Connected Transactions
Air China Ld
13 November 2006
The Stock Exchange of Hong Kong Limited takes no responsibility for the contents
of this announcement, makes no representation as to its accuracy or completeness
and expressly disclaims any liability whatsoever for any loss whatsoever arising
from or in reliance upon the whole or any part of the contents of this
announcement.
AIR CHINA LIMITED
(a joint stock limited company incorporated in the People's Republic of China
with limited liability)
(Stock Code: 753)
CONTINUING CONNECTED TRANSACTIONS
The Company was granted waivers from strict compliance with the relevant
provisions of the Hong Kong Listing Rules by the Hong Kong Stock Exchange with
respect to certain continuing connected transactions as disclosed in the
Prospectus. Such waivers will expire on 31 December 2006. After such date, the
Group must re-comply with the relevant provisions of the Hong Kong Listing Rules
in order to continue these continuing connected transactions.
On 10 November 2006, the Board approved and ratified the continuing connected
transactions as set out in this announcement, and the revised annual cap for
2006 of certain continuing connected transaction, and annual caps for each of
the three years ended 31 December 2007, 2008 and 2009. The Company will seek
Independent Shareholders' approval to the Non-exempt Continuing Connected
Transactions and their respective proposed annual cap for each of the three
years ended 31 December 2007, 2008 and 2009 in accordance with the Hong Kong
Listing Rules.
Except the Non-exempt Continuing Connected Transactions, as each of the
Percentage Ratios (other than the profits ratio) of the other continuing
connected transactions (excluding the de minimis continuing connected
transactions) set out in this announcement, on an annual basis, is higher than
0.1% and less than 2.5%, they therefore fall under Rule 14A.34 of the Hong Kong
Listing Rules. Accordingly, these transactions are subject to the reporting and
announcement requirements set out under Rules 14A.45 to 14A.47 of the Hong Kong
Listing Rules, but are exempt from the requirements of independent shareholders'
approval under Chapter 14A of the Hong Kong Listing Rules.
The Board (including the independent non-executive directors of the Company)
considers that the abovementioned continuing connected transactions have been
conducted on normal commercial terms or on terms no less favourable than those
available to independent third parties and were entered into on a continuing and
regular basis and in the ordinary and usual course of business of the Company,
are fair and reasonable and in the interests of the Company and the Shareholders
as a whole, and that the revised annual cap of 2006 for certain continuing
connected transaction and annual caps for each of the future three years ended
31 December 2007, 2008 and 2009 for the abovementioned continuing connected
transactions are fair and reasonable.
A circular containing, among other things, (i) details of the Non-exempt
Continuing Connected Transactions; (ii) a letter from an independent financial
adviser to the Independent Board Committee and the Independent Shareholders
containing its advice on the Non-exempt Continuing Connected Transactions; and
(iii) the recommendation of the Independent Board Committee in respect of the
Non-exempt Continuing Connected Transactions, will be despatched to shareholders
in accordance with the Hong Kong Listing Rules as soon as practicable.
1. INTRODUCTION
The Company was granted waivers from strict compliance with the relevant
provisions of the Hong Kong Listing Rules by the Hong Kong Stock Exchange with
respect to certain continuing connected transactions as disclosed in the
Prospectus. Such waivers will expire on 31 December 2006. After such date, the
Company must re-comply with the relevant provisions of the Hong Kong Listing
Rules in order to continue these continuing connected transactions.
On 10 November 2006, the Board approved and ratified the continuing connected
transactions as set out in this announcement, the revised annual cap for 2006 of
certain continuing connected transaction and the relevant annual caps for each
of the three years ended 31 December 2007, 2008 and 2009. The Company will seek
Independent Shareholders' approval to the Non-exempt Continuing Connected
Transactions and their respective proposed annual caps for each of the three
years ended 31 December 2007, 2008 and 2009 in accordance with the Hong Kong
Listing Rules.
2. PARTIES AND CONNECTION OF THE PARTIES
The Company, whose principal business activity is air passenger, air cargo and
airline-related services, has been conducting continuing connected transactions
with the following parties:
• China National Aviation Holding Company ('CNAHC') and its associates
('CNAHC Group')
CNAHC is a substantial shareholder of the Company and is therefore a
connected person of the Company as defined under the Hong Kong Listing
Rules. CNAHC is principally engaged in managing the holding company of
CNAHC Group and the state-owned assets and equity it holds in various
companies; aircraft lease; and aviation equipment maintenance, etc.
• China National Aviation Construction and Development Company ('CNACD')
CNACD is a wholly-owned subsidiary of CNAHC and is therefore a connected
person of the Company as defined under the Hong Kong Listing Rules. CNACD
is principally engaged in providing management services for infrastructure
construction projects and technology reconstruction projects.
• China National Aviation Media and Advertisement Co., Ltd. ('CNAMC')
CNAMC is a wholly-owned subsidiary of CNAHC and is therefore a connected
person of the Company as defined under the Hong Kong Listing Rules. CNAMC
is principally engaged in media and advertising business.
• China National Aviation Tourism Company ('CNATC')
CNATC is a wholly-owned subsidiary of CNAHC and is therefore a connected
person of the Company as defined under the Hong Kong Listing Rules. CNATC
is principally engaged in tourism.
• China Aircraft Services Limited ('CASL')
CASL is a 40%-owned subsidiary of CNACG, which is a substantial shareholder
of the Company, and is therefore a connected person of the Company as
defined under the Hong Kong Listing Rules. CASL is principally engaged in
providing aircraft line maintenance, cabin cleaning and ground support
services at Hong Kong International Airport.
• China National Aviation Finance Co., Ltd. ('CNAF')
CNAF is a 74.89% held subsidiary of CNAHC and is therefore a connected
person of the Company as defined under the Hong Kong Listing Rules. CNAF is
principally engaged in providing financial services to the members of CNAHC
Group.
• Lufthansa and its associates ('Lufthansa Group')
Lufthansa Group holds 40% equity interest in and is a substantial
shareholder of Aircraft Maintenance and Engineering Corporation ('Ameco'),
a subsidiary of the Company, and is therefore a connected person of the
Company under the Hong Kong Listing Rules. Lufthansa is principally engaged
in passenger traffic, logistics, MRO Services, catering, leisure travel and
etc.
• Capital Airports Holding Company and its associates ('Beijing Capital
Airports Group')
Capital Airports Holding Company holds 24% equity interest in and is a
substantial shareholder of Air China Cargo, a subsidiary of the Company,
and therefore is a connected person of the Company under the Hong Kong
Listing Rules. Beijing Capital Airports Group is principally engaged in
both aeronautical and non-aeronautical businesses at the Beijing Capital
Airport.
• Cathay Pacific Airways Limited ('Cathay Pacific') and its associates
('Cathay Pacific Group')
Cathay Pacific holds approximately 17.3% of the total issued share capital
of the Company and therefore is a connected person of the Company under the
Hong Kong Listing Rules. Cathay Pacific is principally engaged in the
operation of scheduled passenger and cargo airline services, principally to
and from Hong Kong.
3. DE MINIMIS CONTINUING CONNECTED TRANSACTIONS
3.1 Media and Advertising Services
The Company entered into a media and advertising services framework agreement
(the 'Advertising Services Framework Agreement') and a supplemental agreement
thereto on 1 November 2004 and on 10 November 2006, respectively, with CNAMC.
Description of transaction: Pursuant to the Advertising Services Framework
Agreement and the supplemental agreement thereto, CNAMC will have the right to
procure advertisements and to retain all advertising revenues generated from
such advertisements that appear:
• in the in-flight magazines, in-flight entertainment programmes, boarding
passes and certain other items specified in the Advertising Services
Framework Agreement (the 'Specified Items'); and
• on the potential items that may be developed from time to time
(the 'Potential Items').
As a consideration, CNAMC will pay the Company an annual concession fee for the
Specified Items and 20% of the total revenues generated from advertisements
appearing on the Potential Items. CNAMC has also agreed to:
• according to the annual budget of the Company, provide the Company at nil
charge with the in-flight items (except for in-flight entertainment
programmes) and the Potential Items (for those not owned by the Company) on
which the advertisements appear or will appear;
• provide the Company with some in-flight entertainment programmes produced
by it, the production cost and expense of which will be reimbursed by the
Company; and
• procure contents for the Company's in-flight entertainment programmes from
independent third parties on a commission-free basis.
In addition, CNAMC has the right to bid for advertisement agency and design
services to the Company.
The Advertising Services Framework Agreement will expire on 31 December 2006 and
as provided in its supplemental agreement, among others, its term has been
extended to 31 December 2009.
Reasons for such transaction: The Directors believe that it is in the best
interest of the Company to enter into above transaction with CNAMC because:
• media and advertising business is not the core competency of the Company
while CNAMC has extensive experience in in-flight advertising operation
and has a proven network of advertising sponsors to draw upon; and
• CNAMC has a better understanding of the culture of the Company than
independent third party service providers, thus the in-flight magazines
provided by CNAMC, the in-flight entertainment programs procured by CNAMC
and advertisement designed by CNAMC can better fit the Company's public
relationship strategy.
Historical caps and amounts:
The annual cap of the aggregate amount to be paid by CNAMC to the Company for
each of the three years ended December 31 2006 are RMB23 million, RMB24.7
million and RMB26.6 million, respectively. The aggregate annual amount paid by
CNAMC to the Company for each of the two years ended 31 December 2004 and 31
December 2005 were approximately RMB4.3 million and RMB18.7 million,
respectively.
De Minimis Continuing Connected Transaction:
The maximum aggregate annual amount to be paid by CNAMC under the Advertising
Services Framework Agreement for each of the three years ended 31 December 2007,
2008 and 2009 are expected to fall below the de minimis threshold as stipulated
under Rule 14A.33(3) of the Hong Kong Listing Rules, therefore such transaction
will be exempt from the announcement and independent shareholders' approval
requirement for connected transactions.
3.2 Continuing Connected Transactions with Cathay Pacific Group
Description of transaction: The Company has entered into various transactions
with Cathay Pacific Group in the ordinary course of its business. Such
transactions, which constitute an essential part of the daily operations of an
airline business, include, among others:
• provision of ground handling services by the Cathay Pacific Group to the
Company;
• provision of MRO Services by the Company to the Cathay Pacific Group;
• provision of catering services by the Company to the Cathay Pacific Group;
and
• mutual provision of ticket sales agency services.
The above transactions have been entered into on normal commercial terms based
on arm's length negotiations.
Reasons for the transaction: The Company has entered into various transactions
with Cathay Pacific Group in the ordinary course of the Company's business.
Historical caps and amounts:
The annual cap of the aggregate amount to be paid by the Company to the Cathay
Pacific Group for each of the three years ended December 31 2006 are RMB35
million, RMB40 million and RMB45 million, respectively. The aggregate annual
amount paid by the Company to Cathay Pacific Group for each of the two years
ended 31 December 2004 and 31 December 2005 were approximately RMB10.9 million
and RMB20.14 million, respectively.
De Minimis Continuing Connected Transaction:
The maximum aggregated annual amount to be paid by the Company to Cathay Pacific
Group and that to be paid by Cathay Pacific Group to us for the above
transactions for each of the three years ended 31 December 2007, 2008 and 2009
are expected to fall below the de minimis threshold as stipulated under Rule
14A.33(3) of the Hong Kong Listing Rules, therefore such transactions will be
exempt from the announcement and independent shareholders' approval
requirement for connected transactions.
4. CONTINUING CONNECTED TRANSACTIONS EXEMPT FROM THE INDEPENDENT
SHAREHOLDERS' APPROVAL REQUIREMENTS
4.1 Construction Project Management Services
The Company entered into a construction project management agreement (the
'Construction Project Management Agreement') and a supplemental agreement
thereto with CNACD on 1 November 2004 and on 10 November 2006, respectively.
Description of transaction: Pursuant to the Construction Project Management
Agreement and the supplemental agreement thereto:
• CNACD will provide the Company project management services on projects
involving the construction of any property or industrial plant/facility
with budgeted costs of RMB20 million or above;
• in return for its project management services, the Company shall pay CNACD
a fee of up to 2% of the construction budget if the total budget of the
project is RMB1 billion or more, and up to 2.5% if the total amount of the
project is below RMB1 billion;
• if the actual settlement price of the project managed by CNACD is higher
than the total budget of the project agreed upon in the contract, CNACD
will pay the Company the difference between the actual settlement price and
the total budget of the project agreed upon in the contract, unless the
difference is caused by (i) a change of government policies; (ii) factors
attributed to the Company; or (iii) force majeure; and
• if CNACD acquires land relating to a project on the Company's behalf, the
Company will pay CNACD an agency fee of up to 2% of all the fees and
expenses in relation to the land acquisition (including, among other
things, land acquisition fee, formality fee, labour expenses and travelling
expenses, but excluding land premium).
The Construction Project Management Agreement will expire on 31 December 2006
and as provided in its supplemental agreement, among others, its term has been
extended to 31 December 2009.
Reasons for such transaction: It is customary to engage construction project
management services provider for complex construction projects. The outsourcing
of project management services allows the Company to focus on its core business
operation. Since CNACD possesses aviation industry related experience and
knowledge, which is not generally available from independent third party
services providers, the Directors believe it is desirable to engage CNACD as
project manager by entering into such transaction.
Historical Amounts and Proposed Caps:
The management fee paid by the Company to CNACD for each of the two years ended
31 December 2004 and 31 December 2005 and the first six months of 2006 were nil,
approximately RMB1.18 million and RMB1.17 million, respectively.
It is proposed that the maximum annual aggregate amount of the construction
project management fee payable by the Company to CNACD for each of the three
years ended 31 December 2007, 2008, 2009 will not exceed the annual limit of
RMB40 million, RMB30 million and RMB30 million, respectively.
Transaction Historical Caps Historical Figures Future Caps
Annual Annual Annual Actual Actual Unaudited Estimated Annual Annual Annual
cap cap cap annual annual historical annual cap cap cap
for the for the for the amount amount amount amount for the for the for the
year year year for for the for the for the year year year
ended ended ended the year period year ended ended ended ended
31 Dec 31 Dec 31 Dec year ended from
2004 2005 2006 ended 31 Dec 1 Jan to 31 Dec 2006 31 Dec 31 Dec 31 Dec
31 Dec 2005 30 Jun 2007 2008 2009
2004 2006
Construction RMB40 RMB40 RMB40 Nil RMB1.18 RMB1.17 RMB2 RMB40 RMB30 RMB30
project million million million million million million million million million
management fee
Basis for such caps:
In arriving at the above caps, the Directors considered particular situation of
certain construction projects and the construction schedule of these projects in
the coming three years.
In the past more than two years, the management fee the Company paid to CNACD
was low because:
• In 2005 and 2006, the Company commissioned CNACD to provide project
management service for the construction projects including the Air China
part of the T3 terminal building in Beijing ('T3 Terminal') and aircrew
office building of Zhejiang (branch) company ('Zhejiang Project'). As the
T3 Terminal has not entered the construction stage yet, there was no
management fee incurred for it. As for the Zhejiang Project, some
management fee was incurred, but as the Company is strictly following the
payment schedule based on the progress of construction, some management fee
will be paid at the end of 2006; and
• due to the prolonged construction designing and relevant PRC planning
authorities' examination and approval procedures, in the past three years,
construction of relatively few projects has been started and therefore
the Company did not paid much construction management fee.
However, with the continuing growth of our operation scale, our infrastructure
construction will concentrate in the future three years, in particular, 2007 and
2008, to reach a peak. Among the projects, whose construction term covers the
future two or three years, are the stay-over building in Guangzhou, the aircrew
office building in Chongqing, aircrew office building in Chengdu, the aircraft
maintenance center in Shanghai, warehouse project in Tianjin, T3 Terminal in
Beijing and etc. The total budgeted amount of the above projects is about RMB4.3
billion and the estimated budgeted amount for each of the future three years is
approximately RMB1.62 billion, RMB1.66 billion and RMB1.04 billion,
respectively. Given the fact the Company may not be able to have full control
over the development process of certain large construction projects due to
various reasons, the Company has considered the possibility that large amount of
capital expenditure may be incurred within one single year.
4.2 Property Leasing
The Company entered into a properties leasing framework agreement (the
'Properties Leasing Framework Agreement') and a supplemental agreement thereto
with CNAHC on 1 November 2004 and 10 November 2006, respectively.
Description of transaction: Pursuant to the Properties Leasing Framework
Agreement and the supplemental agreement thereto, the Company will lease from
CNAHC 16 properties covering an aggregate gross floor area of approximately
59,318.88 sq.m. for various uses including as business premises, offices and
storage facilities.
The Company will lease to the CNAHC Group a total of 6 properties covering an
aggregate gross floor area of approximately 7,996.55 sq.m. for various uses
including as business premises and offices.
The rent payable under the Properties Leasing Framework Agreement currently is,
and will continue to be determined in accordance with the relevant PRC
regulations or market rates. In principle, the annual increase in rental rate
will not exceed 5%.
The Properties Leasing Framework Agreement will expire on 31 December 2006 and
as provided in its supplemental agreement, among others, its term has been
extended to 31 December 2009.
Reasons for such transaction: In the ordinary course of business, the Company
has entered into similar property leasing transactions with various parties
including both connected persons and independent third parties.
Historical Amounts and Proposed Caps:
The aggregate amount of rent paid by the Company to CNAHC for each of the two
years ended 31 December 2004 and 31 December 2005 and the first six months of
2006 were approximately RMB16.99 million, RMB29.89 million and RMB26.55 million,
respectively.
It is proposed that the maximum annual aggregate amount of rent payable by the
Company to CNAHC for each of the three years ended 31 December 2007, 2008, 2009
will not exceed the annual limit of RMB55 million, RMB60 million and RM70
million, respectively.
The maximum annual aggregate amount of the rent payable by CNAHC to the Company
for each of the next three years ended 31 December 2007, 2008 and 2009 are
expected to fall below the de minimis threshold as stipulated under Rule 14A.33
(3) of the Hong Kong Listing Rules, therefore such transaction will be exempt
from the announcement and independent shareholders' approval requirements for
connected transactions.
Transaction Historical Caps Historical Figures Future Caps
Annual Annual Annual Actual Actual Unaudited Estimated Annual Annual Annual
cap cap cap annual annual historical annual cap cap cap
for the for the for the amount amount amount amount for the for the for the
year year year for the for the for the for the year year year
ended ended ended year year period year ended ended ended ended
31 Dec 31 Dec 31 Dec ended ended from 31 Dec 31 Dec 31 Dec
2004 2005 2006 31 Dec 31 Dec 1 Jan to 31 Dec 2006 2007 2008 2009
2004 2005 30 Jun
2006
Rent paid by RMB47.6 RMB50 RMB52.5 RMB16.99 RMB29.89 RMB26.55 RMB48.73 RMB55 RMB60 RMB70
us to CNAHC million million million million million million million million million million
under the
Properties
Leasing
Agreement
Basis for such caps:
In arriving at the above caps, the Directors have considered the historical
figures for the property leasing and taken into account the possibility that the
market price for rents of relevant properties will be increasing at an annual
rate of 5%, and the potential increase in the floor area of properties leased by
the Company from CNAHC.
As of to date, the properties leased by the Company from CNAHC and its
subsidiaries cover a floor area of 59,318 sq.m., representing an increase of
floor area of approximately 6,200 sq.m. compared to the period from 2004 to
2005. In 2006, three newly leased properties, i.e. Zhejiang Jiaoyun Building,
Sanliting aircrew boarding house in Hangzhou and a ticketing office at Chengdu,
were added to the properties leased by the Company. Considering the rising
rental rate of properties in the PRC, and the coming 2008 Beijing Olympic Games
and other factors, the Directors expect that the rental payment will continue to
rise in the next three years. Additionally, the construction of the Xi'nan
Air China Building, which is owned by CNAHC, is almost finished. After that, the
gross floor area of properties leased from CNAHC will increase.
4.3 Tourism Co-operation Services
The Company entered into a tourism services cooperation agreement (the
'Tourism Cooperation Agreement') and a supplemental agreement thereto with
CNATC on 1 November 2004 and on 10 November 2006, respectively.
Description of transaction: Pursuant to the Tourism Cooperation Agreement and
the supplemental agreement thereto, the Company has agreed to provide the
following services to CNATC:
• Commercial charter flight services: the Company will provide charter
(including charter flight route) services to customers procured by CNATC
at market rates.
• Package tours co-operation services: the Company and CNATC will sell
package tours combining (i) the Company's airline tickets with (ii)
accommodation at hotels owned and operated by CNATC. For the airline
tickets in such packages sold by CNATC, CNATC will pay the Company in
accordance with the pricing principle under the 'Sales Agency Framework
Agreement' while the Company will pay CNATC for the hotel fee portion of
the packages.
• Reciprocal frequent-flyer programme ('FFP') co-operation services: CNATC
will join the Company's FFP under which our Companion card members are
encouraged to stay at CNATC's hotels by receiving mileage credits for such
stay. As consideration, CNATC will pay us the equivalent value represented
by those mileage credits.
Pursuant to the Tourism Cooperation Agreement, CNATC agreed to provide the
following services to the Company:
• FFP co-operation services: under the FFP, if our Companion card members
redeem their mileage credits for free, discounted or upgraded stay at
CNATC's hotels, the Company will reimburse CNATC for such redemption at a
price similar to our arrangements with other FFP partners.
• Hotel accommodation services: CNATC will provide hotel accommodation
services to the Company's employees on duty and passengers affected by our
flight delays or cancellations, for which services the Company will pay
relevant fees to CNATC at group rates.
• Aviation tourist services with special features including but not limited
to a newly launched service of ground transportation for passengers
of two classes.
The Tourism Co-operation Agreement will expire on 31 December 2006 and as
provided in its supplemental agreement, among others, its term has been extended
to 31 December 2009.
Reasons for the transaction: In the ordinary course of business, the Company has
entered into similar transactions with various parties including both connected
persons and independent third parties. CNATC is a resourceful and well-known
tourism corporation with outstanding competency in air tourism. Tourism
cooperation with CNATC enables both CNATC and the Company to fully leverage on
their advantages to achieve better operating performance.
Historical Amounts, Revised Cap and Proposed Caps:
The annual aggregated amount paid by CNATC to the Company for each of the two
years ended 31 December 2004 and 31 December 2005 and the first six months of
2006 were approximately RMB6.74 million, RMB16.16 million and RMB25.81 million,
respectively.
The Directors have been monitoring the Company's continuing connected
transactions. Due to the launch of charter flight route business and based on
internal estimate of the annual transaction amount of 2006, the Directors note
that the existing cap for 2006 for tourism cooperation with CNATC will not be
sufficient for the Company's current requirement and therefore propose that
the existing cap, i.e. RMB40.4 million, be revised to be RMB51 million.
It is proposed that the aggregate amount to be paid by CNATC to the Company for
tourism cooperation for each of the three years ended 31 December 2007, 2008 and
2009 will not exceed the annual limit of RMB59.20 million, RMB69.04 million, and
RMB80.84 million, respectively.
The maximum aggregate annual amount to be paid by the Company to CNATC for
tourism cooperation for each of the three years ended 31 December 2007, 2008 and
2009 are expected to fall below the de minimis threshold as stipulated under
Rule 14A.33(3) of the Hong Kong Listing Rules, therefore such transaction will
be exempt from the announcement and independent shareholders' approval
requirement for connected transactions.
Transaction Historical Caps Historical Figures Future Caps
Annual Annual Annual Actual Actual Unaudited Estimated Revised Annual Annual Annual
cap cap cap annual annual historical annual annual cap cap cap
for the for the for the amount amount amount amount cap for the for the for the
year year year for the for the for the for the for the year year year
ended ended ended year year period year year ended ended ended
31 Dec 31 Dec 31 Dec ended ended from ended ended 31 Dec 31 Dec 31 Dec
2004 2005 2006 31 Dec 31 Dec 1 Jan to 31 Dec 31 Dec 2007 2008 2009
2004 2005 30 Jun 2006 2006
2006
Amount to be RMB30.8 RMB35.6 RMB40.4 RMB6.74 RMB16.16 RMB25.81 RMB51 RMB51 RMB59.2 RMB69.04 RMB80.84
paid by million million million million million million million million million million million
CNATC to
us under
the Tourism
Co-operation
Services
Agreement
Basis for such caps:
In arriving at the above caps, the Directors have considered the historical
figures for the same transactions and have taken into account the positive
prospects of such transactions.
Since early 2006, the Company cooperated with CNATC to offer commercial charter
flight route services to CNATC for the less popular routes, i.e. the route
between Beijing and Xilin Haote as well as that between Beijing and Mianyang.
Under such cooperation, the two flight routes are chartered to CNATC. In other
words, all the flights on the two flight routes are chartered to CNATC. Such
cooperation model has substantially increased the amount paid by CNATC to us.
From January 2006 to September 2006, CNATC paid us approximately RMB28
million for charter flight route service. Such revenue is expected to reach up
to approximately RMB41 million in total for 2006. Accordingly, the revenue
generated from FFP cooperation services as well as the package tours
co-operation services also have a substantial growth. Such revenue generated in
2006 is estimated to be not more than RMB10 million. Accordingly the estimated
annual transaction amount for 2006 will be approximately RMB51 million.
The Company and CNATC intend to further strengthen their cooperation in respect
of the charter flights available for the less popular routes. The Company
expects to enjoy a revenue growth in the next three years for further
improvement of the operation of the said two charter flight routes and the
potential cooperation opportunities emerging from the addition of extra less
popular routes. Based on the projection that the revenue generated from charter
flight cooperation during 2007 and 2009 is expected to achieve an annual growth
of 20%, the number of frequent flyers will also be further increased.
Accordingly, the revenue generated from its FFP cooperation services as well as
the package tours co-operation services is also expected to have a continuous
growth.
4.4 Comprehensive Services
The Company entered into a comprehensive services agreement (the
'Comprehensive Services Agreement') and a supplemental agreement thereto with
CNAHC on 1 November 2004 and on 10 November 2006 respectively.
Description of transaction: pursuant to the Comprehensive Services Agreement and
the supplemental agreement thereto:
• CNAHC will provide the Company with various ancillary services,
including but not limited to:
(i) catering service;
(ii) supply of various items for in-flight services;
(iii) manufacturing and repair of airline-related ground equipment and
vehicles;
(iv) cabin decoration and equipment;
(v) passenger cabin and cargo cabin ancillary parts (including seats);
(vi) warehousing services;
(vii) in-flight articles cleaning services; and
(viii) printing of air tickets and other documents.
• The Company will provide certain welfare-logistics services to
the retired employees of CNAHC and its subsidiaries.
The charges payable by the Company to CNAHC for the comprehensive services above
shall be based on prevailing market rate or, if no prevailing market rate is
available, fair and reasonable price determined after arm's length
negotiation. The management charges payable by CNAHC to the Company for the
welfare-logistics services provided to its retired employees shall be settled at
a rate of 4%. Such charges relating to retired employees shall be appropriated
to the Company before the quarter for making such payment.
The Comprehensive Services Agreement will expire on 31 December 2006 and as
provided in its supplemental agreement, among others, its term has been extended
to 31 December 2009.
Reasons for the transaction: For the services to be provided by CNAHC, the
Directors believe that CNAHC has special strengths that independent parties do
not possess, including (1) knowledge of the aviation industry; (2) a proven
track record of quality and timely service; and (3) the site where services are
provided by CNAHC are generally near to the site of the Company and therefore
the ability to offer efficient services. In light of these factors, the
Directors believe that it is in the best interest of the Company to enter into
above transactions with CNAHC.
Historical Amounts and Proposed Caps:
The annual aggregated amount paid by the Company to CNAHC for each of the two
years ended 31 December 2004 and 31 December 2005 and the first six months of
2006 were approximately RMB92.80 million, RMB91.20 million and RMB39 million,
respectively.
It is proposed that the total amount to be paid by the Company to CNAHC under
the Comprehensive Services Agreement for each of the three years ended 31
December 2007, 2008 and 2009 will not exceed the annual limit of RMB80 million,
RMB90 million and RMB100 million, respectively.
For each of the three years ended 31 December 2007, 2008 and 2009, the total
annual amount to be paid by CNAHC to the Company for the provision of
welfare-logistics services to the retired employees is expected to fall below
the de minimis threshold as stipulated under Rule 14A.33(3) of the Hong Kong
Listing Rules, therefore such transaction will be exempt from the announcement
and independent shareholder approval requirement for connected transactions.
Transaction Historical Caps Historical Figures Future Caps
Annual Annual Annual Actual Actual Unaudited Estimated Annual Annual Annual
cap cap cap annual annual historical annual cap cap cap
for the for the for the amount amount amount amount for the for the for the
year year year for the for the for the for the year year year
ended ended ended year year period year ended ended ended
31 Dec 31 Dec 31 Dec ended ended from ended 31 Dec 31 Dec 31 Dec
2004 2005 2006 31 Dec 31 Dec 1 Jan to 31 Dec 2007 2008 2009
2004 2005 30 Jun 2006
2006
Amount to be RMB100 RMB115 RMB132 RMB92.80 RMB91.20 RMB39 RMB75 RMB80 RMB90 RMB100
paid by us to million million million million million million million million million million
CNAHC under
the
Comprehensive
Services
Agreement
Basis for such caps:
In arriving at the above caps, the Directors have considered the historical
figures for the same transaction and have taken into account the expected growth
of the Company's air passenger services in the next few years.
On the one hand, there were decreasing transaction amounts recorded in the past
three years, which were mainly due to the restructuring and streamlining of
enterprises that provided services to the Company and the disposal of interests
in such enterprises by CNAHC Assets Management Company (the Assets Management
Company). As at the end of 2006, the number of affiliates of Assets Management
Company has been reduced by four.
On the other hand, in 2005, the transaction amount relating to the in-flight
catering services accounted for approximately 60% of those of the comprehensive
services. As the number of flights is growing, it is expected that the catering
business of the affiliated enterprise of the Assets Management Company, i.e.
Zhejiang Zhongyu, will also be increased in the future. Accordingly, the
projected transaction amounts will increase from 2007 to 2009.
4.5 Line Maintenance and Other Ground Services
The Company entered into a standard ground handling agreement (the 'Standard
Ground Handling Agreement') with CASL on 17 April 2004, which has a term of one
year and is subject to renewal and the latest renewal was done in January 2006
and the renewed term is still one year.
Description of transaction: CASL provides line maintenance and other ground
services at Hong Kong International Airport to the Company. The services are
charged at market rates.
Reasons for the transaction: CASL had been providing such services to the
Company prior to the restructuring for the Company's initial public offering
in 2004 and the Company will continue to require such services.
Historical Amounts and Proposed Caps:
The aggregated amount paid by the Company to CASL for each of the two years
ended 31 December 2004 and 31 December 2005 and the first six months of 2006
were approximately RMB23.7 million, RMB29.15 million and RMB14.32 million,
respectively.
It is proposed that the maximum annual aggregate amount payable by the Company
to CASL for the line maintenance and other ground services for each of the three
years ended 31 December 2007, 2008 and 2009 will not exceed the annual limit of
RMB45 million, RMB50 million and RMB55 million, respectively.
Transaction Historical Caps Historical Figures Future Caps
Annual Annual Annual Actual Actual Unaudited Estimated Annual Annual Annual
cap cap cap annual annual historical annual cap cap cap
for the for the for the amount amount amount amount for the for the for the
year year year year year year
ended ended ended for the for the for the for the ended ended ended
31 Dec 31 Dec 31 Dec year year period year ended 31 Dec 31 Dec 31 Dec
2004 2005 2006 ended ended from 31 Dec 2007 2008 2009
31 Dec 31 Dec 1 Jan to 2006
2004 2005 30 Jun
2006
Amount to be RMB40 RMB45 RMB50 RMB23.7 RMB29.15 RMB14.32 RMB33 RMB45 RMB50 RMB55
paid by million million million million million million million million million million
us to CASL
under the
Standard
Ground
Handling
Agreement
Basis for such caps:
In arriving at the above caps, the Directors have considered the historical
figures for the same transaction and the high speed of growth of transaction
amounts in recently years, and have also taken into account the possible
increase in the Company's demand for the line maintenance and other ground
services including some new services at the Hong Kong International Airport
along with the increasing demand for the Company's passenger services in the
next few years.
In addition, due to the rapid business growth of the Company, our fleet size has
been growing very fast. The number of aircraft operated by the Company at the
end of 2004, 2005 and the first six months of 2006 amounted to 151, 176 and 192,
respectively. In 2006, purchase agreements in respect of the purchase of 49
aircrafts in total were executed. There will be more flights to Hong Kong that
will increase relevant ground service charges.
Besides, there is a possibility that 3% Goods and Service Tax will be charged by
the Government of Hong Kong Special Administrative Region, which may or may not
be approved in the future. Locally, Hong Kong has continued to suffer
inflationary pressure with Consumer Pricing Index rising to 2.3% for the month
of July 2006. All these factors will probably lead to the increase of the
service charges to be paid by the Company to CASL.
4.6 Sales Agency Services for Airline Tickets and Cargo Space
The Company entered into a sales agency framework agreement (the 'Sales
Agency Services Framework Agreement') and a supplemental agreement thereto with
CNAHC on 1 November 2004 and on 10 November 2006, respectively.
Description of transaction: Pursuant to the Sales Agency Services Framework
Agreement and the supplemental agreement thereto, certain associates of CNAHC
acting as the Company's sales agents will:
• purchase air tickets and cargo spaces from the Company at wholesale prices
and resell such air tickets and cargo spaces to end-purchasers; or
• procure purchasers for the Company's air tickets and cargo
spaces on a commission basis.
The Company will pay the relevant agency commission based on relevant PRC
regulations or, where the regulations do not provide a specific commission,
based on market rates. Currently, the commissions prescribed for sales of air
tickets are as follows:
• for domestic routes, 3% of the ticket price;
• for Hong Kong and Macau routes, 7% of the ticket price; and
• for international routes, 9% of the ticket price.
In accordance with industry practice, and subject to applicable regulations, the
Company may also offer incentives to sales agents for reaching certain ticket
sale targets.
The Sales Agency Services Framework Agreement will expire on 31 December 2006
and as provided in its supplemental agreement, among others, its term has been
extended to 31 December 2009.
Reasons for the transaction: The Company has entered into similar transactions
with various parties including both connected persons and independent third
parties in its ordinary course of business. The agency companies of CNAHC have
rich experience and sizable customer base in air transportation agency business.
Historical Amounts and Proposed Caps:
The annual aggregate sales agency commission and amount of incentive paid by the
Company to CNAHC Group for each of the two years ended 31 December 2004 and 31
December 2005 and the first six months of 2006 were approximately RMB25.91
million, RMB34.74 million and RMB19.18 million, respectively. The annual
aggregate sales of airline tickets and cargo space to CNAHC Group for on-sale to
end-users for each of the two years ended 31 December 2004 and 31 December 2005
and the first six months of 2006 were approximately RMB218.4 million, RMB232.83
million and RMB103.71 million, respectively.
It is proposed that the maximum annual aggregate amount of sales agency
commission and amount of incentive to be paid by the Company to CNAHC Group for
each of the three years ended 31 December 2007, 2008 and 2009 will not exceed
the annual limit of RMB63 million, RMB75.60 million, and RMB90.72 million,
respectively; and that the annual aggregate sales of airline tickets and cargo
space to CNAHC Group for on-sale to end-users for each of the three years ended
31 December 2007, 2008 and 2009 will not exceed the annual limit of RMB357
million, RMB408 million, and RMB459 million, respectively.
Transaction Historical Caps Historical Figures Future Caps
Annual Annual Annual Actual Actual Unaudited Estimated Annual Annual Annual
cap cap cap annual annual historical annual cap cap cap
for the for the for the amount amount amount amount for the for the for the
year year year for the for the for the for the year year year
ended ended ended year year period year ended ended ended ended
31 Dec 31 Dec 31 Dec ended ended from 31 Dec 2006 31 Dec 31 Dec 31 Dec
2004 2005 2006 31 Dec 31 Dec 1 Jan to 2007 2008 2009
2004 2005 30 Jun
2006
Agency RMB29 RMB35 RMB42 RMB25.91 RMB34.74 RMB19.18 RMB41 RMB63 RMB75.6 RMB90.72
commissions million million million million million million million million million million
and incentives
paid by us to
CNAHC)
Sales of airline RMB420 RMB470 RMB533 RMB218.4 RMB232.83 RMB103.71 RMB260 RMB357 RMB408 RMB459
tickets million million million million million million million million million million
and cargo
space to
CNAHC Group
Basis for such caps:
In arriving at the above caps, the Directors have considered the historical
figures for the past three years and the potential growth of such transactions.
The actual amount of the agency commission and amount of incentives paid in
respect of ticket sales for each of the two years ended 31 December 2004 and 31
December 2005 and the first six months of 2006 were RMB25.91 million, RMB34.74
million and RMB19.18 million, respectively. The annual growth rate of 2005 over
2004 was 35%.
Due to the rapid business growth of the Company, its fleet size has been growing
very fast. Through implementation of the first and business class renovation
works as well as by leveraging on the potential business growth arising from the
2008 Beijing Olympic Games, the Directors expect that the the agency commission
and amount of incentives paid in respect of ticket sales will considerably
increase accordingly. The Directors expect the transaction amount will have an
annual increase of approximately 20% over the future three years.
As for the sale of air tickets and cargo space, the actual revenues generated
from the ticket and cargo space sales in the first six months of 2006 were
RMB103.71 million. The revenue generated from the ticket and cargo space sales
is expected to be up to RMB260.10 million in 2006. The Company's cargo fleet
now has 8 aircraft, compared to 4 aircraft in 2004. The future expansion of the
Company's fleet size and the restructuring of Air China Cargo plus the 2008
Beijing Olympic Games will lead to sustainable growth of the ticket and cargo
space sales.
5. NON-EXEMPT CONTINUING CONNECTED TRANSACTIONS
5.1 Financial Services
The Company entered into a financial services agreement (the 'Financial
Services Agreement') and a supplemental agreement thereto with CNAF on 1
November 2004 and on 10 November 2006, respectively.
Description of transaction: Pursuant to the Financial Services Agreement and the
supplemental agreement thereto, CNAF has agreed to provide the Group with a
range of financial services including the following:
• deposit services;
• loan and finance leasing services;
• negotiable instrument and letter of credit services;
• trust loan and trust investment services;
• underwriting services for debt issuances;
• intermediary and consulting services;
• guarantee services;
• settlement services;
• internet banking services; and
• any other services provided by CNAF under the approval of the China Banking
Regulatory Commission ('CBRC').
The fees and charges payable by the Group to CNAF under the Financial Services
Agreement are determined with reference to the applicable fees and charges
specified by the People's Bank of China (the 'PBOC') and the CBRC for the
relevant services from time to time, and if neither the PBOC nor the CBRC has
specified a fee or charge for a particular service, then the service will be
provided by CNAF on terms no less favourable than terms available from
commercial banks in China and the terms offered by CNAF to other members of
CNAHC Group.
The Financial Services Agreement will expire on 31 December 2006 and as provided
in its supplemental agreement, among others, its term has been extended to 31
December 2009.
Reasons for the transaction: The Directors believe that it is in the interest of
the Company to enter into above transaction with CNAF having taken into account
the following factors:
• in respect of transactions between the Group and members of CNAHC group,
CNAF is able to provide more efficient settlement service compared with
independent third party banks; and
• since CNAF is 19.31% owned by the Company, the Company can
ultimately benefit from the business development of CNAF.
Historical Amounts and Proposed Caps:
The annual aggregated amount of certain transactions between the Group and CNAF
for each of the two years ended 31 December 2004 and 31 December 2005 and the
first six months of 2006 are as follows:
• Maximum daily outstanding balance of deposits (including accrued interest)
placed by the Group with CNAF were RMB1,196 million, RMB1,047 million
and RMB 784 million, respectively;
• Maximum daily outstanding balance of loans (including accrued interest)
granted by CNAF to the Group were RMB523.9 million, RMB597.47 million
and RMB690 million, respectively; and
• Fees and charges paid by the Group to CNAF for other financial Services
were nil, approximately RMB14.40 million and RMB7.91million, respectively.
It is proposed that the maximum aggregate annual amount of certain transactions
between the Group and CNAF for each of the next three years ended 31 December
2007, 2008 and 2009 will not exceed the annual limit as follows:
• Maximum daily outstanding balance of deposits (including accrued
interest) placed by the Group with CNAF will be RMB2.5 billion; and
• Maximum daily outstanding balance of loans (including accrued
interest) granted by CNAF to the Group will be RMB2.5 billion.
The maximum aggregate annual amount to be paid by the Group to CNAF for other
financing services for each of the three years ended 31 December 2007, 2008 and
2009 are expected to fall below the de minimis threshold as stipulated under
Rule 14A.33(3) of the Hong Kong Listing Rules, therefore such transactions will
be exempt from the announcement and independent shareholders' approval
requirement for connected transactions.
Transaction Historical Caps Historical Figures Future Caps
Annual Annual Annual Actual Actual Unaudited Estimated Annual Annual Annual
cap cap cap annual annual historical annual cap cap cap
for the for the for the amount amount amount amount for the for the for the
year year year for the for the for the for the year year year
ended ended ended year year period year ended ended ended ended
31 Dec 31 Dec 31 Dec ended ended from 31 Dec 2006 31 Dec 31 Dec 31 Dec
2004 2005 2006 31 Dec 31 Dec 1 Jan to 2007 2008 2009
2004 2005 30 Jun
2006
Financial RMB5 RMB5 RMB5 RMB1,196 RMB1,047 RMB784 RMB1 RMB2.5 RMB2.5 RMB2.5
Services billion billion billion million million million billion billion billion billion
(deposit)
Financial RMB3 RMB3 RMB3 RMB523.9 RMB597.47 RMB690 RMB750 RMB2.5 RMB2.5 RMB2.5
Services
(loan) billion billion billion million million million million billion billion billion
Basis for such caps:
In arriving at the caps for financial services to be provided by CNAF, the
Directors have considered the historical figures and have taken into account (i)
the historical and estimated figures as set out in the table above; (ii) the
level of financial flexibility required by the Company; and (iii) the increase
in capital expenditures needs as the business scale expands.
The Company has entered into a new stage of swift growth after its restructuring
and successful listing and has more room for development. Its demands for
financial services will be increased accordingly. Since the fuel price has
become relatively stable, the Company's performance will be improved steadily
and the cash flow will increase gradually, which will result in a substantial
demand for deposits. Meanwhile, the expansion of the Company's fleet size and
the air routes network will also lead to a higher demand for loans. In
particular, huge amount of loans are needed to finance the purchase of new
aircraft each year for the coming three years.
5.2 Subcontracting of Charter Flight Services
The Company entered into a charter flight service framework agreement (the
'Charter Flight Service Framework Agreement') and a supplemental agreement
thereto with CNAHC on 1 November 2004 and on 10 November 2006, respectively.
Description of transaction: Pursuant to the Charter Flight Service Framework
Agreement and the supplemental agreement thereto, CNAHC will subcontract to the
Company its obligation of government charter flight that it undertakes from the
PRC government. The Company's hourly rate of the charter flight service fee
will be calculated on the basis of the following formula that includes total
cost and reasonable margins:
Hourly rate = Total cost per flight hour x (1 + 6.5%)
Total cost includes all direct costs and indirect costs.
The Charter Flight Service Framework Agreement will expire on 31 December 2006
and as provided in its supplemental agreement thereto, among others, its term
has been extended to 31 December 2009.
Reasons for the transaction: As the national flag carrier of China, the Company
has historically provided charter flights for government related travel services
to national leaders, government delegations, national sports teams and cultural
envoys. The Company has gained significant brand recognition by being the
designated government charter flight carrier. Based upon the hourly rate formula
under the Charter Flight Service Framework Agreement and its supplemental
agreement, it is expected that the Company will generate considerable revenue
from such transaction.
Historical Amounts and Proposed Caps:
The aggregate annual amount paid by CNAHC to the Company for each of the two
years ended 31 December 2004 and 31 December 2005 and the first six months of
2006 were nil, approximately RMB407.05 million and RMB221.83 million,
respectively.
It is proposed that the maximum annual aggregate amount of revenue derived from
the Charter Flight Service Framework Agreement for each of the three years ended
31 December 2007, 2008 and 2009 will not exceed the annual limit of RMB700
million, RMB812 million and RMB917 million, respectively.
Transaction Historical Caps Historical Figures Future Caps
Annual Annual Annual Actual Actual Unaudited Estimated Annual Annual Annual
cap cap cap annual annual historical annual cap cap cap
for the for the for the amount amount amount amount for the for the for the
year year year for the for the for the for the year year year
ended ended ended year year period year ended ended ended ended
31 Dec 31 Dec 31 Dec ended ended from 31 Dec 2006 31 Dec 31 Dec 31 Dec
2004 2005 2006 31 Dec 31 Dec 1 Jan to 2007 2008 2009
2004 2005 30 Jun
2006
Amount of RMB600 RMB650 RMB700 Nil RMB407.05 RMB221.83 RMB500 RMB700 RMB812 RMB917
revenue million million million million million million million million million
derived from
the Charter
Flight Service
Framework
Agreement
Basis for such caps:
In arriving at the above caps, the Directors considered the historical and
estimated figures as set out in the table above of the same transaction and the
following factors:
• considering the development of China's foreign relationship as well as its
booming foreign economic cooperation, the Directors expect that
governmental delegates, national sports teams and cultural envoys will have
more frequent visits to foreign countries, especially before 2008 Beijing
Olympics Games. The Directors expect substantial increase in flight hours
is respect of such charter flight in 2007 and 2008;
• the level of flexibility as suggested by relevant government bodies; and
• the potential future surge in the fuel and other flight-related costs.
5.3 Continuing Connected Transactions between the Group and the Lufthansa Group
Description of transaction: The Company has entered into various transactions
under separate agreements with different periods, some of which are more than
three years, with Lufthansa Group in the ordinary course of its business,
including, among others:
• MRO Services provided by the Company to the Lufthansa Group;
• mutual provision of catering services;
• mutual provision of ground handling services in China and Germany;
• mutual provision of ticket sales agency services;
• airline codeshare arrangement under which the actual carrier's flights can
be marketed under the airline designator code of the partner carrier and
revenues earned from these arrangements are allocated between the parties
based on negotiated terms according to airline industry standards;
• special prorate arrangement under which a carrier agrees to accept
passengers from another carrier and receive payment directly from that
carrier; and
• other airline co-operation arrangements between the Lufthansa Group and the
Company.
The above transactions have been entered into on normal commercial terms based
on arm's length negotiations.
Reasons for the transaction: The Company has entered into various transactions
with Lufthansa Group in the ordinary course of the Company's business.
Lufthansa is one of the leading airlines worldwide and is one of the founding
members of the Star Alliance, which is the largest and most awarded airline
alliance in the world. Lufthansa is a premium brand which has a high level of
recognition and a first class reputation. Through the co-operation with
Lufthansa Group, the Group could further enhance the quality and attractiveness
of its products and services.
Historical Amounts and Proposed Caps:
For each of the two years ended 31 December 2004 and 31 December 2005 and the
first six months of 2006, (i) the aggregate annual amount paid by the Company to
Lufthansa Group, for its ground handling and catering services and pursuant to
sales agency arrangement, code-sharing, special prorate and other airline
cooperation arrangements, were approximately RMB435.05 million, RMB634.34
million and RMB234.28 million, respectively; and (ii) the aggregate annual
amount paid by Lufthansa Group to us, for our ground handling service and MRO
Services and pursuant to sales agency arrangement, code-sharing, special prorate
and other airline cooperation arrangements, were approximately RMB409.30
million, RMB466.27 million and RMB209.28 million, respectively.
It is expected that for each of the three years ended 31 December 2007, 2008 and
2009, (i) the maximum amount payable by the Company to Lufthansa Group, for its
ground handling and catering services and pursuant to sales agency arrangement,
code-sharing, special prorate and other airline cooperation arrangements, will
not exceed the annual limit of RMB775.20 million, RMB900 million and RMB1,017
million, respectively; and (ii) the maximum amount payable by Lufthansa Group to
us, for our ground handling service and MRO services and pursuant to sales
agency arrangement, code-sharing, special prorate and other airline cooperation
arrangements, will not exceed the annual limit of RMB592.80 million, RMB687.70
million and RMB777 million, respectively.
Transaction Historical Caps Historical Figures Future Caps
Annual Annual Annual Actual Actual Unaudited Estimated Annual Annual Annual
cap cap cap annual annual historical annual cap cap cap
for the for the for the amount amount amount amount for the for the for the
year year year for the for the for the for the year year year
ended ended ended year year period year ended ended ended ended
31 Dec 31 Dec 31 Dec ended ended from 31 Dec 31 Dec 31 Dec 31 Dec
2004 2005 2006 31 Dec 31 Dec 1 Jan to 2006 2007 2008 2009
2004 2005 30 Jun
2006
Amount to be RMB630 RMB660 RMB750 RMB435.05 RMB634.34 RMB234.28* RMB680 RMB775.20 RMB900 RMB1,017
paid by million million million million million million million million million million
the Company
to Lufthansa
Group
Amount to be RMB500 RMB530 RMB600 RMB409.30 RMB466.27 RMB209.28* RMB520 RMB592.8 RMB687.7 RMB777
paid by million million million million million million million million million million
the
Lufthansa
Group
to Company
* Due to accounting policy reason and that the high season for travelling is
July, August and September, the transaction amount in the second half year
will be much higher than that of the first half year.
Basis for such caps:
In arriving at the above caps, the Directors have considered (i) the historical
and estimated figures as set out in the table above; and (ii) the discussion
with Lufthansa Group about its planned flight schedules between Germany and
China; and (iii) the Company's business plan about increased flight routes to
Germany.
It is expected that compared to 2005, the rate of growth for the actual
transaction amount of 2006 will be about 7.2% for amounts paid by the Company to
Lufthansa Group, and about 11.5% for amounts to be paid by Lufthansa Group to
the Company. This is mainly due to the increase in code sharing services, which
resulted from the rapid business growth of the Company and the growth of its
fleet size.
Considering the expansion of the Company's fleet, plus that the expected
increase in the business of the Company and Lufthansa Group brought by the 2008
Beijing Olympic Games and the stronger trading relationships between China and
Germany along with the economic development of China and Germany, transaction
amount for the future three years are expected to considerably increase. In
addition, after the Company becomes a member of the Star Alliance, the Company
will have more opportunities of commercial cooperation with Lufthansa Group.
Based on the above reasons, the Directors consider that the annual growth rate
for the caps is expected to be less than 14%, 16% and 13%, respectively, for the
three years ended 31 December 2009 are fair and reasonable. The growth rates of
2007 and 2008 will be higher than that of 2009 due to the impact of 2008 Beijing
Olympic Games, with 2008 being the highest amongst the three years due to the
fact that the 2008 Beijing Olympic Games will take place in 2008.
5.4 Continuing Connected Transactions between the Group and the Beijing
Capital Airports Group
Description of transaction: The Company had entered into various transactions
with Beijing Capital Airports Group in the ordinary course of its business under
various agreements. On 10 November 2006, the Company and Beijing Capital
Airports Group entered into a service framework agreement ('Service Framework
Agreement'), under which the services include, among others:
• provision of taking-off/landing/parking services of the Company's aircraft
at airports owned by the Beijing Capital Airports Group;
• provision of passengers' waiting lounge, check-in counters and office
buildings to the Company by airports owned by the Beijing Capital
Airports Group;
• provision of utilities (including water, gas and electricity) to the
Company at Beijing Capital International Airport by the Beijing Capital
Airports Group; and
• provision of ground handling services to the Company by the Beijing Capital
Airports Group.
Most of the services provided by the Beijing Capital Airports Group to the
Company are charged on the pricing terms which are prescribed, approved or
recommended by PRC governmental authorities.
The Service Framework Agreement has a term of three years from 1 January 2007 to
31 December 2009, subject to renewal.
Reasons for the transaction: The Company has entered into various transactions
with Beijing Capital Airports Group in the ordinary course of the Company's
business.
Historical Amounts and Proposed Caps:
The actual transaction amounts paid by the Company to the Beijing Capital
Airports Group for each of the two years ended 31 December 2004 and 31 December
2005 and the first six months of 2006 were approximately RMB653.40 million,
RMB709.82 million and RMB381.82 million, respectively.
It is proposed that for each of the three years ended 31 December 2007, 2008 and
2009, the maximum amount payable by the Company to Beijing Capital Airports
Group under the Service Framework Agreement will not exceed the annual limit of
RMB1,026 million, RMB1,190 million and RMB1,350 million, respectively.
Transaction Historical Caps Historical Figures Future Caps
Annual Annual Annual Actual Actual Unaudited Estimated Annual Annual Annual
cap cap cap annual annual historical annual cap cap cap
for the for the for the amount amount amount amount for the for the for the
year year year for the for the for the for the year year year
ended ended ended year year period year ended ended ended ended
31 Dec 31 Dec 31 Dec ended ended from 31 Dec 31 Dec 31 Dec
2004 2005 2006 31 Dec 31 Dec 1 Jan to 31 Dec 2006 2007 2008 2009
2004 2005 30 Jun
2006
Amount paid by us RMB730 RMB900 RMB1,200 RMB653.40 RMB709.82 RMB381.82 RMB900 RMB1,026 RMB1,190 RMB1,350
to million million million million million million million million million million
the Beijing
Capital
Airports Group
Basis for such caps:
In arriving at the above caps, the Directors have taken into account (i) the
historical and estimated figures as set out in the table above, and (ii) the
increase in the number of flights based on the Company's projections, as well
as:
• that the Company will continue to position Beijing as the hub for its
development strategy. Considering that the fast growing fleet size of the
Company and the 2008 Beijing Olympic Games, the number of aircrafts of the
Company taken off/landed at Beijing Capital Airport will increase
accordingly and as a result, the landing fee and other services fee charged
by the Beijing Capital Airports is expected to be increased; and
• in addition, the costs incurred in connection with public facilities and
ground operations etc. of the Beijing Capital Airports will also be
increased due to the rise in the energy costs in recent years, the
expansion of the infrastructural facilities in the Beijing Capital Airports
and the completion of the T3 Terminal.
6. LISTING RULES IMPLICATIONS
6.1 The continuing connected transactions under the Financial Services
Agreement and its supplemental agreement between the Company and CNAF, the
Charter Flight Service Framework Agreement and its supplemental agreement
between the Company and CNAHC, and the Service Framework Agreement between the
Company and the Beijing Capital Airports Group, and the continuing connected
transactions between the Company and Lufthansa Group fall under Rule 14A.35 of
the Hong Kong Listing Rules. These transactions are subject to reporting and
announcement requirements set out under Rules 14A.45 to 14A.47 of the Hong Kong
Listing Rules and are required to be approved by the Independent Shareholders in
accordance with the requirements set out under Rules 14A.48 at the Company's
EGM.
6.2 Except the Non-exempt Continuing Connected Transactions, as each of the
Percentage Ratios (other than the profits ratio) of the other continuing
connected transactions (excluding the de minimis continuing connected
transactions) set out in this announcement above, on an annual basis, higher
than 0.1% and less than 2.5%, they therefore fall under Rule 14A.34 of the Hong
Kong Listing Rules. Accordingly, these continuing connected transactions are
subject to the reporting and announcement requirements set out under Rules
14A.45 to 14A.47 of the Hong Kong Listing Rules, but are exempt from the
requirements of independent shareholders' approval under Chapter 14A of the
Hong Kong Listing Rules.
6.3 The Board (including the independent non-executive directors of the
Company) considers that the abovementioned continuing connected transactions
have been conducted on normal commercial terms or on terms no less favourable
than those available to independent third parties and were entered into on a
continuing and regular basis and in the ordinary and usual course of business of
the Company, are fair and reasonable and in the interests of the Company and the
Shareholders as a whole, and that the revised annual cap of 2006 for certain
continuing connected transaction and the annual cap for each of the future three
years ended 31 December 2007, 2008 and 2009 for the abovementioned continuing
connected transactions are fair and reasonable.
6.4 A circular containing, among other things, (i) details of the Non-exempt
Continuing Connected Transactions; (ii) a letter from an independent financial
adviser to the Independent Board Committee and the Independent Shareholders
containing its advice on the Non-exempt Continuing Connected Transactions; and
(iii) the recommendation of the Independent Board Committee in respect of the
Non-exempt Continuing Connected Transactions, will be despatched to shareholders
in accordance with the Hong Kong Listing Rules as soon as practicable.
7. PRC LAW IMPLICATIONS
7.1 Pursuant to the Listing Rules of the Shanghai Stock Exchange, the
supplemental agreements mentioned above to the following agreements shall be
approved or ratified by the Shareholders at the EGM:
(a) Financial Services Agreement;
(b) Charter Flight Service Framework Agreement;
(c) Sales Agency Services Framework Agreement; and
(d) Standard Ground Handling Agreement.
DEFINITIONS
In this announcement, unless the context otherwise requires, the following terms
shall have the following meanings:
'Air China Cargo' Air China Cargo Co., Ltd, a company with limited
liability incorporated under the laws of People's
Republic of China and with 51% of its registered
capital owned by the Company as at the date of
this announcement
'Board' The board of Directors of the Company
'Company' Air China Limited, a company incorporated in the
People's Republic of China, whose H shares are
listed on the Hong Kong Stock Exchange as its
primary listing venue and on the Official List of
the UK Listing Authority as its secondary listing
venue, and whose A shares are listed on the
Shanghai Stock Exchange
'Directors' The directors of the Company
'EGM' The Company's extraordinary general meeting to be
held on 28 December 2006
'Group' The Company, its subsidiaries and joint ventures
'Hong Kong Listing Rules' The Rules Governing the Listing of Securities on
The Stock Exchange of Hong Kong Limited
'Hong Kong Stock Exchange' The Stock Exchange of Hong Kong Limited
'Independent Board Committee' A board committee comprising Mr. Wu Zhipan,
Mr. Zhang Ke and Mr. Jia Kang, all being the
independent non-executive directors
of the Company
'Independent Shareholders' The independent shareholders of the Company
'MRO Services' Aircraft maintenance, repair and overhaul services
'Non-exempt Continuing The transactions under the Financial Services
Connected Transaction' Agreement and its supplemental agreement between
the Company and CNAF, the Charter Flight Service
Framework Agreement and its supplemental agreement
between the Company and CNAHC, the Service
Framework Agreement between the Company and the
Beijing Capital Airports Group and the
continuing connected transactions between the
Company and Lufthansa Group
'Percentage Ratios' The percentage ratios set out in Rule 14.07 of the
Hong Kong Listing Rules, i.e. 'assets ratio',
'profits ratio', 'revenue ratio', 'consideration
ratio' and 'equity capital ratio'
'PRC' The People's Republic of China, excluding, for the
purpose of this announcement only, Hong Kong,
Macau and Taiwan
'Prospectus' The Company's prospectus dated 3 December 2004
'RMB' Renminbi, the lawful currency of the PRC
'Shareholders' Shareholders of the Company
By order of the Board
Air China Limited
Zheng Baoan Li Man Kit
Joint Company Secretaries
Beijing, 13 November 2006
As at the date of this announcement, the Directors of the Company are Messrs 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* and
Jia Kang*.
* Independent non-executive Director of the Company
This information is provided by RNS
The company news service from the London Stock Exchange
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