Annual Report and Accounts

Air China Ld
11 April 2007

Air China Limited is the only national flag carrier and a leading        
provider of air passenger, air cargo and airline related services in     
China.                                                                   
                                                                         
Air China Limited is primarily based in Beijing, China, one of the most  
important hubs for air transportation in China. Taking advantage of its  
balanced network of extensive and complementary domestic, international  
and regional routes serving 77 domestic and 43 international destinations
and 1 regional destination, Air China Limited aims to become the best    
partner of all passengers in providing safe, convenient, comfortable and 
customised services.                                                     
                                                                         
Air China Limited's mission is to become the favored airline for         
mainstream passengers, the most valuable and profitable airline in China,
and an airline with international competitiveness.                       
                                                                         



Contents

 
2    Corporate Information                                               
3    Summary of Financial Information                                    
4    Summary of Operating Data                                           
6    Chairman's Statement                                                
9    Business Overview                                                   
14   Management's Discussion and Analysis of Financial Position          
     and Operating Results                                               
20   Corporate Governance Report                                         
30   Report of the Directors                                             
48   Report of the Supervisory Committee                                 
49   Profile of Directors, Supervisors and Senior Management             
     Financial Statements prepared under International Financial         
     Reporting Standards                                                 
53   - Report of the Independent Auditors                                
55   - Consolidated Income Statement                                     
56   - Consolidated Balance Sheet                                        
58   - Consolidated Statement of Changes in Equity                       
59   - Consolidated Cash Flow Statement                                  
61   - Balance Sheet                                                     
63   - Notes to Financial Statements                                     
     Financial Statements prepared under PRC Accounting                  
     Standards and Regulations                                           
134  - Consolidated Balance Sheet                                        
136  - Consolidated Income Statement                                     
137  - Consolidated Profit Appropriation Statement                       
138  Supplementary Information                                           
148  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 
Li Jiaxiang                                                              
Kong Dong                                                                
Wang Shixiang                                                            
Yao Weiting                                                              
Christopher Dale Pratt                                                   
Ma Xulun                                                                 
Cai Jianjiang                                                            
Fan Cheng                                                                
Hu Hung Lick, Henry                                                      
Wu Zhipan                                                                
Zhang Ke                                                                 
Jia Kang                                                                 
                                                                         
SUPERVISORS 
Zhang Xianlin                                                            
Liao Wei                                                                 
Zhang Huilan                                                             
Liu Feng                                                                 
Liu Guo Qing                                                             
                                                                         
LEGAL REPRESENTATIVE OF THE COMPANY
Li Jiaxiang                                                              
                                                                         
JOINT COMPANY SECRETARIES
Zheng Baoan                                                              
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                                         


 
                                                                   (RMB'000)
                            2006       2005       2004       2003       2002
Operating Revenue     44,936,606 38,290,966 33,520,757 24,641,405 24,983,677
Profit from operations 2,517,704  3,673,816  4,485,251  2,284,264  3,284,379
Profit before tax      3,929,221  3,374,254  3,559,559    178,279  1,039,826
Profit after tax                                                            
(including profit                                                           
attributable                                                                
to minority            3,305,097  2,470,380  2,548,695     88,498    670,753
shareholders)                                                               
Profit attributable to                                                      
minority shareholders    617,256     64,124    162,731   (71,106)    171,143
Profit attributable                                                         
to shareholders of the 2,687,841  2,406,256  2,385,964    159,604    499,610
Company                                                                     
EBITDA(1)              7,813,232  8,186,496  7,948,503  5,661,736  6,535,950
EBITDAR(2)            10,206,623  9,928,427  9,207,230  6,753,854  7,391,360
Earnings per share                                                          
attributable to                                                             
shareholders of the        0.262      0.255      0.360        N/A        N/A
Company (RMB)                                                               
Return on shareholders'     9.04      11.98      14.42       2.32       9.95
equity (%)                                                                  

 
(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.                   


 
                                                                (RMB'000)
                           31         31         31         31         31
                     December   December   December   December   December
                         2006       2005       2004       2003       2002
                                                                         
Total 
assets             83,963,601 68,201,943 66,689,269 56,397,062 57,394,612
Total 
liabilities        52,227,908 46,651,337 48,660,727 48,081,813 50,866,224
Minority 
interests           2,011,435  1,458,365  1,480,287  1,422,380  1,508,125
Shareholders' 
equity                                                           
(excluding                                                               
minority 
interests)         29,724,258 20,092,241 16,548,255  6,892,869  5,020,263
Shareholders' 
equity per               2.43       2.13       1.83        N/A        N/A
share (RMB)                                                              





Summary of Operating Data

 
                                              2006           2005  Increase/
                                                                  (decrease)
                                                                            
Traffic                                                                     
                                                                            
RPK (in millions)                         63,361.6       54,854.6      15.5%
International                             27,120.1       23,173.6      17.0%
Mainland China                            32,970.3       28,884.1      14.1%
Hong Kong and Macau                        3,271.1        2,796.9      17.0%
                                                                            
RFTK (in millions)                         3,477.5        2,929.6      18.7%
International                              2,603.6        2,160.2      20.5%
Mainland China                               723.9          636.6      13.7%
Hong Kong and Macau                          150.1          132.8      13.0%
                                                                            
Passengers (in thousands)                 33,971.2       29,754.3      14.2%
International                              6,696.0        5,876.3      13.9%
Mainland China                            25,253.2       22,162.1      13.9%
Hong Kong and Macau                        2,022.0        1,715.9      17.8%
                                                                            
Cargos and mails carried (tonnes)      1,019,359.3      884,908.1      15.2%
                                                                            
Kilometers flown (in millions)               484.9          415.2      16.8%
                                                                            
Block hours (in thousands)                   755.2          642.3      17.6%
                                                                            
Number of flights                        280,814.0      241,633.0      16.2%
International                             50,753.0       44,539.0      14.0%
Mainland China                           209,656.0      178,414.0      17.5%
Hong Kong and Macau                       20,405.0       18,680.0       9.2%
                                                                            
RTK (in millions)                          9,174.2        7,855.0      16.8%
                                                                            
Capacity                                                                    
                                                                            
ASK (in millions)                         83,492.3       74,086.8      12.7%
International                             36,038.0       31,508.1      14.4%
Mainland China                            42,902.2       38,385.7      11.8%
Hong Kong and Macau                        4,551.9        4,193.1       8.6%
                                                                            
AFTK (in millions)                         6,404.4        5,319.4      20.4%
International                              4,615.4        3,733.0      23.6%
Mainland China                             1,524.6        1,347.9      13.1%
Hong Kong and Macau                          264.4          238.5      10.9%
                                                                            
ATK (in millions)                         13,959.2       12,021.5      16.1%
                                                                            
                                                                            
                                                                            
                                                                            
                                              2006           2005  Increase/
                                                                  (decrease)
                                                                            
Load factor                                                                 
                                                                            
Passenger load factor (RPK/ASK)              75.9%          74.0%    1.9 ppt
International                                75.2%          73.6%    1.6 ppt
Mainland China                               76.9%          75.3%    1.6 ppt
Hong Kong and Macau                          71.9%          66.7%    5.2 ppt
                                                                            
Cargo and mail load factor (RFTK/AFTK)       54.3%          55.1%  (0.8) ppt
International                                56.4%          57.9%  (1.5) ppt
Mainland China                               47.5%          47.2%    0.3 ppt
Hong Kong and Macau                          56.8%          55.7%    1.1 ppt
                                                                            
Yield                                                                       
Yield per RPK (RMB)                         0.5929         0.5758       3.0%
International                               0.5629         0.5498       2.4%
Mainland China                              0.6082         0.5903       3.0%
Hong Kong and Macau                         0.6875         0.6415       7.2%
                                                                            
Yield per RFTK (RMB)                        2.0577         2.2090     (6.8%)
International                               2.1260         2.3057     (7.8%)
Mainland China                              1.3183         1.4067     (6.3%)
Hong Kong and Macau                         4.4393         4.4739     (0.8%)
                                                                            
Fleet                                                                       
                                                                            
Total aircraft in service at year end          225            194      16.0%
Daily utilization (block hours per day        10.1           10.1          -
per aircraft)                                                               
                                                                            
Unit cost                                                                   
                                                                            
Operating expenses per ASK (RMB)              0.52           0.48       8.3%
Operating expenses per ATK (RMB)              3.14           2.96       6.1%

 
The above summary of operating data for the year ended 31 December 2006  
includes the entire Air China Cargo Co., Ltd. ('Air China Cargo') and Air
Macau Company Limited ('Air Macau'). Accordingly, the summary of         
operating data for the year ended 31 December 2005 has been adjusted to  
conform to the basis of the current year's presentation.                 
                                                                         
Chairman's Statement                                                     
                                                                         
During 2006, Air China Limited (the 'Air China' or the 'Company'), its   
subsidiaries and joint ventures (collectively the 'Group') continued to  
secure a leading position in the aviation industry in the Mainland China 
and maintain a proactive approach for improvement in all aspects such as 
flight safety, operating performance, capital operation, brand building  
and corporate restructuring. While proactively coping with the rising jet
fuel price and intense market competition, the Company has completed the 
restructuring of the shareholdings of the Company, Cathay Pacific Airways
Limited ('Cathay'), China National Aviation Company Limited ('CNAC', a   
subsidiary of the Company), CITIC Pacific Limited and Swire Pacific      
Limited in Cathay and Hong Kong Dragon Airlines Limited ('Dragonair') and
the listing of its A shares, and has made substantial progress in joining
airline alliance. With the change in our growth mode, our ability to     
resist risks has been further enhanced.                                  
                                                                         
During the reporting period, the Company recorded 704,000 hours of safe  
flight, representing an increase of 17.9% as compared to the             
corresponding period last year. In order to ensure flight safety, the    
Company has implemented the systematic safety management step by step,   
strengthened flight training, improved operating organization and boosted
the level of aircraft maintenance.                                       
                                                                         
During the reporting period, the Company, together with Air China Cargo  
and Air Macau recorded a total traffic turnover of 9.174 billion tonne   
kilometres and carried 33,971,200 passengers and handled 1,019,359 tonnes
of cargos and mails, representing an increase of 16.8%, 14.2% and 15.2%  
respectively as compared to the corresponding period last year. The      
Group's total revenue from business operations amounted to RMB44.937     
billion, representing an increase of 17.4% as compared to RMB38.291      
billion for the corresponding period last year. The operating profit was 
RMB2.518 billion, representing a decrease of 31.5% as compared to        
RMB3.674 billion for the corresponding period last year. Profit          
attributable to shareholders was RMB2.688 billion, representing an       
increase of 11.7% from RMB2.406 billion in 2005. We continued to maintain
a leading position among fellow airlines in the Mainland China in terms  
of profitability.                                                        
                                                                         
During the reporting period, the Group (including Air China Cargo and Air
Macau) experienced a net increase in the number of aircraft by 31 during 
the year such that the total number of aircraft amounted to 225. The     
Company focused on enhancing the flight capacity while constructing hubs 
and network. As network operation capability was strengthened, the       
available seat kilometres in international routes increased by 12.7% as  
compared to last year. The establishment of the South China base, the    
south-western marketing centre and the regional headquarters in Japan,   
Europe and Western America marked new progress in developing sales       
channels. The progress in adopting the systematic management of budgeting
workflow and the establishment and implementation of 14 management       
divisions at the Company level resulted in a noticeable increase in      
revenue and reduction in cost and evidenced new achievements in cost     
control.                                                                 
                                                                         
During the reporting period, the Company continuously strengthened its   
service and brand management. By adhering to the notion of providing     
safe, convenient, comfortable and satisfactory services to passengers    
(the 'SCCS Services'), the Company continued to develop and improve new  
products in the first and business class cabins, and offered a series of 
services and products in connection with the Olympic Games for its       
passenger cabins. The Company developed its in-flight entertainment      
products, implemented the plan of improving service details and promoted 
fine service by fine management. The Company expanded its one-stop       
boarding services, carried out comprehensive service reform and          
endeavoured to perfect operation quality. For the continuous improvement 
of our brand recognition, the Company won 17 influential                 
brand-name-related awards, among which the Company was awarded the 'Best 
Airline of the Year' by the Asia Pacific Aviation Centre and won the     
'Passengers Satisfaction Award' for the third consecutive year in        
travelers' satisfaction survey. The Company was also entitled the 'Top 25
Model Brand Enterprises in China' in the joint press release of the      
Overall Ranking List of China Brand Name and the China Summit Forum.     
                                                                         
The Company made positive progress in corporate restructuring. The       
Company has set up a preliminary new model for business management and   
control, under which a framework of vertical management of four major    
systems, namely the business, flight, transportation control and         
information systems, was initially developed and the efficiency achieved 
through the consolidation of strategic resources emerged. Upon the       
announcement of the new organizational structure and system of the       
Company, the organization and management systems that met the strategic  
requirements of the Company were generally established.                  
                                                                         
There was a balanced growth in the interests of the Group's shareholders,
the Company and its staff during 2006. Meanwhile, the Company's          
development and reform also entered into a critical stage. Looking into  
2007, the Company will remain focused on enhancing its profitability and 
to plan various operating activities in a scientific manner; optimize and
strengthen its principal business and improve the harmonious development 
of its ancillary businesses along with its principal businesses; promote 
hubs-building outside and inside China; implement the strategy of        
'forming airline partnerships for better development and effecting       
internal integration for improving capability'; ardently provide the SCCS
services to enhance its brand competence; proactively increase incomes   
and reduce expenses by making market-oriented initiatives; implement the 
teambuilding strategy for further development of the Company; and lay a  
solid foundation for further development to guard against various risks. 
In addition, the Company will attempt to complete the following eight    
goals by closely adhering to the eight strategies set forth above: to    
complete the corporate restructuring in a satisfactory manner; to        
significantly enhance the operating quality; to effect a fundamental     
reform on the European and American routes; to obtain actual benefits via
the 'Two Stars' co-operation (i.e. by joining the Star Alliance and the  
completion of Project Star); to break through the IT bottleneck; to      
accelerate the regional integration and regional hub construction; to    
substantially increase the cargo transport capacity; to promote the brand
awareness of the Company by offering products relating to the Olympic    
Games. The Company will also fully take advantage of the business        
opportunities arising from the 2008 Olympic Games to be held in Beijing, 
the entry to Star Alliance and the business cooperation with Cathay. The 
Company will also proactively promote the five strategies, namely        
strategies in relation to the hub network, cost advantage, balanced      
development of cargo and passenger services, brand, alliance and         
cooperation strategies. The Company is committed to become the most      
valuable and profitable airline in China, and the favored airline for    
mainstream passengers with international competitiveness.                
                                                                         
Lastly, on behalf of the board of directors, I would like to extend my   
gratitude to our shareholders for their trust and support as well as to  
our management team and staff for their dedication in offering           
professional and quality services.                                       
                                                                         
                                                                         
                                                                         
                                                                         
                                                                         
Li Jiaxiang                                                              
Chairman                                                                 
                                                                         
Beijing, PRC                                                             
19 March 2007                                                            

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