies, aims and objectives, to evaluate the nature and extent of those risks and to manage them efficiently, effectively and economically. The process within the organisation accords with the SPFM and has been in place for the year ended 31 March 2007 and up to the date of approval of the annual report and accounts and accords with guidance from the Scottish Ministers. RISK AND CONTROL FRAMEWORK All bodies subject to the requirements of the SPFM must operate a risk management strategy in accordance with relevant guidance issued by the Scottish Ministers. The general principles for a successful risk management strategy are set out in the SPFM. Risk Management The Managing Director, senior managers and appropriate line managers are responsible for the effective management of risk within the company and ensure that appropriate procedures, resources and skills are introduced and maintained to achieve this. Policy aims and objectives adopted by the Board in relation to risk are: Minimisation of the risks of injury, damage, loss of facilities and inconvenience to the travelling public, other service users, staff and service providers arising from the provision of company facilities and services; Business continuity; Raising awareness of the need for Risk Management throughout the company; Enabling the Board of Directors and management of the company to anticipate and respond to changing social, environmental and legislative conditions; Application of a documented robust framework and procedures for identification, analysis, assessment and management of risk; Minimisation of the cost of risk; Ongoing maintenance and review of the Risk Register for the company. Formal reporting lines on risk follow existing management structures. Strategic risk is managed and reviewed at Board level. Safety Management Systems The company is also in the process of working with the Safety Regulation Group within the Civil Aviation Authority to develop a Safety Management System covering our Air Navigation Service Provision to meet the EU Common Requirements Regulation. This is due to be completed by December This involves the development of a hazard assessment matrix for all operational areas to enable further proactive management of risk and enhancement of control measures. I am committed to implementing, developing and improving appropriate strategies, management systems and processes to ensure that all our aviation activities uphold the highest level of safety performance and meet national, European and international standards. Safety is the first priority in all our aviation activities. The safety initiatives for the coming year are: Establish and measure our aviation safety performance against objectives and/or targets; Develop and implement a Safety Critical Events Scheme to assist in risk monitoring and mitigation and as safety related key performance indicators; Continue to develop the hazard logs and safety risk registers for all the airports and for Head Office; Develop a company wide operational competency standards scheme and robust incident investigation processes; Develop an operational requirements awareness programme for all our staff; Introduce a peer group audit programme to assure the efficacy of our operational procedures and safety management system; As far as reasonably practicable achieve the highest levels of safety standards and performance in all our aviation activities; As far as reasonably practicable continually improve our safety performance; Form an Aviation Safety Review Group to review safety progress utilising external industry expertise. 23 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

26 STATEMENT ON INTERNAL CONTROL (Continued) We all have a responsibility for working in a safe manner. The application of effective aviation safety management systems is integral to all our aviation activities with the objective of achieving the highest levels of safety standards and performance. Control Environment Capable, competent personnel are viewed as an essential part of the control environment. High standards of behaviour are supported by high recruitment standards and ongoing staff training and development. The systems of internal financial control include: An annual budget approved by the Board; Regular consideration by the Board of actual and budget results; Delegated financial authorities; Clearly defined procurement and evaluation procedures. More generally, the organisation is committed to a process of continuous development and improvement; developing systems in response to any relevant reviews and developments in best practice in this area. In particular, in the period covering the year to 31 March 2007 and up to the signing of the accounts a Board member has been specifically designated with responsibility for safety on behalf of the Board. REVIEW OF EFFECTIVENESS As Accountable Officer I have responsibility for reviewing the effectiveness of the system of internal control. My review is informed by: The senior managers within the company who have responsibility for the development and maintenance of the internal control framework; The work of the internal auditors, who submit to the company s Audit Committee regular reports which include their objective opinion on the adequacy and effectiveness of the system of internal control, together with recommendations for improvement; Comments made by the external auditors in their management letters and other reports The following processes are established: The Board The Board is responsible for determining the business strategy of the company, taking into account the Scottish Ministers expressed policy to encourage economic and social development in the Highlands and Islands. The Board is composed of six members appointed by the Scottish Ministers. The six members are the non-executive Chairman, the executive Managing Director and four non-executive Directors. The Board meets on a six weekly cycle and has adopted a policy of requiring all significant matters to be referred to the Board for decision unless these are specifically within delegated limits given to the Managing Director. Monitoring systems used by the Board The Board at its regular meetings deals with issues of risk and internal control on an ongoing basis. In particular, it reviews safety, financial performance including variances from budget, commercial and marketing information and objectives, acquisitions and disposals as necessary, environmental and regulatory issues, business planning and strategies. The management team led by the Managing Director monitors financial performance by a system of monthly financial reporting and review together with forward projections. Board Committees During the year the Audit Committee was composed of three non-executive directors: Mr G S Johnston, Dr C A Goodlad and Ms S MacLennan. The Committee, chaired by Mr G S Johnston, works to terms of reference agreed by the Board and meets on a regular basis. The Managing Director and the Company Secretary are normally invited to attend meetings. The Committee receives regular reports from both the internal and external auditors and makes periodic reports concerning internal control to the Board. The Committee reviews and comments to the Board as to corporate governance compliance and the adequacy of risk management arrangements. Internal Audit The internal audit concentrates on areas determined by analysis of the degree of risk and in accordance with the internal audit plan considered by the Audit Committee and approved by the Board. The Audit Committee enhances the independence and value of internal audit and provides a forum for senior management to discuss internal control including issues raised by internal audit. Operational Control Each of the airports under the company s control is subject to regular operational inspections by the Civil Aviation Authority as regulator. The Assessor An Assessor appointed by the Scottish Ministers is entitled to attend but not vote at any meeting of the company or its Directors. Appropriate action is in place to address any weaknesses identified and to ensure the continuous improvement of the system. Inglis E Lyon Managing Director 7 June ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

27 STATEMENT OF DIRECTORS RESPONSIBILITIES IN RESPECT OF THE ACCOUNTS The Directors are responsible for preparing the Annual Report and the financial statements in accordance with the applicable law regulations. Company law requires the Directors to prepare accounts for each financial year. Under that law the Directors have elected to prepare financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). The financial statements are required by law to give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing those accounts, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts; prepare the accounts on the going concern basis unless it is inappropriate to presume that the company will continue in business. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the company and to enable them to ensure that the accounts comply with the Companies Act They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 25 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

28 GROUP PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 MARCH 2007 Note TURNOVER Continuing operations: Ongoing 13,635 11,766 Acquisitions Inverness Air Terminal Limited 147 GROUP TURNOVER (2) 13,635 11,913 SUBSIDIES Total receivable (3) 23,929 60,704 Capital carried to deferred income (3) (9,664) (45,941) Revenue (3) 14,265 14,763 27,900 26,676 DIRECT OPERATING COSTS (26,273) (24,834) GROSS PROFIT 1,627 1,842 ADMINISTRATIVE EXPENSES (3,511) (3,821) OPERATING (LOSS) Continuing operations: Ongoing (1,884) (2,203) Acquisitions Inverness Air Terminal Limited GROUP OPERATING (LOSS) (4)(5) (1,884) (1,979) Share of operating (loss) in joint venture (59) (37) TOTAL OPERATING (LOSS): GROUP AND SHARE OF JOINT VENTURE (1,943) (2,016) PROFIT ON DISPOSAL OF TANGIBLE FIXED ASSETS 1,431 1,155 (512) (861) INTEREST RECEIVABLE AND SIMILAR INCOME (8) INTEREST PAYABLE AND SIMILAR CHARGES (9) (266) PROFIT/(LOSS) ON ORDINARY ACTIVITIES BEFORE TAX 433 (690) TAX ON ORDINARY ACTIVITIES (10) 824 (279) PROFIT/(LOSS) FOR THE FINANCIAL YEAR 1,257 (969) GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED 31 MARCH Profit/(loss) for the financial year excluding share of losses of joint venture 1,315 (933) Share of joint venture s (loss) for the year (58) (36) Profit/(loss) for the financial year attributable to members of the parent company 1,257 (969) Actuarial gain on pension scheme 1,000 1,300 Total gain recognised since last annual report 2, Notes 1 to 22 form part of these accounts 26 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

29 GROUP BALANCE SHEET AS AT 31 MARCH 2007 Note FIXED ASSETS Intangible assets (11) 2,923 3,188 Tangible assets (12) 59,588 55,303 Investments (13) Investment in joint venture: Share of gross assets 1,486 1,472 Share of gross liabilities (1,249) (1,190) Element redeemable to company 1,862 1,823 2,099 2,105 Other investments (13) ,875 60,699 CURRENT ASSETS Debtors (14) 2,649 3,171 Cash in hand 5,375 3,192 8,024 6,363 CREDITORS: Amounts falling due within one year (15) (2,689) (3,164) NET CURRENT ASSETS 5,335 3,199 TOTAL ASSETS LESS CURRENT LIABILITIES 70,210 63,898 PROVISION FOR LIABILITIES AND CHARGES (16) (579) ACCRUALS AND DEFERRED INCOME Deferred subsidies (17) (62,762) (58,128) NET ASSETS EXCLUDING RETIREMENT BENEFITS 7,448 5,191 Retirement benefits asset (20) NET ASSETS INCLUDING RETIREMENT BENEFITS 7,848 5,591 CAPITAL AND RESERVES Share capital (18) Profit and loss account (19) 7,798 5,541 TOTAL SHAREHOLDER S EQUITY (19) 7,848 5,591 David Sutherland CBE CA Chairman Inglis Lyon Managing Director 7 June 2007 Notes 1 to 22 form part of these accounts 27 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

30 COMPANY BALANCE SHEET AS AT 31 MARCH 2007 Note FIXED ASSETS Tangible assets (12) 59,588 44,230 Investments (13) 3,174 30,921 62,762 75,151 CURRENT ASSETS Debtors (14) 2,649 9,273 Cash in hand 5,375 1,552 8,024 10,825 CREDITORS: Amounts falling due within one year (15) (3,036) (2,896) NET CURRENT ASSETS 4,988 7,929 TOTAL ASSETS LESS CURRENT LIABILITIES 67,750 83,080 PROVISION FOR LIABILITIES AND CHARGES (16) (21,738) ACCRUALS AND DEFERRED INCOME Deferred Subsidies (17) (60,115) (56,022) NET ASSETS EXCLUDING RETIREMENT BENEFITS 7,635 5,320 Retirement benefits asset (20) NET ASSETS INCLUDING RETIREMENT BENEFITS 8,035 5,720 CAPITAL AND RESERVES Share capital (18) Profit and loss account (19) 7,985 5,670 TOTAL SHAREHOLDER S EQUITY (19) 8,035 5,720 David Sutherland CBE CA Chairman Inglis Lyon Managing Director 7 June 2007 Notes 1 to 22 form part of these accounts 28 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

31 GROUP CASH FLOW STATEMENT FOR THE YEAR ENDED 31 MARCH 2007 Note NET CASH INFLOW FROM OPERATING ACTIVITIES (5.2) RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Interest received CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT Purchase of tangible fixed assets (8,995) (9,779) Purchase of investments (239) (2,588) Receipt of capital subsidy: Scottish Ministers 8,001 44,156 European Regional Development Fund 702 1,548 Other Sale of tangible fixed assets 1,439 1,214 1,810 34,788 TAXATION Corporation tax paid (5) ACQUISITIONS AND DISPOSALS Purchase of subsidiary undertaking (28,333) Net cash acquired with subsidiary undertaking 1,309 (27,024) FINANCING Repayment of long term loans (6,565) INCREASE IN CASH 2,183 1,685 RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS Increase in cash in the period 2,183 1,685 Net funds at 1 April 3,192 1,507 Net funds at 31 March 5,375 3,192 Notes 1 to 22 form part of these accounts 29 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

32 NOTES TO THE ACCOUNTS BASIS OF PREPARATION 1. ACCOUNTING POLICIES 1.1 BASIS OF PREPARATION The accounts are prepared in accordance with the historical cost convention and in accordance with applicable accounting and financial reporting standards. The company receives subsidies from the Scottish Ministers on an annual basis. The annual accounts are prepared on the assumption that the company will continue to receive such subsidies for the foreseeable future. 1.2 BASIS OF CONSOLIDATION The group accounts consolidate the results of Highlands and Islands Airports Limited and its subsidiary undertakings drawn up to 31 March each year. No individual profit and loss account is presented for Highlands and Islands Airports Limited as permitted in section 230 of the Companies Act The Company profit for the year was 1,315,000 (2006: loss 840,000). Entities in which the group holds an interest on a long-term basis and are jointly controlled by the group and one or more other venturers under a contractual arrangement are treated as joint ventures. In the group accounts, joint ventures are accounted for using the gross equity method. 1.3 GOODWILL Positive goodwill arising on acquisitions is capitalised, classified as an asset on the balance sheet and amortised on a straight line basis over its useful economic life up to a presumed maximum of 10 years. It is reviewed for impairment at the end of the first full financial year following the acquisition and in other periods if events or changes in circumstances indicate that the carrying value may not be recoverable. 1.4 INTANGIBLE ASSETS Intangible assets acquired separately from a business are capitalised at cost. Intangible assets acquired as part of an acquisition of a business are capitalised separately from goodwill if the fair value can be measured reliably on initial recognition, subject to the constraint that, unless the asset has a readily ascertainable market value, the fair value is limited to an amount that does not create or increase any negative goodwill on the acquisition. Intangible assets, excluding development costs, created within the business are not capitalised and expenditure is charged against profits in the year in which it is incurred. Intangible assets are amortised on a straight line basis over their estimated useful lives up to a maximum of 10 years. The carrying value of intangible assets is reviewed for impairment at the end of the first full year following acquisition and in other periods if events or changes in circumstances indicate that the carrying value may not be recoverable. 1.5 TANGIBLE ASSETS Tangible fixed assets are stated at cost. Interest and other directly attributable finance costs in respect of loans for the purposes of constructing assets, are capitalised as part of the cost of constructing the buildings up to the date of practical completion. Subsequent interest is charged to the profit and loss account. Depreciation is provided on tangible fixed assets to spread the cost by equal annual instalments over their estimated useful lives, as follows: Freehold buildings years Leasehold land and buildings over the remaining life of the lease to a maximum of 20 years Navigation aids 7 years Plant and other equipment 3-10 years Vehicles 5 years Runways, aprons and main services 7-25 years Runway bases 100 years The following categories of tangible fixed assets are not depreciated: Freehold land Furniture, fixtures and fittings Initial purchases of furniture, fixtures and fittings are treated as tangible fixed assets; replacement expenditure is charged to the profit and loss account. Items that are disposed of and not replaced are eliminated from tangible fixed assets. Net Depreciation (as disclosed in Note 4) includes: depreciation charge for the year and release of deferred subsidies. 1.6 INVESTMENTS Investments are shown at cost less provision for impairment. 1.7 SUBSIDIES Subsidies represent amounts received from the Scottish Ministers in accordance with Section 34 of the Civil Aviation Act 1982 along with other revenue and capital grants. Subsidies in respect of capital expenditure are credited to a deferred income account and released to the profit and loss account over the estimated useful lives of the relevant assets. Subsidies for revenue expenditure are separately disclosed within turnover in the period to which they relate. 1.8 DEFERRED TAXATION Deferred taxation is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in financial statements. Deferred tax assets and liabilities are not discounted. 30 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

33 1.9 LEASES The rentals on operating leases are charged to the profit and loss account as incurred PENSION COSTS The company operates the Highlands and Islands Airports Pension Scheme, a defined benefit scheme. Contributions are charged to the profit and loss account in accordance with actuarial recommendations, so as to spread the cost over the employees remaining working lives with the company. On the advice of an independent qualified actuary, contributions are made to the plan to ensure that the plan s assets are sufficient to cover future liabilities. Pension plan assets are measured using market values. Pension plan liabilities are measured using the projected unit method and discounted at the current rate of return on a high quality corporate bond of equivalent term and currency to the liability. Any increase in the present value of the liabilities of the defined benefit pension plan expected to arise from employee service in the period is charged against operating profit. The expected return on the plan s assets and the increase during the period in the present value of the plan s liabilities arising from the passage of time are included in interest receivable and similar income. Actuarial gains and losses are recognised in the Statement of Total Recognised Gains and Losses CAPITAL INSTRUMENTS In accordance with FRS4 capital instruments, the costs associated with the issue of capital instruments, other than shares, are charged to the profit and loss account over the life of the instrument, at a constant rate based on the carrying amount. 2. TURNOVER Turnover represents amounts received and receivable (stated net of value added tax) in respect of airport services provided in the UK. 3. SUBSIDIES Revenue subsidies from Scottish Ministers and others represent revenue of 13,475,000 received from the Scottish Ministers in accordance with Section 34 of the Civil Aviation Act 1982 and 153,000 from the Scottish Ministers to provide administrative services for the Air Discount Scheme. A total of 68,000 was received from Highlands & Islands Enterprise Inverness and East Highland (HIEIEH) towards various studies. A further 569,000 was utilised from the Route Development Fund, which provides support for new routes from the Highlands and Islands, up to 31 March REVENUE Scottish Executive Operating subsidy 13,475 14,375 Scottish Executive Route Development Fund Scottish Executive Barra Hard Runway Study 51 Scottish Executive Enhancement of Wick Air Services 44 HIEIEH Inverness Master plan grant 18 6 HIEIEH Network assistance grant 1 5 HIEIEH Inbound charter study grant 5 Scottish Executive Air Discount Scheme 153 HIEIEH Marketing Assistance grants 32 HIEIEH Website Development grant 17 14,265 14,763 CAPITAL Scottish Executive Operating subsidy 6,751 6,698 Scottish Executive Inverness Airport PFI buy out 34,957 Scottish Executive Sumburgh Runway extension 1,250 2,500 ERDF Sumburgh Runway extension 761 1,730 Shetland Islands Council Sumburgh Runway extension Miscellaneous Terminal Building Gateway projects 8 HITRANS Inverness RADAR 50 9,664 45,941 23,929 60, ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

34 NOTES TO THE ACCOUNTS (Continued) 4. OPERATING RESULTS YEAR TO 31 MARCH 2007 Subsidy Consolidation received Total Inter group from Scottish Activities trading Ministers Barra Benbecula Campbeltown TURNOVER Traffic operations 11,236 10, Other income 2,399 1,361 (397) Subsidies receivable 14,265 14,763 13,655 14, ,900 26,676 (397) 13,655 14, OPERATING COSTS Staff costs 15,717 14, ,506 1, Property rates Security,utilities,materials 6,127 6,989 (397) Repairs and maintenance 3,198 2, Net depreciation (1) Other operating costs 3,360 3, ,784 28,655 (341) ,300 2, OPERATING (LOSS)/PROFIT (1,884) (1,979) (56) 13,655 14,487 (492) (533) (1,749) (1,567) (745) (696) 5. OPERATING LOSS 5.1 THIS IS STATED AFTER CHARGING: Depreciation 5,173 4,325 Auditors remuneration audit services Auditors remuneration non-audit services 10 7 Goodwill impairment 21,738 Amortisation of other intangible assets AND AFTER CREDITING: Deferred subsidies released 4,999 25, ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

35 Inverness Islay Kirkwall Stornoway Sumburgh Tiree Wick ,032 4, ,203 1,105 1,350 1,278 1,758 1, , ,974 5, ,326 1,211 1,626 1,498 2,031 1, ,754 3, ,120 2,054 1,992 1,907 2,557 2, ,610 1, ,440 3, ,063 1, (12) (18) (4) ,159 1, ,471 8,695 1,164 1,109 3,497 3,370 3,576 3,269 5,615 5, ,737 2,733 (1,497) (2,758) (757) (779) (2,171) (2,159) (1,950) (1,771) (3,584) (3,420) (629) (615) (1,965) (2,112) 5. OPERATING LOSS (Continued) RECONCILIATION OF OPERATING LOSS TO NET CASH INFLOW FROM OPERATING ACTIVITIES Operating (loss) (1,884) (1,979) Depreciation 5,173 4,325 Deferred subsidies released (4,999) (25,612) Decrease/(increase) in debtors 582 (477) (Decrease)/increase in creditors (718) OTHER NON-CASH MOVEMENTS Current service costs 1,600 1,000 Past service costs Amortisation of other intangible assets Impairment of goodwill 21,738 Net cash inflow from operating activities ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

36 NOTES TO THE ACCOUNTS (Continued) 6. STAFF COSTS Wages and salaries 10,415 9,997 Social security costs Pension costs 3,893 3,442 Other staff costs ,717 14,737 The average number of employees during the period was 304 (2006: 308). 7. DIRECTORS EMOLUMENTS Emoluments Pension contributions Directors emoluments, including pension contributions, fell within the following ranges: No. No. 1 5, ,001 10, ,001 20, ,001 25, , , , ,000 1 The emoluments of the Chairman were 19,540 (2006: 20,911) including pension contributions of Nil (2006: Nil) and of the highest paid Director, Inglis Edward Lyon, were 112,626 (2006: 82,020) excluding pension contributions of 19,360 (2006: 16,039). The highest paid Director s emoluments for 2007 include provisions for bonus payments for the two years ended 31 March 2007 whilst the emoluments for 2006 did not include provision for a bonus payment as the terms had not been agreed at 31 March Mr I Lyon was the only Director for whom the company made contributions during the year as a member of the Highlands and Islands Airports Pension Scheme. Directors emoluments include 6,803 that was paid to Solas Business Services Limited for the services of Shona MacLennan as a Director during the year. 8. INTEREST RECEIVABLE AND SIMILAR INCOME Interest received Expected return on pension plan assets 2,900 2,200 Interest on retirement benefits liabilities (2,200) (1,900) Share of joint venture ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

37 9. INTEREST PAYABLE AND SIMILAR CHARGES Finance advisory fees TAX ON ORDINARY ACTIVITIES Current tax UK corporation tax at 19% (2006: 30%) Adjustment in respect of prior periods (278) Total current tax (credit)/charge (245) 284 Deferred tax Origination and reversal of timing differences (579) (5) Tax on profit on ordinary activities (824) 279 The adjustment in respect of prior periods relates to the parent company UK corporation tax provision of 278,000 made in the year ended 31 March This provision has been released in the current year; a rollover relief claim having been made in respect of the Capital Gain on the sale of the land to Inverness Airport Business Park Limited. The deferred tax credit of 579,000 relates to the historical deferred tax provision made by Inverness Air Terminal Limited. This is no longer required as the assets giving rise to the deferred tax liability have now been hived up into Highlands and Islands Airports Limited and its historical tax losses of 6.1 million mean that this 579,000 provision is no longer required FACTORS AFFECTING CURRENT TAX CHARGE The tax assessed for the period is different from the starting/standard rate of corporation tax in the UK of 19% (2006: 30%). The differences are explained below: Profit/(loss) on ordinary activities before tax 433 (690) Tax at 19% (2006: 30%) thereon: 82 (207) Effects of: Adjustments in respect of prior periods (278) Expenses not deductible for tax purposes 12 (174) Other timing differences 11 8 Capital allowances in excess of net depreciation Pension provisions not deductible for tax purposes Utilisation of tax losses (13) (1) Adjustments relating to the sale of fixed assets (3) 338 Profit on sale of fixed assets not taxable rollover relief claim (265) Current tax (credit)/charge for period (245) ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

38 NOTES TO THE ACCOUNTS (Continued) 11. INTANGIBLE FIXED ASSETS Goodwill Other Total COST At 1 April ,082 2,900 24,982 Share of joint venture At 31 March ,107 2,900 25,007 AMOUNTS PROVIDED At 1 April , ,794 Provided during the year At 31 March , ,084 NET BOOK VALUE At 31 March ,554 2,923 At 31 March ,844 3,188 Other intangible assets relates to concession income separately identifiable as part of the acquisition of Inverness Air Terminal Limited. This is being amortised over its useful economic life of 10 years. 12. TANGIBLE FIXED ASSETS GROUP Plant Assets in and Other Runways Course of Land and Equipment Aprons Construction Buildings Vehicles and Main and Freehold Navaids Furniture Services Installation Total COST OR VALUATION At 1 April ,452 8,227 16,079 20,684 10,205 89,647 Additions during year 1, ,481 1,652 9,497 Disposals during year (11) (12) (215) (549) (787) Transfers during year ,803 (10,176) At 31 March ,120 8,719 16,418 35,419 1,681 98,357 DEPRECIATION At 1 April 2006 (8,805) (3,833) (11,862) (9,844) (34,344) Provided during year (1,803) (980) (805) (1,585) (5,173) Disposals during year At 31 March 2007 (10,600) (4,803) (12,486) (10,880) (38,769) NET BOOK VALUE At 31 March ,520 3,916 3,932 24,539 1,681 59,588 at 31 March ,647 4,394 4,217 10,840 10,205 55, ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

39 COMPANY Plant Assets in and Other Runways Course of Land and Equipment Aprons Construction Buildings Vehicles and Main And Freehold Navaids Furniture Services Installation Total COST At 1 April ,322 8,227 16,048 20,684 10,205 78,486 Additions during year 12, ,481 1,652 20,570 Disposals during year (11) (12) (215) (549) (787) Transfers during year ,803 (10,176) At 31 March ,034 8,719 16,416 35,419 1,681 98,269 DEPRECIATION At 1 April 2006 (8,719) (3,833) (11,860) (9,844) (34,256) Provided during year (1,803) (980) (805) (1,585) (5,173) Disposals during year At 31 March 2007 (10,514) (4,803) (12,484) (10,880) (38,681) NET BOOK VALUE At 31 March ,520 3,916 3,932 24,539 1,681 59,588 At 31 March ,603 4,394 4,188 10,840 10,205 44,230 The net book value of freehold land and buildings includes 312,496 in respect of land (2006: 311,752). 13. INVESTMENTS GROUP Joint venture (a) 2,099 2,105 Other fixed asset investments (b) ,364 2, ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

40 NOTES TO THE ACCOUNTS (Continued) 13. INVESTMENTS (CONTINUED) (a) Joint venture Inverness Airport Business Park Limited At 1 April 2006 Share of loss retained by joint venture At 31 March (36) (58) (94) Additional disclosures are given in respect of Inverness Airport Business Park Limited, which exceeds certain thresholds under FRS 9 Associates and Joint Ventures, as follows: Fixed assets 1,470 1,440 Current assets Share of gross assets 1,486 1,472 Liabilities due within one year Liabilities due after more than one year 1,121 1,086 Share of gross liabilities 1,249 1,190 Share of net assets Redeemable shares of 1 each held by the company 1,862 1, 1,823 Investment in joint venture 2,099 2,105 The summarised results of the joint venture company are as follows: Turnover Loss before tax (171) (105) Taxation Loss after tax (171) (105) (b) Other fixed asset investments 000 At 1 April Additions 162 At 31 March ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

41 COMPANY Subsidiary Joint Other undertakings ventures investments Total COST At 1 April ,383 2, ,971 Additions Disposal/Hive up transfer (27,986) (27,986) At 31 March , ,224 AMOUNTS PROVIDED At 1 April 2006 and 31 March NET BOOK VALUE At 31 March , ,174 At 31 March ,333 2, ,921 Details of the investments in which the company holds 20% or more of the nominal value of any class of share capital are as follows: Proportion of Nature of Name of company Holding shares held Business SUBSIDIARY UNDERTAKINGS Airport Management Services Limited Ordinary shares 100% Dormant Inverness Air Terminal Limited Ordinary shares 100% Non-trading JOINT VENTURE Inverness Airport Business Park Limited Ordinary shares 34% Property investment Redeemable shares 87% 14. DEBTORS Group Company Group Company Trade debtors 1,156 1,156 1,514 1,117 Prepayments and accrued income Amounts owed by subsidiary undertaking 6,636 Amounts owed by joint venture Other debtors ,140 1,140 2,649 2,649 3,171 9, ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

42 NOTES TO THE ACCOUNTS (Continued) 15. CREDITORS Group Company Group Company Amounts falling due within one year Trade creditors Other creditors Corporation tax Amounts owed to subsidiary undertaking 347 Other taxes and social security costs Accruals and deferred income 1,313 1,313 1,137 1,042 2,689 3,036 3,164 2, PROVISION FOR LIABILITIES AND CHARGES Group Company Group Company Deferred tax 579 Onerous contract provision 21, ,738 Movement on deferred tax At 1 April 579 Hive up transfer 579 Movement (579) (579) 579 At 31 March 579 Analysis of deferred tax balances - capital allowances in advance of depreciation timing differences relating to pensions (300) (300) - trading losses (512) (512) 579 A deferred tax asset has not been recognised in respect of timing differences related to historical trading losses incurred by the company amounting to 6.1 million, which will be recovered only if the company begins to make significant taxable profits. There is insufficient evidence that this asset will be recovered to allow its recognition in these accounts. The estimated value of the deferred tax asset not recognised, measured at a standard rate of 30% is 1,330,000 (2006: 2,211,000). 1.7 million of the total tax losses are being used to reduce the deferred tax liability to Nil meaning the deferred tax asset is in relation to the remaining 4.4 million of tax losses. 40 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

43 17. DEFERRED SUBSIDIES Group Company Group Company Balance at 1 April 58,128 56,022 35,797 35,797 Subsidies Receivable 9,664 9,664 45,941 45,941 Deferred grants acquired with subsidiary undertaking 2,129 Hive up transfer (832) Released to profit and loss account (4,999) (4,708) (25,612) (25,589) Released against asset disposals (31) (31) (127) (127) Balance at 31 March 62,762 60,115 58,128 56, SHARE CAPITAL Company Authorised Issued and fully paid Number Number Ordinary shares of 1 each 50,000 50, SHARE CAPITAL, MOVEMENT ON RESERVES AND RECONCILIATION OF MOVEMENT IN SHAREHOLDER S FUNDS GROUP Profit Share and Loss Capital account Total At 1 April ,541 5,591 Retained profit for the year 1,257 1,257 Actuarial gain on pension scheme 1,000 1,000 At 31 March ,798 7,848 The cumulative amount of goodwill written off at 31 March 2007 is 21,738,000 (2006: 21,738,000). Included in the profit and loss account above is a cumulative amount of 400,000 (2006: 400,000) in respect of the retirement benefits asset net of deferred tax. COMPANY Profit Share and Loss Capital account Total At 1 April ,670 5,720 Retained profit for the year - 1,315 1,315 Actuarial gain on pension scheme - 1,000 1,000 At 31 March ,985 8, ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

44 NOTES TO THE ACCOUNTS (Continued) 20. PENSION COSTS The information below is disclosed in accordance with the provisions of FRS17. This note excludes assets and liabilities in respect of money purchase AVCs and insured pensions Total market value of assets 48,400 43,100 32,700 26,300 21,100 Present value of the scheme s liabilities 48,000 42,700 32,600 28,600 27,600 Surplus/(deficit) in the scheme (2,300) (6,500) As a deferred tax asset has not been recognised, see note 13, the related deferred tax liability of 120,000 on the above surplus in the scheme has not been recognised. The company operates a defined benefit scheme in the UK. The values of the scheme s liabilities have been determined by a qualified actuary based on the results of an actuarial valuation as at 31 December 2004, updated to the balance sheet date, and using the following assumptions: %pa %pa %pa %pa %pa Discount rate Rate of increase in salaries Rate of increase in pensions in payment Rate of increase in pensions deferment Rate of inflation Mortality table PA92C2020 PA92C2020 PA92C2020 PA92C2020 PA80-5 The company s share of the assets in the Highlands and Islands Airports Pension Scheme and the expected rate of return were: Expected Value at Expected Value at Expected Value at long term 2007 long term 2006 long term 2005 return 000 return 000 return 000 % % % Equities , , ,000 Other Bonds , , ,400 Total market value of assets 48,400 43,100 32, Analysis of amount charged to operating profit Current service cost (excluding employee contributions) 3,800 3,200 Past service cost Total operating charge 3,900 3,500 Analysis of amount credited to other finance income Expected return on pension scheme assets 2,900 2,200 Interest on pension scheme liabilities (2,200) (1,900) Net return ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

45 Analysis of amount recognised in STRGL Actual less expected return on assets (100) 5,500 Experience (losses)/gains on liabilities (300) 300 Effect of change in assumptions on liabilities 1,400 (4,500) Actuarial gain recognised in STRGL 1,000 1,300 The company has agreed to contribute at a rate of 22.0% of pensionable salaries for the next accounting year Movement in surplus during the year Surplus in scheme at start of the year Current service cost (excluding employee contributions) (3,800) (3,200) Cash contribution (excluding employee contributions) 2,200 2,200 Past service cost (100) (300) Other finance income Actuarial gain 1,000 1,300 Surplus in scheme at end of the year History of experience gains and losses Difference between expected and actual returns on scheme assets: 000 amount (100) 5,500 1,900 3,600 8,400 % of assets at year end (0%) 13% 6% 14% 40% Experience (losses)/gains on scheme liabilities: 000 amount (300) 300 1,800 1,800 (300) % of liabilities at year end (1%) 1% 6% 6% (1%) Total gain recognised in STRGL: 000 amount 1,000 1,300 3,200 4,100 11,600 % of liabilities at year end 2% 3% 10% 14% 42% 43 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

46 NOTES TO THE ACCOUNTS (Continued) 21. CAPITAL COMMITMENTS Group Company Group Company Contracted ,749 2, RELATED PARTIES (a) During the year the company received subsidies totalling 22,198,000 from the Scottish Ministers. (b) During the year the company contributed 77,000 to Inverness Airport Business Park Limited, a joint venture company, towards the construction of the new Inverness airport access road for which redeemable shares of 39,000 were received. (c) The Directors agreed to restructure the group by hiving up the trade, assets and liabilities of Inverness Air Terminal Limited (IATL) into the parent company Highlands and Islands Airports Limited (HIAL). Net assets of 3,310,739 were transferred from IATL at their net book value. These transactions were entered into on an arm s length basis. 44 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

47 ECONOMIC REGULATION STATEMENT FOR THE YEAR ENDED 31 MARCH 2007 Highlands and Islands Airports Limited is subject to economic regulation under the Airports Act 1986 which requires the company to hold permissions from the Civil Aviation Authority to levy airport charges. Operational activities are required to be allocated between airport charges levied in connection with the landing, parking and taking-off of aircraft (including passenger related charges) and other operational income. All revenue and costs from non-operational activities, such as items where the income is not primarily from airport users, is required to be shown in a separate category. Costs have been apportioned on a basis obtained by the analysis of 1994/95 actual expenditure AIRPORT OPERATIONAL ACTIVITIES AIRPORT INCOME Airport charges 11,236 Subsidies 14,265 25,501 Costs (28,593) (3,092) OTHER INCOME Revenue 2,399 Costs (1,191) 1,208 NON-OPERATIONAL ACTIVITIES The Group has no such activities under the Act Group operating loss for the period (1,884) Unless specified elsewhere in these accounts, the Group received no preferential treatment or financial support from any associated person or organisation during the period of these accounts. 45 ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

48 GROUP FIVE YEAR SUMMARY RESULTS FOR THE YEARS ENDED 31 MARCH (As restated) (As restated) PROFIT AND LOSS ACCOUNT Traffic operations and other income 13,635 11,913 10,826 9,806 9,229 Subsidies Total receivable 23,929 60,704 21,505 24,545 25,149 Capital carried to deferred income (9,664) (45,941)* (4,101) (7,159) (9,203) Revenue 14,265 14,763 17,404 17,386 15,946 less: net operating costs 29,784 28,655 29,555 27,905 26,543 Operating (loss) (1,884) (1,979) (1,325) (713) (1,368) Share of joint venture (59) (37) Profit/(loss) on disposal of fixed assets 1,431 1,155 (22) Interest receivable Interest payable and similar charges (266) Tax on ordinary activities 824 (279) Profit/(loss) for the financial year 1,257 (969) (940) (643) (1,304) ** BALANCE SHEET Fixed assets 64,875 60,699 39,093 38,863 34,826 Net current assets 5,335 3,199 1,864 1,516 1,503 Provision for liabilities and charges (579) Accruals and deferred income (62,762) (58,128) (35,797) (35,079) (30,386) Retirement benefits asset/(liability) (2,300) 7,848 5,591 5,260 3,000 5,943 *** Share capital Reserves 7,798 5,541 5,210 2,950 5,893 Total shareholder s equity 7,848 5,591 5,260 3,000 5,943 * The capital subsidy figure includes 28,333,000 which was used to purchase the entire share capital of Inverness Air Terminal Limited on 20 January 2006 and 6,624,000 which was used to repay a long term loan that existed at that date ** The profits/(losses) on disposal of fixed assets for 2003 and 2004 are disclosed within net operating costs ***The results for 2003 have not been adjusted for FRS STATISTICS Total passengers 1,232,782 1,152,895 1,015, , ,301 Total aircraft movements 101,223 93,234 82,764 81,064 76, ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

49 INDEPENDENT AUDITOR S REPORT TO THE MEMBERS OF HIGHLANDS AND ISLANDS AIRPORTS LIMITED We have audited the group and parent company financial statements (the financial statements ) of Highlands and Islands Airports Limited for the year ended 31 March 2007 which comprise the Group Profit and Loss Account, the Group and Company Balance Sheets, the Group Cash Flow Statement, the Group Statement of Total Recognised Gains and Losses and the related notes 1 to 22. These financial statements have been prepared under the accounting policies set out therein. This report is made solely to the company s members, as a body, in accordance with Section 235 of the Companies Act Our audit work has been undertaken so that we might state to the company s members those matters we are required to state to them in an auditors report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company s members as a body, for our audit work, for this report, or for the opinions we have formed. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS. The Directors responsibilities for preparing the Annual Report and the financial statements in accordance with applicable United Kingdom law and Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of Directors Responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act We also report to you whether the information given in the Directors report is consistent with the financial statements. In addition we report to you if, in our opinion, the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors remuneration and other transactions is not disclosed. We read other information contained in the Annual Report, and consider whether it is consistent with the audited financial statements. This other information comprises only the Chairman s Statement, the Statement of Internal Control, the Economic Regulation Statement and the Group Five Year Summary. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. We review whether the statement on page 23 complies with Scottish Executive guidance on statements of system of internal control. We report if it does not comply with the guidance, or if the statement is misleading or inconsistent with other information we are aware of from our audit. BASIS OF AUDIT OPINION We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group s and company s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. OPINION In our opinion: the financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the group s and the parent company s affairs as at 31 March 2007 and of the group s loss for the year then ended; the financial statements have been properly prepared in accordance with the Companies Act 1985; the information given in the Directors report is consistent with the financial statements; and in all material aspects, the income and expenditure presented in the financial statements have been applied to the purposes intended by Parliament and the financial transactions conform to the authorities which govern them. OTHER OPINION In our opinion the Economic Regulation Statement presents fairly the information set forth therein and is in accordance with the requirements of the accounts conditions issued by the Civil Aviation Authority under section 41(1) of the Airports Act Ernst & Young LLP Registered auditor Inverness 12 June ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

50 TARGETS FOR DEVELOPMENT & PERFORMANCE INDICATORS TARGETS FOR DEVELOPMENT HIAL aims to reduce its dependency on revenue subsidy through business efficiency and commercial innovation while ensuring that its airports fulfil their role as part of an integrated transport network for the region which supports economic development and social inclusion. HIAL will maintain and improve upon safety levels within the organisation through the development of a Safety Critical Events Scheme and related Key Performance Indicators. This will include achieving full Air Navigation Service Provider status by 31 December 2007 and completing the roll out and implementation of the HIAL Safety Management System by May The project to transfer radar service provision for Inverness Airport from RAF Lossiemouth to self provision based at Inverness will be completed by December Responsibility for the operation of Dundee City Airport will be transferred from Dundee City Council to HIAL in September 2007, including the migration of HIAL safety strategies, systems and processes. HIAL will manage and develop its earned income by: Applying airport charges that strike a balance between available subsidy, current income and maintaining and enhancing the air network; Working with airlines to deliver new air routes and services that become commercially viable and make a long term contribution to our revenue; Ensuring that opportunities for increasing non-aviation revenue through concessions, car parking and property are fully developed at all our airports. HIAL will work with the Scottish Executive and stakeholders to secure financial support for marketing activity and other initiatives to stimulate traffic and attract new routes. The targets are: To achieve total passenger growth of 7% per annum. Maintaining and strengthening existing network. To achieve one million passengers per annum at Inverness in 2010/11. Capital investment priorities for the year are: Securing funding from the 2007 Spending Review for an expansion to Inverness terminal. Procurement of airport-based radar facility at Inverness. Airfield ground lighting replacement and taxiway rehabilitation at Stornoway. Tiree runway rehabilitation. PERFORMANCE INDICATORS Total revenue cost per departing passenger Actual Forecast Total revenue per departing passenger Actual Forecast Base year 2006/ ANNUAL REPORT AND GROUP ACCOUNTS 2006/2007

51 COMPANY DIRECTORY REGISTERED OFFICE Highlands and Islands Airports Limited Head office Inverness Airport Inverness IV2 7JB Registered in Scotland No Managing Director Inglis Lyon Financial Controller & Company Secretary Jane Thornton Director of Safety & Operations Alan Shaw CORPORATE SERVICES Company Accountant Norman Ross Human Resources Manager Bernie Moriarty Infrastructure Services Manager Grant Dudgeon Public Relations & Marketing Manager Nathaniel Anderson AIRPORTS Benbecula Airport Manager Michael Maclean Inverness Airport Manager James E Walton Kirkwall Airport Manager David Blackman Stornoway Airport Manager Duncan C Smith Sumburgh Airport Manager Nigel Flaws Wick Airport Manager Angela Donaldson Regional Manager South (for Barra, Campbeltown, Islay & Tiree) Derrick Lang Designed and Produced by Crombie Anderson, Edinburgh

52 Highlands and Islands Airports Limited Head Office, Inverness Airport, Inverness, Scotland IV2 7JB T: F: E: W: