Final Results - Part 1
Air China Ld
26 April 2005
Part 1
Air China Limited (the 'Company') is a joint stock limited company with limited
liability incorporated in the PRC under the laws of the PRC on September 30,
2004. The Company has an extensive operating history in China through its
predecessors and has historically been the principal Chinese airline providing
international, domestic and regional airline services. Our original predecessor
was the Beijing Administrative Bureau of Civil Aviation Administration of China
which is now known as the General Administration of Civil Aviation of China ('
CAAC'), which began providing air services since 1955. Our immediate predecessor
was established in 1988 as Air China International Corporation to assume the
operations of the CAAC's Beijing Administrative Bureau.
Our parent company, China National Aviation Holding Company ('CNAHC'), was
formed in October 2002 to hold certain airline and airline-related assets,
including the equity interest of Air China International Corporation. Air China
International Corporation also merged with China National Aviation Corporation
('CNAC (PRC)'), which owned Zhejiang Airlines, and China Southwest Airlines in
October 2002. In 2003, China Southwest Airlines and CNAC Zhejiang Airlines were
dissolved as legal entities and their respective airline operations, assets and
liabilities, and employees were integrated with Air China International
Corporation.
We were established by restructuring for the purpose of initial public offering
in 2004. By way of restructuring, we assumed all the airline and airline-related
business operated by Air China International Corporation, together with its
related assets and liabilities, including its aircraft and related equipment and
the equity interests in various investees. In addition, we assumed from China
National Aviation Corporation (Group) Limited ('CNACG') a controlling interest
of approximately 69% in China National Aviation Company Limited ('CNAC'), a
company listed on the Hong Kong Stock Exchange that provides passenger and cargo
air transportation and other airline-related services through its subsidiaries
and affiliates. CNAC in turn owns approximately 43.3% of Hong Kong Dragon
Airlines Limited ('Dragonair') and 51.0% of Air Macau Company Limited ('Air
Macau'). We have also acquired 48.0% of the equity interest of Shandong Aviation
Group and 22.8% of the equity interest of Shandong Airlines Co., Ltd. whose B
Shares are listed on Shenzhen Stock Exchange.
Our business scope mainly covers: international and domestic scheduled and
non-scheduled passenger, cargo, mail and luggage transportation, domestic and
international business jet service, aircraft custody, aircraft maintenance,
agency service between airlines; other businesses related to above core business
include ground service and aviation courier service (except mail and objects of
the same nature as mail) and in-flight duty free items. We provide above
airline-related services in Beijing, Chengdu, Hong Kong and other locations
through our own business units and joint ventures with prominent companies,
including Deutsche Lufthansa AG ('Lufthansa') and Hong Kong Jardine Matheson
Ltd.
As of December 31, 2004, the Company, including Air China Cargo Co., Ltd. ('Air
China Cargo'), operated a fleet of 151 aircraft, mainly including B747, B737,
B767, B777, B757, A319, A320, A340 and one business jet (Gulfstream IV).
On December 15, 2004, our Company had its H Shares, namely overseas listed
foreign invested shares, successfully listed in Hong Kong and London.
Chinese Registered 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
Ma Xulun
Cai Jianjiang
Fan Cheng
Hu Hung Lick, Henry
Wu Zhipan
Zhang Ke
Supervisors: Zhang Xianlin
Liao Wei
Zhang Huilan
Liu Feng
Legal Representative of the Company: Li Jiaxiang
Joint Company Secretaries: Fan Cheng
Li Man Kit (ACIS, ACS)
Qualified Accountant: Chan Wai Kwong, Joel (FCCA, CPA)
Authorised Representatives: Cai Jianjiang
Li Man Kit
Legal Adviser to the Company as to Hong Freshfields Bruckhaus Deringer
Kong and English law:
Independent 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 of our H Shares: Hong Kong and London
MAJOR ACCOUNTING FIGURES AND FINANCIAL INDICATORS#
For the four years preceding the end of the reporting period, the major
accounting figures and financial indicators are as follows (unit: RMB'000):
2004 2003 2002 2001
Revenue from major businesses 33,520,757 24,641,405 24,983,677 22,736,452
Profit from operations 4,485,251 2,284,264 3,284,379 3,286,105
Profit before tax 3,656,533 178,279 1,039,826 1,609,722
Net profit after tax 2,548,695 88,498 670,753 1,057,062
(including minority interests)
Minority interests (162,731) 71,106 (171,143) (108,774)
Net profit attributable to shareholders 2,385,964 159,604 499,610 948,288
Earnings per share (RMB) 0.36
Net asset yield (%) 14.42 2.32 9.95 22.31
Total assets 66,689,269 56,397,062 57,394,612 58,253,358
Total liabilities 48,660,727 48,081,813 50,866,224 52,685,546
Minority interests 1,480,287 1,422,380 1,508,125 1,317,289
Owners' equity 16,548,255 6,892,869 5,020,263 4,250,523
(excluding minority interests)
Net asset per share (RMB) 2.50
Notes:
1. Share Capital are calculated on weighted average basis
= (6,500,000,000 x 348 + 9,050,618,182 x 17) / 365
= 6,618,795,915 Shares
2. Net profit excludes minority interests; net assets excludes minority
interests
Comparison on Major Financial Data 2001-2004
/raster(65%,p)='chart01'
(Excluding Air Macau) 2003 2004 2004 vs. 2003 Increase/
(Decrease)
%
Traffic
RPK (in millions) 33,477.0 46,644.5 39.3
International 12,765.1 19,627.9 53.8
Domestic 19,525.2 25,487.2 30.5
Hong Kong and Macau 1,186.7 1,529.5 28.9
RFTK (in millions) 2,206.2 2,581.7 17.0
International 1,686.3 1,976.4 17.2
Domestic 461.9 544.1 17.8
Hong Kong and Macau 58.1 61.2 5.3
Passengers carried (in thousands) 18,053.7 24,500.0 35.7
International 2,656.2 4,219.0 58.8
Domestic 14,798.9 19,521.7 31.9
Hong Kong and Macau 598.6 759.2 26.8
Cargo and mail (tonnes) 564,211.0 665,252.7 17.9
Kilometers flown (in millions) 266.1 338.7 27.3
Block hours (in thousands) 390.1 510.2 30.8
Number of flights 147,225 183,693 24.8
International 19,882 28,366 42.7
Domestic 121,756 148,751 22.2
Hong Kong and Macau 5,587 6,576 17.7
RTK (in millions) 5,200.4 6,751.4 29.8
Capacity
ASK (in millions) 50,732.6 64,894.0 27.9
International 19,708.5 27,896.8 41.5
Domestic 28,982.6 34,626.6 19.5
Hong Kong and Macau 2,041.5 2,370.6 16.1
AFTK (in millions) 4,028.2 4,843.0 20.2
International 2,854.9 3,481.7 22.0
Domestic 1,065.1 1,253.2 17.7
Hong Kong and Macau 108.2 108.1 (0.1)
ATK (in millions) 8,594.1 10,683.5 24.3
(Excluding Air Macau) 2003 2004 2004 vs. 2003
Increase/
(Decrease)
%
Load factor
Passenger load factor (RPK/ASK) 66.0% 71.9% 5.9 pt
International 64.8% 70.4% 5.6 pt
Domestic 67.4% 73.6% 6.2 pt
Hong Kong and Macau 58.1% 64.5% 6.4 pt
Cargo and mail load factor (RFTK/AFTK) 54.8% 53.3% (1.5) pt
International 59.1% 56.8% (2.3) pt
Domestic 43.3% 43.4% 0.1 pt
Hong Kong and Macau 53.7% 56.6% 2.9 pt
Yield
Yield per RPK (RMB) 0.54 0.56 3.70
International 0.47 0.51 8.51
Domestic 0.57 0.60 5.26
Hong Kong and Macau 0.68 0.67 (1.47)
Yield per RFTK (RMB) 1.87 1.99 6.42
International 1.95 2.10 7.69
Domestic 1.43 1.39 (2.80)
Hong Kong and Macau 3.10 3.62 16.77
Fleet
Total aircraft in service at period end 131 151 15.3
Daily utilization (block hours per day per aircraft) 8.7 10.2 17.2
Unit cost
Operating expenses per ASK (RMB)(1) 0.41 0.42 2.44
Operating expenses per ATK (RMB)(2) 2.41 2.54 5.39
1. Unit cost reflects total operating expenses of both passenger and
cargo services divided by total ASK.
2. Unit cost reflects total operating expenses of both passenger and
cargo services divided by total ATK.
/raster(100%,p)='CNA_director_4'
Dear shareholders,
On behalf of the board of directors of Air China Limited, I wish to express our
sincere appreciation for your support to the Group (including Air China Limited,
its subsidiaries and joint ventures).
In 2004, the Group achieved a great-leap-forward development. By seizing the
market opportunities, we focused our efforts on corporate restructuring and
listing preparation, flight safety maintenance as well as on internal operation
coordination enhancement. Despite the fact that the global aviation industry
experienced a recession for three consecutive years, our H Shares were
successfully listed on both Hong Kong and London stock exchanges on December 15,
2004, achieving gross proceeds of approximately USD1,120 million or
approximately RMB9,300 million in equivalent (taking into account of proceeds
from subsequent exercise of over-allotment option). We topped the list of all
initial public offerings among the airlines over the past seventeen years. With
a premium of 101% of share issue price over net asset value per share at June
30, 2004, the shareholders' equity of the Company amounts to RMB16,548 million
and the liabilities to assets ratio reduced to approximately 72.97%. As a
result, the capital structure of the Company has been optimized, with our brand
value significantly enhanced and our corporate governance structure further
improved.
In 2004, the Group achieved the best performance ever in its history for major
performance indicators and consolidated profit before tax reached RMB3,657
million. Air traffic revenue and other operating revenue reached RMB30,835
million and RMB2,686 million respectively, representing increases of 31.6% and
120.4% over 2003. According to CAAC's statistics, our total profit accounted for
over 50% of the total profit of the whole mainland China airlines.
To improve our services, the Group established an efficient internal service
management system while at the same time adopted measures to maintain and upkeep
customer relationship, resulting in a decrease of about 17% in customer
complaints compared to the previous year. Last year, the Company was appointed
as the only airline partner of 2008 Beijing Olympic Games, which greatly boosted
the brand name of the Company. In 2004, according to a travellers' satisfaction
survey, the Company obtained two awards, namely Excellence Award for Travellers'
Satisfaction and Excellence Award for Service Brand categorized for airlines
carrying over 15 million passengers. Our successful listing in Hong Kong and
London make our brand the focus among the media and the investors, thereby
significantly enhancing our intangible asset value.
Cathay Pacific Airways Limited ('Cathay Pacific'), as a strategic investor,
acquired 10% share capital of the Company upon its listing. This not only
provides a platform for cooperation between the two companies in many business
and operation sectors, but also creates opportunities for network connection
between Hong Kong and Beijing. Such a relationship helps to improve the
operation efficiency as well as the management capability of the Company. In
addition, the Company holds indirect interest in Dragonair and Air Macau through
CNAC and enjoyed cooperation with Dragonair under codeshare arrangements on
certain routes between Hong Kong and the mainland China. We also have a similar
cooperation arrangement with Air Macau through which we expect to realize better
profitability.
Looking forward, as the economic globalization proliferates, we are fully aware
of the challenges and opportunities lying ahead. The greatest opportunity is
that the Chinese economy is now in a prime period of strategic growth. In the
coming three years, the demand for air traffic will keep going at an anticipated
growth rate of 13% to 15%. The international market will grow faster than the
domestic market while the cargo sector will grow faster than the passenger
sector. However, affected by international political and economic environment,
the cost of jet fuel may stay high and the competition can be more severe.
Interest rate, exchange rate and capital market are also undergoing frequent
changes. All these will present new challenges to the Group's financial risks
control capability.
Where there is challenge, there is opportunity. The Group is now facing an
opportunity for development and transformation. By completing airline
integration and listing, the Group achieved significant milestones. Our fleet is
expanding rapidly and, when the fleet of all the Company's subsidiaries, joint
ventures and associates are taken into account, the fleet comprises over 250
aircraft, which could enable us to enjoy economies of scale. Our development
focus on hub and network, whereby strengthening our dominance over the market.
We have already built up our competitive edge within the sector and re-secured
our leading position. All these have laid a solid foundation for a rapid,
healthy and balanced development of the Group in the future. Our goal is to
maximise the value of the Company and to establish the Company as the favored
airline for mainstream passengers, the most valuable and profitable airline in
China and an airline with international competitiveness.
In 2005, without prejudice to safety operation, the Company will further enhance
our core competitiveness and brand recognition to create a sound development
environment featured by safety, high efficiency and sustaining profitability.
Thus the Company will take the following measures:
1. Through functional integration, transform and streamline our
organizational structure to enhance our operational efficiency. To tighten
internal risk control and prevent operational risk exposure.
2. Solidify our hub position while building up a more rational market
reach. Continue to focus on Beijing, Chengdu and East China markets, give
appropriate attention to the South China market, and realize more synergy by
working closely with our Hong Kong and Macau counterparts.
3. Strengthen our competitiveness in a balanced international and
domestic network.
4. Deploy more air cargo capacity. Optimize cargo transportation network.
5. Continue our efforts in providing safe, convenient, comfortable and
customerised services. Improve the quality of our services, and further enhance
our brand name recognition by leveraging our status as the only airline partner
of the 2008 Beijing Olympic Games.
Looking back, in 2004, the Company well exceeded the profit forecast made at the
time of its initial public offering, thus affirming its commitment to its
shareholders. I would like, on behalf of the board of directors, to express my
appreciation to the management team and staff of the Group for their
professionalism and dedication. Last but not the least, I, on behalf of the
board of directors, would like to thank our shareholders for their trust and
support.
/raster(60%,p)='lee'
Li Jiaxiang
Chairman
Beijing, PRC
April 12, 2005
We are the national flag carrier of China and a leading provider of air
passenger, air cargo and airline-related services in China. We are primarily
based in Beijing, the capital and a major hub for domestic and international air
transportation. We have the largest share of air transportation business at
Beijing Capital International Airport, China's busiest airport. With our
operational centre in Beijing and extensive route network serving major Chinese
cities and international destinations, we believe we are well positioned to
capture the growing demand for airline services in greater China.
Our leading position in the Chinese air transportation market is primarily
attributed to our status as:
China's largest commercial airline, accounting for approximately
29.2% of the total RTKs flown by all Chinese airlines in 2004, according to CAAC
statistics;
China's largest air cargo services provider, accounting for
approximately 36.0% of the total RFTKs flown by all Chinese airlines in 2004,
according to CAAC statistics;
the Chinese airline with the highest brand value, according to World
Brand Lab, which ranked 'Air China' the 32nd most valuable brand name in China,
the highest ranked Chinese airline brand.
We believe that by operating a well-balanced route network with complementary
domestic and international routes, we can provide our passengers with convenient
direct flights and transfer services. Our investments in Air Macau, Dragonair,
Shenzhen Airline and Shandong Airline allow us to benefit from the growth in
other aviation markets. We have formed business partnerships with various
leading international and regional airlines, which we believe will assist us in
broadening our scope of service, expanding our international customer base and
providing additional customized customer services.
As of December 31, 2004, the Company (including Air China Cargo) operated a
fleet of 151 aircraft, serving 72 domestic and 36 international and regional
destinations. For the 12 months ended December 31, 2004, we carried
approximately 24.50 million passengers and approximately 665,253 tonnes of
cargo, with passenger traffic of approximately 46,640 million RPKs and cargo
traffic of approximately 2,580 million RFTKs. Passenger load factor and cargo
and mail load factor for scheduled flights was 71.9% and 63.4% respectively.
In 2001, 2002, 2003 and 2004, our combined revenues totaled RMB22,736.5 million,
RMB24,983.7 million, RMB24,641.4 million and RMB33,520.8 million, respectively,
and our net profit attributable to shareholders totaled RMB948.3 million,
RMB499.6 million, RMB159.6 million and RMB2,386.0 million, respectively.
Shareholders are advised to read the following discussion and analysis in
conjunction with the financial statements of the Group prepared in accordance
with the International Financial Reporting Standards as set out on pages from 44
to 126 of this Annual Report.
Business Review#
The Group is the national flag carrier and a leading provider of air passenger,
air cargo and airline related services in China. Taking advantage of its
balanced network of extensive and complementary domestic and international
routes as well as its dominant position in Beijing, the Group offers non-stop
and transit services to its passengers from overseas, mainland China, Hong Kong
and Macau. As at December 31, 2004, we operated an overall of 183,693 flights
serving 72 domestic and 36 international and regional destinations. We offered
an average of 3,426 scheduled passenger flights and 367 scheduled cargo flights
weekly. We operated a fleet of 151 aircraft, including 124 Boeing aircraft, 26
Airbus aircraft, 1 business jet, the average age of our fleet was 8.1 years.
During the year, Chinese and global economy continued to improve, thereby
bringing about a rapid surge of market demand for airline services in China,
which greatly mitigated the adverse effects of the outbreak of SARS in 2003.
Meanwhile, the Group also faced certain challenges due to the soaring price of
international jet fuel and intensified competition. Against this background, the
Group seized the market opportunity by adopting a series of effective measures,
resulting in great improvement in financial results and a more secured leading
position in China aviation market. In 2004, we were appointed as the exclusive
airline partner of 2008 Beijing Olympic Games, which significantly promoted the
Company's brand recognition. In addition, the successful listing of our shares
on Hong Kong and London stock exchanges laid a solid foundation for the Group's
future development.
The Group operated certain airline business through its subsidiaries and
operating results of each subsidiary have already been calculated into the
consolidated financial statements. CNAC is the largest subsidiary of the Company
and is listed on the Hong Kong Stock Exchange. CNAC is the controlling
shareholder of Air Macau and the single largest shareholder of Dragonair. In
2003 and 2004, the operating revenues of CNAC accounted for 5.7% and 6.0% of the
operating revenues of the Group in these years respectively.
In 2004, Air China Cargo, a branch of the Company in 2003, was transformed into
a joint venture in which the Group holds 51% equity interest, and its operating
results has been included in the consolidated financial statements prepared in
accordance with proportionate consolidation method under IFRS. In 2004, the
Group accomplished acquisition of 48% of the equity interest of Shandong
Aviation Group and 22.8% of the equity interest of Shandong Airlines Co., Ltd..
The Group's business, its financial position and operating results are mainly
affected by such external factors as the development of Chinese economy and
international trade, regulations of aviation industry, jet fuel price, special
events, the seasonal nature of airline operation, performance of associates,
financing costs, which were not within the control of the Group to a certain
extent.
Operating Results - 2004 Compared with 2003#
The Group's net profit attributable to equity holders of the parent for 2004 was
RMB2,386 million and that for 2003 was RMB160 million. Our operating revenue
increased by 36.0% to RMB33.521 million in 2004 from RMB24,641 million in 2003.
Our operating expenses increased by 29.9% to RMB29,036 million in 2004 from
RMB22,357 million in 2003. As the increase in operation revenue exceeded that in
operation expenses, the profit from operation increased by 96.4% to RMB4,485
million in 2004 from RMB2,284 million in 2003. Our finance costs decreased by
23.4% to RMB1,800 million in 2004 from RMB2,349 million in 2003. Share of
profits less losses from associates increased by 130.9% to RMB561 million in
2004 from RMB243 million in 2003. Generally speaking, our profit before tax
increased by 1,954.5% to RMB3,657 million in 2004 from RMB178 million in 2003.
Net profit attributable to equity holders of the parent increased by 1,391.3% to
RMB2,386 million in 2004 from RMB160 million in 2003.
Operating Revenues#
Our operating revenues principally included air traffic revenues and other
operating revenues. Most of our operating revenues were from air traffic
revenues, representing 92.0% of operation revenues in 2004, while the other
operating revenues represented 8.0% of operating revenues. Among air traffic
revenues in 2004, 89.7% was generated from passenger services and 10.3% was from
cargo and mail services.
Operating revenue increased by 36.0% to RMB33,521 million in 2004 from RMB24,641
million in 2003, mainly due to revenue growth from passenger services. Revenue
from passenger services increased by 45.4% to RMB27,665 million in 2004 from
RMB19,030 million in 2003. The capacity of passenger traffic in ASKs increased
by 27.9% to 64,894 million ASKs in 2004 from 50,733 million ASKs in 2003.
Passenger load factor increased to 71.9% in 2004 from 66.0% in 2003. Income per
RPK increased by 3.7% to RMB0.56 in 2004 from RMB0.54 in 2003. In 2004, the
daily utilization of aircraft averaged at 10.2 hours, increased by 1.5 hours
when compared to 2003.
Revenue generated from international passenger services accounted for 39.7% of
the total revenue from passenger services of the Group in 2004, representing an
increase of 62.6% to RMB10,835 million in 2004 from RMB6,663 million in 2003,
and the main reason was an apparent recovery of the demand for international
airline services in 2004 from the SARS outbreak in 2003 and the increased input
of capacity in international routes by the Group. The passenger traffic capacity
(in ASKs) of international routes of the Group increased by 41.5% to RMB27,897
million kilometers in 2004 from RMB19,709 million kilometers in 2003. The
passenger load factor increased to 70.4% in 2004 from 64.8% in 2003. Level of
passenger yield from international routes increased to RMB0.51 per RPK in 2004
from RMB0.47 per RPK in 2003.
Revenue generated from domestic passenger services accounted for 55.1% of the
Group's total revenue from passenger services in 2004, increasing by 38.3% to
RMB15,340 million in 2004 from RMB11,093 million in 2003, primarily due to the
increase of passenger load factor and yield of domestic services. The passenger
traffic capacity (in ASKs) of domestic airline of the Group increased by 19.5%
to RMB34,627 million kilometers in 2004 from RMB28,983 million kilometers in
2003. Passenger load factor increased to 73.6% in 2004 from 67.4% in 2003.
Passenger yield in domestic services increased to RMB0.60 per RPK in 2004 from
RMB0.57 per RPK in 2003.
Passenger traffic revenue from Hong Kong and Macau accounted for 5.2% of the
Group's passenger traffic revenue in 2004, increasing by 17.0% to RMB1,490
million in 2004 from RMB1,274 million in 2003, primarily due to the uprising of
passenger load factor in Hong Kong and Macau services. The passenger traffic
capacity (in ASKs) of Hong Kong and Macau services of the Group increased by
16.1% to RMB2,371 million kilometers in 2004 from RMB2,042 million kilometers in
2003. Passenger load factor increased to 64.5% in 2004 from 58.1% in 2003.
Passenger yield from Hong Kong and Macau services decreased to RMB0.67 per RPK
in 2004 from RMB0.68 per RPK in 2003.
Revenue from cargo and mail operations decreased by 27.8% to RMB3,170 million in
2004 from RMB4,392 million in 2003, primarily due to the fact that Air China
Cargo, which is engaged in cargo operations, had changed into a joint venture in
2004 of proportionally consolidation from a branch of the Company. The cargo
traffic capacity (in AFTKs) increased by 20.2% to RMB4,843 million kilometers in
2004 from RMB4,028 million kilometers in 2003.The overall load factor of cargo
traffic decreased to 53.3% in 2004 from 54.8% in 2003. The overall cargo yield
increased to RMB1.99 per RFTK in 2004 from RMB1.87 per RFTK in 2003.
Other operating revenue increased by 120.3% to RMB2,686 million in 2004 from
RMB1,219 million in 2003, primarily due to the increase in bellyhold income.
Operating Expenses#
Operating expenses increased by 29.9% to RMB29,036 million in 2004 from
RMB22,357 million in 2003, primarily due to increases in jet fuel costs,
take-off, landing and depot charges and aircraft maintenance, repair and
overhaul expenses, and employee compensation costs. Operating expenses as a
percentage of operating revenues decreased to 86.6% in 2004 from 90.7% in 2003.
Jet fuel expenses increased by 54.0% to RMB8,354 million in 2004 from RMB5,425
million in 2003, primarily due to the increased consumption of jet fuel as a
result of the increased number of flights operated and higher domestic and
international jet fuel prices. Our weighted average jet fuel cost for each
barrel increased by 25.7% to RMB474 in 2004 from RMB377 in 2003.
Take-off, landing and depot charges increased by 22.6% to RMB4,230 million in
2004 from RMB3,450 million in 2003, primarily due to the increased number of
flights operated.
Depreciation expenses increased by 2.5% to RMB3,463 million in 2004 from
RMB3,377 million in 2003, primarily due to the acquisition of eleven aircraft
from August to September in 2004.
Aircraft maintenance, repair and overhaul expenses increased by 32.0% to
RMB2,836 million in 2004 from RMB2,149 million in 2003, primarily due to
increased line maintenance requirements as a result of increased block hours.
Employee compensation costs increased by 22.8% to RMB2,921 million in 2004 from
RMB2,379 million in 2003, primarily due to the increase of flight hours.
Air catering charges increased by 39.0% to RMB1,172 million in 2004 from RMB843
million in 2003, primarily due to an increase in the number of passengers
carried by the Group.
Aircraft and jet engines operating lease expenses increased by 17.7% to RMB1,071
million in 2004 from RMB910 million in 2003, primarily due to the addition of
nine aircraft acquired through operating leases.
Other operating lease expenses increased by 2.7% to RMB187 million in 2004 from
RMB182 million in 2003, primarily due to higher rental rates for our terminal
stations and sales offices as compared to the lower rental rates for the same
negotiated after the SARS outbreak.
Other flight operation expenses increased by 27.7% to RMB2,698 million in 2004
from RMB2,112 million in 2003, primarily due to a change in the accounting
method of the CAAC Infrastructure Development Fund, whereby it is no longer
offset by revenues but is released to costs directly in 2004.
Selling and marketing expenses increased by 31.1% to RMB1,387 million in 2004
from RMB1,058 million in 2003, primarily due to higher sales commissions as a
result of increased ticket sales.
General and administrative expenses increased by 51.8% to RMB715 million in 2004
from RMB471 million in 2003, primarily due to higher travelling expenses
resulting from increased business volume and donation for Olympic Games and loss
on property, plant and equipment retirement.
Finance Costs#
Net finance costs decreased by 23.4% to RMB1,800 million in 2004 from RMB2,349
million in 2003, of which interest expenses decreased by 18.6% to RMB1,824
million in 2004 from RMB2,241 million in 2003, primarily due to the repayment of
certain bank loans and a decrease in finance lease obligations. Interest income
increased by 78.9% to RMB34 million in 2004 from RMB19 million in 2003,
primarily due to an increase in bank deposits.
Share of Profits Less Losses from Associates#
In 2004, share of profits less losses from associates was RMB561 million, as
compared to that of RMB243 million in 2003, primarily due to the significant
increase of the profits of our associates Dragonair, Jardine Airport Services
Limited ('JASL') and Menzies Macau Airport Services Limited.
Income Tax#
The Company is subject to the PRC income tax at a rate of 33%. The income tax of
the Group increased to RMB1,108 million in 2004 from RMB90 million in 2003,
primarily due to the increase of the profit before taxation in 2004.
LIQUIDITY AND CAPITAL RESOURCES#
We financed our working capital needs through consolidated capital from
operating activities and bank loans. As at December 31, 2003 and 2004, the total
amount of cash and cash equivalents of the Group were RMB2,620 million and
RMB9,734 million respectively. In 2003 and 2004, the Group generated net cash
from operating activities of RMB5,425 million and RMB6,151 million respectively,
whilst the Group's net cash outflow from investing activities in the same period
reached RMB4,360 million and RMB4,974 million respectively, primarily due to the
amounts utilized for purchase and improvement of aircraft and aviation
equipment. In 2004, the Group's net cash inflow from financing activities
amounted to RMB5,620 million, primarily due to the new issues of shares by the
Company at the end of the year; while in 2003, the Group recorded a net cash
outflow from financing activities of RMB2,207 million, primarily due to the
repayment of certain bank loans.
Similar to other Chinese airlines, we have been operating with a net current
liabilities position. As at December 31, 2003 and 2004, the net current
liabilities of the Group were RMB12,384 million and RMB6,860 million
respectively. The decrease of net current liabilities was primarily due to the
increase of current assets as a result of the new issue of shares by the
Company.
As at December 31, 2003 and 2004, the short-term loans of the Group were
RMB9,237 million and RMB8,806 million respectively, while the long-term loans
were RMB12,820 million and RMB12,897 million respectively in the same period. As
at December 31, 2004, our bank and other loans due within 1 year, 1 to 2 years,
3 to 5 years and over 5 years were RMB8,806 million, RMB3,064 million, RMB6,215
million and RMB3,618 million respectively. As of December 31, 2003 and 2004, our
liabilities under finance leases were RMB13,699 million and RMB12,281 million
respectively. As of December 31, 2004, our liabilities under finance leases due
within 1 year, 1 to 2 years, 3 to 5 years and over 5 years were RMB1,705
million, RMB1,944 million, RMB6,722 million and RMB1,910 million respectively.
As at December 31, 2004, the equity attributable to shareholders of the Group
was RMB16,548 million, representing an increase of RMB9,655 million when
compared with RMB6,893 million in the previous year, primarily due to the
issuance by the Company of 2,550,618,182 H Shares with a par value of RMB1.00
each at an offer price of HKD 2.98 per share.
Capital Expenditures#
As of December 31, 2004, the Group had contracted for 27 passenger aircraft to
be delivered from 2005 to 2006. The Group's total investment in aircraft is
expected to be RMB7,511 million (The plan of the Company is to change the
contracts for 5 B737-700 under operating leases and if commercial terms are not
applicable, the total investments for aircraft will be adjusted to RMB9,023
million), including prepayments for purchasing aircraft in 2006 and afterwards
of RMB4,682 million. Other investment in capital expenditure items is estimated
to be RMB1,899 million, which mainly involves improvement of first class and
business class cabins, the Company's ancillary projects in No. 3 Terminal of
Beijing International Airport, and some long-term investment projects. Some
capital expenditures projects of the Company are generally subject to Chinese
government approval, and are subject to adjustments depending on approval time,
the prevailing market conditions, financing and other relevant factors.
Financial Risk Management Policy#
The Group is exposed to the fluctuations in jet fuel price during its ordinary
operations. International jet fuel prices have been historically, and will in
the future continue to be, subject to price volatility and fluctuations in
supply and demand. Our strategy for managing our jet fuel price risk aims to
provide us with protection against sudden and significant price increases. To
meet these objectives, we will continue to use instruments such as swaps,
options and collars with approved counter-parties and within approved limits.
The Group recorded a gain of RMB170 million and RMB41 million from the
derivative instruments from jet fuel used by us in 2003 and 2004, respectively.
A substantial portion of the Group's debt, part of its operating revenues and
expenses and capital expenditures are denominated in certain major foreign
currencies and consequently subject to fluctuations in exchange rates. The Group
recorded exchange losses of RMB297 million and RMB55 million in 2003 and 2004,
respectively. In order to reduce our foreign currency risk, we have pursued a
strategy for certain major foreign currencies, to make the match between our
revenues and payments denominated in such currencies. We are also currently
evaluating proposals to hedge our foreign currency exposure by entering into
hedge transactions.
Assets Mortgage#
As at December 31, 2004, the Group mortgaged several aircraft and flight
equipment with an aggregate carrying amounts of approximately RMB28,585 million
(2003: RMB29,732 million) pursuant to certain borrowing and lease agreements,
details of which are set out in notes 16, 33 and 34 to the financial statements.
As at December 31, 2004, the Group's bank deposits amounting to RMB117 million
(2003: RMB1,246 million) were pledged against borrowing and leasing arrangements
and financial derivatives.
Commitments and Contingent Liabilities#
As at December 31, 2004, the Group's capital commitments amounted to
approximately RMB15,820 million, mostly regarding the purchase of certain
aircraft and relevant equipment to be delivered in 2005 and 2006.
As at December 31, 2004, the Group committed to make a capital contribution of
approximately RMB422 million to its joint venture.
As at December 31, 2004, the Group entered into operating lease agreements with
respect to certain office premises, aircraft and related equipment pursuant to
which we committed to make lease payments in aggregate amounts of at least
RMB1,140 million within 1 year, RMB3,216 million within 2 to 5 years, and
RMB1,000 million after 5 years.
Details of the commitments are set out in note 42 to the financial statements.
The Group's primary contingent liabilities as at December 31, 2004 are set out
in note 41 to the financial statements.
Gearing Ratio#
As at December 31, 2004, the gearing ratio (represented by total liabilities
divided by total assets) of the Company was approximately 73%, representing a
decrease of 12 percentage points from approximately 85% as at December 31, 2003.
Group Activities and Results#
The Group is a provider of air passenger, air cargo and airline-related
services. The results of the Group for the year ended December 31, 2004 and the
financial positions of the Company and the Group as of the same date are set out
in the financial statements on pages 44 to 126 herein.
Dividend#
As disclosed in the prospectus issued under the initial public offering of the
Company, the Company has taken into consideration the future development,
shareholders' interests, operating results and cash flows in determining the
distribution of dividend. The Company confirmed that in accordance with the PRC
GAAP, the appropriation rates to the statutory common reserve fund, the
statutory common welfare fund and the discretionary common reserve fund for the
year ended December 31, 2004 were 10%, 5% and 5% respectively.
The Board of Directors of the Company does not recommend the declaration of
final dividend for the year ended December 31, 2004. Such retained profit shall
be carried forward to the next year and in the distribution ratio currently
expected to be between 15% to 30% of the profit after the recovery of losses (if
any) and the appropriations of statutory common reserve fund, the statutory
common welfare fund and the discretionary common reserve fund.
--------------------------------------------------------------------------------
Bank and other loans#
Details of the bank and other loans of the Company and the Group are set out in
note 34 to the financial statements.
Capitalization of Interests#
Details of the capitalization of interests of the Group for the year ended
December 31, 2004 are set out in note 8 to the financial statements.
Property, plant and equipment#
Movements in the property, plant and equipment of the Company and the Group for
the year ended December 31, 2004 are set out in note 16 to the financial
statements.
Reserves#
The reserves of the Company available for distribution to shareholders as at
December 31, 2004 are set out in note 40 to the financial statements.
Movements in the reserves of the Company during the year are set out in note 38
to the financial statements.
Movements in the reserves of the Group during the year are set out in the
consolidated statement of changes in equity on page 47 of the annual report.
Donations#
For the year ended December 31, 2004, the Group made donations for charitable
purposes and other purposes amounting to RMB40.5 million.
EMPLOYEE PENSION Cost#
Details of the employee pension cost and employee benefits are set out in note
11 to the financial statements.
Use of Proceeds from Initial Public Offering#
In the year of 2004, the Company conducted its initial public offering and
2,550,618,182 H Shares were issued (excluding 255,061,818 H Shares sold by
selling shareholders) for net proceeds of RMB7,601 million. The proceeds are
being used in accordance with the purposes disclosed in the prospectus of the
Company dated December 3, 2004.
--------------------------------------------------------------------------------
Share Capital#
As at December 31, 2004, before the exercise of over-allotment option under
initial public offering, the Company's total share capital was RMB9,050,618,182,
divided into 9,050,618,182 shares with a nominal value of RMB1.00 each. That
over-allotment option was exercised on January 7, 2005 and as at April 12, 2005
being the date of this report the Company's total share capital is
RMB9,433,210,909, divided into 9,433,210,909 shares with a nominal value of
RMB1.00 each. The share capital structure of the Company is as follows:
As at As at
December 31, 2004 April 12, 2005
Type of Shares Number of Shares % of Total Issued Share Capital Number of Shares % of Total Issued Share Capital
Domestic Shares 4,855,945,675 53.65% 4,826,195,989 51.16%
Non-H Foreign Shares 1,388,992,507 15.35% 1,380,482,920 14.64%
H Shares 2,805,680,000 31.00% 3,226,532,000 34.20%
Total 9,050,618,182 100% 9,433,210,909 100%
ULTIMATE HOLDING COMPANY#
CNAHC, which is incorporated in the PRC, is regarded by the Directors of the
Company as being the Company's ultimate holding company.
SIGNIFICANT INTERESTS AND SHORT POSITIONS IN SHARES AND UNDERLYING SHARES#
As at December 31, 2004, the interests and short positions of the following
persons (other than the Company's Directors, Supervisors or chief executive) in
the shares and underlying shares of the Company as recorded in the register of
the Company required to be kept under Section 336 of the Securities and Futures
Ordinance of Hong Kong (the 'SFO') were as follows:
Name of Type of Type of Number of % of the % of the % of the % of the Total Short
Shareholder Shareholding Shares Shares Held Total Issued Total Total Issued Issued Non-H Position
Share Issued H Domestic Foreign Shares
Capital Shares Shares of the Company
of the of the of the
Company Company Company
CNAHC Direct holding Domestic 4,855,945,675 53.65% - 100% - -
shares
CNACG Direct holding Non-H 1,388,992,507 15.35% - - 100% -
Foreign
shares
Cathay Pacific Direct holding H Shares 905,061,819 10.00% 32.26% - - -
(1)
Swire Pacific Indirect H Shares 905,061,819 10.00% 32.26% - - -
Limited(2) holding
John Swire & Sons Indirect H Shares 905,061,819 10.00% 32.26% - - -
(H.K.) Limited(2) holding
John Swire & Sons Indirect H Shares 905,061,819 10.00% 32.26% - - -
Limited(2) holding
Merrill Lynch - H Shares 382,592,728 4.23% 13.64% - - Yes(4)
International
Merrill Lynch & - H Shares 382,592,728 4.23% 13.64% - - Yes(4)
Co., Inc(3)
Merrill Lynch - H Shares 382,592,728 4.23% 13.64% - - Yes(4)
International
Incorporated(3)
Merrill Lynch - H Shares 382,592,728 4.23% 13.64% - - Yes(4)
International
Holdings Inc(3)
Merrill Lynch - H Shares 382,592,728 4.23% 13.64% - - Yes(4)
Europe PLC(3)
Merrill Lynch - H Shares 382,592,728 4.23% 13.64% - - Yes(4)
Europe
Intermediate
Holdings(3)
Merrill Lynch - H Shares 382,592,728 4.23% 13.64% - - Yes(4)
Holdings Limited
(3)
ML UK Capital - H Shares 382,592,728 4.23% 13.64% - - Yes(4)
Holdings(3)
Merrill Lynch Far Over-allotment H Shares 420,852,000 4.65% 15% - - -
East Limited(5) option(6)
China Over-allotment H Shares 420,852,000 4.65% 15% - - -
International option(8)
Capital
Corporation
Limited (7)
HKSCC (9) Direct holding H Shares 2,181,620,909 24.10% 77.76% - - -
Notes:
(1) Among the 905,061,819 H shares, Cathay Pacific has security
interest in 382,592,728 H shares arising from a share lending agreement pursuant
to which Cathay Pacific lent 382,592,728 H shares of the Company to Merrill
Lynch International.
(2) Swire Pacific Limited, John Swire & Sons (H.K.) Limited and John
Swire & Sons Limited have duplication of Cathay Pacific's interests in the H
shares of the Company as they are direct or indirect (as the case may be)
controlling shareholder of Cathay Pacific.
(3) Merrill Lynch & Co., Inc., Merrill Lynch International
Incorporated, Merrill Lynch International Holdings Inc., Merrill Lynch Europe
PLC, Merrill Lynch Europe Intermediate Holdings, Merrill Lynch Holdings Limited,
and ML UK Capital Holdings have duplication of Merrill Lynch International's
interests in the H shares of the Company as they are direct or indirect (as the
case may be) controlling shareholder of Merrill Lynch International.
(4) A short position in 382,592,728 H shares of the Company arising
from a share lending agreement pursuant to which Merrill Lynch International
borrowed 382,592,728 H shares of the Company from Cathay Pacific.
(5) Merrill Lynch & Co., Inc., Merrill Lynch International
Incorporated, Merrill Lynch International Holdings Inc., and Merrill Lynch (Asia
Pacific) Limited have duplication of Merrill Lynch Far East Limited's interests
in the H shares of the Company as they are direct or indirect (as the case may
be) controlling shareholder of Merrill Lynch Far East Limited.
(6) Interests held jointly with China International Capital
Corporation Limited pursuant to an over-allotment option as disclosed in the
section headed 'Structure of the Global Offering - The Global Offering' in the
prospectus dated December 3, 2004 issued by the Company.
(7) China Jianyin Investment Limited and Central Huijin Investment
Company Limited have duplication of China International Capital Corporation
Limited's interest in the H shares of the Company as they are direct or indirect
(as the case may be) controlling shareholder of China International Capital
Corporation Limited.
(8) Interests held jointly with Merrill Lynch Far East Limited
pursuant to an over-allotment option as disclosed in the section headed '
Structure of the Global Offering - The Global Offering' in the prospectus dated
December 3, 2004 issued by the Company.
(9) To the knowledge of the Company, among the 2,181,620,909 H shares
held by HKSCC Nominees Limited,
(i) Wellington Management Company, LLP had an interest in 153,112,100
H shares of the Company (representing approximately 5.45% of its then total
issued H shares);
(ii) Temasek Holdings (Private) Limited had an interest in 399,950,000
H shares of the Company (representing approximately 14.25% of its then issued H
shares), out of which the interest in 292,000,000 H shares were held through
Aranda Investment (Mauritius) Pte Ltd. and the interest in the remaining
107,950,000 H shares were held through Dahlia Investments Ptd Ltd, FPL Alpha
Investment Pte Ltd and Fullerton (Private) Limited, respectively.
As at December 31, 2004, the interests and short positions of the following
persons in the shares and underlying shares of CNAC, as recorded in the register
of CNAC, required to be kept under Section 336 of the SFO were as follows:
Name of Interests Holder Type of Interests Number of Ordinary Shares of % of the Total Issued Share
CNAC Concerned Capital of CNAC
CNAHC Attributable Interest 2,264,628,000(1) 68.4%
Air China Limited Beneficial owner 2,264,628,000(2) 68.4%
Best Strikes Limited Beneficial owner 187,656,000 5.6%
On Ling Investments Limited Attributable Interest 322,856,000(3) 9.7%
Novel Investments Holdings Attributable Interest 322,856,000(3) 9.7%
Limited
Novel Enterprises (BVI) Limited Attributable Interest 322,856,000(3) 9.7%
Novel Credit Limited Attributable Interest 322,856,000(3) 9.7%
Novel Holdings (BVI) Limited Attributable Interest 322,856,000(3) 9.7%
Westleigh Limited Attributable Interest 322,856,000(3) 9.7%
J.P. Morgan Chase & Co. Investment manager 197,894,000 5.97%
Custodian corporation/ 24,538,000 0.74%
approved lending agent
J.P. Morgan Chase Bank N.A. Attributable Interest 24,538,000(4) 0.74%
J.P. Morgan Fleming Asset Attributable Interest 173,356,000(5) 5.23%
Management Holdings Inc.
J.P. Morgan Fleming Asset Attributable Interest 173,356,000(5) 5.23%
Management (Asia) Inc.
J.P. Morgan Asset Management Attributable Interest 169,692,000(5) 5.12%
Limited
Notes:
(1) CNAHC's interests in CNAC duplicate with those interest of our
Company.
(2) Our Company's interests in CNAC duplicate with those interests of
CNAHC.
(3) 5.6% of the interest held by each of these companies in CNAC
duplicates with Best Strikes Limited's interest in CNAC. The interests of these
companies in CNAC also duplicate each other.
(4) The interest held by it in CNAC duplicates with J.P. Morgan Chase
& Co.'s interest in CNAC held by it as custodian corporation/approved lending
agent.
(5) The interests held by each of these companies in CNAC duplicate
with J.P. Morgan Chase & Co.'s interest in CNAC held by it as investment
manager. The interests of these companies in CNAC also duplicate each other.
Share Appreciation Rights#
The details of the Share Appreciation Rights Scheme provided by the Company are
set out in note 39 to the financial statements.
The Company did not grant any Share Appreciation Rights in 2004. The Company is
expected to formulate the specific implementation plan for Share Appreciation
Rights Scheme in 2005.
PRE-EMPTIVE RIGHTS#
There is no provision for pre-emptive rights under the Company's Articles of
Association which would oblige the Company to offer new shares on a pro-rata
basis to existing shareholders.
PURCHASE, SALE OR REDEMPTION OF SHARES#
During the year ended December 31, 2004, neither the Company nor any of its
subsidiaries had purchased, sold or redeemed any of its securities. For this
purpose, the term 'securities' shall have the meaning ascribed to it in the
Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong
Limited (the 'Listing Rules').
Subsidiaries, joint ventures and Associates#
As at December 31, 2004, the details of the subsidiaries of the Company and the
joint ventures and associates of the Group are set out in the note 17, note 18
and note 19, respectively to the financial statements.
MAJOR CUSTOMERS AND SUPPLIERS#
For the year ended December 31, 2004, the Group's purchases from the largest
equipment supplier and the five largest equipment suppliers accounted for 15%
and 36% of the Group's total purchases respectively. None of the Directors or
Supervisors of the Company, their associates, nor any shareholders, which to the
best knowledge of the Directors own 5% or above of the Company's share capital,
had any interest in the Group's five largest equipment suppliers.
For the year ended December 31, 2004, the aggregate sales attributable to the
Group's five largest customers were less than 30% of the Group's total sales.
DIRECTORS AND SUPERVISORS OF THE COMPANY#
Information on the Directors and Supervisors of the Company during the year of
2004 (since its incorporation on September 30, 2004) and up to the date of this
report is as follows:
Directors
Name Age Position Date of Appointment
Li Jiaxiang 55 Chairman and Non-executive Director September 30, 2004
Kong Dong 56 Vice Chairman and Non-executive Director September 30, 2004
Wang Shixiang 55 Vice Chairman and Non-executive Director September 30, 2004
Yao Weiting 57 Non-executive Director September 30, 2004
Ma Xulun 40 Executive Director and President September 30, 2004
Cai Jianjiang 41 Executive Director and Vice President September 30, 2004
Fan Cheng 49 Executive Director and Chief Financial Officer October 18, 2004
Hu Hung Lick, Henry 85 Independent Non-executive Director November 22, 2004
Wu Zhipan 48 Independent Non-executive Director September 30, 2004
Zhang Ke 51 Independent Non-executive Director September 30, 2004
Supervisors
Name Age Position Date of Appointment
Zhang Xianlin 51 Chairman of Supervisory Committee September 30, 2004
Liao Wei 40 Supervisor October 18, 2004
Zhang Huilan 44 Supervisor September 30, 2004
Liu Feng 46 Supervisor September 30, 2004
Ms. Chan Ching Har, Eliza was appointed as a Director of the Company on
September 30, 2004 and later resigned on November 12, 2004.
INDEPENDENCE OF THE INDEPENDENT NON-EXECUTIVE DIRECTORS#
The Company has confirmed its receipt of, from each of the Independent
Non-executive Directors of the Company, a confirmation of his independence
pursuant to Rule 3.13 of the Listing Rules. The Company considers all of the
Independent Non-executive Directors are of independence.
DIRECTORS' AND SUPERVISORS' INTERESTS AND SHORT POSITIONS IN THE SHARES,
UNDERLYING SHARES AND DEBENTURE OF THE COMPANY#
As at December 31, 2004, Mr. Zhang Xianlin, a Supervisor of the Company, had
interests in 33,126,000 shares, which represents 1% of the share capital of
CNAC, a subsidiary of the Company.
Save as the above mentioned, none of our Directors, Supervisors and chief
executive has any interests or short positions in the shares, underlying shares
or debentures of the Company or its any associated corporations (within the
meaning of Part XV of the SFO, as recorded in the register required to be kept
under section 352 of the SFO or as notified to the Company and the Hong Kong
Stock Exchange pursuant to the Model Code for Securities Transactions by
Directors of Listed Companies.
INTERESTS OF THE DIRECTORS AND SUPERVISORS IN CONTRACTS AND SERVICE CONTRACTS#
Each of the Directors and Supervisors of the Company has entered into a service
contract with the Company for a term of three years. None of those service
contracts with the Company is not determinable by the Company within one year
without payment of compensation (other than statutory compensation).
None of the Directors and Supervisors of the Company was materially interested,
whether directly or indirectly, in any contract of significance (within the
meaning of the Listing Rules) subsisting during or at the end of year 2004 with
the Company or the Company's subsidiary or holding company or a subsidiary of
the Company's holding company.
EMPLOYEES#
As at December 31, 2004, the Group has 29,133 employees (including total head
count of the equity invested entities). The following table sets forth the
number of employees fallen into different departments:
As of December 31, 2004
Flight Crew
Pilots (Note 1) 2,446
Flight Attendants 2,968
Ground personnel
Ground services 2,517
Maintenance 3,188
Others 2,132
Marketing and sales 2,184
Management 3,152
Total 18,587
Employees of the equity invested entities other than the Company (Note 2) 10,546
Total 29,133
Note 1: The number of pilots in Air China Cargo is not included.
Note 2: The number of pilots employed by Air China Cargo is included.
COMPENSATION POLICY#
Our employees receive cash remuneration consisting of salary and other cash
subsidies. In general, employee salaries are determined based on the employee's
qualification, position, seniority and performance. Cash subsidies may include
living subsidies, but subject to changes. The Group also provides various
non-cash benefits, including medical insurance, unemployment insurance, early
retirement and other social welfare benefits to employees in the PRC. In
addition, all of our full-time employees in the PRC are covered by a defined
contribution retirement scheme operated by the PRC government, to which the
Group is required to make annual contributions at rates ranging from 15% to 20%
of our employees' basic salaries.
In order to retain the captain team and give them incentives, the Company worked
out and implemented a captain incentive scheme in October, 2004, whereby their
bonuses are linked with the hours flown, safety indicators and efficiency of the
Company. Under this scheme, the annual bonuses will be awarded based on a
standard of RMB110,000 for each captain of B747, B777 and A340, RMB105,000 for
each captain of B767 and B757, RMB100,000 for each captain of B737, A320 and
A319.
The details of the remuneration of Directors and Supervisors were set out in
note 10 to the financial statements.
TAXATION ON DIVIDENDS#
Dividends paid by a PRC company are normally subject to a PRC withholding tax
levied at flat rate of 20%. Pursuant to a rule of the taxation authority of the
PRC, however, dividends paid by a PRC company to its shareholders with respect
to shares listed on an overseas stock exchange, such as H Shares, are not
subject to above mentioned PRC withholding tax.
MATERIAL LEGAL PROCEEDINGS#
As of December 31, 2004, other than as disclosed in note 41 to the financial
statements, the Group was not involved in any significant litigation or
arbitration. To our knowledge, there was no litigation or claims of material
importance pending or proposed to be made or having been made against the Group.
COMPLIANCE WITH THE CODE OF BEST PRACTICE#
The Company set up a well-functioning corporate governance structure upon
listing. As of December 31, 2004, the Company had altogether held five Board
meetings. Our Company has been abiding by all the rules and regulations, which
has efficiently protected the interests of the Company and its shareholders.
The Board of Directors of the Company consists of:
The Strategy & Investment Committee, the current members of which are Mr. Kong
Dong, Mr. Wang Shixiang, Mr. Ma Xulun and Mr. Cai Jianjiang, with Mr. Ma Xulun
acting as the chairman of the Committee.
The Audit & Risk Control Committee, which currently comprises two Independent
Non-executive Directors, Mr. Wu Zhipan and Mr. Zhang Ke, and one Non-executive
Director, Mr. Yao Weiting, with Mr. Zhang Ke acting as the chairman of the
Committee.
The Nominations & Remuneration Committee, the current members of which are Mr.
Li Jiaxiang, Mr. Kong Dong, Dr. Hu Hung Lick, Henry, Mr. Zhang Ke and Mr. Wu
Zhipan, with Mr. Wu Zhipan acting as the chairman of the Committee.
The Directors of the Company are in the opinion that the Company has from its
listing date, namely December 15, 2004, to December 31, 2004 complied with the
Code of Best Practice as set out in Appendix 14 to the Listing Rules before its
amendment which came into effect on January 1, 2005.
In 2005, the Company started to revise its internal corporate governance
structure based on the requirements of 'Code on Corporate Governance Practices'
as set out in Appendix 14 to the Listing Rules as revised.
CONTRACT OF SIGNIFICANCE#
The Company entered into a Restructuring Agreement on November 20, 2004 with
CNAHC and CNACG, pursuant to which CNAHC and CNACG transferred to the Company
certain businesses, assets, liabilities and investments.
Details of the Restructuring Agreement were set out in the Company's prospectus
dated December 3, 2004.
Assets valuation#
The Company's prospectus dated December 3, 2004 in relation to its initial
public offering contained the valuation of the Group's properties, aircraft and
equipment (the 'Assets') as at September 30, 2004 of a total amount of
approximately RMB44,092 million (the 'Valuation'), details of which are set out
in Appendices IV and V to that prospectus. The Assets are not stated at the
Valuation in the Group's financial statements for the year ended December 31,
2004. Should the Assets be stated at values based upon the Valuation, additional
depreciation of approximately RMB117 million would be charged to the Group's
consolidated income statement for the year of 2004.
CONNECTED TRANSACTIONS#
Our Group has entered into a number of transactions on a continuing basis with
CNAHC and its associates (as defined under the Listing Rules) and other
connected persons of our Group. Details of those connected transactions
conducted during the year of 2004, which are not exempt under Rule 14A.33 of the
Listing Rules, are as follows:
I. CONTINUING CONNECTED TRANSACTIONS BETWEEN OUR GROUP AND CNAHC GROUP
Construction Project Management Services
We entered into a construction project management agreement (the 'Construction
Project Management Agreement') with China National Aviation Construction and
Development Company (the 'CNACD'), a wholly owned subsidiary of CNAHC on
November 1, 2004.
Pursuant to this agreement:
CNACD will provide us with project management services on projects
involving the construction of any property or industrial plant/facility with
budgeted costs equal to or exceeding RMB20 million;
In return for its project management services, we will pay CNACD a
fee of up to 2% of the construction budget if the budget is equal to or exceeds
RMB1 billion, and up to 2.5% if the budget is below RMB1 billion;
If CNACD is able to manage the construction projects such that the
final cost falls below the amount we have budgeted, we will pay CNACD a bonus
fee, which will be decided by both parties through arm's length negotiation but
shall not exceed 40% of the management fee calculated based on the budgeted
amount of the project;
If the final cost of the project managed by CNACD is higher than the
budgeted amount, CNACD will pay us the difference between the final cost and the
budgeted amount unless the difference is caused by (i) a change of government
policies; (ii) factors attributed to us; or (iii) force majeure; and
If CNACD acquires land relating to a project on our behalf, we 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, travel expenses, but excluding the land
premium).
The Construction Project Management Agreement will expire on December 31, 2006
subject to renewal.
Properties Leasing
We entered into a properties leasing framework agreement (the 'Properties
Leasing Framework Agreement') with CNAHC on November 1, 2004.
Pursuant to this agreement, we will lease from the CNAHC group a total of 14
properties covering an aggregate gross floor area of approximately 53,087 square
metres for various uses including as business premises, offices and storage
facilities. We will also lease to CNAHC group a total of 7 properties covering
an aggregate gross floor area of approximately 8,262 square metres. The rents
payable under the Properties Leasing Framework Agreement are and will continue
to be determined in accordance with market rates.
The Properties Leasing Framework Agreement will expire on December 31, 2006
subject to renewal.
Media and Advertising Services
We entered into a media and advertising services framework agreement (the '
Advertising Services Framework Agreement') on November 1, 2004 with China
National Aviation Media and Advertisement Co., Ltd. ('CNAMC'), a wholly owned
subsidiary of CNAHC.
Pursuant to this agreement, CNAMC will have the right to procure advertisements
and will be entitled to retain all the advertising revenues generated from these
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 the consideration, CNAMC will pay us an annual concession fee for the
Specified Items and 20% of the total revenues generated from advertisements
which appear on the Potential Items. CNAMC has also agreed to:
provide us at no charge with the in-flight items (except for the
in-flight entertainment programmes) and the Potential Items (for those not owned
by us) on which the advertisements appear or will appear;
provide us with some in-flight entertainment programmes it produces,
the production cost and disbursement of which will be reimbursed by us; and
procure the content for our in-flight entertainment programmes from
independent third parties on a commission-free basis.
In addition, CNAMC has the right to bid for the provision of advertisement
agency and design services to us.
The Advertising Services Framework Agreement will expire on December 31, 2006
subject to renewal.
Tourism Co-operation Services
We entered into a tourism services co-operation agreement (the 'Tourism
Co-operation Agreement') on November 1, 2004 with China National Aviation
Tourism Company ('CNATC').
Pursuant to this agreement, we have agreed to provide the following services to
CNATC:
Commercial charter flight services: we will provide charter services
to customers procured by CNATC at market rates.
Package tours co-operation services: we and CNATC will sell package
tours combining (i) our 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 us in accordance with the pricing principle in the
'Sales Agency Framework Agreement' while we will pay CNATC for the hotel fee
portion of the packages.
Reciprocal frequent-flyer programme ('FFP') co-operation services:
CNATC will join our FFP programme 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 Co-operation Agreement, CNATC has agreed to provide the
following services to us:
FFP co-operation services: Under the FFP programme, if our Companion
card members redeem their mileage credits for free, discounted or upgraded stay
at CNATC's hotels, we will reimburse CNATC for the redemption at a price similar
to our arrangements with other FFP partners.
Hotel accommodation services: CNATC will provide hotel accommodation
services to our employees on duty and the passengers affected by our flight
delays and cancellations and we will pay CNATC at group rates.
The Tourism Co-operation Agreement will expire on December 31, 2006 subject to
renewal.
Comprehensive Services
We entered into a comprehensive services agreement (the 'Comprehensive Services
Agreement') with CNAHC on November 1, 2004 pursuant to which:
CNAHC will provide us with various ancillary services, including but
not limited to:
(i) supply of various items for in-flight services;
(ii) manufacturing and repair of airline-related ground equipment and
vehicles;
(iii) cabin decoration and equipment;
(iv) passenger cabin and cargo cabin ancillary parts (including seats);
(v) warehousing services;
(vi) cabin cleaning services; and
(vii) printing of air tickets and other documents.
We will provide certain welfare-logistics services to the retired
employees of CNAHC and its subsidiaries.
The charges payable by us to CNAHC for the comprehensive services above as well
as the charges payable by CNAHC to us for the welfare-logistics services
provided to retired employees shall be based on prevailing market rates or, if
no prevailing market price is available, fair and reasonable prices based on
arm's length negotiations.
The Comprehensive Services Agreement will expire on December 31, 2006 subject to
renewal.
Line Maintenance and Other Ground Services
We entered into a standard ground handling agreement (the 'Standard Ground
Handling Agreement') with China Aircraft Services Limited ('CASL'), a
53.3%-owned subsidiary of CNACG, on April 17, 2004, pursuant to which CASL
agreed to provide line maintenance and other ground services at Hong Kong
International Airport to us. The services are charged at market rates.
Financial Services
We entered into a financial services agreement (the 'Financial Services
Agreement') with China National Aviation Finance Co., Ltd. ('CNAF') which is 52%
owned by CNAHC and 42.5% owned by the Company on November 1, 2004.
Pursuant to this agreement, CNAF has agreed to provide us 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 approved by the China Banking
Regulatory Commission ('CBRC').
The fees and charges payable by us to CNAF under the Financial Services
Agreement are determined by 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 services will be
provided by CNAF on terms no less favorable than terms available from commercial
banks in China.
The Financial Services Agreement will expire on December 31, 2006 subject to
renewal.
Subcontracting of Charter Flight Services
We entered into a charter flight service framework agreement (the 'Charter
Flight Service Framework Agreement') on November 1, 2004 with CNAHC.
Pursuant to this agreement, CNAHC will subcontract to us their obligation of
government charter flight that they undertake from the PRC government. Our
hourly rate of the charter flight service fee will, subject to periodical
adjustment, be calculated on the basis of the following formula which includes
total cost and reasonable margins:
Hourly rate = Total cost per flight hour x (1 + 6.5%)
The total cost includes all direct cost and indirect cost.
The Charter Flight Service Framework Agreement will expire on December 31, 2006
subject to renewal.
Sales Agency Services for Airline Tickets and Cargo Space
We entered into a sales agency framework agreement with CNAHC (the 'Sales Agency
Services Framework Agreement') on November 1, 2004.
Pursuant to this agreement, certain associates of CNAHC acting as our sales
agents will
purchase our air tickets and cargo space at wholesale prices and
on-sell such air tickets and cargo space to end-purchasers; or
procure purchasers for our air tickets and cargo space on a
commission basis.
We will pay the relevant agents commissions based on relevant PRC regulations
or, where regulations do not provide for a specific commission, based on market
rates. Currently, the commissions prescribed for sales of air tickets are:
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 December 31, 2006
subject to renewal.
II. CONTINUING CONNECTED TRANSACTIONS BETWEEN OUR GROUP AND THE LUFTHANSA
GROUP
Lufthansa holds a 40% equity interest in and is a substantial shareholder of
Aircraft Maintenance and Engineering Corporation ('Ameco'), a subsidiary of us,
and is therefore a connected person of us under the Listing Rules.
We have entered into various transactions with Lufthansa and its associates
(collectively, the 'Lufthansa Group') in the ordinary course of our business,
including, among others:
Aircraft maintenance, repair and overhaul services ('MRO') provided
by us 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 us.
The above transactions have been entered into on normal commercial terms based
on arm's length negotiations.
III. CONTINUING CONNECTED TRANSACTIONS BETWEEN OUR GROUP AND THE BEIJING
CAPITAL AIRPORTS GROUP
Capital Airports Holding Company holds a 24% equity interest in and is a
substantial shareholder of Air China Cargo, and therefore is a connected person
of us under the Listing Rules. We have entered into various transactions with
Capital Airports Holding Company and its associates (collectively, the 'Beijing
Capital Airports Group') in the ordinary course of our business, including,
among others:
provision of taking-off/landing/parking services of our aircraft at
airports owned by the Beijing Capital Airports Group;
provision of passengers' waiting lounge, check-in counters and office
buildings to us by airports owned by the Beijing Capital Airports Group;
provision of utilities (including water, gas and electricity) to us
at Beijing Capital International Airport by the Beijing Capital Airports Group;
and
provision of ground handling services to us by the Beijing Capital
Airports Group.
Most of the services provided by the Beijing Capital Airports Group to us are
charged on the pricing terms which are prescribed, approved or suggested by PRC
governmental authorities.
IV. CONTINUING CONNECTED TRANSACTIONS BETWEEN OUR GROUP AND THE CATHAY
PACIFIC GROUP
Cathay Pacific holds 10% of the total issued share capital of the Company and
therefore is a connected person of us under the Listing Rules. We have entered
into various transactions with Cathay Pacific and its associates (collectively,
the 'Cathay Pacific Group') in the ordinary course of our business. Such
transactions, the nature of which is part of the necessary daily operation of an
airline business, include, among others:
provision of ground handling services by the Cathay Pacific Group to
us;
provision of MRO services by us to the Cathay Pacific Group;
provision of catering services by us 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.
V. CONTINUING CONNECTED TRANSACTIONS BETWEEN THE CNAC GROUP AND OTHER
CONNECTED PERSONS OF THE GROUP
CNAC is a non-wholly owned subsidiary of our Company. Therefore, the continuing
connected transactions entered into between CNAC and its subsidiaries
(collectively,the 'CNAC Group') as one party and connected persons as the other
party, will also constitute continuing connected transactions for us under the
Listing Rules. Details of those continuing connected transactions conducted
during the year of 2004, which are not exempt under Rule 14A.33 of the Hong Kong
Listing Rules from the Company's perspective, are as follows:
Provision of In-flight Catering Services by Macau Catering Services Company
Limited
Macau Catering Services Company Limited ('MCS') is an associate of a substantial
shareholder of Air Macau. MCS provides in-flight meals in Macau to Air Macau
based on normal commercial terms determined on an arm's length basis, and at
prices no less favourable than those Air Macau would be able to obtain from
independent third-party providers of comparable services. The in-flight catering
services expenses paid by Air Macau to MCS in 2004 was approximately HK$41.2
million, the percentage ratio test under the Listing Rules of which is less than
2.5% but more than 0.1%, therefore such transactions are exempt, from the
Company's perspective, from the independent shareholders' approval requirement
but are subject to the announcement requirement for connected transactions under
the Listing Rules. CNAC has obtained a waiver from the Hong Kong Stock Exchange
from strict compliance with the announcement and/or independent shareholders'
approval requirements relating to above continuing connected transactions under
the Listing Rules
Payment of Airport Charges and Airport Fees
In the ordinary course of business of Air Macau, airport charges and airport fee
are invoiced and collected by Administration of Airports Limited, an indirect
subsidiary of CNACG, on behalf of Macau International Airport Company ('MIAC'),
an associate company of a substantial shareholder of Air Macau. As a result, the
payment of airport charges and airport fees constitutes continuing connected
transactions under the Listing Rules. The total airport charges and airport fees
paid by Air Macau to ADA in 2004 was approximately HK$69.3 million, the
percentage ratio test under the Listing Rules of which is less than 2.5% but
more than 0.1%, therefore such transactions are exempt, from the Company's
perspective, from the independent shareholders' approval requirement but are
subject to the announcement requirement for connected transactions. CNAC has
obtained a waiver from the Hong Kong Stock Exchange from strict compliance with
the announcement and/or independent shareholders' approval requirements relating
to above continuing connected transactions under the Listing Rules.
VI. WAIVER FROM STRICT COMPLIANCE OF THE LISTING RULES
The Company has obtained a waiver from the Hong Kong Stock Exchange expiring on
December 31, 2006 from strict compliance with the announcement and/or
independent shareholders' approval requirements relating to above continuing
connected transactions (except for transactions set out under above section V)
under the Listing Rules. The maximum aggregate annual value (cap) permitted by
the Hong Kong Stock Exchange and the aggregate annual value actually occurred
for each category of above continuing connected transactions for the year ended
December 31, 2004 are set out below:
Aggregate Amount of Transactions
for the
Year Ended December 31, 2004
Cap Actual Amount
RMB RMB
Transactions (in millions) (in millions)
Transactions with the CNAHC Group
Construction project management services 40.0 0
Properties leasing 47.6 17.0
Media and advertising services 23.0 4.3
Tourism services co-operation 30.8 6.7
Comprehensive services 100.0 92.8
Line maintenance and other ground services 40.0 23.7
Financial services:
Payment of fees and charges 40.0 0
Maximum daily outstanding deposits with CNAF 5,000.0 1,196.3
Maximum daily outstanding loans from CNAF 3,000.0 523.9
Subcontracting of charter flights 600.0 0
Sales agency service:
Aggregate sales of airline tickets and cargo space to the CNAHC group for on-sale to 420.0 218.4
end-purchasers
Aggregate ticket and cargo agency commission and amount of incentives to be paid by 29.0 25.9
us to CNAHC group
Transactions with the Lufthansa Group
Total amount to be paid by us to Lufthansa Group 630.0 435.0
Total amount to be paid by Lufthansa Group to us 500.0 409.3
Transactions with the Beijing Capital Airports Group
Total amount to be paid by us to Beijing Capital Airports Group 730.0 653.4
Transactions with the Cathay Pacific Group
Aggregate amount to be paid by us to the Cathay Pacific Group 35.0 10.9
VII. INDEPENDENT NON-EXECUTIVE DIRECTORS' CONFIRMATION
The Independent Non-executive Directors of the Company have confirmed that all
connected transactions in the year ended December 31, 2004 to which our Company
was a party have been entered into:
1. in the ordinary and usual course of business of the Company;
2. either:
(i) on normal commercial terms; or
(ii) where there was no sufficient comparable transactions to judge whether
they are on normal commercial terms, on terms no less favourable to the Company
than terms available to or from independent third parties, where applicable; and
3. in accordance with the relevant agreement governing them on terms that
are fair and reasonable and in the interests of the shareholders of the Company
as a whole.
--------------------------------------------------------------------------------
VIII. AUDITORS' CONFIRMATION
Messrs. Ernst & Young, the auditors of the Company, has provided a letter to the
board of directors of the Company, confirming that above connected transactions:
1. have received the approval of the Company's board of directors;
2. are in accordance with the pricing policies as stated in the relevant
agreements;
3. have been entered into in accordance with the relevant agreement
governing the transactions; and
4. have not exceeded the cap disclosed in the prospectus of the Company.
AUDITORS #
The Company has appointed Ernst & Young and Ernst & Young Hua Ming as its
international auditors and domestic auditors respectively for the year ended
December 31, 2004. Ernst & Young has audited the attached financial statements
prepared in compliance with International Financial Reporting Standards. The
Company has retained Ernst & Young and Ernst & Young Hua Ming since the date of
its listing. The resolution concerning retention of Ernst & Young and Ernst &
Young Hua Ming as its international auditors and domestic auditors for the year
ending December 31, 2005 will be proposed at the Annual General Meeting of the
Company to be held on May 30, 2005.
Property Ownership Certificate#
As disclosed in the prospectus of the Company dated December 3, 2004, CNAHC
agreed to contribute the properties the Company then occupied to the Company
pursuant to the Restructuring Agreement. All these properties had been
registered under the name of Air China International Corporation, the Company's
predecessor. The Company and CNAHC are actively applying to relevant property
authorities for the transmission and renaming of property certificates. The
Company expected this process to be completed within six months since its
incorporation. As of December 31, 2004, the transmission and renaming of these
property certificates was not completed. The Company will notify its
shareholders in the interim or annual report immediately following the
completion of these processes.
--------------------------------------------------------------------------------
In our opinion, the fact that the above processes have not been completed would
not affect the normal use of these properties, and this fact would not have any
material adverse effect to the Company's business operation. Once the above
processes are completed, the Company shall have the legal title of relevant
properties and right to mortgage, sub-let and dispose of these properties.
By Order of the Board
Li Jiaxiang
Chairman
Beijing, PRC
April 12, 2005
To all shareholders,
Since the incorporation of the Company in September 2004, the Supervisory
Committee has carried out its duties in accordance with the Company's Articles
of Association and relevant requirements. It has performed effective
supervision, through the inspection of relevant documents and attending meetings
of the Board of Directors, on resolutions made by the Board of the Directors to
ensure that they are in compliance with the relevant laws and regulations and in
the best interests of the Company and shareholders. Such resolutions are made in
a manner to ensure the shareholders' interests and long-term development of the
Company.
The Supervisory Committee is in the opinion that the decision-making process of
the Company is in compliance with the Company's Articles of Association and
relevant norms. The directors and the senior management of the Company observed
their fiduciary duties and worked diligently and legally. The Supervisory
Committee is not aware that the Directors and the senior management of the
Company acted in breach of the laws and regulations and the Articles of
Association of the Company or against the interests of the Company.
The Supervisory Committee considers that the Company's 2004 financial statements
reflected a true and fair view of the financial position and operating results
of the Company. The unqualified opinion expressed in the auditors' report issued
by Ernst & Young is objective and fair.
The Supervisory Committee is of the view that the use of proceeds from the
Company's recent initial public offering is in accordance with the disclosure in
the Company's prospectus and such use of proceeds has not been changed for other
purposes.
The Supervisory Committee is of the opinion that the connected transactions
between the Company and its connected persons were conducted at fair market
price without prejudice to the interests of the Company and its minority
Shareholders.
In the opinion of the Supervisory Committee, the Company has achieved
satisfactory results in 2004. It is expected that the Company will spare more
efforts in getting continuous revenue growth, exercising better cost control and
risk management. In 2005, the Supervisory Committee will continue to perform its
duties in safeguarding the interests of the shareholders of the Company in
accordance with the Company's Articles of Associations and relevant
requirements.
By Order of the Supervisory Committee
/raster(60%,p)='cheng'
Zhang Xianlin
Chairman of the Supervisory Committee
Beijing, PRC
April 12, 2005
Directors#
Li Jiaxiang, aged 55, is the Chairman of the Board and a Non-executive Director
of the Company. Mr. Li has in-depth knowledge of the aviation industry. Prior to
joining Air China International Corporation in November 2000 as Vice President
and becoming its President in October 2002, Mr. Li had previously served in the
China Air Force since 1969 and served in various positions including as a Major
General. In October 2002 he was appointed as Vice President of CNAHC and then
promoted to the position of President in August 2004, a post he continues to
hold. Mr. Li graduated from Shandong Coal Technology Institute in 1969 and
studied in China Northwestern University from 1999 to 2001 majoring in
international economic law.
Kong Dong, aged 56, is a Vice Chairman of the Board and a Non-executive Director
of the Company. Mr. Kong has been involved in the aviation industry for over 20
years and has extensive experience in business management. Prior to joining the
CNAHC Group in January 2001, Mr. Kong was Deputy General Manager of China Ocean
Helicopter Company from 1985 to 1991, President of Shenzhen Airport Group from
1992 to 1995, and Director-General in charge of the expansion project of the
Beijing Capital International Airport from 1995 to 2000. In January 2001, he
joined CNAC (PRC) as President and sits on the board of CNAC (a subsidiary of
the Company) as chairman. In October 2002, he joined CNAHC as Vice President. He
also serves as President and Vice Chairman of the Board of CNACG. Mr. Kong
graduated from Nanchang University (previously known as Jiangxi Technology
University) in 1977 with a Bachelor's degree and is a senior economist.
Wang Shixiang, aged 55, is a Vice Chairman of the Board and a Non-executive
Director of the Company. Mr. Wang has over 30 years experience in the aviation
industry and is experienced in the business management. Mr. Wang was previously
President of the Civil Aviation Flight Academy of China from 1995 to 1999 and
General Manager of China Southwest Airlines from 2000 to 2002. He joined CNAHC
in October 2002 as Vice President after China Southwest Airlines was merged into
Air China International Corporation. Mr. Wang graduated from the Civil Aviation
Flight Academy of China (previously known as China Civil Aviation Advanced
School) in 1968 and is a qualified First-Class Pilot Tutor. Mr. Wang also
graduated from China Central Party University in 2000, after studying a
post-graduate programme.
Yao Weiting, aged 57, is a Non-executive Director of the Company. Mr. Yao has
over 30 years of extensive experience in accounting and finance. Mr. Yao worked
as Chief Accountant in Air China International Corporation from 2000 to 2002 and
joined CNAHC in October 2002 as a Vice President. Prior to joining Air China
International Corporation, Mr. Yao was Deputy Director of Economic Adjustment
Bureau of China Metallurgical Ministry from 1997 to 1998 and Assistant to the
State Council Investigation Special Commissioner from 1998 to 1999. Mr. Yao also
serves as an independent non-executive director of Angang New Steel Company
Limited, a company listed on the Hong Kong Stock Exchange. Mr. Yao graduated
from Zhejiang Institute of Economics and Management in 1967 majoring in
industrial accounting and is a senior accountant as well as a senior economist.
Ma Xulun, aged 40, is an Executive Director and President of the Company. Mr. Ma
has over 20 years of extensive experience in finance and management. As the
President, Mr. Ma is responsible for the overall management of the Company.
Prior to joining Air China International Corporation in December 1998 as Vice
President, Mr. Ma was Deputy General Manager of China Commodities Storing and
Transportation Corporation from 1995 to 1997 and Deputy Director General of
Finance Department of CAAC from 1997 to 1998. Mr. Ma graduated from Shanxi
Finance University in 1984 with a Bachelor's Degree of Economics and is a
non-practicing certified public accountant.
Cai Jianjiang, aged 41, is an Executive Director and Vice President of the
Company. Mr. Cai has over 20 years experience in the aviation industry. As the
Vice President, Mr. Cai is mainly responsible for the marketing, sales and
international affairs of the Company. Prior to joining Air China International
Corporation in 2000 as a General Manager of its Shanghai Branch and later as the
assistant to the President of Air China International Corporation from 2001 to
2002, Mr. Cai served as president of Shenzhen Airlines from 1999 to 2000. Mr.
Cai served as Vice President of Air China International Corporation starting
from October 2002. Mr. Cai graduated from China Civil Aviation Institute in
1983.
Fan Cheng, aged 49, is an Executive Director and the Chief Financial Officer of
the Company. Mr. Fan graduated from Nanjing Institute of Chemistry and Chemical
Engineering in 1982 with a Bachelor's degree and graduated from Beijing
University in 2000 with an MBA degree. Mr. Fan is a senior engineer, a senior
accountant and a non-practicing certified public accountant. Mr. Fan joined Air
China International Corporation in March 2001 and served as General Manager of
Assets Management Department of CNAHC from December 2002 until October 2004. Mr.
Fan is also a director of CNACG. Mr. Fan has over 20 years of extensive
experience in business operation, finance and management. As the Chief Financial
Officer, Mr. Fan is mainly responsible for financial management.
Hu Hung Lick, Henry, aged 85, is an Independent Non-executive Director of the
Company. He graduated from the University of Paris with a Docteur-en-Droit
degree. Dr. Hu has been practicing as a barrister for over 49 years and is
currently the president of Shue Yan College in Hong Kong. He is also a member of
the China International Economic and Trade Arbitration Commission. Dr. Hu has
been serving as an independent non-executive director of CNAC since April 1997.
He is also an independent non-executive director of Founder Holdings Limited, a
company engaged in investment holding and listed on the Hong Kong Stock
Exchange. He was a member of Preparatory Committee and Selection Committee for
the First Government of Hong Kong and was member of the Standing Committee of
the 8th and 9th Chinese People's Political Consultative Conference. He is a
Justice of Peace of Hong Kong and was awarded the honorary title of Officer of
the Order of the British Empire, or O.B.E., in 1975 and the Golden Bauhinia Star
by the government of Hong Kong in 1998.
Wu Zhipan, aged 48, is an Independent Non-executive Director of the Company. Mr.
Wu acquired a Doctor in Laws Degree from School of Law, Peking University, in
1988, and was a visiting scholar at Harvard Law School from 1991 to 1992. Mr. Wu
is currently the Vice chancellor of Beijing University. He is also an expert
consultant of the Supreme People's Court, an arbitrator of the Arbitration Panel
of China International Economic and Trade Arbitration Commission and President
of the China Economic Law Research Institute Society. Mr. Wu is the author of a
large number of legal publications and has 20 years of extensive work experience
in the legal field. Mr. Wu is also an independent non-executive director of two
Shanghai Stock Exchange listed companies, namely China Minsheng Banking, Corp.,
Ltd. and Henan Zhongfu Industry, Co., Ltd., an independent non-executive
director of Fortune SGAM Fund Management Co., Ltd. and an independent supervisor
of a Hong Kong and New York Stock Exchange listed company, namely PetroChina
Company Limited. PetroChina Company Limited is engaged in a broad range of
petroleum and natural gas-related activities. China Minsheng Banking Co., Ltd.
is engaged in banking and financing activities. Henan Zhongfu Industry Co., Ltd.
is engaged in the manufacturing of aluminium products.
Zhang Ke, aged 51, is an Independent Non-executive Director of the Company. Mr.
Zhang graduated from Renmin University of China in 1982 with a Bachelor's degree
of economics. He is a certified public accountant and currently Chairman and
chief partner of ShineWing Certified Public Accountants. Mr. Zhang is a member
of the Standing Council of CICPA, honorary professor in the Accounting
Department of Renmin University of China, and a member of CPA Examination
Committee of the Ministry of Finance. Mr. Zhang has over 20 years of extensive
experience in the fields of investment, managerial consultancy, finance and
auditing.
SUPERVISORS#
Zhang Xianlin, aged 51, is Chairman of the Supervisory Committee. Mr. Zhang
graduated from Huazhong University of Science and Technology with a Doctor's
degree and is a certified public accountant and senior accountant. Prior to
joining the Company in 2004, Mr. Zhang joined CNACG in 1996 and served as
Managing Vice President, a post he continues to hold. Mr. Zhang served in the
Finance Department of CAAC's Northern Administration Bureau from 1988 to 1992
and served as Deputy Director General of the Finance Department of CAAC from
1992 to 1997. Mr. Zhang has over 30 years of extensive experience in enterprise
finance and investment management. Mr. Zhang is also an executive director of
CNAC and a non-executive director of Cathay Pacific.
Liao Wei, aged 40, is a Supervisor of the Company. Mr. Liao graduated from China
Southwest Finance University with a Bachelor's Degree in 1986 and is a senior
accountant. Mr. Liao worked in CNACG from 1997 to 2002 and held the position of
General Manager of CNACG's investment department since May 2000. Mr. Liao joined
CNAHC in December 2002 and has served as General Manager of CNAHC's finance
department since September 2003, a post he continues to hold. Prior to joining
CNACG in 1997, Mr. Liao worked in CAAC's Finance Department and Air Macau. Mr.
Liao has many years of extensive experience in finance.
Zhang Huilan, aged 44, is a Supervisor of the Company. Ms. Zhang graduated from
Asia (Macau) International Public University with an MBA degree in 2000 and is a
senior accountant. Ms. Zhang holds IATA diploma in airline accounting and
finance. Ms. Zhang served as the financial controller of CNAC (Macau) from 1993
to 2001. Prior to joining the Company in 2004, Ms. Zhang worked in CNAC (PRC) as
General Manager of its finance department in 2001 and then joined CNAHC in
December 2002 as the Deputy General Manager of Financial Department and was
later appointed Deputy General Manager of Asset Management Department of CNAHC.
Ms. Zhang has many years of extensive experience in finance and business
management.
Liu Feng, aged 46, is a Supervisor of the Company and is the representative of
the employees on the Supervisory Committee. Mr. Liu graduated from the China
Central Party University. Mr. Liu joined Air China International Corporation in
1992 as the secretary to the trade union and has been serving as the deputy
director of the trade union office of Air China International Corporation since
December 1995.
Senior Management#
Cheng Yiru, aged 56, is a Vice President of the Company. Mr. Cheng graduated
from Civil Aviation Flight Academy of China in 1971 and is a First-Degree Pilot.
Prior to joining Air China International Corporation as a Vice President in
October 2002 Mr. Cheng served as Deputy General Manager of China Southwest
Airlines from 1994 to 2002. Mr. Cheng has been involved in the PRC's civil
aviation industry for over 30 years. As the Vice President, Mr. Cheng is mainly
responsible for the fleet, aviation safety supervision, flying technique
management and operation quality of the Company.
Sun Yude, aged 51, is a Vice President of the Company. Mr. Sun graduated from
China Civil Aviation Institute in 1986. Prior to joining Air China International
Corporation in October 2002 as a Vice President, Mr. Sun served as General
Manager of Zhejiang Airlines from 2000 to 2002. Mr. Sun has been involved in the
Chinese civil aviation industry for over 30 years. As the Vice President, Mr.
Sun is mainly responsible for the planning and development department and
information technology work of the Company.
Ma Kuiliang, aged 58, is a Vice President of the Company. Mr. Ma graduated from
China Civil Aviation Institute in 1968 and is a senior engineer. Mr. Ma served
as President of AMECO from 2000 to 2001. Mr. Ma served as Assistant President of
Air China International Corporation from December 2001 and then became its Vice
President since October 2002. Prior to joining Air China International
Corporation, Mr. Ma worked with CAAC Beijing Maintenance Base. Mr. Ma has over
30 years of extensive experience in engineering and management in the Chinese
civil aviation industry. As the Vice President, Mr. Ma is mainly responsible for
the aircraft engineering work of the Company.
Yang Lihua, aged 49, is a Vice President of the Company. Ms. Yang graduated from
Beijing Languages University in 1977 with a Bachelor's degree. She joined Air
China International Corporation in 1988 and was a manager of Cabin Service
Department from 1986 to 1995, Deputy Chief of the Flight Team of Air China
International Corporation from 1996 to 2000, and as General Manager of Passenger
Service Department of Air China International Corporation from 2000 to 2002. Ms.
Yang served as a Vice President of Air China International Corporation since
October 2002. Prior to joining Air China International Corporation, Ms. Yang
worked with CAAC Beijing Administrative Bureau. Ms. Yang has been involved in
the Chinese civil aviation industry for more 30 years. As the Vice President,
Ms. Yang is mainly responsible for cabin services, ground services and services
quality of the Company.
Gao Dianbang, aged 56, is the Chief Pilot of the Company. Mr. Gao graduated from
Civil Aviation Flight Academy of China in 1969 and is a First-Degree pilot. He
joined Air China International Corporation in 1988 and served as the Chief of
Flight Team and Assistant President of Air China International Corporation.
Prior to joining Air China International Corporation in 1988, Mr. Gao served as
flight instructor in CAAC Beijing Administrative Bureau. Mr. Gao has over 30
years of extensive experience in flight operation. As the Chief Pilot, Mr. Gao
is mainly responsible for overall flight operation management of the Company.
Joint Company Secretaries#
Fan Cheng, Mr. Fan's biographical details are set out in the paragraph headed '
Directors' above.
Li Man Kit, aged 48, is a Joint Company Secretary of the Company. He has been
the Company Secretary of CNAC and CNACG since December 2000. Mr. Li graduated
from University of East Asia, Macau in business administration and also holds
both a Bachelor's degree in Chinese Law and a Master's degree in International
Law from Peking University. He is an associate member of the Institute of
Chartered Secretaries and Administrators, UK and the Hong Kong Institute of
Chartered Secretaries. Prior to joining the CNAC Group, Mr. Li was the company
secretary of a shipping group of companies whose shares were listed in both Hong
Kong and London. Mr. Li has many years of experience in para-legal, corporate
reorganisation, administrative and personnel management and company secretarial
work.
QUALIFIED ACCOUNTANT#
Chan Wai Kwong, Joel, aged 40, is the qualified accountant of our Company. He is
also the Head of Internal Audit of our Company. Mr. Chan holds a Professional
Diploma in Accountancy from Hong Kong Polytechnic University. After graduation,
Mr. Chan joined Ernst & Young in 1988 and was in charge of providing audit
services to various clients ranging from small PRC joint venture companies to
Hong Kong and U.S. listed companies. Mr. Chan had worked for Laidlaw Pacific
(Asia) Limited (a registered investment adviser with SFC) from 1997 to 2000 as
senior manager of corporate finance. He also worked for Diyixian.com Limited as
its financial controller from 2000 to 2002. Prior to joining our Company, Mr.
Chan worked with Princeton Venture Partners Limited (a registered investment
adviser with SFC) as a manager. Mr. Chan has over 15 years of experience in
auditing, accounting and financial services. He is a fellow of the Association
of Chartered Certified Accountants and a member of the Hong Kong Institute of
Certified Public Accountants.
/raster(100%,p)='Ernst_Young_logo_e'
To the members
Air China Limited
(Incorporated in the People's Republic of China with limited liability)
We have audited the financial statements on pages 44 to 126 which have been
prepared in accordance with International Financial Reporting Standards. These
financial statements are the responsibility of the Company's Directors. Our
responsibility is to express an opinion on these financial statements based on
our audit. This report is made solely to you, as a body, and for no other
purpose. We do not assume responsibility towards or accept liability to any
other person for the contents of this report.
We conducted our audit in accordance with International Standards on Auditing.
Those standards require that we plan and perform the audit to obtain reasonable
assurance as to whether the financial statements are free from material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Company's Directors, as well as evaluating the overall financial statements
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements give a true and fair view of the state
of affairs of the Company and of the Group as of 31 December 2004, and of the
results of operations and cash flows of the Group for the year then ended in
accordance with International Financial Reporting Standards and have been
properly prepared in accordance with the disclosure requirements of the Hong
Kong Companies Ordinance.
Ernst & Young
Certified Public Accountants
Hong Kong
12 April 2005
2004 2003
Notes RMB'000 RMB'000
Air traffic revenues 4 30,834,822 23,422,660
Other operating revenues 5 2,685,935 1,218,745
33,520,757 24,641,405
Operating expenses
Jet fuel (8,353,752) (5,425,059)
Take-off, landing and depot charges (4,230,349) (3,449,769)
Depreciation (3,463,252) (3,377,472)
Aircraft maintenance, repair and overhaul (2,835,648) (2,149,353)
Employee compensation costs 7 (2,921,322) (2,379,102)
Air catering charges (1,171,784) (842,743)
Aircraft and jet engines operating lease expenses (1,071,256) (910,134)
Other operating lease expenses (187,471) (181,984)
Other flight operation expenses (2,698,234) (2,112,432)
Selling and marketing expenses (1,387,088) (1,057,630)
General and administrative expenses (715,350) (471,463)
Total operating expenses (29,035,506) (22,357,141)
Profit from operations 6 4,485,251 2,284,264
Finance costs 8 (1,799,873) (2,349,078)
Dilution gains on investments 9 410,137 -
Share of profits less losses from associates 561,018 243,093
Profit before tax 3,656,533 178,279
Tax 12 (1,107,838) (89,781)
Profit for the year 2,548,695 88,498
Attributable to:
Equity holders of the parent 2,385,964 159,604
Minority interests 162,731 (71,106)
2,548,695 88,498
Earnings per share
- Basic 15 36.0 cents 2.5 cents
- Diluted 15 36.0 cents -
2004 2003
Notes RMB'000 RMB'000
NON-CURRENT ASSETS
Property, plant and equipment 16 43,441,637 42,423,920
Lease prepayments 933,898 29,807
Interests in associates 19 4,001,521 3,067,846
Advance payments for aircraft and related equipment 632,154 744,404
Government grant receivable - 764,422
Due from CNAHC 20 631,813 -
Deposits for aircraft under operating leases 137,583 145,483
Other investments 21 21,666 21,930
Deferred tax assets 22 776,084 590,153
50,576,356 47,787,965
CURRENT ASSETS
Financial assets 44 (iv) - 34,000
Trade receivables 23 2,364,816 1,955,592
Inventories 24 743,288 712,451
Prepayments, deposits and other receivables 25 3,108,588 1,977,363
Pledged deposits 26 117,231 1,245,542
Cash and cash equivalents 26 9,734,074 2,620,221
Due from other CNAHC group companies 28 44,916 63,928
16,112,913 8,609,097
TOTAL ASSETS 66,689,269 56,397,062
CURRENT LIABILITIES
Financial liabilities 44 (iv) - (6,000)
Trade payables 29 (4,443,608) (4,214,981)
Bills payable 30 (362,033) (1,317,220)
Other payables and accruals 31 (3,920,287) (3,240,545)
Provision for major overhauls 32 (28,130) (115,346)
Air traffic liabilities (1,215,770) (1,165,116)
Tax payable (186,055) (53,929)
Obligations under finance leases 33 (1,705,146) (1,607,056)
Bank and other loans 34 (8,806,051) (9,236,674)
Due to shareholders 27 (2,256,117) (2,968)
Due to other CNAHC group companies 28 (49,617) (33,073)
(22,972,814) (20,992,908)
2004 2003
Notes RMB'000 RMB'000
NET CURRENT LIABILITIES (6,859,901) (12,383,811)
TOTAL ASSETS LESS CURRENT LIABILITIES 43,716,455 35,404,154
NON-CURRENT LIABILITIES
Obligations under finance leases 33 (10,576,241) (12,091,837)
Bank and other loans 34 (12,896,622) (12,819,821)
Long-term payables 35 (446,311) (801,349)
Deferred income 36 (1,102,853) (887,708)
Provision for major overhauls 32 (470,698) (289,593)
Provision for early retirement benefits obligations (195,188) (198,597)
(25,687,913) (27,088,905)
NET ASSETS 18,028,542 8,315,249
Represented by:
EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT
Owners' equity - 6,892,869
Issued share capital 37 9,050,618 -
Reserves 7,497,637 -
16,548,255 6,892,869
MINORITY INTERESTS 1,480,287 1,422,380
TOTAL EQUITY 18,028,542 8,315,249
Ma Xulun Fan Cheng
Director Director
Attributable to equity holders of the Company
Owners' Issued Capital Statutory Retained Total Minority Total
equity share reserve reserve profits interests equity
capital funds
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
As at 1 January 2003 5,020,263 - - - - 5,020,263 1,508,125 6,528,388
Profit for the year 159,604 - - - - 159,604 (71,106) 88,498
Capital contributions 2,055,845 - - - - 2,055,845 - 2,055,845
Dividends paid (26,690) - - - - (26,690) (14,639) (41,329)
Distributions (note 14) (316,153) - - - - (316,153) - (316,153)
As at 31 December 2003 and 6,892,869 - - - - 6,892,869 1,422,380 8,315,249
1 January 2004
Capital contribution of 560,782 - - - - 560,782 - 560,782
cash
(note a)
Capital contribution of 885,626 - - - - 885,626 - 885,626
land use rights (note b)
Capitalisation of amount 17,965 - - - - 17,965 - 17,965
payable to CNAHC (note c)
Deferred taxation (note 22) 793,755 - - - - 793,755 - 793,755
Profit from 1 January 2004 1,758,879 - - - - 1,758,879 117,506 1,876,385
to
30 September 2004
Dividends paid (29,074) - - - - (29,074) (24,909) (53,983)
Distributions (note d) (2,182,921) - - - - (2,182,921) - (2,182,921)
Capitalisation upon (8,697,881) 6,500,000 1,892,201 - 305,680 - - -
reorganisation of the
Company
Profit from 1 October 2004 - - - - 627,085 627,085 45,225 672,310
to 31 December 2004
Distributions (note e) - - - - (377,550) (377,550) - (377,550)
Dilution of interest (note - - - - - - (79,915) (79,915)
9)
Transfer to statutory - - - 93,020 (93,020) - - -
reserve funds (note 14)
Issue of new shares upon - 2,550,618 5,536,678 - - 8,087,296 - 8,087,296
listing (note 37 (c))
Share issuing expenses - - (486,457) - - (486,457) - (486,457)
(note 37 (c))
As at 31 December 2004 - 9,050,618 6,942,422 93,020 462,195 16,548,255 1,480,287 18,028,542
Notes:
a. In September 2004, China National Aviation Holding Company ('CNAHC')
made a cash contribution of RMB560,782,100 to the Company.
b. Upon incorporation of the Company, CNAHC effected the transfer of
certain land use rights in an aggregate amount of approximately RMB885,626,000
to the Company.
c. This represented payable of approximately RMB17,965,000 of the Company
assumed by CNAHC in 2004 which was accounted for as a capital contribution.
d. In accordance with the (/raster(55%,p)='c41') 'Provisional Regulations
Relating to Corporate Reorganisation of Enterprises and Related Management of
State-owned Capital and Financial Treatment' notice issued by the Ministry of
Finance and pursuant to the Restructuring as set out in note 1 to these
financial statements, after the Company's incorporation, the Company is required
to make a distribution to CNAHC and China National Aviation Corporation (Group)
Limited ('CNACG' and which is a Hong Kong incorporated company wholly owned by
CNAHC), details of which are set out in note 14 (b) to these financial
statements. The total amount of distributions made to CNAHC and CNACG pursuant
to this notice is approximately RMB2,143,785,000. Details of the distributions
are set out in note 14 (b) to these financial statements.
In addition, the distributions include an amount of approximately RMB39,136,000
which represents the net assets which have been carved-out and treated as deemed
distribution pursuant to the Restructuring as set out in note 1 to these
financial statements.
e. As a result of the completion of BACL Agreement, SWACL Agreement and
HKSACL Agreement, details of which are set out in note 14 (a) to these financial
statements, the Group made a payment of approximately RMB377,550,000 to CNAHC.
This payment has been made to CNAHC and accounted for as a special distribution
to CNAHC by the Company.
2004 2003
RMB'000 RMB'000
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before tax 3,656,533 178,279
Adjustments for:
Exchange losses, net 161,824 370,148
(Gain)/loss on disposal of property, plant and equipment, net 33,872 (17,048)
Gains on trading of derivatives, net (41,036) (169,921)
Dilution gains on investments (410,137) -
Depreciation 3,463,252 3,377,472
Share of profits less losses from associates (561,018) (243,093)
Dividend income on long-term investments (4,622) (406)
Interest income (33,703) (18,803)
Interest expense 1,824,392 2,241,166
Provision for/(write-back of) doubtful debts, net (988) 12,144
Provision for/(write-back of) inventories, net (11,508) 24,090
Operating profit before working capital changes 8,076,861 5,754,028
(Increase)/decrease in inventories (19,681) 2,228
Increase in trade receivables (425,080) (93,284)
(Increase)/decrease in amounts due from other CNAHC group companies 19,012 (32,309)
Increase in prepayments, deposits and other receivables (164,606) (77,792)
Decrease in deposits for aircraft under operating leases 18,581 19,288
Increase/(decrease) in amounts due to other CNAHC group companies 16,544 (6,001)
Increase in trade payables 268,645 806,877
Increase/(decrease) in bills payable (955,187) 900,820
Increase in other payables and accruals 1,154,425 41,676
Increase in provision for major overhauls 93,889 151,486
Increase in air traffic liabilities 52,664 276,883
Increase/(decrease) in provision for early retirement benefits (3,409) 15,272
Recognition of deferred income (70,593) (57,894)
Cash generated from operations 8,062,065 7,701,278
Interest paid (1,872,691) (2,248,996)
Tax paid:
Mainland China enterprise income tax paid (36,953) (17,032)
Overseas taxes paid (1,568) (10,550)
NET CASH INFLOW FROM OPERATING ACTIVITIES 6,150,853 5,424,700
2004 2003
RMB'000 RMB'000
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (5,270,777) (3,065,218)
Proceeds from disposal of property, plant and equipment 189,840 164,873
Increase in lease prepayments (18,465) (4,939)
Increase in advance payments for aircraft and related equipment (867,828) (784,061)
Net cash settlements of derivatives 69,036 100,921
(Increase)/decrease in amounts due from associates 4,461 (18,406)
Increase/(decrease) in amounts due to associates 58,796 (27,522)
(Increase)/decrease in time deposits with original maturity of more than (290,024) 22,587
three months
(Increase)/decrease in pledged deposits 1,128,311 (853,958)
Interest received 33,703 18,803
Capital contributions to associates (709,253) (4,000)
Dividends received on long-term investments 4,622 406
Dividends received from associates 176,365 90,551
Proceeds from disposal of long-term investments 264 -
Net cash inflow of cash and cash equivalents in respect of the establishment of a joint 516,491 -
venture (note 45 (b))
NET CASH OUTFLOW FROM INVESTING ACTIVITIES (4,974,458) (4,359,963)
NET CASH INFLOW BEFORE FINANCING ACTIVITIES 1,176,395 1,064,737
CASH FLOWS FROM FINANCING ACTIVITIES
New bank and other loans 10,146,285 10,205,236
Repayment of bank and other loans (10,500,107) (13,371,026)
Repayment of principal under finance lease obligations (1,607,056) (1,961,181)
Settlement of long-term payables (119,946) (132,509)
Increase/(decrease) in balance due to shareholders (468,789) 1,276,384
Contributions by CNAHC 560,782 2,055,845
Distributions to CNAHC - (342,843)
Dividends paid to minority shareholders (24,909) (14,639)
Receipt of government grants 32,609 77,338
Net proceeds from issuance of new shares upon listing 7,600,839 -
NET CASH INFLOW/(OUTFLOW) FROM FINANCING ACTIVITIES 5,619,708 (2,207,395)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 27,726 85,946
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 6,823,829 (1,056,712)
Cash and cash equivalents at beginning of year 2,589,395 3,646,107
CASH AND CASH EQUIVALENTS AT END OF YEAR (note 45 (a)) 9,413,224 2,589,395
2004
Notes RMB'000
NON-CURRENT ASSETS
Property, plant and equipment 16 41,908,428
Lease prepayments 919,871
Interests in subsidiaries 17 176,929
Interests in joint ventures 18 1,392,388
Interests in associates 19 780,837
Advance payments for aircraft and related equipment 442,071
Due from CNAHC 20 631,813
Deposits for aircraft under operating leases 55,831
Other investments 21 816
Deferred tax assets 22 658,000
46,966,984
CURRENT ASSETS
Trade receivables 23 2,197,293
Inventories 24 468,930
Prepayments, deposits and other receivables 25 2,847,552
Pledged deposits 26 80,519
Cash and cash equivalents 26 8,421,859
Due from other CNAHC group companies 28 8,801
14,024,954
TOTAL ASSETS 60,991,938
CURRENT LIABILITIES
Trade payables 29 (3,819,353)
Bills payable 30 (362,033)
Other payables and accruals 31 (3,387,870)
Provision for major overhauls 32 (28,130)
Air traffic liabilities (1,087,838)
Tax payable (151,533)
Obligations under finance leases 33 (1,705,146)
Bank and other loans 34 (8,255,695)
Due to shareholders 27 (2,240,213)
Due to other CNAHC group companies 28 (12,163)
(21,049,974)
2004
Notes RMB'000
NET CURRENT LIABILITIES (7,025,020)
TOTAL ASSETS LESS CURRENT LIABILITIES 39,941,964
NON-CURRENT LIABILITIES
Obligations under finance leases 33 (10,576,241)
Bank and other loans 34 (12,896,622)
Long-term payables 35 (437,577)
Deferred income 36 (1,102,853)
Provision for major overhauls 32 (373,242)
Provision for early retirement benefits (195,188)
(25,581,723)
NET ASSETS 14,360,241
Represented by:
Issued share capital 37 9,050,618
Reserves 38 5,309,623
TOTAL EQUITY 14,360,241
Ma Xulun Fan Cheng
Director Director
1. GROUP REORGANISATION, PRINCIPAL ACTIVITIES AND BASIS OF PRESENTATION OF
FINANCIAL STATEMENTS#
Air China Limited (the 'Company') was incorporated on 30 September 2004 in
Beijing, the People's Republic of China (the 'PRC'), as a joint stock limited
company as part of the restructuring (the 'Restructuring') of CNAHC, a PRC
state-owned enterprise under the supervision of the State Council, in
preparation for the listing of the Company's H shares on The Stock Exchange of
Hong Kong Limited (the 'Hong Kong Stock Exchange') and the London Stock Exchange
as described below.
Pursuant to the Restructuring, CNAHC and through its wholly-owned subsidiaries,
effected the transfer of the following to the Company upon its incorporation:
(a) the assets, liabilities and undertakings which principally relate to
the business of the provision of airline operations (the 'Relevant Businesses');
and
(b) the shareholding interests in certain subsidiaries, joint ventures and
associates which principally carry on the business of the provision of airline
operations, aircraft engineering services, air catering services, airport ground
handling services and other airline-related businesses (the 'Relevant Companies
').
Pursuant to the Restructuring, the Company entered into a restructuring
agreement with CNAHC and CNACG on 20 November 2004 (the 'Restructuring Agreement
'). In accordance with the Restructuring Agreement, CNAHC transferred to the
Company, among other things, the following:
(a) all of the airline and airline-related businesses operated by Air China
International Corporation (/raster(70%,p)='c40'), the Company's immediate
predecessor;
(b) all related assets, including aircraft and other property, plant and
equipment of Air China International Corporation;
(c) all related liabilities, including Air China International
Corporation's bank loans; and
(d) the equity interests in various investees in airline and
airline-related businesses owned by Air China International Corporation,
including equity interests in Air China Cargo Co., Ltd. ('Air China Cargo'),
Aircraft Maintenance and Engineering Corporation, Beijing ('AMECO') and Shenzhen
Airlines Co., Ltd. ('Shenzhen Airlines').
In accordance with the Restructuring Agreement, CNACG transferred its
approximately 69% equity interests in China National Aviation Company Limited ('
CNAC') to the Company by way of a capital contribution.
The effective date of the Restructuring was 30 September 2004, after which date
the Company assumed the rights and obligations of the businesses, assets and
liabilities transferred to the Company by CNAHC and CNACG.
1. GROUP REORGANISATION, PRINCIPAL ACTIVITIES AND BASIS OF PRESENTATION OF
FINANCIAL STATEMENTS #
As at the date of approval of these financial statements, the Group is in the
process of applying to the relevant government authorities to obtain the title
certificates of certain of the above-mentioned assets, primarily buildings and
land use rights, with an aggregate carrying value of approximately RMB3,098
million, and to register the already transferred equity interests in certain
investees, including equity interests in Air China Cargo, AMECO and Shenzhen
Airlines, from Air China International Corporation into the Company's name. The
Directors of the Company are of the view that the Group is entitled to lawfully
and validly occupy and use the above-mentioned assets and own the aforesaid
equity interests. The Directors of the Company are of the opinion that the
aforesaid matter will not have any significant impact on the Group's financial
position as at 31 December 2004.
In consideration for CNAHC and CNACG transferring the Relevant Businesses and
the Relevant Companies to the Company, the Company issued 5,054,276,915 domestic
shares (in the form of State legal person shares) and 1,445,723,085 non-H
Foreign Shares with a par value of RMB1.00 each to CNAHC and CNACG, respectively
(note 37 (a)). The shares issued to CNAHC and CNACG represented the then entire
registered and issued share capital of the Company upon its incorporation.
Prior to the incorporation of the Company, the Relevant Businesses and the
Relevant Companies were held by two subsidiaries of CNAHC, namely, Air China
International Corporation and CNAC, a Hong Kong incorporated company with its
shares publicly traded on the Hong Kong Stock Exchange. Air China International
Corporation is a state-owned enterprise established in the PRC on 1 July 1988
and was subject to the supervision and regulation of the General Administration
of Civil Aviation of China, formerly known as the Civil Aviation Administration
of China ('CAAC'), a regulatory authority of the civil aviation industry in the
PRC. Pursuant to the documents issued by the State Council and the Ministry of
Finance dated 14 July 2002 and 9 August 2002, respectively, the PRC government
approved the formation of CNAHC, a state-owned enterprise under the supervision
of the State Council, which then held, inter alia, a 100% direct interest in Air
China International Corporation, a 100% direct interest in China Southwest
Airlines ('CSWA'), a 100% direct interest in China National Aviation Corporation
('CNAC (PRC)'), which owned 100% interest in CNAC Zhejiang Airlines ('ZJA') and
approximately a 69% indirect interest in CNAC. In 2003, CNAHC undertook further
reorganisation measures to merge the business operations of CSWA and ZJA into
Air China International Corporation, following which CSWA and ZJA became
branches of Air China International Corporation.
The Group's principal activities are airline and airline-related services,
including aircraft engineering services, air catering services and airport
ground handling services conducted mainly in the PRC, Hong Kong and Macau.
The registered office of the Company is located at 9th Floor, Blue Sky Mansion,
28 Tianzhu Road, Zone A, Tianzhu Airport Industrial Zone, Shunyi District,
Beijing 101312, the PRC.
In the opinion of the Directors, the Company's ultimate holding company is
CNAHC.
Further details of the Restructuring are set out in the Company's prospectus
dated 3 December 2004 issued in respect of the listing of the Company's H shares
on the Hong Kong Stock Exchange and the London Stock Exchange.
1. GROUP REORGANISATION, PRINCIPAL ACTIVITIES AND BASIS OF PRESENTATION OF
FINANCIAL STATEMENTS #
On 15 December 2004, 2,805,680,000 new H shares in the Company, details of which
are set out in note 37 (b) to these financial statements, were listed on the
Hong Kong Stock Exchange and the London Stock Exchange. On 11 January 2005, an
additional 420,852,000 new H shares in the Company, details of which are set out
in note 47 (a) to these financial statements, were issued and listed on the Hong
Kong Stock Exchange and the London Stock Exchange upon the exercise of the
over-allotment option.
As CNAHC controlled the Relevant Businesses and Relevant Companies before the
Restructuring and continues to control the Company after the Restructuring, the
consolidated financial statements of the Group for the years ended 31 December
2003 and 2004 have been prepared as a reorganisation of companies under common
control in a manner similar to a pooling-of-interests. Accordingly, the assets
and liabilities of the Company are stated at historical amounts, except for the
measurement at fair value of financial instruments in accordance with IAS 39
(amended 2004).
The consolidated balance sheets as at 31 December 2003 and 2004 present the
Group's assets and liabilities as if the Restructuring had been completed at 1
January 2003. The consolidated results and consolidated cash flows include the
Group's results of operations and cash flows as if the Relevant Businesses and
interests in the Relevant Companies had been transferred to the Group at 1
January 2003. The Company's Directors are of the opinion that the consolidated
financial statements prepared on this basis present fairly the consolidated
financial position, consolidated results and consolidated cash flows of the
Group as a whole. Therefore, the net profit for the year ended 31 December 2004
includes the consolidated results before the Restructuring.
As the Company was only incorporated on 30 September 2004, there are no
comparative figures as at 31 December 2003 in the Company's balance sheet.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES#
Basis of preparation
The consolidated financial statements of the Group have been prepared in
accordance with International Financial Reporting Standards ('IFRS') which
comprise standards and interpretations approved by the International Accounting
Standards Board, and International Accounting Standards ('IAS') and Standing
Interpretations Committee interpretations approved by the International
Accounting Standards Committee that remain in effect, except for the following
standards that have been early adopted as at 1 January 2001, which is the
earliest date for the preparation of the financial information in relation to
the listing of the Company's H shares:
. IFRS 1 (amended 2004), First-Time Adoption of International Financial
Reporting Standards;
. IFRS 3, Business Combinations;
. IFRS 5, Non-current Assets Held for Sale and Discontinued Operations;
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES #
Basis of preparation
. IAS 1 (amended 2004), Presentation of Financial Statements;
. IAS 2 (revised 2003), Inventories;
. IAS 7 (amended 2003), Cash Flow Statements;
. IAS 8 (revised 2003), Accounting Policies, Changes in Accounting
Estimates and Errors;
. IAS 10 (amended 2004), Events after the Balance Sheet Date;
. IAS 12 (amended 2004), Income Taxes;
. IAS 14 (amended 2004), Segmental Reporting;
. IAS 17 (amended 2004), Leases;
. IAS 18 (amended 2004), Revenue;
. IAS 19 (amended 2004), Employee Benefits;
. IAS 20 (revised 2003), Accounting for Government Grants and
Disclosure of Government Assistance;
. IAS 21 (revised 2003), The Effects of Changes in Foreign Exchange
Rates;
. IAS 23 (amended 2003), Borrowing Costs;
. IAS 27 (amended 2004), Consolidated and Separate Financial
Statements;
. IAS 28 (amended 2004), Investments in Associates;
. IAS 31 (amended 2004), Interests in Joint Ventures;
. IAS 32 (amended 2004), Financial Instruments: Disclosure and
Presentation;
. IAS 33 (amended 2004), Earnings Per Share;
. IAS 36 (amended 2004), Impairment of Assets;
. IAS 37 (amended 2004), Provisions, Contingent Liabilities and
Contingent Assets;
. IAS 38 (amended 2004), Intangible Assets; and
. IAS 39 (amended 2004), Financial Instruments: Recognition and
Measurement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES #
Basis of preparation
The consolidated financial statements have been prepared on a historical cost
basis, except for the measurement at fair value of financial instruments in
accordance with IAS 39 (amended 2004).
Basis of consolidation
The consolidated financial statements comprise the financial statements of the
Company and all its subsidiaries. The financial statements of the subsidiaries
are prepared for the same reporting period as the parent company using
consistent accounting policies. Adjustments are made to bring into line any
dissimilar accounting policies that may exist.
Subsidiaries are consolidated from the date on which control is transferred to
the Group and cease to be consolidated from the date on which control is
transferred out of the Group. This control is normally evidenced when the Group
owns, either directly or indirectly, more than 50% of the voting rights of a
company's share or registered capital, is able to govern the financial and
operating policies of an enterprise so as to benefit from its activities. All
significant inter-company transactions and balances within the Group are
eliminated on consolidation.
Minority interests represent the interests of outside shareholders in the
results and net assets of the Company's subsidiaries, not held by the Group and
are presented in the consolidated balance sheet within equity, separately from
the shareholders' equity.
Foreign currencies
The Group's functional and presentation currency is Renminbi ('RMB'), except for
overseas subsidiaries, which use their local currencies.
Foreign currency transactions are recorded at the applicable exchange rates
ruling at the transaction dates as quoted by the People's Bank of China.
Monetary assets and liabilities denominated in foreign currencies at the balance
sheet date are translated into RMB at the applicable exchange rates ruling at
that date as quoted by the People's Bank of China. All exchange differences are
dealt with in the income statement.
On consolidation, the financial statements of overseas subsidiaries are
translated into RMB. The income statements of these subsidiaries are translated
into RMB at the weighted average exchange rates for the year, and the balance
sheets are translated into RMB at the exchange rates ruling at the balance sheet
date. The resulting translation differences are included in the exchange
fluctuation reserve.
For the purpose of the consolidated cash flow statement, the cash flows of the
overseas subsidiaries are translated into RMB at the exchange rates ruling at
the dates of the cash flows. Frequently recurring cash flows of overseas
subsidiaries, which arise throughout the year, are translated into RMB at the
weighted average exchange rates for the year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES #
Subsidiaries
A subsidiary is a company whose financial and operating policies the Company
controls, directly or indirectly, so as to obtain benefits from its activities.
A subsidiary is consolidated from the date the Company obtains control until
such time as control ceases.
The results of subsidiaries are included in the Company's income statement to
the extent of dividends received and receivable. In the Company's balance sheet,
the Company's interests in subsidiaries are stated at cost less any impairment
losses.
Interests in joint ventures
The Group's interests in its joint ventures are accounted for by proportionate
consolidation, which involves recognising a proportionate share of the joint
venture's assets, liabilities, income and expenses with similar items in the
consolidated financial statements on a line-by-line basis.
Interests in associates
The Group's investments in its associates are accounted for under the equity
method of accounting. An associate is an entity in which the Group has
significant influence and which is neither a subsidiary nor a joint venture of
the Group. The investments in associates are carried in the balance sheet at
cost plus post-acquisition changes in the Group's share of net assets of the
associates, less any impairment in value. The income statement reflects the
Group's share of the results of operations of the associates. The Group's
investments in its associates include goodwill (net of accumulated amortisation
and impairment) on acquisition, which is treated in accordance with the
accounting policy for goodwill stated below. When the Group's share of losses in
an associate equals or exceeds its interest in the associate, the Group does not
recognise further losses, unless the Group has incurred obligations or made
payments on behalf of the associates.
In the Company's balance sheet, the investments in associates are stated at cost
less any impairment losses. The results of associates are accounted for by the
Company on the basis of dividends received and receivable.
Property, plant and equipment
Property, plant and equipment, other than construction in progress ('CIP'), are
stated at cost less accumulated depreciation and any impairment in value.
The cost of an asset comprises its purchase price and any directly attributable
costs of bringing the asset to its working condition and location for its
intended use. Expenditure incurred after the assets have been put into
operation, such as repairs and maintenance, is normally charged to the income
statement in the period in which it is incurred. In situations where it can be
clearly demonstrated that the expenditure has resulted in an increase in the
future economic benefits expected to be obtained from the use of the asset, the
expenditure is capitalised as an additional cost of that asset.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES #
Property, plant and equipment
Depreciation is calculated on the straight-line basis over the expected useful
life of the asset, after taking into account its estimated residual value, as
follows:
Depreciation life Residual value
Aircraft and flight equipment 10 to 20 years Nil-5%
Buildings 15 to 35 years 5%
Machinery, transportation equipment and office equipment 4 to 20 years 5%
The gain or loss on disposal or retirement of a property, plant and equipment
recognised in the income statement is the difference between the net sales
proceeds and the carrying amount of the relevant asset at the time of disposal.
CIP represents office buildings and various infrastructure projects under
construction and equipment pending installation in the aircraft and is stated at
cost less any impairment losses, and is not depreciated. Cost comprises the
direct costs of construction, the cost of equipment as well as finance charges
from borrowings used to finance these assets during the construction or
installation period. CIP is reclassified to the appropriate categories of
property, plant and equipment when completed and ready for use.
The carrying values of property, plant and equipment are reviewed for impairment
when events or changes in circumstances indicate that the carrying values may
not be recoverable. If any such indication exists and where the carrying values
exceed the estimated recoverable amounts, the assets or cash-generating units
are written down to their recoverable amounts. The recoverable amount of
property, plant and equipment is the greater of fair value less costs to sell
and value in use. In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific to
the asset. For an asset that does not generate largely independent cash inflows,
the recoverable amount is determined for the cash-generating unit to which the
asset belongs. Impairment losses are recognised in the income statement.
Lease prepayments
Lease prepayments represent acquisition costs of land use rights less
accumulated amortisation and impairment losses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES #
Goodwill
Goodwill represents the excess of cost over the fair value of the identifiable
assets, liabilities and contingent liabilities of acquired businesses. The Group
early adopted IFRS 3, Business Combinations, and applied the requirements of
IFRS 3 to goodwill existing at or acquired after, and to business combinations
occurring from 1 January 2001. In accordance with IFRS 3, the Group ceased
amortising goodwill as of 1 January 2001.
On disposal of subsidiaries, associates or joint ventures, the gain or loss on
disposal is calculated by reference to the net assets at the date of disposal,
including the attributable amount of goodwill which remains unamortised and any
relevant reserves, as appropriate.
IAS 36 (amended 2004) requires that goodwill be tested for impairment at the
cash-generating units on an annual basis and whenever there is an indication
that a unit may be impaired, by comparing the carrying amount of the unit,
including the goodwill, with the recoverable amount of the unit. An impairment
loss shall be recognised for a cash-generating unit if the recoverable amount of
the unit is less than the carrying amount of the unit. The impairment loss shall
be allocated to reduce the carrying amount of the assets of the unit (group of
units) in the following order: (i) first, to reduce the carrying amount of any
goodwill allocated to the cash-generating unit (group of units); and (ii) then,
to the other assets of the unit pro-rata on the basis of the carrying amount of
each asset in the unit. In allocating an impairment loss, the Group shall not
reduce the carrying amount of an asset below the highest of: (i) its fair value
less costs to sell (if determinable); (ii) its value in use (if determinable);
and (iii) zero.
Advance payments for aircraft and related equipment
Advance contract payments to aircraft manufacturers to secure deliveries of
aircraft and related equipment in future years, including attributable finance
costs, are included in assets. The advances are accounted for as part of the
cost of property, plant and equipment upon delivery of the aircraft.
Investments
All investments are initially recognised at cost, being the fair value of the
consideration given and including acquisition charges associated with the
investments.
After initial recognition, investments, except those investments which do not
have a quoted market price in an active market and whose fair value cannot be
reliably measured, are classified as available-for-sale and measured at fair
value through profit or loss. Gains or losses on available-for-sale investments
are recognised in the income statement. Investments that do not have a quoted
market price in an active market and whose fair value cannot be reliably
measured are stated at cost less impairment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES #
Leases
Finance leases which transfer to the Group substantially all the risks and
benefits of ownership of the leased item are capitalised at the inception of the
lease at the fair value of the leased properties or, if lower, at the present
value of the minimum lease payments. Lease payments are apportioned between the
finance charges and reduction of the lease liability so as to achieve a constant
rate of interest on the remaining balance of the liability. Finance charges are
charged directly against income. Capitalised leased assets are depreciated over
the estimated economic useful lives of the assets.
Leases where the lessor retains substantially all the risks and benefits of
ownership of the asset are classified as operating leases. Where the Group is
the lessor, assets leased by the Group under operating leases are included in
non-current assets and rentals receivables under the operating leases are
credited to the income statement on the straight-line basis over the lease
terms. Where the Group is the lessee, rentals payable under the operating leases
are charged to the income statement on the straight-line basis over the lease
terms.
Inventories
Inventories, which consist primarily of expendable spare parts and supplies, are
stated at cost less any provision for obsolescence, and are expensed when
consumed in operations. Cost is determined on the weighted average basis.
Work in progress represents material cost, labour cost and overhead cost
capitalised for the provision of aircraft engineering services and is stated at
the lower of cost, calculated on a weighted average basis, and net realisable
value. Net realisable value is determined on the basis of anticipated sales
proceeds less estimated costs to be incurred to completion and disposal.
Cash and cash equivalents
For the purpose of the consolidated cash flow statement, cash and cash
equivalents comprise cash on hand and demand deposits, and short term highly
liquid investments which are readily convertible into known amounts of cash and
which are subject to an insignificant risk of changes in value, and have a short
maturity of generally within three months when acquired, less bank overdrafts
which are repayable on demand and form an integral part of the Group's cash
management.
For the purpose of the balance sheet, cash and cash equivalents comprise cash on
hand and at banks and other financial institutions, including term deposits,
which are not restricted as to use.
Manufacturers' credits
In connection with the acquisition of certain aircraft and related equipment,
the Group receives various credits from the manufacturers. Such credits are
deferred until the aircraft and related equipment are delivered, at which time
they are applied as a reduction of the cost of acquiring the aircraft and
related equipment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES #
Employee benefits
(a) Pension obligations
The full-time employees of the Group are covered by various government-sponsored
pension plans under which the employees are entitled to a monthly pension based
on certain formulae. Certain government agencies are responsible for the pension
liability to these retired employees. The Group contributes on a monthly basis
to these pension plans. Under these plans, the Group has no legal or
constructive obligation for retirement benefits beyond the contributions made.
Contributions to these plans are expensed as incurred.
(b) Termination and early retirement benefits
Termination benefits are payable whenever an employee's employment is
voluntarily terminated before the normal retirement date or whenever an employee
accepts voluntary redundancy in exchange for these benefits. The Group
recognises termination benefits when it is demonstrably committed to either
terminating the employment of current employees according to a detailed formal
plan without possibility of withdrawal or to providing termination benefits as a
result of an offer made to encourage voluntary redundancy.
(c) Housing benefits
In prior periods, the Group sold staff quarters to its employees, subject to a
number of eligibility requirements, at below market prices. When staff quarters
are identified as being subject to sale under these arrangements, the carrying
value of the staff quarters is written down to the net recoverable amount. Upon
sale, any difference between sales proceeds and the carrying amount of the staff
quarters is charged to the income statement. The above staff quarters'
allocation scheme was phased out before the incorporation of the Company in
accordance with the policies of the PRC government.
In 1998, the State Council of the PRC issued a circular, which stipulated that
the sale of quarters to employees at preferential prices should be withdrawn. In
2000, the State Council further issued a circular stating that cash subsidies
should be made to the employees following the withdrawal of allocation of staff
quarters. However, the specific timetable and procedures to implement these
policies were to be determined by the individual provincial or municipal
government based on the particular situation of the province or municipality.
Based on the relevant detailed local government regulations promulgated, certain
entities within the Group have adopted cash housing subsidy plans, whereby, for
those eligible employees who have not been allocated with any quarters or who
have not been allocated with quarters up to the prescribed standards before the
staff quarters' allocation scheme was terminated, the Group will pay them
one-off cash housing subsidies based on their years of service, position and
other criteria. These cash housing subsidies are charged to the income statement
in the year in which it was determined that the payment of such subsidies is
probable and the amounts can be reasonably estimated.
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