Annual Report 2007

Air China Ld 11 April 2008 Air China is the only national flag carrier of China and the exclusive airline partner of the 2008 Beijing Olympic Games. Air China has been selected as one of the 2007 Top 20 Globally Most Competitive Chinese Companies and has officially become a member of the Star Alliance, the world's largest airline alliance, since December 2007. Air China is headquartered in Beijing, the capital of China, with Shanghai and Chengdu as its two increasingly important hubs. As at 31 December 2007, by joining the Star Alliance the routes network of Air China could cover 155 countries and regions as well as 895 destinations. Air China continues to maintain its core values of providing safe, convenient, comfortable and customised services, and dedicates to offer distinguished services and excellent experience to global passengers and cargo forwarders. The strategic objectives of Air China are 'to build up international competitive strength, continue to enhance development potentials, offer its customers with unique and excellent experience and realise a sustainable growth so as to create value to all the relevant parties'. In addition, Air China also directly or indirectly holds interests in the following airlines: Air Macau Company Limited (51%), Air China Cargo Co., Ltd. (51%), Shandong Airlines Company Limited (22.8%), Shenzhen Airlines Company Limited (25%) and Cathay Pacific Airways Limited (17.5%). Contents 2 Corporate Information 3 Summary of Financial Information 4 Summary of Operating Data 6 Chairman's Statement 9 Business Overview 13 Management's Discussion and Analysis of Financial Position and Operating Results 20 Corporate Governance Report 29 Report of the Directors 45 Report of the Supervisory Committee 46 Profile of Directors, Supervisors and Senior Management Financial Statements prepared under International Financial Reporting Standards 50 - Independent Auditors' Report 52 - Consolidated Income Statement 53 - Consolidated Balance Sheet 55 - Consolidated Statement of Changes in Equity 56 - Consolidated Cash Flow Statement 58 - Balance Sheet 60 - Notes to Financial Statements Financial Statements prepared under China Accounting Standards 139 - Consolidated Balance Sheet 141 - Consolidated Income Statement 142 Supplementary Information 144 Glossary of Technical Terms Corporate Information REGISTERED CHINESE NAME ENGLISH NAME Air China Limited REGISTERED OFFICE 9/F, Blue Sky Mansion 28 Tianzhu Road Zone A, Tianzhu Airport Industrial Zone Shunyi District Beijing China PRINCIPAL PLACE OF BUSINESS IN HONG KONG 5th Floor, CNAC House 12 Tung Fai Road Hong Kong International Airport Hong Kong WEBSITE ADDRESS www.airchina.com.cn DIRECTORS Kong Dong Wang Shixiang Yao Weiting Ma Xulun Christopher Dale Pratt Chen Nan Lok, Philip Cai Jianjiang Fan Cheng Hu Hung Lick, Henry Wu Zhipan Zhang Ke Jia Kang SUPERVISORS Sun Yude Liao Wei Zhou Guoyou Liu Feng Liu Guoqing LEGAL REPRESENTATIVE OF THE COMPANY Li Jiaxiang JOINT COMPANY SECRETARIES Huang Bin Li Man Kit (ACIS, ACS) QUALIFIED ACCOUNTANT David Tze-kin Ng (CPA) AUTHORISED REPRESENTATIVES Cai Jianjiang Li Man Kit LEGAL ADVISER TO THE COMPANY Haiwen & Partners (as to PRC Law) Freshfields Bruckhaus Deringer (as to Hong Kong and English Law) INTERNATIONAL AUDITORS Ernst & Young H SHARE REGISTRAR AND TRANSFER OFFICE Computershare Hong Kong Investor Services Limited Rooms 1712-1716, 17th Floor Hopewell Centre 183 Queen's Road East Wanchai Hong Kong LISTING VENUES Hong Kong, London and Shanghai Summary of Financial Information (in RMB'000) 2007 2006 2005 2004 2003 ---------------------------------------------------------------------------------------------------------- Operating Revenue 51,330,541 44,936,606 38,290,966 33,520,757 24,641,405 Profit from operations 3,834,127 2,517,704 3,673,816 4,485,251 2,284,264 Profit before tax 5,606,113 3,929,221 3,374,254 3,559,559 178,279 Profit after tax (including profit attributable to minority shareholders) 4,121,500 3,305,097 2,470,380 2,548,695 88,498 Profit attributable to minority shareholders (107,497) 617,256 64,124 162,731 (71,106) Profit attributable to shareholders of the Company 4,228,997 2,687,841 2,406,256 2,385,964 159,604 EBITDA(1) 9,411,048 7,813,232 8,186,496 7,948,503 5,661,736 EBITDAR(2) 11,961,669 10,206,623 9,928,427 9,207,230 6,753,854 Earnings per share attributable to shareholders of the Company (RMB) 0.356 0.262 0.255 0.360 N/A Return on shareholders' equity (%) 13.49 9.04 11.98 14.42 2.32 ---------------------------------------------------------------------------------------------------------- (1) EBITDA represents earnings before finance revenue (including interest income, net exchange gains, net gains on fuel derivatives and dividend income from available-for-sale investments), finance costs, enterprise income taxes, gain on disposal of an associate, share of profits and losses of associates, depreciation and amortisation as computed under the International Financial Reporting Standards. (2) EBITDAR represents EBITDA less operating lease expenses on aircraft and engines as well as other operating lease expenses. (in RMB'000) 31 December 31 December 31 December 31 December 31 December 2007 2006 2005 2004 2003 ---------------------------------------------------------------------------------------------------------- Total assets 91,056,277 84,477,536 68,201,943 66,689,269 56,397,062 Total liabilities 59,548,924 52,741,843 46,651,337 48,660,727 48,081,813 Minority interests 150,216 2,011,435 1,458,365 1,480,287 1,422,380 Shareholders' equity (excluding minority interests) 31,357,137 29,724,258 20,092,241 16,548,255 6,892,869 Shareholders' equity per share (RMB) 2.64 2.43 2.13 1.83 N/A ---------------------------------------------------------------------------------------------------------- Summary of Operating Data The following summary includes the operating data of Air China Limited (the 'Company'), Air China Cargo Co., Ltd. ('Air China Cargo') and Air Macau Company Limited ('Air Macau') 2007 2006 Increase/(decrease) ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- Traffic RPK (in millions) 70,025.8 63,361.6 10.52% International 30,200.8 27,120.1 11.36% Mainland China 36,534.4 32,970.3 10.81% Hong Kong and Macau 3,290.6 3,271.1 0.60% RFTK (in millions) 3,875.5 3,477.5 11.44% International 2,948.6 2,603.6 13.25% Mainland China 776.3 723.9 7.24% Hong Kong and Macau 150.5 150.1 0.23% Passengers (in thousands) 37,256.2 33,971.2 9.67% International 7,356.5 6,696.0 9.86% Mainland China 27,931.2 25,253.2 10.60% Hong Kong and Macau 1,968.6 2,022.0 (2.64%) Cargos and mails carried (tonnes) 1,103,914.0 1,019,359.3 8.29% Kilometers flown (in millions) 519.6 484.9 7.16% Block hours (in thousands) 817.6 755.2 8.27% Number of flights 294,905 280,814 5.02% International 56,288 50,753 10.91% Mainland China 219,237 209,656 4.57% Hong Kong and Macau 19,380 20,405 (5.02%) RTK (in millions) 10,170.3 9,174.2 10.86% ---------------------------------------------------------------------------------------------------------- Capacity ---------------------------------------------------------------------------------------------------------- ASK (in millions) 89,233.7 83,492.3 6.88% International 39,206.5 36,038.0 8.79% Mainland China 45,558.7 42,902.2 6.19% Hong Kong and Macau 4,468.5 4,551.9 (1.83%) AFTK (in millions) 6,868.1 6,404.4 7.24% International 5,099.9 4,615.4 10.50% Mainland China 1,531.3 1,524.6 0.44% Hong Kong and Macau 236.9 264.4 (10.42%) ATK (in millions) 14,938.7 13,959.2 7.02% ---------------------------------------------------------------------------------------------------------- 2007 2006 Increase/(decrease) ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- Load factor Passenger load factor (RPK/ASK) 78.47% 75.89% 2.59ppt International 77.03% 75.25% 1.78ppt Mainland China 80.19% 76.85% 3.34ppt Hong Kong and Macau 73.64% 71.86% 1.78ppt Cargo and mail load factor (RFTK/AFTK) 56.43% 54.30% 2.13ppt International 57.82% 56.41% 1.41ppt Mainland China 50.70% 47.48% 3.21ppt Hong Kong and Macau 63.52% 56.78% 6.75ppt ---------------------------------------------------------------------------------------------------------- Yield ---------------------------------------------------------------------------------------------------------- Yield per RPK (RMB) 0.6231 0.5929 5.10% International 0.5913 0.5629 5.05% Mainland China 0.6429 0.6082 5.71% Hong Kong and Macau 0.6955 0.6875 1.16% Yield per RFTK (RMB) 1.8927 2.0577 (8.02%) International 1.8504 2.1260 (12.97%) Mainland China 1.5239 1.3183 15.60% Hong Kong and Macau 4.6267 4.4393 4.22% ---------------------------------------------------------------------------------------------------------- Fleet ---------------------------------------------------------------------------------------------------------- Total number of aircraft in service at year end 234 225 9 Daily utilization (block hours per day per aircraft) 9.92 10.10 (1.81%) ---------------------------------------------------------------------------------------------------------- Unit cost ---------------------------------------------------------------------------------------------------------- Operating expenses per ASK (RMB) 0.55 0.52 5.77% Operating expenses per ATK (RMB) 3.28 3.14 4.46% ---------------------------------------------------------------------------------------------------------- Chairman's Statement Dear Shareholders, In 2007, China's economy continued to maintain the trend of a rapid but steady growth and the market demand for air transportation remained robust. The Company has, while ensuring its flight safety, improved the service quality and realised steady growth in profitability as well as created more value to all relevant parties. During the reporting period, the Group (including the Company and its subsidiaries and joint ventures) recorded a total traffic turnover of 10.17 billion tonne kilometres and carried 37.256 million passengers and handled 1.104 million tonnes of cargos and mails, representing an increase of 10.9%, 9.7% and 8.3% respectively as compared with the corresponding period of last year. The Group's total revenue from business operations (including air traffic revenue and other operating revenue) amounted to RMB51.33 billion and profit before tax amounted to RMB5.606 billion, representing an increase of 14.23% and 42.68% respectively as compared with the corresponding period of last year. The Group achieved new height in terms of profitability and continued to maintain its leading position among domestic airlines in China. As compared with the same period last year, the share of profit generated from air transportation business in our total profit has increased. The Company's investment return has increased substantially owing to strong performance of Cathay Pacific Airways Limited ('Cathay Pacific'), while the appreciation of Renminbi also contributed positively to our profit. Strengthening the hub building and solidifying the market position. By the end of 2007, the number of aircraft serving Beijing has reached 132, representing 60% of our total capacity. In order to optimise and expand our route network, five international routes (including Beijing-Sapporo and Beijing-Athens routes) and a number of domestic routes were launched, the number of connecting flights has steadily increased and the number of transit passengers has significantly increased. Our passenger throughput at Beijing hub accounted for 44.6% of the total passenger throughput of all domestic airlines at Beijing Capital International Airport, and the Company's market position in Beijing is thus strengthened. The market shares of the Company in Chengdu and Shanghai have also been steadily increasing. Substantial progress in forming alliance and business cooperation and further enhanced market influence. In December 2007, the Company was formally admitted to the Star Alliance, the largest airline alliance in the world, and thereafter the route network coverage of the Star Alliance extended to 155 countries and regions with 895 destinations. By taking the advantage of its admission to the alliance, the Company is able to fully expand its geographical coverage. Starting from 26 March 2008, the Company will commence its full operation at Terminal 3 of the Beijing Capital International Airport, which may help to realise the strategy of 'Move Under One Roof' with other members of the Star Alliance and to facilitate a smooth operation of connecting flights between the Company and other members of the Star Alliance. During the reporting period, the Company continued to strengthen its business cooperation with Cathay Pacific by setting up a jointly operated Beijing-Hong Kong route. The sales teams of the two companies in Beijing and Hong Kong were combined and a mechanism for regular capacity and scheduling coordination was set up. We have been also successfully promoting our cooperation in areas of procurement, cabin service, aircraft maintenance and IT. Innovative services and products and marketing means and excellent market integration results. During the reporting period, the Company fully completed the renovation scheme for its first class and business class cabins in March. In August, the Company introduced the 'Forbidden Pavilion' for its first class cabin and 'Capital Pavilion' for its business class cabin and in October the Junior Phoenix Card ( ) was launched. Our newly purchased aircraft are all equipped with new designed seats to provide upgraded services for our first class and business class customers. The introduction of various services and products are intended to provide more options for our customers. In this regard, the Company aggressively promoted e-commerce, self-service check-in, online check-in and electronic passenger ticketing operation. As a result of further expanding the through check-in business, the average monthly through check-in business handled by overseas and domestic airports substantially increased. While resource integration of both international and domestic markets was also strengthened, our Europe route started to post a profit while loss in the North America route was largely reduced. Our operating results were better than expected and positive effects of integration also started to reveal in other regions. Enhancing service quality and brand value by leveraging on 2008 Olympic Games and 'Quality Service Year' campaign. During the reporting period, the Company continued to further strengthen its notion of providing safe, convenient, comfortable and customised services by launching the 'Quality Service Year' campaign. By leveraging our status as the sole passenger airline partner of Beijing 2008 Olympic Games, the Company has formulated and refined the service assurance plan for 2008 Olympic Games and passed the examination and review of 26 Good Luck Beijing test events and pre-competitions to fully prepare itself for providing high quality services during the Olympic Games. In 2007, the Company was enlisted in the 'World's Top Five Hundred Brands' and the '2007 Top 20 Globally Most Competitive Chinese Companies'. The Company was ranked No.27 for the 'Top 500 Most Valuable Chinese Brands'. The Company's brand value was further enhanced. Emphasising energy saving and emission reduction and further strengthening cost control. During the reporting period, the Company adopted various measures to improve the energy efficiency. Such measures include strengthening the management on the use of aircraft ramp supporting facilities, eliminating inefficient load, optimising air route, increasing the overall load factor, introducing and using additional fuel saving aircraft and engines. These measures not only lowered unit fuel consumption level but also reduced the carbon dioxide emission and noise pollution. Meanwhile, our cashflow management, debt management and financing management were also improved through various measures such as central procurement, fuel saving, fuel hedging and maintenance expenses control. Cost control was further strengthened accordingly. Looking ahead in 2008, the Company believes that China's economy and the air transportation market will continue to remain buoyant. However, competition in the air transportation market has become increasingly fierce, especially with the implementation of the liberalization policy, the Chinese aviation industry will face stronger challenges. In response to the changing market situation, the Company has adjusted its corporate strategies from time to time and set higher business development objectives to 'build up international competitive strength, continue to enhance development potentials, offer its customers with unique and excellent experience and realise a sustainable growth so as to create value to all the relevant parties'. I believe, with the support of our shareholders and the joint effort of our management and colleagues, the Company will continue to improve its services, increase its revenue, strengthen its cost control and create better returns for its shareholders, its employees as well as the society. Acting Chairman of the Board Kong Dong Beijing, the PRC, 17 March 2008 To view the full text of this press release, paste the following link into your web browser: http://www.rns-pdf.londonstockexchange.com/rns/1387s_-2008-4-11.pdf This information is provided by RNS The company news service from the London Stock Exchange MTP

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