4. KEY PERFORMANCE INDICATORS

After two years of the COVID-19 pandemic, the year of 2022 was marked by an increased demand for air traffic services, but the traffic scope level was still lower than in the pre-crisis year of 2019. In 2022, Croatia Airlines gradually intensified flight operations by increasing frequencies on the existing routes and introducing new ones. This led to a 48% rise in block time compared to 2021, but the persisting COVID-19 pandemic, especially in the first part of the year, still affected its traffic and financial performance.

In 2022, Croatia Airlines’ aircraft operated a total of 23,348 flights, or 41% more compared to 2021. Compared to 2019, 18% less flights were recorded in 2022. In 2022, the Company transported a total of 1,453,224 passengers, or 84% more than in 2021, but 33% less than in 2019. Given the traffic results, business operations are evidently picking up, and passenger traffic is getting back on track. However, the figures did not yet reach the levels of the pre-pandemic year of 2019. In such market conditions, the Company’s operating loss at the end of 2022 totalled HRK 98.2 million. With the net financing result included, its net loss was HRK 137.1 million. The 2022 result was most affected by rising fuel prices, with the overall negative effect stemming from the increased jet fuel price being HRK 207 million.

The Company’s operating revenues were 87% higher compared to 2021, as a result of a growth in passenger revenues. The latter more than doubled, with 84% more passengers being transported than in 2021. Besides the evident growth of the overall revenues compared to 2021, the very revenue structure also noticeably changed: the share of passenger revenues rose, making up 80% of the operating revenues (71% in 2021), while the share of others declined, making up 19% (28% in 2020). The share of cargo transport revenues remained the same.

Croatia Airlines’ operating costs were 53% higher compared to 2021, primarily as a result of an increased number of flights (+41%) and passengers (+85%), and significantly higher fuel prices. As for the structure of operating expenses, the share of variable costs rose amidst a higher level of block time, while the share of fixed costs decreased compared to 2021. More detailed information on the Company’s financial operations can be found in its Annual Business Report posted on its website: https://www.croatiaairlines.com/hr/O-nama/Financijske-informacije/Izvjesca-o-poslovanju

Three core activities:

5.1. Company name and head office

Croatia Airlines d.d.

The Company’s head office is in Zagreb, Bani 75 b, Buzin.

5.2. Ownership and legal form

Croatia Airlines d.d. is a joint-stock company majority-owned by the state. Its share capital has been fully paid up. On 31 December 2022, the Company’s share capital amounted to HRK 627,879,530 and was divided into 62,787,953 ordinary shares with the nominal value of HRK 10.

5.3. Major shareholders

5.4. Management structure

SHAREHOLDERS’ GENERAL ASSEMBLY – a body through which the shareholders exercise their rights. The scope of the authority of the General Assembly is prescribed by the Companies Act and the Company’s Articles of Association.

SUPERVISORY BOARD – a body whose main task is to supervise the Management Board in running the Company’s business operations. According to the Articles of Association, the Supervisory Board is made up of five members, one of whom is the representative of employees. Members of the Supervisory Board receive remuneration in accordance with the Decision on Remuneration of Members of the Supervisory Board and the Management Board. In 2022, the Supervisory Board held seven regular meetings and three ad hoc meetings (digital decision-making, without meetings being held). The Audit Committee held four meetings in 2022. It presents its conclusions to the Supervisory Board orally, within regular meetings.

COMPANY MANAGEMENT – manages the Company’s business activities. Its competence and role are regulated by the Companies Act, the Company’s Articles of Association and other internal rules and regulations. No changes occurred within the Company’s Management Board in 2022. The Company applies the Corporate Governance Code of Zagrebačka burza d.d. (Zagreb Stock Exchange) and the Corporate Code of Governance of Companies in which the Republic of Croatia has Shares or Interests, and fulfils all obligations arising therefrom.

5.5. Significant changes during the reporting period

Following a public tender, and pursuant to the relevant decision of the Government of the Republic of Croatia, in 2022 the Ministry of the Sea, Transport and Infrastructure and Croatia Airlines entered into a contract on the provision of scheduled air transport services in the period from 4 July 2022 to 28 March 2026 on the routes DBV-ZAG-DBV, SPU-ZAG-SPU, ZAG-ZAD-PUY-ZAD-ZAG, ZAG-BWK-ZAG, OSI-DBV-OSI and OSI-SPUOSI, for the purpose of maintaining the traffic connection between the regions and boosting the economic development of the Republic of Croatia.

The main strategic initiative set out in the Croatia Airlines’ Post-COVID Strategy is replacement of the existing fleet with newer and more cost-effective aircraft, via operating lease. The decision about starting the fleet renewal process was made in early October 2022, when Croatia Airlines opted for A220 type aircraft, with the capacity of 149 (A220-300) and 127 seats (A220-100), to be delivered in the period from 2024 to 2026.

In November 2022 the Government of the Republic of Croatia, the Company’s owner, granted it funds worth HRK 94 million in the form of a shareholder loan, and a capital injection of HRK 296 million in December, in line with the Programme for the Granting of State Aid to the Maritime, Transport, Transport Infrastructure and Related Activities Sector in the Current COVID-19 Pandemic.

5.6. Croatia Airlines as a brand

The Company branding started parallel with its founding, almost 34 years ago, with the development of its corporate visual identity being one of the most important components of the process. Croatia Airlines’ visual identity undeniably contributes to its being recognised as a Croatian brand. Its corporate design aims to project its image of a highly reputable airline not only in Croatia but throughout the world, while at the same time reflecting its safety, reliability and technical precision. The image of Croatia Airlines is not only a visual expression of the Company’s culture; It has become a part of the national identity. The ‘Croatia’ logo on its aircraft is exceptionally important, as it promotes the country throughout Europe.

In cooperation with the Zagreb Tourist Board, from 1 December 2021 to 30 April 2022 Croatia Airlines offered its passengers meals inspired by Zagreb, titled the Zagreb Snack. It also promoted the country’s capital through leaflets and films featured on flights, and heart-shaped decorations inside its aircraft.

Furthermore, in cooperation with the Tourist Board of Osijek-Baranja County and the Croatian Tourist Board, in the period from 1 August to 30 November 2022 Croatia Airlines promoted Slavonia by treating its passengers to the delicious Slavonian Snack.

Owing to the cooperation with the Zagreb Tourist Board, passengers flying Croatia Airlines in the period from 1 December to 31 March 2023 could revel in the Zagreb Snack again.

The Company’s inflight magazine Croatia has a great role in its visual corporate identity and greatly promotes the country. It places emphasis on its stunning nature, historical values and cultural events. In cooperation with the Croatian Tourist Board and other tourist boards, the Company publishes advertisements and articles in the magazine. Films promoting various Croatian destinations are shown on Airbus flights. Croatia Airlines supports sports in Croatia and was the official carrier of the Croatian Olympic Committee and the Croatian Football Federation also in 2022, thus promoting the country and contributing to its visibility worldwide.

By extending the agreement with the Croatian Football Federation until the end of August 2024, it reaffirmed its successful cooperation and bond with the national team, which it flew to the FIFA World Cup in Qatar, and back to Croatia.

The Company contributes to the development of Croatia’s tourism also with its inflight magazine Croatia, which has a great role in its visual corporate identity and greatly promotes the country.

Facebook - 160,315 followers

Twitter – 5,370 followers

Instagram – 25,673 followers

LinkedIn – 19,874 followers

YouTube – 1,080 subscribers

5.7. Fleet and capacities

In 2022, Croatia Airlines operated a fleet of 12 aircraft: seven Airbus aircraft – one A320 and five A319 (one under an operating lease), and six Q400, all under an operating lease. In the final quarter of 2022, the Company agreed upon a dry lease of an Airbus A320, as a spare aircraft that would be used as needed (in the event of traffic disruptions, due to technical problems arising from the aged fleet) and charged by applying the power by the hour principle.

Our fleet comprises the following aircraft: Airbus A320-200, Airbus A319-100 and Dash8 – Q400.

*Four aircraft have 144, and one has 150 seats

5.8. Key services and activitiesi

As the national flag carrier, Croatia Airlines recognises its social responsibility to ensure optimum connection of the Republic of Croatia with the rest of the world, with an emphasis on contributing to the development of the country’s tourism. It has been continually adapting to the needs of the tourism industry and development, and planning its network of direct flights from both capital Zagreb and destinations on the Adriatic coast accordingly. It also provides passengers with good connections to their final destinations in cooperation with its airline partners, as well as those offering other means of transport.

In thirty-four years of existence and provision of transport services, Croatia Airlines has been connecting Croatian cities with major European metropolises, and in cooperation with its airline partners – with the entire world. As a member of Star Alliance, the world’s largest airline association, it provides its passengers access to the global network of flights coupled with numerous benefits.

5.9. Countries/markets served

In 2022, within Croatia Airlines’ network of flights Zagreb, Split, Dubrovnik, Osijek, Pula and Rijeka airports were directly connected to 22 international destinations, and Croatia to 17 European countries. Our destinations are: Amsterdam, Athens, Vienna, Berlin, Brussels, Bucharest, Copenhagen, Dublin, Düsseldorf, Frankfurt, London Heathrow and Gatwick, Lyon, Milan, Munich, Paris, Prague, Rome, Sarajevo, Skopje, Stockholm, and Zurich.

Within Croatia, the Company’s aircraft connected Zagreb with Dubrovnik, Split, Zadar and Pula, and during the tourist season with Osijek and Bol on the island of Brač. In 2022, we operated 15,246 revenue flights in scheduled traffic and transported 1,453,224 passengers, with the capacity of 2,461,561 seats being offered, or 48.4% more compared to 2021. In cooperation with other airlines, we provide a good connection to the U.S., Canadian and other distant markets.

5.10. Destinations/airports/routes

Charter flights

Croatia Airlines also offers charter flights, that is, a possibility of organising individual or series of flights for any company or organisation requiring a personalised, reliable and commercially optimal air transport service.

https://www.croatiaairlines.com/hr/ostale-usluge/charter-prijevoz

Goods and mail transport

Cargo transport is also a part of Croatia Airlines’ services. Whether on its own and/or in cooperation with other airlines, the Company transports fragile goods, large shipments, animals or easily perishable goods, such as fresh fish, daily press, flowers, medicines, etc.

https://www.croatiaairlines.com/hr/ostale-usluge/cargo-prijevoz

Supervision services at Croatian airports

Croatia Airlines also offers supervision services, intended primarily for airlines that have no representatives in Croatia and for the companies that are unable to cover all of their traffic demands with the existing personnel. These services are provided at Dubrovnik, Split and Zagreb airports, and comprise the supervision of the handling agents’ work, support in the event of traffic irregularities, and representation of airlines at destination airports. Additional information is available at: https://www.croatiaairlines.com/hr/Dodatne-usluge/Zemaljske-usluge/Usluge-supervizije

Aircraft maintenance services

Croatia Airlines’ Technical Centre offers various services in the field of base and line maintenance, engineering services, and technical and logistics support for other companies. To date, it has performed several hundreds of major works on its own fleet and that of other companies. All information on maintenance services is available on the Company’s webpage: https://www.croatiaairlines.com/services/technical-services

Commercial training

Our training courses are based on IATA’s standard programmes, and are held at the Training Centre by Croatia Airlines’ highly experienced instructors. Since 1993 the Company has been organising a wide range of training courses needed by travel and commodity agencies for the acquisition of the IATA licence, training courses for the employees of airports, freight forwarders and airlines.

The Company’s Flight Operations Training Centre offers courses for the flight, cabin and ground operations personnel. All training courses are based on certified programmes harmonised with EASA regulations and approved by the Croatian Civil Aviation Agency.

Croatia Airlines’ Technical Training Centre is a certified organisation for the training of aircraft and technical personnel, offering a wide range of training courses for certain types of aircraft, and specialist training courses for aviation engineers and technicians. Aircraft type training is provided in accordance with the EASA Part 66/ Part 147 standard, and is intended for the holders of Part 66 licence for the maintenance of A, B1, B2 or C category aircraft and for the engineers https://www.croatiaairlines.com/hr/ostale-usluge/skolovanja

5.12. Information on employees

Average employee age: 44 years

Average employment time: 17 years

94% of employees employed on an indefinite contract basis 11 employees outside CA performing work for CA

Employees in the Republic of Croatia: 880; 97%

Employees abroad: 29; 3 %

All of our employees have equal development and advancement opportunities, regardless of their parental status. A total of 43 employees were on parental leave in 2022. Of this number, 29 employees returned to work after a year, while the rest of them opted for extended leave. All employees who returned from parental leave continued working for the Company.

Based on the data shown below, the return to work rate was 67.44%.

Supplier structure

Domestic suppliers: 39%

Foreign suppliers: 61%

With a view to providing top-quality services in line with its Business Plan, Croatia Airlines uses a complex supply chain adapted to the specific requirements of air traffic. In terms of fields of supply, the supply chain is managed through larger categories comprising the supply of: goods and services, aviation fuel, ground services, technical equipment, etc.

During 2022, Croatia Airlines conducted business with a total of 1,611 suppliers, of which 985 (61%) were foreign ones. As the greatest turnover is realised in foreign markets, of the total turnover of HRK 1,560 million, HRK 912 million falls off on foreign suppliers. In terms of regions, in 2022 the highest turnover was realised in dealings with suppliers from Europe. The share of domestic suppliers in the total number of suppliers is approximately 39%. As for the structure of turnover, when it comes to domestic suppliers the highest turnover was generated in operations with airports and in the fuel procurement segment. The biggest share of international transactions is traditionally realised through cooperation with suppliers from Germany, both in terms of total transaction volumes and the number of suppliers. When it comes to the type of service in international traffic, the highest turnover was generated from fleet maintenance services, aircraft block time and airport services, operating leases and fuel procurement.

Suplier countries according to turnover generated

Jet fuel (petroleum-based fuel) suppliers

As the prices of jet fuel and oil reached record highs given the new market conditions and limited quantities available at certain European airports, the year of 2022 was particularly challenging for Croatia Airlines. Despite all, the Company managed to ensure smooth operations by closely cooperating with its supplier in the Republic of Croatia and suppliers at international airports. It retained the top-level aircraft fuelling service and high fuel quality, and regularly conducted internal supervision of suppliers and quality inspections within its membership in IFQP (IATA FUEL QUALITY POOL).

Europe’s energy transition and requirements imposed on European aircraft operators are the biggest challenge ahead of Croatia Airlines.

The Company continued to actively participate in the activities of working groups defining the European Fit for 55 legislative package and amendments to the EU ETS regulations aimed at ensuring sustainable operations of airlines. It also started talks with potential suppliers of sustainable aviation fuel (SAF) at European airports.

Ground service providers

Ground services include aircraft handling services (passengers, luggage, goods and mail), air traffic control services, and passenger accommodation services.

They ensure safe and regular provision of passenger and cargo transport through airports, using airport infrastructure, handling agent services and passenger hotel accommodation services in the event of traffic disturbances.

A specificity of flight operations in the winter period is the de-icing and anti-icing service within the DAQCP (DE-ICING/ANTI-ICING QUALITY CONTROL POOL).

All handling agents of ground service providers are verified and approved by civil aviation authorities and licensing bodies competent to issue service provision licences.

All ground service providers at Croatia Airlines’ regular destinations undergo company quality control. Those that are members of IATA, an umbrella association of airline companies, have been accredited IATA’s Safety Audit for Ground Operations (ISAGO) certification, which guarantees that safety standards are met. In 2022, these services were provided by 40 domestic and more than 170 foreign suppliers at regular destination airports, and more than 90 suppliers with the status of an occasional provider of services related to seasonal and charter transport.

Aircraft catering service suppliers

Catering service suppliers include catering companies at airports, suppliers of beverages, newspapers, expendable material and dishes for aircraft.

All of them are obliged to act in accordance with the provisions of the Food Act of the Republic of Croatia and have the HACCP standard implemented, which is subject to control within the Company’s quality assurance system.

The business class service encompasses a wide selection of beverages and pre-packaged meals, while economy-class passengers are offered bottled water and a small, pre-packaged snack. Ever since the beginning of the pandemic, we have been distributing sanitising wipes to all our passengers upon entering the aircraft. In 2022, we cooperated with 35 local and 14 foreign goods and service suppliers.

Aircraft parts and maintenance service suppliers

Since Croatia Airlines maintains both its own aircraft and that of other carriers, by adhering to the same international and manufacturer standards, the supply chain includes the procurement of aircraft parts, material, tools and equipment, and the procurement of part, tool and equipment maintenance services, with the aim of ensuring the continuing airworthiness of its aircraft and the material basis for the maintenance of other companies’ aircraft. Procurement takes place in the free market, and is facilitated by qualified aviation suppliers approved by the buyer through quality assurance mechanisms (at Croatia Airlines this is a list of approved suppliers which is an integral part of the CAME/MOE manuals).

Due to the specific nature of procurement of aircraft parts and material governed by international trade conventions and other regulations, including aviation regulations, this procedure is exempt from the provisions of the Procurement Ordinance.

Cargo and customs clearance agents

Freight forwarders and cargo agents provide the transportation and customs clearance services and usually include 39 domestic and 35 international agents for all cargo and mail transported by Croatia Airlines.

5.14. Membership in professional associations and organisations

Croatia Airlines is a member of professional associations, financial organisations, and economic and business organisations in the activities of which it participates upon paying regular membership fees. Croatia Airlines’ membership and participation in the work of the industry’s umbrella associations, among which IATA and Star Alliance should be singled out, are of utmost importance for the Company’s operations. IATA (International Air Transport Association) is a global association of airlines whose business standards are a basis for the operations of all carriers offering scheduled flights in international air transport of passengers and cargo. Croatia Airlines’ membership in Star Alliance is exceptionally important from the commercial and strategic point of view. Owing to its membership in the world’s largest airline association, Croatia Airlines maintains a strong competitive position in the market and the position of the leading air traffic service provider not only in the Croatian market, but in the entire region.

Since 2017, Croatia Airlines has been a member of the European Regions Airline Association (ERA), a non-profit association whose main objective is to improve the conditions of business operations in the European airline sector, covering through membership the entire aviation industry with 50 airlines and 140 air service providers, including aircraft and engine manufacturers, airports, service providers and suppliers from all over Europe. Membership in this association additionally boosts Croatia Airlines’ international image and offers it excellent opportunities to respond better to the modern business challenges. Jasmin Bajić, Croatia Airlines President and CEO, was in 2018 elected member to the governing body of this international association.

AIRLINE ASSOCIATIONS

IATA (INTERNATIONAL AIR TRANSPORT ASSOCIATION)

Star Alliance

ERA (EUROPEAN REGIONS AIRLINE ASSOCIATION)

European Aviation Maintenance

PASRA (PASSENGER AIRLINE SALES REPRESENTATIVES ASSOCIATION)

OTHER ASSOCIATIONS

Croatian Chamber of Economy

Croatian Employers’ Association

Croatian Association of Corporate Treasurers

Croatian Public Relations Association

Croatian IT Association

1st flight in domestic traffic (Zagreb-Split)

Croatia Airlines is awarded JAR 145 certificate in line with the highest European standards

1st flight in international traffic (Zagreb-Frankfurt)

Croatia Airlines joins the International Air Transport Association (IATA) Acquisition of 3 Boeing 737

Opening of the first foreign branch office in Frankfurt

- Among top 100 Croatian websites and top 10 websites in the Tourism and Travels category (Vidi magazine)

- 19th most successful airline in the world (Airline Business magazine)

Regional membership in the global association Star Alliance

Croatia Airlines is awarded JAR OPS 1 AOC and ISO 9001:2000 certificates

1st award for the tourism film in the Tour Region Film category (Tourfilm Festival)

1993 -1995

Fleet expansion (3 ATR-42 and 2 Boeing 737)

Fleet modernisation and expansion (replacement of Boeing aircraft with Airbus aircraft)

- New hangar

- Replacement of the ATR42 fleet with Dash8-Q400 aircraft in the period from 2008 to 2010

2006 The highest rated regional member of Star Alliance/The best airline in South-East Europe in 2006 (Finance Central Europe)

2007 Amadeus e-Travel Airline Conference 2007 Award/Superbrands award

2008 Web 100 award in the E-innovation category (Vidi magazine)/Superbrands award

Opening of the 3 at Zagreb International Airport

White Flag for contribution to the protection and preservation of water cleanliness and for environmental awareness (GUWWA) pandemic (significantly reduced block time)

2021

Continuation of the worst crisis in the history of civil aviation, caused by the coronavirus pandemic /Post-COVID Strategy defined aircraft, which was followed by the signing of the purchase contract

- Fully-fledged membership in Star Alliance

- Telephone ticket sales

- Renewal of IOSA certificate

A 25

- Rebrand 100TM Award for aircraft redesign (Rebrand 100TM, Providence, USA)

- Zlatna spirala (Golden Spire)GRAND PRIX for the best company calendar (Slobodna Dalmacija)

2010

- Superbrands award - Tesla Silver Egg Award

- Award in the web Top100 category for the best mobile web (Vidi magazine)

- IATA certificate

2011

- Best Buy Award certificate according to a GfK research

- Thank-you note for contribution in organising the visits of Pope Benedict XVI to Croatia

2012

- The 4th best airline in Eastern Europe (Skytrax)/Superbrands award

2014

Among the world’s safest airlines (AirlineRatings.com)

Expansion of the destinations network (12 new routes)

- The best airline in the world by the criteria of helping passengers realise their rights; overall ranking: 8th (Air Help)

- The World Airline Awards, the Oscars of the aviation industry: the 4th best airline in Eastern Europe.

- Company’s 30th anniversary

- 40.2 million passengers and over 614,000 flights

In 2020 and 2021, the airline industry was faced with the worst crisis ever, resulting from the global coronavirus pandemic. Although there had already been crises leading to a fall of air traffic, a recovery would soon follow. The 2022 business results testify to the resilience of the airline industry. After facing the greatest shock ever, its recovery is underway and is seen to continue in 2023, as traffic operations are returning to normal following the loosening of pandemic-related restrictions. As of mid-2022, travel restrictions were gradually lifted throughout the world, and more routes were reintroduced. Despite growing costs, a shortage of labour force, strikes, operational disruptions in many key hubs, and growing economic uncertainties, airlines managed to reduce their losses in 2022 compared to the preceding year. However, IATA does not expect air traffic figures to reach the pre-pandemic levels before 2024. Having an important role in the traffic infrastructure of the Republic of Croatia, Croatia Airlines is a leader in the domestic aviation market with a share of some 18% a year, while in the winter season it increases to some 43%. The Company’s role in ensuring the country’s traffic connectivity became even more pronounced during the COVID-19 pandemic crisis in 2020 and 2021, especially in the winter season, when the majority of foreign airlines withdrew from the market or significantly reduced the number of flights.

A proposal for Croatia Airlines’ Post-COVID Strategy, drawn up in mid-2021 jointly with the Boston Consulting Group (BCG), was adopted in the Company’s Supervisory Board session held in August 2021. In 2022, the Company was dedicated to implementing the defined strategic initiatives, and these activities should last for three years and ensure long-term sustainable operations. Along with increasing its efficiency and competitiveness by transforming the current operating models and methods, ahead of the Company are key operational and structural challenges, including fleet renewal and optimisation of its flights network throughout the year. The fleet renewal as of 2024 represents a new development cycle for the Company, as it aims to operate one type of aircraft only, that is, Airbus A220. Taking into account the trends in the highly competitive Croatian airline market, fuel and CO2 emission prices, as well as the EU green policy objectives, there is no alternative to the defined strategic initiatives, and their implementation will enable the Company to seize any opportunities it will come across in the following two years, when air traffic is expected to recover. The key strategic goals in the upcoming period include profitability, responsibility to shareholders, capital increase, fleet renewal and optimisation, and entering into a Public Service Obligation (PSO) contract for the 2022-2026 period. In order to achieve the above stated strategic goals, the Company will implement, or has already implemented, the following measures outlined in its Post-COVID Strategy:

- Fleet structure optimisation – after a detailed analysis of the airline market and aircraft offer, Croatia Airlines opted for A220 type aircraft, with the capacity of 149 (A220-300) and 127 seats (A220-100), to be delivered in the period from 2024 to 2026, and reached a decision on starting the fleet renewal process in early October 2022. For now, it intends to replace 12 aircraft, with the possibility to introduce another three in 2027, as envisaged by the Post-COVID Strategy;

- Optimisation and expansion of its destinations network (in 2022, the Company introduced five new international routes from Split Airport: to Amsterdam, Bucharest, Dublin, Milan and Stockholm, and increased the scope of traffic operations in the winter period by introducing the following routes: OSI-MUC, SPU-ZRH, PUY-ZRH);

- Increase in passenger revenues based on the envisaged rise in the number of transported passengers, while at the same time expanding the offer of services (products) and diversifying their prices, and increasing efficiency through further digitalisation of all commercial activities for the purpose of realising revenue potential;

- Increase in non-flight revenues, primarily those from aircraft maintenance services provided to third parties;

- PSO contract for domestic routes for the 2022-2026 period;

- Various cost-cutting initiatives for a number of cost categories. The implementation of the defined Post-COVID Strategy, and continuing with the privatisation process once the prerequisites are met, should reduce risks related to the Company’s ability to continue operating under the going concern principle in the upcoming period.

In line with its mission and vision, it applies the business model of a network operator within the Star Alliance airline association, which emphasises in all of its key business documents the necessity of maintaining a high level of traffic safety, reliability, quality and punctuality.

The Star Alliance membership has enabled Croatia Airlines to be available in the markets where it does not physically operate flights and to increase capacities on the existing routes. Its business model is based on the concept of a strong network carrier that provides scheduled air traffic services. The strategy of network traffic is focused on clearly defining primary, secondary and tertiary routes, that is, domestic and regional routes, while at the same time defining their specifics and optimising flight frequency. Domestic scheduled air traffic, which is of special interest to the Republic of Croatia, has been operated under the European PSO (Public Service Obligation) model since 2007. Following a public tender, and pursuant to the relevant decision of the Government of the Republic of Croatia, in 2022 the Ministry of the Sea, Transport and Infrastructure and Croatia Airlines entered into a contract on the provision of domestic scheduled air transport services in the period from 4 July 2022 to 28 March 2026.

Mission

Our mission is to generate profit by providing air traffic services. Our priority is to provide our customers with optimum connections between the Republic of Croatia and the world via our own flights and those of our partners, and to contribute to the development of tourism in the Republic of Croatia.

Vision

CROATIA AIRLINES aims to be the first choice of every passenger travelling from or to Croatia.

Croatia Airlines’ business model

Scheduled traffic

- Domestic traffic - under PSO* rules

- International traffic - network carrier’s profitable growth strategy

*Public Service Obligation

Productivity growth

- Aircraft, labour and fuel

Social responsibility and environmental protection

- Attitude to passengers, employees and environment komercijalne suradnje

- With Star Alliance and non-Star Alliance members

Fleet modernisation

Optimisation of complementary development strategies

- Operating, financial and human resource strategies

Safety and quality

6.1. Operational risks and opportunities

Digitalisation of business processes and commercial activities

Efficient risk management is of exceptional importance for the sustainability of business operations. Taking into account the industry’s specific requirements, Croatia Airlines uses, as a rule, the COSO ERM (Committee of Sponsoring Organizations of the Treadway Commission – Enterprise Risk Management) framework and the ISO 9001 risk management standard as a basis for defining its risk management policy. Risk management across all levels of corporate governance requires application of the same methods and processes, and transformation into a formal and structured risk management.

We pay great attention to risk assessment, verification and management to ensure efficient and timely decision-making, business planning and corporate governance.

Most risks are managed within regular corporate governance processes. All processes and related activities undergo internal quality audits once a year, with external quality audits also being performed at regular intervals. These processes are checked for compliance with the existing regulations and standards under which Croatia Airlines is certified, as well as with its internal regulations and procedures. The findings and their status in terms of rectifying potential non-compliance cases are reported once a year to the Management Board, through a management review. In line with the internal audit strategic and annual plans, certain processes and organisational units undergo internal controls. The findings are reported directly to Croatia Airlines’ Management Board, which gives recommendations aimed at improvements. When developing business plans, additional sensitivity analyses are carried out concerning possible changes in some of the high-risk categories of the Company’s business operations so as to prepare alternative scenarios. All of the above makes part of the defined goals and guidelines, which the organisational units are required to implement and harmonise through their risk management procedures, with monitoring being facilitated through internal control systems, the Company’s quality assurance system and internal audit. In this way, risk assessment is carried out within the process of defining the strategic and operational goals to provide a comprehensive overview of risks and possibilities.

Responsibility for the risk management and the supervision of effectiveness of the risk management system lies with Croatia Airlines’ Management Board. Its members and sector managers analyse reports and key performance indicators, and take concrete steps in accordance with the level of non-compliance with the set goals.

The Risk Management Policy of Croatia Airlines d.d. is a key document to support the risk management process. A register of strategic risks has also been set up, listing all major strategic risks of the Company and enabling their constant monitoring. An overview of major risks for Croatia Airlines’ operations is published in its management’s business reports covering a certain period, as well as in its annual business reports. The register of strategic risks is being updated as necessary, and once a year at a minimum. Initial risk assessment, risk response and evaluation, along with existing controls/additional measures, are outlined at workshops in cooperation with responsible risk managers.

Consistent application of an integrated approach to risk management enables the Company to understand the true nature of individual risks, and increases its capacity to take relevant measures in a timely manner. Managing all the said risks in a systematic manner increases the Company’s level of organisational efficiency, with the aim of boosting its competitiveness. Raising further awareness and the adoption of risk culture at all levels of organisation is one of the key factors for the sustainability of the Company’s future business operations.

Main risks in business operations

External risks

Economic surroundings (Croatia and destinations)

Transportation charges and flight permits

Competition

Star Alliance and partnerships

Suppliers

Fuel, currencies, interest rates...

Internal risks

Company strategy

Human resources

Capacity management

Traffic disturbances

Sales and revenue management

Liquidity risk

Fuel prices, emission allowance prices, a risk posed by the war in Ukraine, a potential fall in demand for air traffic services, and consequently liquidity risks, were the main risks affecting airlines’ business operations in 2022. In addition to these long-term risks, a shortage of labour force in all air traffic segments was a significant short-term risk faced by the European airline industry. All major risks the Company faced in its operations during 2022 are elaborated in detail in the Business Report of Croatia Airlines d.d. and Croatia Airlines Group for 2022 posted on the Company’s website.

Every risk is also an opportunity – the Company identifies areas in which its capacities and potentials can be strengthened, and in which changes can be introduced into its business operations to make room for improvements and contribute to their sustainability.

Good cooperation with our stakeholders is a key to successful and safe business operations. This was particularly evident in the COVID-related crisis, when we jointly tried to find optimum solutions to ensure sustainable operations, with contributions from each stakeholder involved in the Company’s business operations. We are guided by the principles of responsibility, ethical conduct, transparency and best business practices in relations with all of our stakeholders. Given the nature of its activity, Croatia Airlines cooperates with a large number of stakeholders, with whom it engages in an open dialogue and exchanges information through well-established communication channels. As a result, we have been able to identify the key topics and interests (material aspects of the Company’s business operations) that make part of the Company’s analyses and ultimately of this Non-financial Statement.

Croatia Airlines has identified and classified its stakeholders into the following three categories according to their importance and impact on its business operations: key stakeholders, stakeholders with significant influence, and other stakeholders. Croatia Airlines has been cooperating with all of its business partners (domestic and foreign) by adhering to the principles of due care and diligence, and taking into account the interests of the owners, i.e. shareholders. The Company strives to maintain business cooperation with all of its partners in good faith and to mutual satisfaction. It takes particular care to adhere to the specific international aviation regulations and recommendations, and to the national legal and professional regulations in view of all of its operations.

Croatia Airlines communicates with its stakeholders with the aim to attain its desired market position, and to systematically inform the general public, and existing and potential users about the Company, its services and news on its business operations. The most important goal is to build and cultivate a distinctive and positive image of Croatia Airlines in a wider public.

Key stakeholders

- Passengers

- Cargo, aircraft maintenance and training service buyers

- Employees

Stakeholders with significant influence

- Shareholders and investors

- Suppliers

- Labour unions

- Government bodies

- Academic/business/professional community

- Certification bodies and companies

Croatia Airlines management

Other stakeholders

- Local community

- Financial service providers

- Airline associations

- Media/public

National and international laws and regulations

Communication with stakeholders

Identification and prioritisation of main topics

- Ensuring sustainable business operations

- Customer satisfaction, product responsibility, marketing

- Economic impact and contribution to economy (tourism)

- Labour relations, decent work, freedom of association and collective bargaining

- Environmental protection, emissions and energy, waste management

- Local community development

Stakeholders Communication Channel

Local community

- Official website

- Call centre

- Fairs and congresses

- Miles&More loyalty programme

- Social media

- Marketing campaigns

- Promotional material

- Inflight magazine CROATIA

- Inflight entertainment

- Service quality questionnaires

Service buyers (cargo, technical, training)

- Business correspondence

- Telephone calls

- Face-to-face meetings

- Business reports

- External user training

- Eventsi

Employees

- Intranet

- e-mail

- Internet platforms such as Teams, Zoom, etc.

- e-news

- Internal meetings

- Works Council

- Workers’ meetings

- Business reports

- Education and training

- Management Board’s memos

Shareholders and investors

- Regular and ad-hoc meetings

- Written communication (mail, e-mail)

- Business reports

- Face-to-face meetings

- Official website

- Official website of Stock Exchange and Croatian Financial Services Supervisory Agency (HANFA)

- Reports on carried out supervision (controls, audits)

Suppliers

- Business correspondence (mail, e-mail, telephone, Internet platforms such as Teams, Zoom, etc.)

- Face-to-face meetings

- Business reports

- Fairs

- Website

Labour unions

- Face-to-face meetings

- Written communication (E-mail, intranet, mail)

Government bodies

- Written communication (mail, e-mail)

- Internet platforms such as Teams, Zoom, etc.

- Business reports

- Official website

- Official website of Stock Exchange and Croatian Financial Services Supervisory Agency (HANFA)

- Reports on carried out supervision (controls, audits)

- Memberships

Local community

- Donations and sponsorships

- Official website

- Direct contact, telephone, e-mail, mail

- Training and internships

- Organised hangar and aircraft tours

Other associations/institutions (financial institutions, airline associations, media/public, academic/business/ professional community, certification bodies and companies)

- Business reports

- Media releases

- Official website

- Official website of Stock Exchange and Croatian Financial Services Supervisory Agency (HANFA)

- Business correspondence (mail, e-mail, telephone, Internet platforms such as Teams, Zoom, etc.)

- Conferences, business meetings

- Promotional campaigns, reports, interviews

- Social media

- Incentive travels

- Scientific and technical papers

- Memberships

- Face-to-face meetings

- Audits

Key Issues And Topics

- Ensuring sustainable business operations

- System safety and quality

- Economic impact and contribution to tourism development

- User satisfaction, product responsibility, marketing

- Environmental protection, emissions and energy, waste management

- Ensuring sustainable business operations

- System safety and quality

- Economic impact and contribution to tourism development

- Customer satisfaction, product responsibility, marketing

- Environmental protection, emissions and energy, waste management

- Local community development

- Ensuring sustainable business operations

- System safety and quality

- Economic impact and contribution to tourism development

- Customer satisfaction, product responsibility, marketing

- Labour relations, decent work, freedom of association and collective bargaining

- Environmental protection, emissions and energy, waste management

- Local community development

- Ensuring sustainable business operations

- System safety and quality

- Economic impact and contribution to tourism development

- Customer satisfaction, product responsibility, marketing

- Labour relations, decent work, freedom of association and collective bargaining

- Environmental protection, emissions and energy, waste management

- Local community development

- Ensuring sustainable business operations

- System safety and quality

- Economic impact and contribution to tourism development

- Customer satisfaction, product responsibility, marketing

- Environmental protection, emissions and energy, waste management - Local community development

- Ensuring sustainable business operations

- System safety and quality

- Economic impact and contribution to tourism development

- Customer satisfaction, product responsibility, marketing

- Labour relations, decent work, freedom of association and collective bargaining

- Environmental protection, emissions and energy, waste management

- Ensuring sustainable business operations

- System safety and quality

- Economic impact and contribution to tourism development

- Customer satisfaction, product responsibility, marketing

- Labour relations, decent work, freedom of association and collective bargaining

- Environmental protection, emissions and energy, waste management

- Local community development

- System safety and quality

- Economic impact and contribution to tourism development

- Environmental protection, emissions and energy, waste management

- Local community development

- Ensuring sustainable business operations

- System safety and quality

- Economic impact and contribution to tourism development

- Customer satisfaction, product responsibility, marketing

- Labour relations, decent work, freedom of association and collective bargaining

- Environmental protection, emissions and energy, waste management

- Local community development

CROATIA inflight magazine

As one way of communicating with our stakeholders, we have for many years been publishing our inflight magazine CROATIA four times a year, with the aim to promote the Croatian culture, heritage and natural attractions, and to support its tourism. Being an integral part of the Company’s visual identity, CROATIA is successfully reflecting the country’s national symbols, thus contributing to the authentic image of Croatia in the world. Due to the extraordinary situation, the summer edition of our inflight magazine was for the first time issued in a digital form in 2020. The measures we implemented on-board to protect our passengers and staff were published in the magazine and all other communication channels throughout the crisis year of 2021.

Croatia Airlines’ social media

We regularly communicate with our service users through social media, where we publish various information such as crew announcements related to flights, announcements about aircraft maintenance, releases in cooperation with the Croatian Tourist Board and Star Alliance, releases related to the Obzor putovanja travel agency, flight schedule, promotional offers, inflight magazine, information about the transport of Croatian athletes, travels during the coronavirus crisis, and much more. On 31 December 2022, we had a total of 160,315 Facebook fans. Shown below is the number of our followers in other social media:

Facebook - 160,315 followers

Twitter – 5,370 followers

Instagram – 25,673 followers

LinkedIn – 19,874 followers

YouTube – 1,080 subscribers

Each year the Croatian Tourist Board presents the award titled Man - the Key to Success, Employee of the Year. Its aim is to boost the quality of services and encourage cordiality of employees in tourism and other related sectors, which directly increases the level of customer satisfaction, spreads the positive image of the Croatian tourism and the overall perception of Croatia as a desirable destination. We are proud to present Azra Pavlaković, an air traffic controller with our Operations and Hub Centre and the recipient of the Employee of the Year award in the category of transport. The award was presented to Azra at the Croatian Tourism Days, the largest gathering of tourism workers in Croatia, which took place from 6 to 8 October 2022 in Šibenik.

“Thank you for your vote of confidence and the Employee of the Year award! It is a great pleasure, privilege and honour to present our Company at this praise-worthy event. And this year it’s truly special as things are finally looking up, there is a lot of optimism about the fresh start for our Company, especially given a notable rise in the number of passengers in these challenging times, which makes it a perfect introduction to a better era, with new aircraft only adding to it.

My colleagues at Croatia Airlines’ Operations Centre are going beyond their limits to ensure safe and cost-effective rotations in line with the regulations. Whenever there is a disruption they invest enormous efforts to consolidate the traffic in the best possible way by reconciling the regulations, cost-effectiveness, defined rotations, crews’ working hours, technical condition of our aircraft, delays caused by Air Traffic Control service providers, and so on.

I am truly proud of this award, and see it as both my personal success and the success of all my hardworking colleagues from the Operations Centre – a small but exceptionally harmonious team.

I have put my heart and soul into this work, and I’m looking forward to every new success!”, said Azra.

6.3. Material aspects of the Company’s business activities and their effect on sustainable development

In the process of identifying important material aspects, we followed the GRI guidelines and stakeholder requirements and identified material issues, established and verified their importance, and then presented them through a materiality matrix. We have established that material aspects of our business encompass all the segments that might have significant economic, environmental and social impacts, and are to a great extent aligned with our business direction and objectives. The working group responsible for activities related to corporate social responsibility (comprising key figures from each sector to which areas and topics addressed in non-financial statements pertain), reanalysed the aspects that reflect the Company’s significant economic, environmental and social impacts and outlined the topics potentially influencing stakeholders’ assessments and decisions. The importance of material topics and their impact on dealings with stakeholders is communicated through meetings, consultations and opinion polls. The material aspects and the boundaries of certain topics remained unchanged compared to the previous reporting period. We used the existing materiality matrix, but we plan to review it afresh for the next reporting period.

Material aspects

Croatia Airlines’ importance in connecting Croatia with other countries and maintaining year-round connectivity of the regions within the country via scheduled domestic flights is beyond question. Following a public tender, and pursuant to the relevant decision of the Government of the Republic of Croatia, in 2022 the Ministry of the Sea, Transport and Infrastructure and Croatia Airlines entered into a contract on the provision of scheduled domestic air transport services in the period from 4 July 2022 to 28 March 2026. Our Company’s contribution to the country’s economic development is unquestionable – it is reflected in a direct contribution to the development of both its economy and tourism, not to mention that the Company is a significant exporter that ranked among the top domestic exporters for several years preceding the COVID-19 crisis.

We are aware that one’s business success is not measured by financial results alone; activities in the segment of social responsibility and contribution to sustainable development are of equal importance. Independently of the services we provide, we are aware that our business success, as well as our worthy representation of the country, directly depend on the trust and satisfaction of our service users; responsibility to our passengers is, therefore, one of the crucial aspects of our business operations. It is our duty to understand their needs and do our best to meet their expectations. We are, therefore, continuously developing new products and services that will make it even easier for our passengers to organise their travels. Great attention is also devoted to employee satisfaction, since highly motivated and satisfied employees are a key factor for the realisation of our goals. This is why mutual respect, cooperation and teamwork are nurtured. The latest resource management trends are being evaluated and applied. The Company has been actively involved in providing career guidance and training and also in improving efficiency of its employees. We are doing our best to retain our employees by offering them competitive, high-quality working conditions.

Today, major work-related risks occur as a result of the labour market dynamics and its open nature and also because of a lack and outflow of skilled workers. In order to address the said risks, we are constantly making efforts to create a stimulating working environment and cooperate with educational institutions in scientific, educational and technical activities. Such institutions include the Faculty of Transport and Traffic Sciences, Polytechnic of Velika Gorica and the Secondary Aviation School. Our close cooperation with the Faculty of Transport and Traffic Sciences in Zagreb has given us the opportunity to monitor the progress of future Croatian pilots attending the Faculty.

The collective bargaining agreement in place has ensured long-term social peace as an important prerequisite for the Company’s regular and stable business operations in the next several years, and for us to face future challenges more efficiently.

103-3

CROATIA AIRLINE’S SIGNIFICANCE FOR THE REPUBLIC OF CROATIA

Croatia Airlines contributes to the development of Croatia’s tourism and economy on an ongoing basis through sponsorships and donations, and by promoting its destinations, culture, gastronomy, science, and sports

Traffic Connection

b In 2022, the Company directly connected Croatia to 18 countries and 30 destinations.

b Croatia Airlines enables local airports to be open throughout the year and provides all passengers excellent connection via air all year round.

bThe Company contributes to the development of tourism in general, but also of MICE tourism as one of the fastest growing segments over the past few years (Croatian ranks 34th in the world and 19th in Europe by congresses held, with Zagreb, Split, Opatija and Dubrovnik being its most important congress destinations).

COVID-19 PANDEMIC AND REPATRIATION FLIGHTS

bCroatia Airlines continued operating even in the extraordinary circumstances of the COVID-19 pandemic. The national flag carrier thus confirmed its strategic role in Croatia’s infrastructure by contributing to the maintenance of traffic connectivity vital for both the country’s economy and citizens, which was particularly prominent in 2020.

bSince the beginning of the crisis, Croatia Airlines has put itself at disposal of the Government of the Republic of Croatia for the transport of humanitarian aid and the return of Croatian soldiers from Afghanistan, and operated several repatriation flights from various parts of Europe.

Helping The Community

bCroatia Airlines strives to support institutions that need humanitarian aid or organise humanitarian projects.

bIt provides help and direct humanitarian aid by granting transport for patients, children or people in need, and participating in charity actions by donating transport services.

CONTRIBUTION TO CROATIA’S ECONOMY

bBy purchasing goods and services from local suppliers, Croatia Airlines indirectly supports about 3,000 jobs.

PROMOTING CROATIA’S GASTRONOMY, CULTURE, ATTRACTIONS AND DESTINATIONS

bThe Company has been presenting Croatia’ cuisine by offering its passengers meals made from local groceries and based on local recipes.

bThe Company’s inflight magazine has a great role in its visual corporate identity and greatly promotes Croatia as a brand, placing emphasis on its stunning nature, historical values and cultural events.

bFilms promoting various Croatian destinations are shown on Airbus flights..

bCroatia Airlines supports sports in Croatia and is the official carrier of the Croatian Olympic Committee, thus promoting the country and contributing to its visibility.

bIt contributes to the functioning of numerous activities that are important for everyday life of Croatian citizens through regular settlement of taxes, contributions and other levies in line with applicable regulations.

bCroatia Airlines has been among the top Croatian exporters for several years in a row (before the pandemic, 2019: 7th place).

We have been nurturing successful business cooperation with our business partners in good faith and to the satisfaction of all parties. Croatia Airlines is helping the community in which it does business through numerous sponsorships and donations.

In the segment of social responsibility, Croatia Airlines has recognised safety as one of the key aspects in all segments of its business operations. In order to secure a high level of safety, it has been heavily investing into the training of its staff to ensure they have top competencies. It also guarantees first-rate aircraft maintenance in line with the highest global aviation standards. The affirmation of ethical norms, business practices and conduct are amongst the most important corporate goals of Croatia Airlines. The Company’s Anti-corruption Programme is of particular importance for carrying out its business activities in an ethical manner.

Croatia Airlines also pays close attention to the impact of its activities on the environment. It strives to operate as a socially responsible company, taking account of the by-products of its operations and their impact on the environment and community. By applying modern technologies and optimising its operations, it has been reducing the negative impact of aircraft operations on the environment, thus contributing to its preservation and sustainable development, and fulfilling its obligations to future generations. We strive to identify the impacts of our business in a timely manner so that we can manage them adequately and thus contribute to the development of Croatian economy and society, and the protection of natural resources. We believe that responsible corporate governance is fundamental for long-term successful business.

Material Aspects

Social

Safety and security

System quality

User satisfaction

Product responsibility

Training and education

Labour relations and decent work

Marketing communication

Freedom of association and collective

Sustainable development goals

Freedom of association and collective bargaining

Environmental

Legal framework for environmental protection

Emissions and energy

Waste management

Economic

Ensuring sustainable business operations

Economic impact

Contribution to tourism development

Procurement procedure and practice highly important for the stakeholders

Local community development

Ensuring sustainable business operations

Economic impact

Supply process and supply chain sustainability

System quality

User satisfaction

Product responsibility Training and education

Labour relations and decent work

Legal framework for environmental protection

Contribution to tourism development

Marketing communication important for the stakeholders

Waste management

Freedom of association and collective bargaining

Emissions and energy important for the environment highly important for the environment

MATERIAL ASPECTS

Ensuring sustainable business operations

Economic impacts and procurement

Contribution to tourism development

Procurement procedure and practice

Safety and security

System quality

User satisfaction

Product responsibility

Training and education

Labour relations and decent work

Marketing communication

Local community development

Economic category

Social category

Freedom of association and collective bargaining

Environmental category

Emissions and energy

Legal frameworks for environmental protection

Waste management

The Company’s goal is to develop its business operations by making the right and timely decisions, with the ultimate goal of ensuring its sustainable development.

As a for-profit organisation, Croatia Airlines recognises all economic aspects as material, particularly emphasising its contribution to the development of Croatia’s tourism and economy as a whole, and the well-being of an individual. In the light of the market conditions in which the Company operates, we produce a significant impact that is reflected in the economic situation at the local, regional, and national levels. As we operate flights throughout the year, we contribute to the development and traffic connectivity of Croatian regions, especially the ones in the south. Croatia Airlines’ strategic role became even more pronounced during the crisis caused by the COVID-19 pandemic, as it was among the rare companies that continued with its operations in the first couple of months following the outbreak, when the vast majority of other airlines either withdrew from the market or significantly reduced the number of flights. We also put ourselves at disposal of the Government of the Republic of Croatia and thus enabled thousands of Croatian citizens to return home, ensured the transport of humanitarian aid and operated several repatriation flights.

We contribute to the functioning of a number of activities that are important for everyday life of Croatian citizens through regular calculations and payment of taxes, contributions and other levies in line with applicable regulations. Our business activities significantly contribute to Croatian economy, and we were among top Croatian exporters for several years preceding the pandemic. In this way we positively affect employment not only in our industry but in others as well.

A detailed overview of the Company’s financial results was prepared in accordance with the IFRS, the Accounting Act and other applicable legal regulations, as well as the industry rules. It is set out in the Audit Report and the Management’s Business Report for 2022, where the key business changes in the reporting period are also elaborated on.

The Company has been managing its economic impact through annual and medium-term planning, as well as by monitoring the achievement of the anticipated results on a monthly basis and undertaking relevant measures in a timely manner in case some major negative deviations from the plan should take place. The entire Company participates in the annual planning process, as each sector/service delivers their framework plans for the year to come. These are consolidated by the Controlling and Internal Audit Sector, which delivers the final plan to the Management Board and the Supervisory Board for approval.

CROATIA AIRLINES’ ECONOMIC CONTRIBUTION IN 2022

Procurement procedure and practice

During the COVID-19 pandemic, Croatia Airlines’ procurement procedures were focused on preventing the spread of the disease and protecting the health of its passengers and employees. We had been following the recommendations and decisions of the National Civil Protection Headquarters and other Croatian public health and regulatory authorities, as well as of international health (WHO, ECDC) and regulatory (IATA, EASA, ICAO) authorities, and defining the procedures and procurement items accordingly, so as to ensure safe domestic and international traffic operations of Croatia Airlines’ aircraft, and safe internal processes.

The economic aspects of Croatia Airlines affect the economic prospects of its stakeholders at local, regional and national level. An ongoing task related to the procurement of goods and services is finding suppliers that can meet supply requirements in terms of quality, quantity, prices and delivery dates. For this purpose, the Company applies appropriate supplier verification methods prescribed by the law and incorporated in the Flight and Ground Operations Procurement Procedures, the Aircraft Maintenance Procurement Procedures and the Procurement Regulations. All internal procurement procedures incorporate the public procurement principles and recommendations to the highest extent possible.

In compliance with aviation regulations and standards, procurement procedures and Procurement Regulations, Croatia Airlines applies the same principles when selecting procurement procedures with respect to all economic entities – the principle of fair competition and equal treatment, the principle of non-discrimination, the principle of mutual recognition, the principles of proportionality and transparency, the principle of efficiency, and the principle of the free movement of goods, capital and services. The Company’s procurement procedures are decentralised, which means that its organisational units initiate and conduct them on their own with the approval of the Management Board. They take on a number of different forms, depending on the type of procurement. Procurement procedures are conducted and suppliers selected in compliance with the Procurement Regulations and relevant Procurement Procedures, whereby the preparation of a specific procurement procedure, the selection of a supplier, the conclusion and execution of a procurement contract must meet the criteria of timeliness and compliance with specification requirements, all with a view to facilitating efficient and effective procurement, and cost-effective procurement spending. The Company’s Procurement Regulations recommend the application of ‘green and sustainable procurement’ whenever possible given the market circumstances, and in line with the Company’s Environmental Protection and Energy Efficiency Guidelines. When procuring machines and devices that pose increased hazards, and hazardous substances, occupational health and safety measures must be taken account of. In terms of correlation between procurement and environmental protection, each procurement of goods and services is subject to assessment of environmental impact (if any). The Company’s Procurement Regulations recommend applying elements of green public procurement whenever possible. The suppliers of Croatia Airlines have been acquainted with the ISO14001/50001 certificates via official correspondence with all suppliers individually and through the information available on the Company’s website. With these certificates, Croatia Airlines confirms its dedication to environmental protection, energy conservation and sustainable development. At the same time, it calls upon all of its suppliers to contribute to environmental protection and energy efficiency through their own active and preventive measures, and by encouraging their business partners to do the same.

The Company’s Environmental Protection Policy and the official correspondence sent to suppliers are available on its webpage: http://www.croatiaairlines.com/hr/O-nama/Korporativne-vrijednosti/odrzivi-razvoj

The prescribed procurement procedure and its key requirements are integrated into all other procurement sub-procedures at Croatia Airlines.

6.4. EU taxonomy

With the adoption of the European Green Deal in 2019, the European Union (EU) set green investment targets. In order to achieve an energy-neutral economy, it is necessary to encourage private investments into sustainable, i.e. green projects and economic activities. The EU Taxonomy Regulation (EU) 2020/852, establishing a classification system of environmentally sustainable economic activities, was adopted in order to achieve the European climate goals and those of the European Green Deal.

Article 8 of the Regulation (EU) 2020/852, known as the Taxonomy Regulation, requires Croatia d.d. as a public-interest undertaking with non-financial reporting obligations under the Non-financial Reporting Directive to report, for the period from 1 January 2022 until 31 December 2022, on how and to what extent its activities are related to economic activities that are considered environmentally sustainable in accordance with Articles 3 and 9 of the Taxonomy Regulation. For the year of 2021, it was necessary to disclose only the proportion of Taxonomy-non-eligible and Taxonomy-eligible economic activities in the total turnover, capital expenditure and operational expenditure of the Company. As of 2022, undertakings are also required to report the share of Taxonomy-aligned activities. An economic activity is considered Taxonomy-eligible if it is included in the delegated acts of the Taxonomy Regulation, i.e. if applicable technical screening criteria have been established. It is considered Taxonomy-aligned if it meets the abovementioned criteria.

In order to determine eligibility of an economic activity, the Working Group on Non-Financial Reporting carried out a two-level analysis to establish:

- If an economic activity is carried out at the level of Croatia Airlines d.d., and

- If an economic activity is listed in the annexes to the delegated acts of the EU Taxonomy Regulation.

In the reporting year 2022, the economic activities of the airline industry have not yet been included in the officially adopted delegated acts of the Taxonomy Regulation. Therefore, the core activity of Croatia Airlines d.d., air transport of passengers and cargo, is considered a Taxonomy-non-eligible activity.

Since the currently available aviation technology is not adapted for zero or low greenhouse gas emission aircraft and will not be for at least another ten years, its inclusion on the list of Taxonomy-eligible activities is extremely important for attracting investments in ’greener’ business operations and a faster transition towards carbon neutrality.

It is expected that activities related to the aviation industry will make part of the next delegated act, which would lead to an increase in the share of Taxonomy-eligible and aligned activities of Croatia Airlines d.d. in the following periods.

Accounting policies and key performance indicators

Key performance indicators for identified economic activities were calculated and published in accordance with the Delegated Regulation on Disclosures (EU) 2021/2178. Since the airline industry is not yet covered by the delegated acts adopted in accordance with Article 10 paragraph 3 of the Regulation (EU) 2020/852, in the financial year 2022 the share of Taxonomy-eligible economic activities in the total turnover, capital expenditures and operational expenses of the Company was 0%.

Table 1 Proportion of revenues from products or services associated with Taxonomy-aligned economic activities – 2022

Substantial contribution criteria

“Does not significantly harm” criteria

A 41

• Total turnover is defined as revenue from the sale of products and the provision of services in line with the International Accounting Standard (IAS) 1, paragraph 82 (a), as adopted by Commission Regulation (EC) 1126/2008, and is presented in Notes 4, 5 and 6 of the Consolidated and separate financial statements for the year that ended on 31 December 2022, together with the independent auditor report, which make an integral part of the Annual Business Report of Croatia Airlines d.d. and Croatia Airlines Group for 2022.

• In 2022, Croatia Airlines d.d. did not generate income from products or services (including intangible assets) related to Taxonomy-aligned economic activities, which is why the key performance indicator for Taxonomy-eligible activities is 0.

• The accounting policies related to the calculation of income are listed in the annual financial statement, on page 74.

Table 2: Proportion of CapEx from products or services associated with Taxonomy-aligned economic activities – 2022

• Capital investments include increases in tangible and intangible assets during the reporting period (including assets acquired through business combinations), before the revaluation procedure (including revaluations and impairments), depreciation costs and excluding changes in fair value, applying IAS 16, paragraph 73 e) , items (i) and (iii), IAS 38, paragraph 118 (e) item (i), IAS 40, paragraphs 76 a) and b) (for fair value), IAS 40, paragraph 79 d) items (i) and (ii) (cost model), IAS 41, paragraph 50 items b) and e) and IFRS 16, paragraph 53 h), as stated in Annex I of the Commission Delegated Regulation (EU) 2021/2178 on disclosures, in the amount of HRK 34,346,375. Total capital investment CapEx, as described in the Taxonomy Regulation, is presented in Note 12 Intangible assets and Note 13 Property, plant and equipment.

• As there were no Taxonomy-eligible economic activities in 2022, there was consequently no Taxonomy-aligned capital expenditure. This is why the key performance indicator is 0.

• Leases that do not lead to the recognition of right-of-use assets are not accounted for as capital expenditure.

• Accounting policies related to the calculation of capital expenditure are listed in the annual financial statement, on pages 78-80.

Table 3: Proportion of OpEx from products or services associated with Taxonomy-aligned economic activities – 2022

• According to the Taxonomy Regulation, total operating expenses are considered to be the costs of maintaining fixed assets as well as direct research and development costs and short-term lease contracts. For Croatia Airlines d.d., they include engine and parts maintenance costs and costs of consumables in the amount of HRK 140,213,041, published in Note 7 Expenses by nature.

• The activities of Croatia Airlines d.d. were not Taxonomy-eligible in 2022, which is why the key performance indicator is 0 (i.e. operating expenses cannot be associated with Taxonomy-aligned activities).

• Accounting policies related to the calculation of operating expenses are listed in the annual financial statement.

The Company applies International Financial Reporting Standards (IFRS). When calculating key performance indicators for reporting purposes under the Taxonomy Regulation, a detailed analysis of elements that needed to be included in the numerator and denominator was performed in order to avoid errors possibly resulting from different classifications in applicable regulations and accounting standards.

6.5. Safety and advancements as business imperatives

Safety is of primary importance for all segments of Croatia Airlines’ corporate activities. There can be no compromise with safety. In order to achieve a high safety level, the Company invests largely in training the flight, cabin, ground and technical personnel and ensures relevant level of expertise of all other employees. Moreover, it ensures a high level of aircraft maintenance that complies with the highest standards of the global airline industry, adheres to all applicable regulations and standards and continually invests technical resources to ensure that safety criteria are given priority in all business segments.

Quality assurance system

Croatia Airlines has introduced an integrated quality assurance system that meets the requirements of the following EU, international and industry regulations and standards: Air Operations Regulation, EASA Part 145, EASA Part 147, EASA Part CAMO, Aircrew Regulation, Directive 2003/87/EC (EU ETS) and ICAO Annex 16 (CORSIA), ISO 9001, ISO 50001 and ISO 14001. The quality assurance system encompasses all organisational units of Croatia Airlines and their respective processes.

CROATIA AIRLINES’ QUALITY ASSURANCE SYSTEM

QUALITY ASSURANCE FOR NON-OPERATING ACTIVITIES

- Finance and accounting

- Legal affairs, human resource and asset management

- Information Technology management

- Commercial Division

- Network and revenue management

- Controlling and internal audit

FLIGHT OPERATIONS QUALITY ASSURANCE

Air Operations Regulation

ORA.GEN 200 Management System

- Flight operations

- Cabin operations

- Ground operations

- Operations Training Centre

Air Crew Regulation ORA.GEN 200 Management System

Air Operation Regulation CR (EU) 965/2012

ISO 9001, 14001, 50001

TECHNICAL QUALITY MANAGEMENT

Part M.A.712 & Part 145.A.65

- Aircraft maintenance

- Engineering and technical support

- Technical Training Centre Part 147.A.130(b)

Aircraft operators performing commercial air transport operations are certified and supervised in line with the provisions of Commission Regulation (EU) No 965/2012 laying down technical requirements and administrative procedures related to air operations. The Company was for the first time awarded the Air Operator Certificate (AOC) by the Air Transport Directorate of the Ministry of the Sea, Tourism, Transport and Development (today the Croatian Civil Aviation Agency) on 29 April 2003. The Air Operator Certificate (AOC) certifies that the operator has the professional ability and organisation to ensure the safety of operations.

2. Aircrew Regulation CR (EU) 1178/2011

Commission Regulation (EU) No 1178/2011 lays down technical requirements and administrative procedures related to civil aviation aircrew. The Company obtained the approved training organisation certificate HR.ATO.001 for:

• A320/DHC8 licence course

• A320/DHC8 licence renewal course

• TRI (A) - A320/DHC8 Type Rating instructor course

• TRI (A) - A320/DHC8 Type rating renewal instructor course

• A320/DHC8 simulator Type Rating course

• A320/DHC8 simulator Type Rating renewal flight instructor course

• A320/DHC8 flight training – landing.

3. Continuing Airworthiness Management Organization - Part CAMO

In late 2007, Croatia Airlines fulfilled all requirements and was issued with a 9A Part M certificate with the scope of authorisation specified in Subpart G, allowing it to carry out independent controls of its fleet airworthiness. Starting from January 2009, the scope of authorisation was further extended to Subpart I, allowing the Company a fully independent review of airworthiness and verification of the aircraft airworthiness certificates. They can be obtained on the basis of the Continuing Airworthiness Management Organisation Manual, which is fully compliant with EU laws. Upon Croatia’s admission to the EU, the Croatian approval HR.MG.001 became recognised and valid within the European Union. Based on the last amendments to the applicable EU regulations in early 2022, Croatia Airlines’ Part M Subpart G approval changed into a new Part CAMO approval - HR.CAMO.0001.

- Part 145

In 2001, Croatia Airlines obtained an approval of the aircraft maintenance organisation in accordance with JAR 145, the regulations in force at the time of approval; in 2004 it was replaced by EASA Part 145, an approval issued in line with requirements of the European Aviation Safety Agency (EASA). On behalf of EASA, the LBA (Luftfahrt Bundesamt) experts monitored the compliance with EASA Part 145 requirements through annual audits. At the same time, Croatia Airlines insisted on holding the equivalent Part 145 certificate, which was issued by the Air Transport Directorate of the Ministry of the Sea, Tourism, Transport and Development. This certificate is today renewed by the Croatian Civil Aviation Agency (CCAA). Upon Croatia’s accession to the EU, the EASA Part 145 approval for non-EU members ceased to be valid and the Croatian approval HR.145.001 became recognised and valid within the European Union.

In 2005, Croatia Airlines obtained an approval of the aircraft maintenance training organisation in accordance with JAR 147, the regulations in force at the time of approval; in 2007 it was replaced by HR Part 147, an approval issued in line with the then valid regulations 9A-Part-147 for all aircraft types within its fleet.

As of 2012, Croatia Airlines holds an approval for basic training and several aircraft types from the aircraft maintenance training organisation. Upon Croatia’s admission to the EU, the Croatian approval HR.147.001 became recognised and valid within the European Union.

4. IOSA Operator

The International Air Transport Association (IATA) set up a standardised, globally-recognised program for assessing the safety of flight operations of all members of the Association. In December 2003, the first IATA Operational Safety Audit (IOSA) was conducted at Croatia Airlines, which confirmed a high level of flight safety. This certificate is subject to biannual renewal.

5. ISO 9001

Our approach to quality management is defined by our core document, the Quality Policy. Croatia Airlines established and in November 2003 certified the quality management system in line with the requirements of ISO 9001, the world’s most widely recognised quality management standard.

6. ISO 14001, ISO 50001

By adopting the Environmental Protection and Energy Efficiency Policy, Croatia Airlines has opted to manage the objectives and risks of its business operations by taking account of environmental protection and improving energy efficiency, thus fulfilling its obligations to future generations. To this end, in 2016 an environmental management system according to ISO 14001 and an energy management system according to ISO 50001 were implemented.

Croatia Airlines is highly dedicated to raising employee awareness about the level of responsibility, the job importance and the way in which the successful performance of job-related tasks contributes to achieving quality-related goals.

Fatigue risk management

As the risk of fatigue is analysed and identified as a potential hazard for the safety of air operations, appropriate risk mitigation measures are adopted and implemented.

Specific working conditions of aircraft crew members include shift work, night work, unpredictable and constantly changing work schedule, and a particular work environment (cockpit and aircraft cabin). This may disrupt sleep and the circadian rhythm, which in turn results in fatigue, accumulated sleep loss and reduced attention. A group named the Fatigue Safety Action Group (FSAG) has been formed to help manage all fatigue-related risks. The FSAG members gather and analyse data and draw up risk assessment reports related to the level of fatigue of flight crew members, outline recommendations and measures for reducing the fatigue risk, cooperate with the Safety Department on devising safety assurance processes, provide training guidelines and material to crew members.

A total of 84 reports were processed and analysed in 2022, which points to an increase compared to 2021, when there were 39 reports. However, it should be taken into account that in 2022, there were 41% more flights than in 2021 due to the traffic recovery after the COVID-19 pandemic. On average, there were 3.6 reports per 1,000 flights. An electronic fatigue report form has been in use within the Q-Pulse quality management system since 2020. As it can be filled out through a mobile application, intranet (Crew portal) or the Internet (web browser), paper-based fatigue reports are no longer used.

C4C project

In 2022, the Company implemented the C4C system (Customer Relationship Management system, CRM), i.e. the functionalities needed for the work of the sales personnel (SAP Sales Cloud) and the Customer Service (SAP Cloud for Customer). C4C is a system that enables sales and support teams a more efficient way of managing relations with individual and corporate customers (B2C and B2B). The project implementation will also enable a more efficient use of human resources and ensure the mobility of sales representatives, who will be able to respond to customer needs in real time, since the system functionalities will be available on a mobile application.

Joint travel centre at Dubrovnik Airport

After opening a joint travel centre at Pula airport in December 2021, on 31 May 2022 Croatia Airlines, Dubrovnik Airport and the Obzor putovanja travel agency set up a joint travel centre at Dubrovnik Airport as well. Owing to the synergy of all participants and complementary activities, this is now a place where passengers can easily book and buy Croatia Airlines’ tickets for both domestic and international scheduled flights, and where travel arrangements are offered, which is an additional service upgrade for the passengers from the Dubrovnik-Neretva County.

Prolonging the works season to summer months

Just like in the preceding year, in 2022 the Technical Sector extended the works season to summer months, and carried out one A check, eight C checks, six 6-year and three 12-year checks and one main landing gear and nose gear replacements on third party aircraft. Maintenance works are carried out in three hangars.

Project of forming a technical profit centre

The goal of the project is to introduce an internal invoicing system between the operator (CTN) and the MRO sector in order to set up better internal control and profitability reporting systems within the technical profit centre (MRO). In the project’s first stage, the Company defined the types of services to be invoiced internally and their prices, while the second stage involves preparation and implementation of internal invoicing within the SAP system, and related adjustments of the existing processes within it. The final portion of the second stage of the project was implemented in the first half of 2022 and included preparation of reports for a monthly tracking of results of the technical profit centre, and additional adjustments of the processes.

Data protection

The IT sector has continued implementing the introduced data protection measures within the infrastructural segments of our Company’s IT system, with the aim of strengthening the security measures affecting personal data protection and the overall protection of the IT system:

• Measures for advancing data security are being implemented in line with the provisions of Directive (EU) 2016/1148 (NIS Directive), Act on Cybersecurity of Operators of Essential Services and Digital Service Providers, and Regulation on Cybersecurity of Operators of Essential Services and Digital Service Providers, so as to advance the information security level.

• The Company implements or has implemented:

- Regular annual information security risk assessment, and supervision of the information security risks recorded in the IT system risk register

- Regular perimeter security checks

- Security testing of the intranet

- Review of vulnerability of the IT infrastructure

- Review of key system access control measures

- Regular scanning of the Company website

- Cloud infrastructure access control

- Regular maintenance of compliance with the PCI-DSS

- EOL and EOS status control for all software components.

• All CSIRT notifications about system vulnerabilities were regularly followed, as well as the information from STAR Alliance, which was disseminated to all employees.

• The training programme aimed at familiarising the employees with the threats of social engineering was intensified, in line with the plan for the implementation of the Cyber Security Training Programme.

ERCM - Emergency Response and Crisis Management

Regardless of the fact that safety is one of the Company’s most important tasks and that it has in place all the required safety and protection measures, the possibility of adverse events should also be taken into account. In order to ensure a continuous level of preparedness, Croatia Airlines has for many years been managing an emergency response and crisis management system.

The Office for Emergency Response and Crisis Management (ERCM) is responsible for planning, devising and testing plans and procedures, and training a variety of teams that are crucial for crisis response. Its primary task is to take care of passengers, their families, crew members and other employees in case of an aircraft accident, incident or any other crisis situation