Final Results - Part 2

Air China Ld
26 April 2005

Part 2

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES #

Employee benefits

(c)     Housing benefits

In addition, all full-time employees of the Group are entitled to participate in
various government-sponsored housing funds. The Group contributes on a monthly
basis to these funds based on certain percentages of the salaries of the
employees. The Group's liability in respect of these funds is limited to the
contributions payable in each period.

Provisions

Provisions are recognised when the Group has a present obligation (legal or
constructive) as a result of a past event and it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation
provided that reliable estimate can be made of the amount of the obligation. If
the effect of the time value of money is material, provisions are determined by
discounting the expected future cash flows at a pre-tax rate that reflects
current market assessments of the time value of money and, where appropriate,
the risks specific to the liability. Where discounting is used, the increase in
the provision due to the passage of time is recognised as an interest expense.

Maintenance and overhaul costs

In respect of aircraft and engines under operating leases, the Group has the
responsibility to fulfil certain return conditions under the relevant operating
leases. In order to fulfil these return conditions, major overhauls are required
to be conducted on a regular basis. Accordingly, estimated costs of major
overhauls for aircraft and engines under operating leases are accrued and
charged to the income statement over the estimated period between overhauls
using the ratios of actual flying hours/cycles and estimated flying hours/cycles
between overhauls. The costs of major overhauls comprise mainly labour and
materials. Differences between the estimated costs and the actual costs of
overhauls are included in the income statement in the period of overhaul.

In respect of aircraft and engines owned by the Group or held under finance
leases, costs of major overhauls are charged to the income statement as and when
incurred.

All other routine repair and maintenance costs incurred in restoring such
property, plant and equipment to their normal working condition are charged to
the income statement as and when incurred.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES #

Revenue recognition

Revenue is recognised when it is probable that the economic benefits will flow
to the Group and the revenue can be reliably measured on the following bases:

(a)     Provision of airline and airline-related services

Passenger revenue is recognised either when transportation is provided or when a
ticket expires unused rather than when a ticket is sold. Unused tickets
generally expire one year from the date the ticket was sold, or for partially
used tickets, the date of first flight. Ticket sales for transportation not yet
provided are included in current liabilities as air traffic liabilities. In
addition, the Group has code-sharing agreements with other airlines under which
a carrier's flights can be marketed under the two-letter airline designator code
of another carrier. Revenues earned under these arrangements are allocated
between the code share partners based on existing contractual agreements and
airline industry standard pro-ratio formulae and are recognised as passenger
revenue when the transportation is provided.

Cargo and mail revenues are recognised when the transportation is provided.

Revenue from airline-related services is recognised when services are rendered.

Revenue was stated net of business tax and contributions to the CAAC
Infrastructure Development Fund prior to 1 January 2004. From 2004,
contributions to the CAAC Infrastructure Development Fund are included in other
flight operation expenses to reflect the change in the levy basis in accordance
with the related new policy promulgated by the PRC government.

(b)     Sale of goods

Revenue is recognised when the significant risks and rewards of ownership have
been transferred to the buyer, provided that the Group maintains neither
managerial involvement to the degree usually associated with ownership, nor
effective control over the goods sold.

(c)     Trading of investments

Revenue is recognised on a trade date basis.

(d)     Interest income

Revenue is recognised on a time proportion basis taking into account the
principal outstanding and the effective rate of interest applicable.

(e)     Dividends

Revenue is recognised when the owners' right to receive the payment has been
established.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES #

Revenue recognition

(f)      Rental income and aircraft and related equipment lease income

Revenue is recognised on a time proportion basis over the terms of the
respective leases.

Frequent flyer programme

For Air China Companion Club member accounts that have sufficient mileage
credits to claim the lowest level of free travel, the Group records a liability
for the estimated incremental costs associated with providing travel awards that
are expected to be redeemed. Incremental costs include the cost of incremental
fuel, meals and insurance but do not include any cost for aircraft ownership,
maintenance, labour or overhead allocation. The liability is adjusted
periodically based on awards earned, awards redeemed, changes in the incremental
costs and changes in the Air China Companion Club programme, and is included in
the balance sheet as a current liability.

Government grants

Government grants are recognised at their fair values when it is probable that
the grant will be received and all attaching conditions will be complied with.
When the grant relates to an expense item, it is recognised as income over the
periods necessary to match the grant on a systematic basis to the costs that it
is intended to compensate. Where the grant relates to an asset, the fair value
is credited to a deferred income account and is released to the income statement
over the expected useful life of the relevant asset by equal annual instalments.

Borrowing costs

Borrowing costs directly attributable to the acquisition of aircraft,
construction or production of qualifying assets, i.e. assets that necessarily
take a substantial period of time to get ready for their intended use, are
capitalised as part of the costs of those assets. The capitalisation of aircraft
borrowing costs ceases when the aircraft is placed into revenue earning services
and the capitalisation of other assets' borrowing costs ceases when the assets
are substantially ready for their intended use or sale.

Where funds have been borrowed generally, and used for the purpose of obtaining
qualifying assets, a capitalisation rate ranging between 5.58% and 5.76% has
been applied to the expenditure on the individual asset.

All other borrowing costs are charged to the income statement in the period in
which they are incurred.

Income tax

Income tax comprises current and deferred income tax. Income tax is recognised
in the income statement, or in equity if it relates to items that are recognised
in the same or a different period directly in equity.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES #

Income tax

Deferred income tax is provided, using the liability method, on all temporary
differences at the balance sheet date between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes.
Deferred income tax liabilities are recognised for all taxable temporary
differences:

.          except where the deferred income tax liability arises from goodwill
amortisation or the initial recognition of an asset or liability in a
transaction that is not a business combination and, at the time of the
transaction, affects neither the accounting profit nor taxable profit or loss;
and

.         in respect of taxable temporary differences associated with
investments in subsidiaries, associates and interests in joint ventures, except
where the timing of the reversal of the temporary differences can be controlled
and it is probable that the temporary differences will not reverse in the
foreseeable future.

Deferred income tax assets are recognised for all deductible temporary
differences, carry-forward of unused tax assets and unused tax losses, to the
extent that it is probable that taxable profit will be available against which
the deductible temporary differences, and the carry-forward of unused tax assets
and unused tax losses can be utilised:

.          except where the deferred income tax asset relating to the deductible
temporary difference arises from the initial recognition of an asset or
liability in a transaction that is not a business combination and, at the time
of the transaction, affects neither the accounting profit nor taxable profit or
loss; and

.          in respect of deductible temporary differences associated with
investments in subsidiaries, associates and interests in joint ventures,
deferred tax assets are only recognised to the extent that it is probable that
the temporary differences will be reversed in the foreseeable future and taxable
profit will be available against which the temporary differences can be
utilised.

The carrying amount of deferred income tax assets is reviewed at each balance
sheet date and reduced to the extent that it is no longer probable that
sufficient taxable profit will be available to allow all or part of the deferred
income tax asset to be utilised. Deferred income tax assets and liabilities are
measured at the tax rates that are expected to apply to the period when the
asset is realised or the liability is settled based on tax rates (and tax laws)
that have been enacted or substantively enacted at the balance sheet date.

Derivative financial instruments

The Group uses derivative financial instruments to hedge its exposure to fuel
prices. In accordance with IAS 39, such derivative financial instruments are
carried in the balance sheet at fair value as financial assets or financial
liabilities.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES #

Derivative financial instruments

For the purposes of hedge accounting, hedges are classified as either fair value
hedges where they hedge the exposure to changes in the fair value of a
recognised asset or liability; or cash flow hedges where they hedge exposure to
variability in cash flows that is either attributable to a particular risk
associated with a recognised asset or liability or a forecasted transaction.

Changes in the fair value of derivatives that are designated and qualify as fair
value hedges and that are highly effective are recorded in the income statement,
along with any changes in the fair value of the hedged assets or liabilities
that are attributable to the hedged risk. In relation to fair value hedges
(interest rate swaps) which meet the conditions for special hedge accounting,
any gain or loss from remeasuring the hedging instrument at fair value is
recognised immediately in the income statement. Any gain or loss on the hedged
item attributable to the hedged risk is adjusted against the carrying amount of
the hedged item and recognised in the income statement. Where the adjustment is
to the carrying amount of a hedged interest-bearing financial instrument, the
adjustment is amortised to the income statement such that it is fully amortised
by maturity. In relation to cash flow hedges (forward foreign currency
contracts) to hedge firm commitments which meet the conditions for special hedge
accounting, the portion of the gain or loss on the hedging instrument that is
determined to be an effective hedge is recognised directly in equity and the
ineffective portion is recognised in the income statement.

When the hedged firm commitment results in the recognition of an asset or a
liability, then, at the time the asset or liability is recognised, the
associated gains or losses that had previously been recognised in equity are
included in the initial measurement of the acquisition cost or other carrying
amount of the asset or liability.

For all other cash flow hedges, the gains or losses that are recognised in
equity are transferred to the income statement in the same year in which the
hedged firm commitment affects the income statement, for example when the future
sale actually occurs.

For derivatives that do not qualify for special hedge accounting, any gains or
losses arising from changes in fair value are taken directly to the income
statement for the year. Hedge accounting is discontinued when the hedging
instrument expires or is sold, terminated or exercised, or no longer qualifies
for special hedge accounting. At that point in time, any cumulative gain or loss
on the hedging instrument recognised in equity is kept in equity until the
forecasted transaction occurs. If a hedged transaction is no longer expected to
occur, the net cumulative gain or loss recognised in equity is transferred to
the income statement for the year.

Use of estimates

The preparation of the financial statements of the Group in accordance with IFRS
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES #

Related parties

Parties are considered to be related if one party has the ability, directly or
indirectly, to control the other party or exercise significant influence over
the other party in making financial and operating decisions. Parties are also
considered to be related if they are subject to common control or common
significant influence. Related parties may be individuals or corporate entities.

Recoverable amount of non-current assets

At each reporting date, the Group assesses whether there is any indication that
an asset may be impaired. Where an indicator of impairment exists, the Group
makes a formal estimate of the recoverable amount. Where the carrying amount of
an asset exceeds its recoverable amount, the asset is considered impaired and is
written down to its recoverable amount. Recoverable amount is the higher of an
asset's or cash-generating unit's fair value less costs to sell and its value in
use and is determined for an individual asset, unless the asset does not
generate cash inflows that are largely independent of those from other assets or
groups of assets.

Trade and other receivables

Trade receivables, which generally have 30 to 90 day terms, are recognised and
carried at original invoice amount less an allowance for any uncollectible
amounts. An estimate for doubtful debts is made when collection of the full
amount is no longer probable. Bad debts are written off when identified.

Other receivables are recognised and carried at cost less allowances for any
uncollectible amounts.

Interest-bearing loans and borrowings

All loans and borrowings are initially recognised at cost, being the fair value
of the consideration received net of issue costs associated with the borrowings.

After initial recognition, interest-bearing loans and borrowings are
subsequently measured at amortised cost using the effective interest rate
method. Amortised cost is calculated by taking into account any issue costs, and
any discount or premium on settlement.

Gains and losses are recognised in the income statement when the liabilities are
derecognised or impaired, as well as through the amortisation process.

Derecognition of financial instruments

The derecognition of a financial instrument takes place when the Group no longer
controls the contractual rights that comprise the financial instrument, which is
normally the case when the instrument is sold, or all the cash flows
attributable to the instrument are passed through to an independent third party.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES #

Impact of recently issued accounting standards

IFRS 2, Share-based Payment, is applicable for accounting periods beginning on
or after 1 January 2005 and requires the Group to recognise share-based payment
transactions in its financial statements, including transactions with employees
or other parties to be settled in cash, other assets, or equity instruments of
the entity. For equity-settled share-based payment transactions, IFRS 2 requires
an entity to measure the goods or services received, and the corresponding
increase in equity, directly, at the fair value of the goods or services
received, unless that fair value cannot be estimated reliably. If the Group
cannot estimate reliably the fair value of the goods or services received, the
Group is required to measure their value, and the corresponding increase in
equity, indirectly, by reference to the fair value of the equity instruments
granted. For cash-settled share-based payment transactions, IFRS 2 requires an
entity to measure the goods or services acquired and the liability incurred at
the fair value of the liability. Until the liability is settled, the Group is
required to re-measure the fair value of the liability at each reporting date
and at the date of settlement, with any changes in value recognised in the
income statement for the period. For share-based payment transactions in which
the terms of the arrangement provide either the Group or the supplier of goods
or services with a choice of whether the Group settles the transaction in cash
or by issuing equity instruments, the Group is required to account for that
transaction, or the components of that transaction, as a cash-settled
share-based payment transaction if, and to the extent that, the Group has
incurred a liability to settle in cash (or other assets), or as an equity
settled share-based payment transaction if, and to the extent that, no such
liability has been incurred. The provisions of IFRS 2 will apply for grants of
shares, share options or other equity instruments that were granted after 7
November 2002 and had not yet vested at the beginning on or after 1 January
2005. The Group does not expect IFRS 2 to have a material effect on its results
of operations and financial position.

IAS 16 (amended 2004), Property, Plant and Equipment, replaces IAS 16 (revised
1998), Property, Plant and Equipment, and is applicable for accounting periods
beginning on or after 1 January 2005. There are a number of differences between
the amended standard and the previous version. These include that the amended
standard requires an entity to evaluate under the general recognition principle
all property, plant and equipment costs at the time they are incurred. Those
costs include costs incurred initially to acquire or construct an item of
property, plant and equipment and costs incurred subsequently to add to, replace
part of, or service an item. The previous version of IAS 16 contained specific
recognition principles for accounting for subsequent costs. Further, the amended
standard requires that the cost of an item of property, plant and equipment
includes the costs of its dismantlement, removal or restoration, and the
obligation for which an entity incurs as a consequence of installing the item.
Its cost also includes the costs of its dismantlement, removal or restoration,
and the obligation for which an entity incurs as a consequence of using the item
during a particular period for purposes other than to produce inventories during
that period. The previous version included within its scope only the costs
incurred as a consequence of installing the item. In addition, under the amended
standard an entity is required to determine the depreciation charge separately
for each significant part of an item of property, plant and equipment, a
requirement which was not clearly set out in the previous version. Also, under
the amended standard, an entity is required to measure the residual value of an
item of property, plant and equipment as the amount that it estimates it would
currently receive for the asset if the asset was already of the age and in the
condition expected at the end of its useful life. The previous version of IAS 16
did not specify whether the residual value was to be this amount or the amount,
inclusive of the effects of inflation, that an entity expected to receive in the
future on the asset's actual retirement date. The Group does not expect the
adoption of new policies arising from the amended standard, when implemented,
will have a material effect on its results of operations and financial position.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES #

Impact of recently issued accounting standards

IAS 24 (revised 2003), Related Party Disclosures, replaces IAS 24 Related Party
Disclosures (reformatted in 1994) and is applicable for accounting periods
beginning on or after 1 January 2005. The main objective of such revision was to
provide additional guidance and clarity in the scope of IAS 24 for the
definitions and the disclosures for related parties. The wording of IAS 24's
objective was amended to clarify that the Group's financial statements should
contain the disclosures necessary to draw attention to the possibility that the
financial position and the income statement may have been affected by the
existence of related parties and by transactions and outstanding balances with
them. Since IAS 24 is a standard for disclosure requirements only, there is no
material effect on the Group's results of operations and financial position upon
adoption.

3.       SEGMENT INFORMATION#

Segment information is presented by way of two segment formats: (i) on a primary
segment reporting basis, by business segment; and (ii) on a secondary segment
reporting basis, by geographical segment.

The Group's operating businesses are structured and managed separately,
according to the nature of their operations and the services they provide. Each
of the Group's business segments represents a strategic business unit that
offers services which are subject to risks and returns that are different from
those of the other business segments.

Currently, the Group's business segment information is divided into four
business segments - airline operations, engineering services, airport terminal
services and other businesses ('others'). Segment net profit represents revenues
less expenses directly attributable to a segment and the relevant portion of
enterprise revenues less expenses that can be allocated on a reasonable basis to
a segment, whether from external transactions or from transactions with other
segments of the Group.

Segment assets and liabilities mainly comprise those operating assets and
liabilities that are directly attributable to the segment or can be allocated to
the segment on a reasonable basis.

In determining the Group's geographical segments, revenues are attributed to the
segments based on origin and destination of each flight segment. Assets, which
consist principally of flight and ground equipment, supporting the entire
worldwide transportation system, are mainly located in the PRC. An analysis of
assets and capital expenditure of the Group by geographical distribution has
therefore not been included.

Intersegment sales and transfers are transacted with reference to the selling
prices used for sales made to third parties at the then prevailing market
prices.

3.       SEGMENT INFORMATION #

Business segments

The following table presents revenue, profit and certain asset, liability and
expenditure information for the Group's business segments for the year ended 31
December 2004:
                                           Airline    Engineering  Airport terminal    Others Eliminations        Total
                                        operations       services          services
                                           RMB'000        RMB'000           RMB'000   RMB'000      RMB'000      RMB'000

REVENUES
Sales to external customers             32,766,164        296,775           287,905   169,913            -   33,520,757
Intersegment sales                               -        731,589                 -   131,299    (862,888)            -

Total revenues                          32,766,164      1,028,364           287,905   301,212    (862,888)   33,520,757

PROFIT FROM OPERATIONS
Segment results                          4,146,402        824,858           203,133   173,746    (862,888)    4,485,251
Finance costs                          (1,785,196)       (14,541)           (1,978)     1,842            -  (1,799,873)
Dilution gains on investments              330,222              -                 -    79,915            -      410,137
Share of profits less losses from          416,813        (4,649)           191,323  (42,469)            -      561,018
associates

Profit before tax                        3,108,241        805,668           392,478   213,034    (862,888)    3,656,533
Tax                                                                                                         (1,107,838)
Minority interests                                                                                            (162,731)

Net profit attributable to equity                                                                             2,385,964
holders of the parent

ASSETS
Segment assets                          62,308,593      1,077,748           160,087   379,390  (2,014,154)   61,911,664
Interests in associates                  3,589,574         25,539           186,056   200,352            -    4,001,521
Unallocated assets                                                                                              776,084

Total assets                                                                                                 66,689,269

LIABILITIES
Segment liabilities                   (48,845,870)      (652,749)         (312,765) (677,442)    2,014,154 (48,474,672)
Unallocated liabilities                                                                                       (186,055)

Total liabilities                                                                                          (48,660,727)
OTHER INFORMATION
Capital expenditures - property,         6,046,355         32,697            25,912    33,641            -    6,138,605
plant and equipment
Depreciation of property, plant and      3,395,049         35,797            19,247    13,159            -    3,463,252
equipment
Provision for/(write-back of)              (4,483)          2,642                 -       853            -        (988)
doubtful debts, net
Provision for/(write-back of)               12,492       (24,000)                 -         -            -     (11,508)
inventories, net


3.         SEGMENT INFORMATION #

Business segments

The following table presents revenue, profit/(loss) and certain asset, liability
and expenditure information for the Group's business segments for the year ended
31 December 2003:
                                           Airline    Engineering  Airport terminal    Others Eliminations        Total
                                        operations       services          services
                                           RMB'000        RMB'000           RMB'000   RMB'000      RMB'000      RMB'000

REVENUES
Sales to external customers             23,910,300        285,493           251,266   194,346            -   24,641,405
Intersegment sales                               -        486,705                 -   126,485    (613,190)            -

Total revenues                          23,910,300        772,198           251,266   320,831    (613,190)   24,641,405

PROFIT FROM OPERATIONS
Segment results                          1,995,224        571,448           173,290   157,492    (613,190)    2,284,264
Finance costs                          (2,326,582)       (17,631)           (1,160)   (3,705)            -  (2,349,078)
Share of profits less losses from          172,016       (18,660)           104,043  (14,306)            -      243,093
associates

Profit/(loss) before tax                 (159,342)        535,157           276,173   139,481    (613,190)      178,279
Tax                                                                                                            (89,781)
Minority interests                                                                                               71,106

Net profit attributable to equity                                                                               159,604
holders of the parent

ASSETS
Segment assets                          51,284,337      1,076,308           250,923   746,182    (618,687)   52,739,063
Interests in associates                  2,747,942          6,984           124,398   188,522            -    3,067,846
Unallocated assets                                                                                              590,153

Total assets                                                                                                 56,397,062

LIABILITIES
Segment liabilities                   (47,237,228)      (683,204)         (174,326) (551,813)      618,687 (48,027,884)
Unallocated liabilities                                                                                        (53,929)

Total liabilities                                                                                          (48,081,813)

OTHER INFORMATION
Capital expenditures - property,         3,703,236         20,332            38,986    86,725            -    3,849,279
plant and equipment
Depreciation of property, plant and      3,309,582         37,119            13,661    17,110            -    3,377,472
equipment
Provision for/(write-back of)               13,824        (1,562)                 -     (118)            -       12,144
doubtful debts, net
Provision for inventories, net                  90         24,000                 -         -            -       24,090

3.         SEGMENT INFORMATION #

Geographical segments

The following tables present consolidated revenue information by geographical
segments for each of the two years ended 31 December 2004:
                                      Domestic    HK/Macau    Europe       North    Japan/     Asia Pacific,      Total
                                                                         America     Korea            others
For the year ended 31 December 2004      RMB'000   RMB'000   RMB'000     RMB'000   RMB'000           RMB'000    RMB'000

REVENUES
Sales to external customers and total 18,482,949 1,744,590 4,232,489   2,477,214 3,846,973         2,736,542 33,520,757
revenues


                                        Domestic  HK/Macau    Europe       North    Japan/     Asia Pacific,      Total
                                                                         America     Korea            others
For the year ended 31 December 2003      RMB'000   RMB'000   RMB'000     RMB'000   RMB'000           RMB'000    RMB'000

REVENUES
Sales to external customers and total 12,926,434 1,572,902 3,547,743   2,336,207 2,287,004         1,971,115 24,641,405
revenues

4.       AIR TRAFFIC REVENUES#

Air traffic revenues comprise revenues from the airline business and is stated
net of business tax and contributions to the CAAC Infrastructure Development
Fund. The CAAC Infrastructure Development Fund, which was netted against gross
air traffic revenues for the year ended 31 December 2003, was included in other
flight operation expenses for the year ended 31 December 2004 to reflect the
change in the levy basis in accordance with the related new policy promulgated
by the PRC government. An analysis of air traffic revenues is as follows:
                                                             Group
                                                                              2004                                 2003
                                                                           RMB'000                              RMB'000

Passenger                                                               27,665,018                           19,030,187
Cargo and mail                                                           3,169,804                            4,392,473

                                                                        30,834,822                           23,422,660


4.       AIR TRAFFIC REVENUES #

(a)      Pursuant to various PRC business tax rules and regulations, the Group
is required to pay business tax to the local tax bureaus at the following rates:

Type of revenue                              Applicable business tax rate

Air traffic          3% of air traffic revenues. All inbound international and Hong Kong and Macau regional flights are
revenues             exempted from business tax.
Other revenues       3% of commission income and ground services income, and 3% to 5% of other revenues.

PRC business tax incurred for the two years ended 31 December 2003 and 2004,
netted against air traffic revenues, amounted to approximately RMB240 million
and RMB711 million, respectively.

For the period from 1 May 2003 to 31 December 2003, PRC business tax for all
domestic, international and regional passenger traffic revenues of the Group was
waived by the PRC government in order to subsidise for the airlines' loss of
revenue due to the outbreak of Severe Acute Respiratory Syndrome ('SARS') in the
region.

(b)      In addition, the Group was required to pay contributions to the CAAC
Infrastructure Development Fund which was calculated at the rates of 5% and 2%
on the domestic and international/Hong Kong and Macau regional air traffic
revenues, respectively, for the year ended 31 December 2003.

For the period from 1 May 2003 to 31 December 2003, CAAC Infrastructure
Development Fund for all domestic, international and regional passenger, cargo
and mail traffic revenues of the Group was waived by the PRC government in order
to subsidise for the airlines' loss of revenue due to the outbreak of SARS in
the region.

For the period from 1 January 2004 to 31 March 2004, the CAAC Infrastructure
Development Fund was suspended by the PRC government. As such, no CAAC
Infrastructure Development Fund was charged to the income statement of the Group
for the three-month period ended 31 March 2004. Effective from 1 April 2004, the
Group is required to pay contributions to the CAAC Infrastructure Development
Fund calculated on the basis of the usage of domestic routes and domestic
segments of international routes, geographic area and length of routes and
aircraft weight.

Contributions to the CAAC Infrastructure Development Fund payable by the Group
for the two years ended 31 December 2003 and 2004 amounted to approximately
RMB247 million and RMB353 million, respectively.

5.       OTHER OPERATING REVENUES#
                                                                                                Group
                                                                                                 2004             2003
                                                                                              RMB'000          RMB'000

Bellyhold income                                                                            1,384,457                -
Aircraft engineering income                                                                   296,775          285,493
Ground services income                                                                        287,905          251,266
General aviation income                                                                       159,990          152,574
Air catering income                                                                           118,140          102,133
Government grants:
(i) Recognition of deferred income (note 36)                                                   70,593           57,894
(ii) Fixed cash subsidy                                                                        37,500           50,000
(iii) Others                                                                                   44,853            1,525
Service charges on return of unused flight tickets                                             63,821           51,678
Cargo handling service income                                                                  49,850           90,021
Sale of materials                                                                              33,008           20,699
Import and export service income                                                               29,767           23,589
Training service income                                                                        23,761           17,915
Aircraft and related equipment lease income                                                    11,516           33,519
Gain on disposal of property, plant and equipment, net                                              -           17,048
Others                                                                                         73,999           63,391

                                                                                            2,685,935        1,218,745


6.       PROFIT FROM OPERATIONS#

The Group's profit from operations is arrived at after charging/(crediting):
                                                                                             Group
                                                                                                   2004            2003
                                                                                                RMB'000         RMB'000

Repair and maintenance costs                                                                  3,608,348       2,804,507
Depreciation (note 16)                                                                        3,463,252       3,377,472
Employee compensation costs (note 7)                                                          2,921,322       2,379,102
Minimum lease payments under operating leases:
Aircraft and jet engines                                                                      1,071,256         910,134
Land and buildings                                                                              187,471         181,984
(Gain)/loss on disposal of property, plant and equipment, net                                    33,872        (17,048)
Auditors' remuneration                                                                            7,206           1,614
Provision for/(write-back of) doubtful debts, net                                                 (988)          12,144
Provision for/(write-back of) inventories, net                                                 (11,508)          24,090

7.       EMPLOYEE COMPENSATION COSTS#
                                                                                                  Group
                                                                                                      2004        2003
                                                                                                   RMB'000     RMB'000

Employee compensation costs (including Directors', supervisors' and management's emoluments):
Wages, salaries and social security costs                                                        2,732,927   2,200,916
Retirement benefit costs (note 11)                                                                 188,395     178,186

                                                                                                 2,921,322   2,379,102

The Group had 26,881 and 25,236 employees as at 31 December 2003 and 31 December
2004, respectively.

8.       FINANCE COSTS#
                                                                                     Group
                                                                                              2004                 2003
                                                                                           RMB'000              RMB'000

Interest expense                                                                         1,827,002            2,248,996
Less: Interest capitalised                                                                 (2,610)              (7,830)

                                                                                         1,824,392            2,241,166

Less: Interest income                                                                     (33,703)             (18,803)
Exchange losses, net                                                                        54,842              297,042
Gains on fuel derivatives, net                                                            (41,036)            (169,921)
Dividend income on long-term investments                                                   (4,622)                (406)

                                                                                         1,799,873            2,349,078

The interest capitalisation rate represented the cost of capital from raising
the related borrowings and it ranged from 5.58% to 5.76% per annum.

9.       DILUTION GAINS ON INVESTMENTS#
                                                                                                Group
                                                                                                     2004          2003
                                                                                                  RMB'000       RMB'000

Dilution gain on investment in Air Cargo Business (note 9 (a))                                    330,222             -
Dilution gains on investments in BACL and SWACL (note 9 (b))                                       79,915             -

                                                                                                  410,137             -

Notes:

(a)      Pursuant to the Restructuring, the air cargo business and relevant air
cargo assets and liabilities (the 'Air Cargo Business') were operated and owned
solely by the Group as if it had been directly held by the Group as of 1 January
2003 in accordance with the basis of presentation as set out in note 1 to these
financial statements. In 2004, the entire Air Cargo Business was transferred to
Air China Cargo, a 51% owned joint venture of the Company, in the form of the
Company's capital contribution and advance to Air China Cargo. Subsequent to the
transfer of Air Cargo Business to Air China Cargo, the Group's effective
interest in the Air Cargo Business was diluted from 100% to 51% and,
accordingly, a gain on dilution of investment in Air Cargo Business of
approximately RMB330 million arose.

9.       DILUTION GAINS ON INVESTMENTS #

(b)      In accordance with the basis of presentation as set out in note 1 to
these financial statements, 60% shareholding interest in Beijing Air Catering
Co., Ltd. ('BACL') and 75% shareholding interest in Southwest Air Catering
Company Limited ('SWACL') were deemed to be held by the Group as of 1 January
2003.

During 2004, the Group transferred its entire 60% shareholding interest in BACL
and 60% shareholding interest in SWACL to Fly Top Limited, a wholly-owned
subsidiary of CNAC, for a consideration of RMB294 million and RMB67 million,
respectively.

In addition to the above, the Group also transferred its remaining 15%
shareholding interest in SWACL to Hongkong Southwest Air Catering Limited ('
HKSACL'), the minority shareholder of SWACL, for a consideration of
approximately RMB17 million.

Subsequent to the completion of the above transactions, the Group's effective
shareholding interests in BACL and SWACL were diluted from 60% and 75% to
approximately 41% and 41%, respectively and, accordingly, gains on dilution of
investments in BACL and SWACL aggregating approximately RMB80 million arose.

10.     DIRECTORS', SUPERVISORS' AND SENIOR MANAGEMENT'S EMOLUMENTS#

Directors' and supervisors' remuneration for the year disclosed pursuant to the
Rules Governing the Listing of Securities on the Hong Kong Stock Exchange and
Section 161 of the Hong Kong Companies Ordinance, is as follows:
                                                                                                     Group
                                                                                                      2004        2003
                                                                                                   RMB'000     RMB'000

Fees                                                                                                    29           -
Basic salaries, housing benefits, other allowances and benefits in kind                              4,279       4,390
Discretionary bonuses                                                                                  636         508
Pension scheme contributions                                                                            43          45

                                                                                                     4,987       4,943

The number of Directors and supervisors whose remuneration fell within the
following bands is as follows:
                                                                                Group
                                                                                 2004                              2003
                                                              Number of Directors and           Number of Directors and
                                                                          supervisors                       supervisors

Nil to HK$1,000,000 (RMB1,060,000 equivalent)                                      13                                13
HK$1,500,001 to HK$2,000,000 (RMB2,120,000                                          1                                 1
equivalent)
HK$2,000,001 to HK$2,500,000 (RMB2,650,000                                          1                                 1
equivalent)

                                                                                   15                                15

10.       DIRECTORS', SUPERVISORS' AND SENIOR MANAGEMENT'S EMOLUMENTS #

Fees of approximately RMB29,000 (2003: Nil) are wholly payable to the
independent non-executive Directors. There were no other emoluments payable to
the independent non-executive Directors during the year (2003: Nil).

An analysis of the five individuals whose remuneration was the highest in the
Group was as follows:
                                                                 Group
                                                                  2004                                             2003
                                                 Number of individuals                            Number of individuals

Director                                                             1                                                1
Supervisor                                                           1                                                1
Employees                                                            3                                                3

The emoluments paid to the three non-director, non-supervisor and highest paid
individuals are as follows:
                                                                                                     Group
                                                                                                      2004        2003
                                                                                                   RMB'000     RMB'000

Basic salaries, housing benefits, other allowances and benefits in kind                              5,360       4,240
Discretionary bonuses                                                                                    -          30
Pension scheme contributions                                                                           164         180

                                                                                                     5,524       4,450

The remuneration of the three highest paid individuals for the year fell within
the following bands:
                                                                                      Group
                                                                                       2004                        2003
                                                                      Number of individuals       Number of individuals

HK$1,000,001 to HK$1,500,000 (RMB1,590,000 equivalent)                                    1                           3
HK$1,500,001 to HK$2,000,000 (RMB2,120,000 equivalent)                                    2                           -

                                                                                          3                           3

10.     DIRECTORS', SUPERVISORS' AND SENIOR MANAGEMENT'S EMOLUMENTS #

There was no arrangement under which a Director or a supervisor or any of the
five highest paid individuals waived or agreed to waive any remuneration during
the year (2003: Nil).

There was no emolument paid by the Group to any of the Directors or supervisors
or any of the five highest paid individuals as an inducement to join or upon
joining the Group or as compensation for loss of office during the year (2003:
Nil).

11.     RETIREMENT BENEFITS#

All of the Group's full-time employees in the PRC are covered by a
government-regulated defined contribution retirement scheme, and are entitled to
an annual pension determined by their basic salaries upon their retirement. The
PRC government is responsible for the pension liabilities to these retired
employees. The Group is required to make annual contributions to the
government-regulated defined contribution retirement scheme at rates ranging
from 15% to 20% of the employees' basic salaries during the year and has no
further obligation for post-retirement benefits in respect of the above. This
defined contribution plan continues to be available to the Group's employees
after the Restructuring. The related pension costs are expensed as incurred.

Prior to the Restructuring, the Group also paid certain supplementary pension
benefits (the 'Supplementary Pension Benefits') to its employees who retired
before the formation of the Company. Pursuant to the Restructuring, CNAHC has
agreed to assume past payments and future liabilities in respect of the
Supplementary Pension Benefits for those employees who retired before the
formation of the Company for nil consideration. The pension payments relating to
the Supplementary Pension Benefits borne by CNAHC was approximately RMB39
million for the year ended 31 December 2004 (2003: RMB54 million) (note 46). The
Group's employees who retire after the formation of the Company are not entitled
to the Supplementary Pension Benefits. CNAHC has agreed to indemnify the Group
against losses from any claims for the Supplementary Pension Benefits.

Further, the Group implemented an early retirement plan for certain employees in
addition to the benefits under the government-regulated defined contribution
retirement scheme and the Supplementary Pension Benefits described above. The
benefits of the early retirement plan are calculated based on factors including
the remaining number of years of services from date of early retirement to
normal retirement date and the salary amount on the date of early retirement of
the employees. The costs of early retirement benefits were recognised in the
period when employees opted for early retirement. Where the effect of
discounting is material, the amount recognised for early retirement benefits is
the present value at the balance sheet date of the future cash flows expected to
be required to settle the obligation. The increase in the discounted present
value amount arising from the passage of time is included in finance costs in
the income statement.

11.     RETIREMENT BENEFITS #

The expenses attributed to the PRC government-regulated defined contribution
retirement scheme and the early retirement benefits are as follows:
                                                                                                 Group
                                                                                                  2004            2003
                                                                                               RMB'000         RMB'000

Contributions to PRC government-regulated defined                                              179,740         154,728
contribution retirement scheme
Early retirement benefits                                                                        8,655          23,458

Total (note 7)                                                                                 188,395         178,186

Forfeited contribution totaling RMB1,579,000 (2003: RMB983,000) was utilised
during the year. At 31 December 2004, the Group had no forfeited contributions
available to reduce its contributions to the pension scheme in future years
(2003: RMB54,000).

12.     TAX#

According to the PRC Enterprise Income Tax Law, the Company, its subsidiaries,
joint ventures and associates established in the PRC are subject to the
enterprise income tax at a rate of 33% (2003: 33%) on their taxable income.

Hong Kong profits tax has been provided at the rate of 17.5% (2003: 17.5%) on
the estimated assessable profits arising in Hong Kong during the year.

The Group is subject to income tax on an entity basis on profits arising in or
derived from the jurisdictions in which members of the Group are domiciled and
operate. In accordance with an approval document issued by the relevant tax
authorities, the filing of tax returns of the Relevant Businesses and all
wholly-owned PRC-established subsidiaries of the Company prior to its
incorporation on 30 September 2004 was handled by CNAHC on a consolidated group
basis. The share of the income tax liability of the Relevant Businesses and all
wholly-owned PRC-established subsidiaries of the Company prior to its
incorporation was calculated at the applicable tax rate on their profits
determined in accordance with PRC accounting principles and after the relevant
adjustments made under the prevailing PRC Enterprise Income Tax Law as
applicable to domestic enterprises. Such tax was payable to CNAHC which in turn
would settle the tax liability with the relevant tax bureau. Similarly, the net
profit attributable to CNAHC for the period from 1 January 2004 to 30 September
2004 (the date of incorporation of the Company) referred to in note 14 (b) to
these financial statements will be calculated after deducting the amount of
income tax payable to CNAHC, which in turn will settle any tax liability on
profit arisen during that period with the relevant tax bureau.

Following the incorporation of the Company, the Company will settle its tax
liability by itself with the respective tax bureaus.

12.     TAX #

The determination of current and deferred income tax was based on enacted tax
rates. Major components of income tax charge are as follows:
                                                                                                      Group
                                                                                                       2004        2003
                                                                                                    RMB'000     RMB'000

Current income tax
Current income tax charge
- Mainland China                                                                                    398,944      18,313
- Hong Kong                                                                                           4,096         154
Deferred income tax
Relating to origination and reversal of temporary differences (note 22)                             607,824      33,847

                                                                                                  1,010,864      52,314

Share of tax attributable to associates                                                              96,974      37,467
Income tax charge for the year                                                                    1,107,838      89,781

A reconciliation of income tax expense applicable to profit before income tax at
the statutory income tax rate in the PRC to income tax expense at the Group's
effective income tax rate, and a reconciliation of the applicable rates (i.e.,
the statutory tax rates) to the effective tax rates, are as follows:
                                                                                         Group
                                                                                          2004             2003
                                                                                       RMB'000      %   RMB'000       %

Profit before income tax                                                             3,656,533          178,279

At statutory income tax rate of 33%                                                  1,206,656   33.0    58,832    33.0
Lower income tax rates of other territories                                          (109,440)  (3.0)     2,610     1.5
Income not subject to tax                                                            (145,333)  (4.0)  (35,388)  (19.8)
Expenses not deductible for tax purposes                                               155,955    4.3    70,164    39.4
Effect on opening deferred income tax of increase in other territories' income tax           -      -     9,542     5.4
rates
Share of adjustments in income tax of previous periods attributable to associates            -      -  (15,979)   (9.0)

Tax charge at Group's effective income tax rate                                      1,107,838   30.3    89,781    50.5

12.       TAX #

At 31 December 2004, there was no significant unrecognised deferred tax
liability (2003: Nil) for taxes that would be payable on the un-remitted
earnings of certain of the Group's subsidiaries and joint ventures, as the
Directors of the Company do not have intention to remit any significant amount
of earnings to the Company in the foreseeable future.

There are no income tax consequences attaching to the payment of dividends by
the Company to its shareholders.

13.     Net Profit ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT#

The net profit attributable to equity holders of the parent for the period from
1 October 2004 to 31 December 2004 dealt with in the financial statements of the
Company was approximately RMB1,230 million (note 38).

14.     APPROPRIATIONS#

Set out below are the details of distributions made by the Company for the two
years ended 31 December 2004:
                                                                                                Group
                                                                                                 2004              2003
                                                                                              RMB'000           RMB'000

Carved-out of net assets (note 14 (c))                                                         39,136           316,153
Dividends paid (note 14 (c))                                                                   29,074            26,690
Distribution to CNAHC (note 14 (a))                                                           377,550                 -
Distribution to CNAHC (note 14 (b))                                                         2,025,105                 -
Distribution to CNACG (note 14 (b))                                                           118,680                 -

Total                                                                                       2,589,545           342,843

(a)      On 21 April 2004, Fly Top Limited, a wholly-owned subsidiary of CNAC,
entered into the following acquisition agreements which were supplemented on 26
April 2004:

(i)       a share purchase agreement with Air China International Corporation in
relation to the acquisition of 60% of the equity interest in BACL ('BACL
Agreement') for a consideration of RMB294 million; and

(ii)      a share purchase agreement with Air China International Corporation in
relation to the acquisition of 60% of the equity interest in SWACL ('SWACL
Agreement') for a consideration of RMB67 million.

On 12 November 2004, all the pre-completion undertakings of BACL Agreement and
SWACL Agreement were completed and these two acquisition agreements were
effective on that date accordingly.

14.     APPROPRIATIONS #

On 20 April 2004, Air China International Corporation entered into a stock
transfer agreement with HKSACL ('HKSACL Agreement'), the minority shareholder of
SWACL, pursuant to which, Air China International Corporation disposed of 15% of
the equity interest in SWACL to HKSACL for a consideration of approximately
RMB17 million. On 12 November 2004, all the pre-completion undertakings of
HKSACL Agreement were completed and this agreement was effective on that date
accordingly.

Immediately after the completion of BACL Agreement, SWACL Agreement and HKSACL
Agreement, the Group's effective shareholding interests in BACL and SWACL were
diluted from 60% and 75% to approximately 41% and 41%, respectively.

As a result of the completion of BACL Agreement, SWACL Agreement and HKSACL
Agreement, the Group made a payment of approximately RMB378 million to CNAHC,
representing the total consideration payable by CNAC and HKSACL for the
acquisitions of the entire shareholding interests held by the Group in BACL and
SWACL pursuant to the Restructuring as set out in note 1 to these financial
statements. This payment has been made to CNAHC and accounted for as a special
distribution to CNAHC by the Company.

(b)      In accordance with the (/raster(70%,p)='c04') '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 (the English title is a direct translation of the Chinese title of the
notice), which became effective from 27 August 2002, and pursuant to the
Restructuring, after the Company's incorporation, the Company is required to
make a distribution to CNAHC, which represents an amount equal to the net profit
attributable to shareholders, as determined based on the audited accounts
prepared in accordance with the accounting principles and the financial
regulations applicable in the PRC (the 'PRC GAAP'), generated during the period
from 1 January 2004 to 30 September 2004 (the date of incorporation of the
Company) by the businesses and operations (excluding those of CNAC) contributed
to the Group by CNAHC after giving effect to relevant necessary adjustments. The
net profit attributable to shareholders mentioned above for the said period is
calculated after deducting the amount of income tax payable to CNAHC of
approximately RMB191,721,000 which in turn will settle the tax liability on
profit arisen during that period with the relevant tax bureau as detailed in
note 12 to these financial statements.

In addition, in accordance with (/raster(70%,p)='c04') '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, after the Company's incorporation,
the Company is required to make a distribution to CNACG, which represents an
amount equal to the net profit attributable to shareholders, as determined based
on audited accounts prepared in accordance with the PRC GAAP, generated during
the period from 1 January 2004 to 30 September 2004 (the date of incorporation
of the Company) by the businesses and operations (excluding those directly
contributed by CNAHC) contributed to the Group by the CNAC group, less the 2003
final dividend and 2004 interim dividend amounts already paid by CNAC to CNACG.

14.     APPROPRIATIONS #

(c)      The profit distributions made prior to the incorporation of the Company
represent the net assets which have been carved-out and treated as deemed
distributions pursuant to the Restructuring set out in note 1 to these financial
statements and dividends paid during that period.

The rates of dividend and the number of shares ranking for dividends are not
presented in this footnote for those profit distributions made prior to the
incorporation of the Company as such information is not considered meaningful.

Cash dividends to shareholders in Hong Kong will be paid in Hong Kong dollars.

Following the incorporation of the Company, under the PRC Company Law and the
Company's articles of association, net profit after tax as reported in the PRC
statutory financial statements can only be distributed as dividends after
allowance has been made for the following:

(i)       Making up prior years' cumulative losses, if any;

(ii)      Allocations to the statutory common reserve fund of at least 10% of
after-tax profit, until the fund aggregates 50% of the Company's registered
capital. For the purpose of calculating the transfer to reserves, the profit
after tax shall be the amount determined under the PRC GAAP. The transfer to
this reserve must be made before any distribution of dividends to shareholders.

The statutory common reserve fund can be used to offset previous years' losses,
if any, and part of the statutory common reserve fund can be capitalised as the
Company's share capital provided that the amount of such reserve remaining after
the capitalisation shall not be less than 25% of the share capital of the
Company;

(iii)     Allocations of 5% to 10% of after-tax profit, as determined under PRC
GAAP, to the Company's statutory public welfare fund, which will be established
for the purpose of providing for the Company's employees collective welfare
benefits such as the construction of dormitories, canteens and other staff
welfare facilities. The fund forms part of the shareholders' equity as only
individual employees can use these facilities, while the title of such
facilities is held by the Company. The transfer to this fund must be made before
any distribution of dividends to shareholders; and

(iv)     Allocations to the discretionary common reserve if approved by the
shareholders.

The above reserves cannot be used for purposes other than those for which they
are created and are not distributable as cash dividends.

In accordance with the articles of association of the Company, the net profit
after tax of the Company for the purpose of dividends payment is based on the
lesser of (i) the net profit determined in accordance with the PRC GAAP; and
(ii) the net profit determined in accordance with IFRS.

14.     APPROPRIATIONS #

Prior to the incorporation of the Company on 30 September 2004, no profit
appropriation to the aforesaid reserve funds was required.

15.     EARNINGS PER SHARE#

The calculation of basic earnings per share for the year ended 31 December 2004
is based on the net profit attributable to equity holders of the parent for the
year ended 31 December 2004 of approximately RMB2,385,964,000, and the weighted
average of approximately 6,618,795,915 shares in issue during the year on the
assumption that the 6,500,000,000 shares issued as at 30 September 2004 had been
in issue throughout the year ended 31 December 2004, and as adjusted to reflect
the new issue of 2,550,618,182 shares by way of placing and public offering in
connection with the public listing of the Company's H shares on 15 December
2004.

The calculation of basic earnings per share for the year ended 31 December 2003
is based on the net profit attributable to equity holders of the parent for the
year ended 31 December 2003 of approximately RMB159,604,000, and the number of
shares in issue during 2003 on the assumption that the 6,500,000,000 shares
issued as at 30 September 2004 had been in issue throughout the year ended 31
December 2003.

The calculation of diluted earnings per share is based on the net profit
attributable to equity holders of the parent for the year ended 31 December 2004
of approximately RMB2,385,964,000. The weighted average number of ordinary
shares used in the calculation is the 6,618,795,915 shares in issue during the
year, as used in the basic earnings per share calculation and the weighted
average of 556,132 ordinary shares assumed to have been issued at no
consideration on the deemed exercise of all over-allotment options granted to
international underwriters to subscribe for the H shares of the Company during
the year.

Diluted earnings per share for the year ended 31 December 2003 has not been
calculated because no diluting events existed during 2003.

16.     PROPERTY, PLANT AND EQUIPMENT#

Group
                                      Aircraft Buildings   Machinery Transportation    Office Construction        Total
                                    and flight                            equipment equipment  in progress
                                     equipment
                                       RMB'000   RMB'000     RMB'000        RMB'000   RMB'000      RMB'000      RMB'000

At 1 January 2003, net of           38,631,760 2,447,368     930,637        263,866    82,644      519,894   42,876,169
accumulated depreciation
Additions                            2,226,754    23,773     102,500        111,797    27,458      580,766    3,073,048
Disposals                             (80,803)  (54,426)     (7,052)        (2,461)   (3,083)            -    (147,825)
Transfer from CIP                            -   421,311     195,250              -       610    (617,171)            -
Depreciation charge for the year   (2,987,834) (122,486)   (169,733)       (80,058)  (17,361)            -  (3,377,472)

At 31 December 2003 and 1 January   37,789,877 2,715,540   1,051,602        293,144    90,268      483,489   42,423,920
2004, net of accumulated
depreciation
Establishment of a joint venture     (267,119) (186,169)    (86,932)       (21,673)         -      (3,947)    (565,840)
(note 45 (b))
Additions                            4,479,459    42,515     109,019        135,909    77,244      734,028    5,578,174
Disposals                            (424,064)  (49,111)    (28,705)        (7,170)  (22,315)            -    (531,365)
Transfer from CIP                      164,788   285,156      91,393          5,177       206    (546,720)            -
Depreciation charge for the year   (3,024,078) (123,071)   (172,910)       (89,845)  (53,348)            -  (3,463,252)

At 31 December 2004, net of         38,718,863 2,684,860     963,467        315,542    92,055      666,850   43,441,637
accumulated depreciation

At 31 December 2003 and 1 January
2004
Cost                                61,008,650 3,605,551   2,027,910      1,031,027   192,815      483,489   68,349,442
Accumulated depreciation          (23,218,773) (890,011)   (976,308)      (737,883) (102,547)            - (25,925,522)

Net carrying amount                 37,789,877 2,715,540   1,051,602        293,144    90,268      483,489   42,423,920

At 31 December 2004
Cost                                63,813,626 3,674,146   2,045,002      1,068,502   223,531      666,850   71,491,657
Accumulated depreciation          (25,094,763) (989,286) (1,081,535)      (752,960) (131,476)            - (28,050,020)

Net carrying amount                 38,718,863 2,684,860     963,467        315,542    92,055      666,850   43,441,637


16.     PROPERTY, PLANT AND EQUIPMENT #

Company
                                      Aircraft Buildings Machinery Transportation    Office   Construction        Total
                                    and flight                          equipment equipment    in progress
                                     equipment
                                       RMB'000   RMB'000   RMB'000        RMB'000   RMB'000        RMB'000      RMB'000

Transferred to the Company upon     38,595,577 1,858,577   784,743        182,711    76,724        583,635   42,081,967
its incorporation (note 1)
Additions                              372,799         -    25,547         42,916    27,182        308,493      776,937
Disposals                              (9,216)      (32)  (31,158)        (1,650)     (148)              -     (42,204)
Transfer from CIP                            -   219,934    17,770            176         -      (237,880)            -
Depreciation charge for the          (804,864)  (23,307)  (29,053)       (20,021)  (31,027)              -    (908,272)
period

At 31 December 2004, net of         38,154,296 2,055,172   767,849        204,132    72,731        654,248   41,908,428
accumulated depreciation

At 31 December 2004
Cost                                61,842,914 2,820,374 1,520,769        830,178   131,321        654,248   67,799,804
Accumulated depreciation          (23,688,618) (765,202) (752,920)      (626,046)  (58,590)              - (25,891,376)

Net carrying amount                 38,154,296 2,055,172   767,849        204,132    72,731        654,248   41,908,428

Certain of the Group's and the Company's bank loans are secured by certain of
the Group's and the Company's aircraft and flight equipment, which has an
aggregate carrying amount of approximately RMB16,586 million as at 31 December
2004 (2003: RMB16,422 million) (note 34).

The carrying amount of aircraft held under finance leases as at 31 December 2004
is approximately RMB11,999 million (2003: RMB13,310 million) (note 33). Leased
assets are pledged as security for the related finance lease liabilities.

As at 31 December 2004, the Group is in the process of applying to obtain the
title certificates of certain of its buildings with an aggregate carrying amount
of approximately RMB2,178 million, further details of which are set out in note
1 to these financial statements. The Directors of the Company are of the view
that the Group is entitled to lawfully and validly occupy and use the
above-mentioned buildings. 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.

17.     INTERESTS IN SUBSIDIARIES#
                                                                                                                Company
                                                                                                                   2004
                                                                                                                RMB'000

Listed shares in Hong Kong, at cost                                                                             579,472
Unlisted investments, at cost                                                                                   134,647
Due from subsidiaries                                                                                            22,513
Due to subsidiaries                                                                                           (559,703)

                                                                                                                176,929

Market value of listed shares                                                                                 3,161,997

The balances with the subsidiaries are unsecured, interest-free and have no
fixed terms of repayment.

Particulars of the principal subsidiaries at 31 December 2004 are as follows:

Company name                              Place of      Legal Nominal value   Percentage of    Principal activities
                                    incorporation/     status    of paid-up  equity interests
                                 establishment and                  capital    attributable
                                        operations                            to the Company
Direct                                    Indirect
                                                                   (in
                                                               thousands)

Subsidiaries
CNAC                                     Hong Kong    Limited    HK$331,268       69         -       Investment holding
(/raster(55%,p)='c05')                              liability
                                                      company
Air Macau Company Limited ('                 Macau    Limited    MOP400,000        -      35.2         Airline operator
Air Macau')*                                        liability
(/raster(55%,p)='c06')                                company
Air China Group Import and                     PRC    Limited     RMB90,000      100         -        Import and export
Export Trading Co. ('AIE')                          liability                                                   trading
(/raster(55%,p)='c07')                                company
/raster(55%,p)='c08'                           PRC    Limited     RMB20,000      100         -     Provision of airline
(Zhejiang Air Services Co.,                         liability                                  catering and shuttle bus
Ltd.)**                                               company                                                  services
Beijing Aviation Passenger                     PRC    Limited      RMB3,000      100         -   Provision of passenger
Service Corporation                                 liability                                   transportation services
(/raster(55%,p)='c09')                                company
Air China Shantou Industrial                   PRC    Limited     RMB12,000       51         -   Manufacture and retail
Development Company                                 liability                                      of aircraft supplies
(/raster(55%,p)='c10')                                company
China National Aviation Air                    PRC    Limited      RMB6,980      100         -      Provision of travel
Passenger and Cargo Services                        liability                                        agency and freight
Agency Company                                        company                                       forwarding services
(/raster(55%,p)='c11')

17.       INTERESTS IN SUBSIDIARIES #
Company name                              Place of     Legal      Nominal  Percentage of   Principal activities
                                    incorporation/    status     value of equity interests
                                 establishment and                paid-up   attributable
                                        operations                capital  to the Company
Direct                                    Indirect
                                                                 (in
                                                              thousands)

/raster(55%,p)='c12'                           PRC   Limited     RMB1,000        100     -     Provision of information
(Sichuan Southwest Aviation                        liability                                system consultancy services
Information Service Centre)**                        company
Beijing Air China Engineering                  PRC   Limited     RMB1,500        100     -     Provision of engineering
Technology Development Centre                      liability                                       consultancy services
(/raster(55%,p)='c13')                               company
Beijing Civil Aviation Blue                    PRC   Limited     RMB5,533        100     -   Provision of travel agency
Sky Air Travel Services                            liability                                                   services
Company                                              company
(/raster(55%,p)='c14')
Sichuan Southwest Air                          PRC   Limited     RMB1,000        100     -   Provision of wholesale and
Equipment and Supplies Centre                      liability                                            retail services
(/raster(55%,p)='c15')                               company
Air China Development                    Hong Kong   Limited       HK$500         95     -   Provision of air ticketing
Corporation (Hong Kong)                            liability                                                   services
Limited                                              company
(/raster(55%,p)='c16')
/raster(55%,p)='c17'                           PRC   Limited     RMB2,000        100     -          Provision of ground
(Shanghai Air China Base                           liability                                   services, air passenger,
Development Centre)**                                company                                      cargo and consultancy
                                                                                                               services

*       Air Macau is a 51% subsidiary of CNAC.

**      The English names are direct translations of the company's Chinese names.

The above table lists the subsidiaries of the Company which, in the opinion of
the Directors, principally affected the results for the year ended 31 December
2004 or formed a substantial portion of the net assets of the Group at 31
December 2004. To give details of other subsidiaries would, in the opinion of
the Directors, result in particulars of excessive length.

18.     INTERESTS IN JOINT VENTURES#
                                                                                                               Company
                                                                                                                  2004
                                                                                                               RMB'000

Unlisted investments, at cost                                                                                1,392,388

18.     INTERESTS IN JOINT VENTURES #

Particulars of the joint ventures at 31 December 2004 of the Group are set out
below:
Company        Place of incorporation/ Legal status Nominal value of  Percentage of equity  Principal activities
name                 establishment and               paid-up capital interests attributable
                            operations                                    to the Group
Direct                        Indirect
                                                     (in thousands)

Joint
ventures
AMECO                              PRC      Limited       US$102,533       60             -       Provision of aircraft
(/raster                                  liability                                            overhaul and maintenance
(55%,p)=                                    company                                                            services
'c18')
Air China                          PRC      Limited     RMB2,200,000       51             - Provision of cargo carriage
Cargo                                     liability                                                            services
(/raster                                    company
(55%,p)=
'c19')
(note)
BACL                               PRC      Limited         US$8,000        -          41.4        Provision of airline
(/raster                                  liability                                                   catering services
(55%,p)=                                    company
'c20')
SWACL                              PRC      Limited        RMB20,000        -          41.4        Provision of airline
(/raster                                  liability                                                   catering services
(55%,p)=                                    company
'c21')

Note: During the year, the Company has reclassified its interest in Air China
Cargo from a subsidiary to a joint venture upon the termination of a discussion
to acquire additional equity interests in Air China Cargo from another joint
venture partner.

As at the balance sheet date and for the two years ended 31 December 2004, the
Group's proportionate share of the assets, liabilities, and the Group's
proportionate share of the revenues and expenses of the joint ventures are as
follows:
                                                                                               Group
                                                                                                2004               2003
                                                                                             RMB'000            RMB'000

Current assets                                                                             1,606,903            610,502
Non-current assets                                                                         1,706,734            633,369

Total assets                                                                               3,313,637          1,243,871
Current liabilities                                                                      (1,578,665)          (728,033)
Non-current liabilities                                                                      (8,734)                  -

Net assets attributable to the Group                                                       1,726,238            515,838

Revenues                                                                                   3,944,633            959,938
Operating expenses                                                                       (3,748,389)          (848,222)
Finance costs                                                                               (16,137)           (21,919)
Share of profits less losses from associates                                                   1,006              1,111

Profit before tax                                                                            181,113             90,908
Tax                                                                                         (51,976)           (16,427)

Net profit attributable to the Group                                                         129,137             74,481

18.       INTERESTS IN JOINT VENTURES #

As at the date of approval of these financial statements, the Group is in the
process of applying to change the registered shareholder name of certain
investees, including Air China Cargo and AMECO. Further details are set out in
note 1 to these financial statements.

19.     INTERESTS IN ASSOCIATES#
                                                                         Group                                  Company
                                                                          2004                2003                 2004
                                                                       RMB'000             RMB'000              RMB'000

Unlisted shares, at cost                                                     -                   -              845,641
Share of net assets                                                  2,587,304           1,789,948                    -
Goodwill                                                             1,404,966           1,205,390                    -
Due from associates                                                    106,520             110,981               17,305
Due to associates                                                     (97,269)            (38,473)             (82,109)

                                                                     4,001,521           3,067,846              780,837

The balances with the associates are unsecured, interest-free and have no fixed
terms of repayment.

Movements of goodwill are as follows:
                                                                                               Group
                                                                                                2004               2003
                                                                                             RMB'000            RMB'000

Goodwill at beginning of the year (note 19 (a))                                            1,205,390          1,205,390
Additions (note 19 (b))                                                                      199,576                  -

Goodwill at end of the year                                                                1,404,966          1,205,390

Accumulated impairment                                                                             -                  -


19.     INTERESTS IN ASSOCIATES #

Notes:

(a)      The goodwill brought forward from 2003 related to the acquisition of
shareholding interests of 35.86% and 7.43% in Hong Kong Dragon Airlines Limited
('Dragonair') by CNACG and its then wholly-owned subsidiary, CNAC, in June 1996
and October 1997, respectively. The aggregate goodwill arising from these two
acquisitions was approximately RMB2,130 million and subsequently reduced to
approximately RMB1,205 million through deemed disposal upon the initial public
offering of CNAC and the accumulated amortisation on the straight-line basis
over a period of 20 years until 1 January 2001 (the date of adoption of IFRS 3
by the Group).

(b)      The goodwill arose in the current year related to the acquisitions of
effective shareholding interests of 48.0% in Shandong Aviation Group Corporation
('Shandong Aviation'), 22.8% in Shandong Airlines Co., Ltd. ('Shandong Airlines
') and 13.9% in LSG Lufthansa Service Hong Kong Limited ('LSGHK') by the Group,
resulting in an aggregate goodwill amount of approximately RMB200 million.

Impairment testing of goodwill attributable to Dragonair

Goodwill acquired through the business combination in relation to the
acquisition of shareholding interest in Dragonair has been allocated to the
cash-generating unit, Dragonair, within the airline operations segment.

The recoverable amount of Dragonair has been determined based on a value in use
calculation. To calculate this, cash flow projections are based on financial
budgets approved by management covering a one-year period. The discount rate
applied to the cash flow projections beyond the one-year period is 5.0%. No
growth has been projected beyond the one-year period.

Key assumptions used in the value in use calculation of Dragonair

The following describes each key assumption on which management has based its
cash flow projections when undertaking the impairment testing of goodwill
attributable to Dragonair:

Passenger revenues - the bases used to determine the value assigned to the
budgeted passenger revenues are available seat kilometers, passenger traffic,
passenger load factor and passenger yield. Values assigned to the key
assumptions reflect past experience and are consistent with external information
sources.

Operating expenses - the bases used to determine the values assigned are staff
headcount, scheduled flight hours, passenger traffic and jet fuel consumption.
Values assigned to the key assumptions reflect past experience and are
consistent with external information sources.

19.     INTERESTS IN ASSOCIATES #

Summarised financial information of the Group's associates is as follows:
                                                                                             Group
                                                                                              2004                2003
                                                                                           RMB'000             RMB'000

Aggregate of associates' financial positions:
Total assets                                                                            27,767,944          21,918,291

Total liabilities                                                                     (20,747,807)        (17,215,202)

Aggregate of associates' results:
Revenues                                                                                16,770,072           9,639,481

Net profit                                                                               1,330,066             639,579

Share of profits less losses after tax from associates:
Dragonair                                                                                  279,801              43,336
Others                                                                                     184,243             162,290

                                                                                           464,044             205,626

Particulars of the associates at 31 December 2004 are as follows:
Name                    Business  Place of incorporation/ establishment  Percentage of equity interests       Principal
                       structure                         and operations                    attributable      activities
                                                                                           to the Group

Shenzhen Airlines      Corporate                                    PRC                              25         Airline
(/raster(55%,p)=                                                                                               operator
'c22')
Dragonair#             Corporate                              Hong Kong                            29.9         Airline
(/raster(55%,p)=                                                                                               operator
'c23')
Shandong Aviation      Corporate                                    PRC                              48      Investment
(/raster(55%,p)=                                                                                                holding
'c24')
Shandong Airlines      Corporate                                    PRC                            22.8         Airline
(/raster(55%,p)=                                                                                               operator
'c25')


19.     INTERESTS IN ASSOCIATES #
Name                                      Business              Place of     Percentage of         Principal activities
                                         structure        incorporation/  equity interests
                                                       establishment and      attributable
                                                              operations      to the Group

Sichuan SNECMA Aeroengine Maintenance    Corporate                   PRC              40.3 Provision of maintenance and
Co., Ltd.                                                                                  repair services for aircraft
(/raster(55%,p)='c26')                                                                                          engines
Chengdu Falcon Aircraft Engineering      Corporate                   PRC              35.6 Provision of maintenance and
Service Co., Ltd.                                                                          repair services for aircraft
(/raster(55%,p)='c27')                                                                                          engines
Yunan Airport Aircraft Maintenance       Corporate                   PRC                40 Provision of maintenance and
Services Co., Ltd.                                                                                      repair services
(/raster(55%,p)='c28')
Macau Aircraft Repair and Conversion     Corporate                 Macau              17.3 Provision of aircraft repair
Company Limited# (/raster(55%,p)='c29')                                                         and conversion services
Jardine Airport Services Limited#        Corporate             Hong Kong              34.5  Provision of airport ground
(/raster(55%,p)='c30')                                                                                handling services
Menzies Macau Airport Services Limited#  Corporate                 Macau              23.2  Provision of airport ground
(/raster(55%,p)='c31')                                                                                handling services
Guangzhou Baiyun International Airport   Corporate                   PRC                21  Provision of airport ground
Ground Handling Service Company Limited                                                               handling services
(/raster(55%,p)='c32')
/raster(55%,p)='c33'                     Corporate                   PRC                40  Provision of airport ground
(Sanya World Trade Development Company                                                                handling services
Limited)*
CAAC Data Communications Co., Ltd. (/    Corporate                   PRC              23.2   Provision of aviation data
raster(55%,p)='c34')                                                                             communication services
CAAC Cares Chongqing Co., Ltd.           Corporate                   PRC              24.5 Provision of airline-related
(/raster(55%,p)='c35')                                                                      information system services
/raster(55%,p)='c36'                     Corporate                   PRC                35 Provision of airline-related
(Chengdu CAAC Southwest Cares Co., Ltd.)                                                    information system services
*
Tradeport Hong Kong Limited#             Corporate             Hong Kong              17.3    Provision of services for
(/raster(55%,p)='c37')                                                                         developing and operating
                                                                                                       logistics centre
LSGHK# (/raster(55%,p)='c38')            Corporate             Hong Kong              13.9         Provision of airline
                                                                                                      catering services
China National Aviation Finance Co.,     Corporate                   PRC              40.7       Provision of financial
Ltd. ('CNAF') (/raster(55%,p)='c39')**                                                                         services

#        Shareholding interests are held indirectly through subsidiaries of the
Company.

*        The English names are direct translations of the company's Chinese
names.

**      30% of the Group's equity interests in CNAF is held directly by the
Company, while the remaining 10.7% is held indirectly through subsidiaries of
the Company.

19.     INTERESTS IN ASSOCIATES #

As at the date of approval of these financial statements, the Group is in the
process of applying to change the registered shareholder name of certain
associates, including Shenzhen Airlines. Further details are set out in note 1
to these financial statements.

20.     LONG TERM RECEIVABLE FROM CNAHC#

On 30 September 2004, the Company entered into an agreement with CNAHC whereby
CNAHC agreed to assume the obligation to settle an aggregate amount of
approximately RMB757 million, which was recorded by the Group as government
grant receivable as at 31 December 2003 of RMB842 million, consisting of long
term portion and short term portion of RMB764 million and RMB78 million,
respectively. This receivable from CNAHC is unsecured, interest-free and
repayable over eight years commencing from 31 December 2004 by 16 semi-annual
instalments to be made by 30 June and 31 December each year. Pursuant to the
relevant agreement, the first instalment amount of RMB25 million was settled by
31 December 2004 and the final instalment amount of approximately RMB32 million
should be settled by 30 June 2012, with the remaining 14 semi-annual instalment
amounts of RMB50 million each to be settled by 30 June and 31 December each year
between 30 June 2005 and 31 December 2011.

21.     OTHER INVESTMENTS#

Other investments consist of unlisted equity investments.

22.     DEFERRED TAX ASSETS#
                                                                                          Group                 Company
                                                                                           2004      2003          2004
                                                                                        RMB'000   RMB'000       RMB'000

Balance at beginning of year                                                            590,153   624,000             -
Transferred to the Company upon its incorporation                                             -         -       660,349
(note 1)
Charge for the year (note 12)                                                         (607,824)  (33,847)       (2,349)
Credited to equity                                                                      793,755         -             -

Balance at end of year                                                                  776,084   590,153       658,000


22.     DEFERRED TAX ASSETS #

The principal components of the Group's and the Company's deferred income tax
are as follows:
                                                                                           Group                Company
                                                                                         2004       2003           2004
                                                                                      RMB'000    RMB'000        RMB'000

Deferred income tax liabilities:
Accelerated depreciation for tax purposes                                           (441,441)  (826,000)      (426,000)
Differences in air traffic revenues recognition                                             -   (27,000)              -
Other deferred income tax liabilities                                                (47,000)   (52,000)       (47,000)

Gross deferred income tax liabilities                                               (488,441)  (905,000)      (473,000)

Deferred income tax assets:
Additional tax deduction on revaluation surplus arising                               714,000          -        606,000
from the Restructuring
Provisions and accruals                                                               384,000    675,000        381,000
Losses available for offset against future taxable income                              20,525    685,153              -
Other deferred income tax assets                                                      146,000    135,000        144,000

Gross deferred income tax assets                                                    1,264,525  1,495,153      1,131,000

Net deferred income tax assets                                                        776,084    590,153        658,000

There was no material un-provided deferred income tax during the year (2003:
Nil).

23.     TRADE RECEIVABLES#

The Group normally allows a credit period ranging from 30 days to 90 days to its
sales agents and other customers. An aged analysis of the trade receivables, net
of provision for doubtful debts, of the Group and the Company is analysed as
follows:
                                                             Group                                              Company
                                                              2004                      2003                       2004
                                                           RMB'000                   RMB'000                    RMB'000

Within 30 days                                           1,838,756                 1,257,040                  2,067,875
31 to 60 days                                              280,382                   465,109                    102,938
61 to 90 days                                              152,548                   106,603                     14,949
Over 90 days                                                93,130                   126,840                     11,531

At end of year                                           2,364,816                 1,955,592                  2,197,293

Included in the Group's and the Company's trade receivables was the following
amount due from a joint venture:
                                                                Group                                           Company
                                                                 2004                    2003                      2004
                                                              RMB'000                 RMB'000                   RMB'000

Joint venture                                                 412,539                       -                   841,916

24.     INVENTORIES#

Inventories primarily consist of materials and supplies.

Set out below is the breakdown of materials and supplies:
                                                                              Group                            Company
                                                                               2004           2003                2004
                                                                            RMB'000        RMB'000             RMB'000

Flight equipment spare parts                                                680,039        577,478             454,220
Work in progress                                                             38,061        104,338               1,621
Catering supplies                                                            25,188         30,635              13,089

                                                                            743,288        712,451             468,930

25.       PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES#

Set out below is the breakdown of prepayments, deposits and other receivables:
                                                                                        Group                   Company
                                                                                         2004       2003           2004
                                                                                      RMB'000    RMB'000        RMB'000

Advance payments for aircraft and related equipment                                 2,193,458  1,213,380      1,958,515
Advances and others                                                                   324,655    191,448        322,047
Manufacturers' credits on aircraft acquisition receivable                              74,518     84,935         74,518
Government grant receivable                                                                 -     77,338              -
Prepaid aircraft operating lease rentals                                               95,681     65,790         79,260
Receivables from the sale of staff quarters                                            24,681     57,962         24,681
Miscellaneous deposits                                                                395,595    286,510        388,531

                                                                                    3,108,588  1,977,363      2,847,552

26.     CASH AND CASH EQUIVALENTS AND PLEDGED DEPOSITS#
                                                                                 Group                          Company
                                                                                  2004          2003               2004
                                                                               RMB'000       RMB'000            RMB'000

Cash and bank balances                                                       8,635,653     2,147,434          7,888,436
Cash placed with CNAF                                                          261,904     1,457,103            219,655

                                                                             8,897,557     3,604,537          8,108,091

Time deposits placed with banks                                                648,667       261,226             94,287
Time deposits placed with CNAF                                                 305,081             -            300,000

                                                                               953,748       261,226            394,287
Less: Pledged deposits against
Bank loans (note 34)                                                            64,242     1,177,064             64,242
Finance leases (note 33)                                                        16,277        41,500             16,277
Others*                                                                         36,712        26,978                  -

Pledged deposits                                                               117,231     1,245,542             80,519

Cash and cash equivalents (note 45 (a))                                      9,734,074     2,620,221          8,421,859

*        Includes deposits pledged against the Group's aircraft operating leases
and financial derivatives.

26.     CASH AND CASH EQUIVALENTS AND PLEDGED DEPOSITS #

Cash at banks earns interest at floating rates based on daily bank deposit
rates. Time deposits are made for terms of between three days and one year
depending on the immediate cash requirements of the Group and the Company.

27.     DUE TO SHAREHOLDERS#

Set out below is the breakdown of the amounts due to shareholders:
                                                             Group                                              Company
                                                              2004                   2003                          2004
                                                           RMB'000                RMB'000                       RMB'000

Due to CNAHC                                             2,137,437                  2,968                     2,121,533
Due to CNACG                                               118,680                      -                       118,680

                                                         2,256,117                  2,968                     2,240,213

The amounts due to shareholders are unsecured, interest-free and have no fixed
terms of repayment. The amounts mainly represented distributions payable by the
Company as detailed in note 14 to these financial statements.

28.     BALANCES WITH OTHER CNAHC GROUP COMPANIES#

The balances with other CNAHC group companies are unsecured, interest-free and
have no fixed terms of repayment.

29.     TRADE PAYABLES#

An aged analysis of the trade payables is as follows:
                                                                Group                                           Company
                                                              2004                      2003                       2004
                                                           RMB'000                   RMB'000                    RMB'000

Within 30 days                                           3,108,028                 1,157,293                  2,740,974
31 to 60 days                                              805,858                   669,970                    673,690
61 to 90 days                                              304,943                   497,402                    243,448
Over 90 days                                               224,779                 1,890,316                    161,241

At end of year                                           4,443,608                 4,214,981                  3,819,353

29.       TRADE PAYABLES #

Included in the Group's and the Company's trade payables was the following
amount due to a joint venture:
                                                                   Group                                        Company
                                                                 2004                    2003                      2004
                                                              RMB'000                 RMB'000                   RMB'000

Joint venture                                                 179,934                 123,581                   449,835

30.     BILLS PAYABLE#

An aged analysis of the bills payable is as follows:
                                                                   Group                                        Company
                                                              2004                        2003                     2004
                                                           RMB'000                     RMB'000                  RMB'000

Within 30 days                                                   -                     256,220                        -
31 to 60 days                                                    -                     189,931                        -
61 to 90 days                                                    -                     248,687                        -
Over 90 days                                               362,033                     622,382                  362,033

At end of year                                             362,033                   1,317,220                  362,033

Included in the Group's and the Company's bills payable was the following amount
due to CNAF:
                                                   Group                                                        Company
                                                 2004                            2003                              2004
                                              RMB'000                         RMB'000                           RMB'000

CNAF                                                -                         692,372                                 -


31.     OTHER PAYABLES AND ACCRUALS#

Set out below is a breakdown of other payables and accruals:
                                                                                     Group                      Company
                                                                                      2004        2003             2004
                                                                                   RMB'000     RMB'000          RMB'000

Provision for staff housing benefits                                               469,617     772,874          448,694
Accrued salaries, wages and benefits                                               692,510     647,561          562,493
Interest expense payable                                                           269,928     315,617          255,977
Accruals for share issuing expenses                                                208,644           -          208,644
Custom duties and levies payable                                                   742,201     207,098          665,986
Current portion of long-term payables (note 35)                                    101,802     174,363          101,802
Current portion of deferred income (note 36)                                        76,943      57,894           76,943
Advances from customers                                                            294,798     348,716          224,321
Accrued operating expenses                                                         716,548     533,399          611,257
Others                                                                             347,296     183,023          231,753

                                                                                 3,920,287   3,240,545        3,387,870

32.     PROVISION FOR MAJOR OVERHAULS#
                                                                                       Group                    Company
                                                                                        2004        2003           2004
                                                                                     RMB'000     RMB'000        RMB'000

At beginning of year                                                                 404,939     253,453              -
Transferred to the Company upon its incorporation                                          -           -        363,842
(note 1)
Provision for the year                                                               221,543     244,387         61,341
Utilised during the year                                                           (127,654)    (92,901)       (23,811)

At the end of year                                                                   498,828     404,939        401,372
Less: Portion classified as current liabilities                                     (28,130)   (115,346)       (28,130)

Long-term portion                                                                    470,698     289,593        373,242


33.     OBLIGATIONS UNDER FINANCE LEASES#

The Group and the Company have obligations under finance lease agreements
expiring during the years from 2004 to 2011 in respect of aircraft and related
equipment. As at the balance sheet date, future minimum lease payments under
these finance leases, together with the present value of the net minimum lease
payments, which are principally denominated in foreign currencies, are as
follows:
                                             Group and Company                                Group
                                   Minimum lease   Present value of minimum   Minimum lease   Present value of minimum
                                        payments             lease payments        payments             lease payments
                                            2004                       2004            2003                       2003
                                         RMB'000                    RMB'000         RMB'000                    RMB'000

Amounts repayable:
Within one year                        2,313,871                  1,705,146       2,285,703                  1,607,056
In the second year                     2,408,481                  1,943,630       2,271,725                  1,697,597
In the third to fifth years,           7,784,209                  6,722,448       6,721,752                  5,583,404
inclusive
Over five years                        2,049,406                  1,910,163       5,406,410                  4,810,836

Total minimum finance lease           14,555,967                 12,281,387      16,685,590                 13,698,893
payments

Less: Amounts representing           (2,274,580)                                (2,986,697)
finance charges

Present value of minimum lease        12,281,387                                 13,698,893
payments
Less: Portion classified as          (1,705,146)                                (1,607,056)
current liabilities

Long-term portion                     10,576,241                                 12,091,837

Certain lease financing arrangements comprised finance leases between the
Company and certain of its subsidiaries, and corresponding borrowings between
such subsidiaries and the banks. The Company has guaranteed the subsidiaries'
obligations under the bank borrowings and, accordingly, the relevant assets as
mentioned aforesaid and obligations are recorded in the balance sheets to
reflect the substance of the transactions. The future payments under these
leases have therefore been presented by the Company and the Group in amounts
that reflect the payments under the bank borrowings between the subsidiaries and
the banks.

33.     OBLIGATIONS UNDER FINANCE LEASES #

At 31 December 2004, there were 23 aircraft under finance lease agreements.
Under the terms of the leases, the Company has the option to purchase, at the
end of or during the lease terms, certain aircraft at fair market value and
others at either fair market value or at the price as stipulated in the finance
lease agreements. For the current year, the effective borrowing rate ranged from
1.64% to 9.13% (2003: 1.64% to 9.13%).

The Group's and the Company's finance leases were secured by:

(a)      mortgages over certain of the Group's and the Company's aircraft, which
had an aggregate carrying value of approximately RMB11,999 million as at 31
December 2004 (2003: RMB13,310 million) (note 16);

(b)      the pledge of certain of the Group's and the Company's bank deposits
amounting to approximately RMB16 million as at 31 December 2004 (2003: RMB42
million) (note 26); and

(c)      guarantees by certain commercial banks in an aggregate amount of
approximately RMB14,785 million (2003: RMB18,949 million).

As at 31 December 2004, certain PRC state-owned banks have provided
counter-guarantees in an aggregate amount of RMB3,074 million (2003: RMB4,753
million) in respect of the commercial bank guarantee arrangements set out in
note 33 (c) above. CNAHC and CNAF have, in turn, provided counter-guarantees to
certain of these PRC state-owned banks in the amounts of RMB921 million (2003:
RMB5,355 million) and RMB3,976 million (2003: RMB4,506 million) (note 46),
respectively.

34.     BANK AND OTHER LOANS#
                                                                                    Group                       Company
                                                                                  2004          2003               2004
                                                                               RMB'000       RMB'000            RMB'000

Bank loans:
Secured                                                                     13,685,002    14,519,345         13,643,002
Unsecured                                                                    7,519,047     7,228,169          7,144,917

                                                                            21,204,049    21,747,514         20,787,919

Other loans:
Secured                                                                         66,667        81,487             66,667
Unsecured                                                                      431,957       227,494            297,731

                                                                            21,702,673    22,056,495         21,152,317

Bank loans repayable:
Within one year                                                              8,359,280     8,994,367          7,943,149
In the second year                                                           3,049,084     1,903,342          3,049,084
In the third to fifth years, inclusive                                       6,178,222     6,227,447          6,178,222
Over five years                                                              3,617,464     4,622,358          3,617,464
Other loans repayable:
Within one year                                                                446,771       242,307            312,546
In the second year                                                              14,815        14,813             14,815
In the third to fifth years, inclusive                                          37,037        51,861             37,037

Total bank and other loans                                                  21,702,673    22,056,495         21,152,317
Less: Portion classified as current liabilities                            (8,806,051)   (9,236,674)        (8,255,695)

Long-term portion                                                           12,896,622    12,819,821         12,896,622


34.     BANK AND OTHER LOANS #

Further details of bank and other loans at the balance sheet date are as
follows:
                                                                                                 Group          Company
Nature                                                                      Interest rate      2004      2003      2004
                                                                       and final maturity   RMB'000   RMB'000   RMB'000

RMB denominated loans:
Loans for construction      Floating interest rates ranging from 5.58% to 5.76% per annum         -    80,000         -
projects                                 at 31 December 2003 with maturities through 2010

Loans for purchases of      Floating interest rates ranging from 4.94% to 5.76% and 4.94% 5,382,986 6,282,444 5,382,986
aircraft and related      to 6.21% per annum at 31 December 2004 and 2003 with maturities
equipment                                             through 2014 and 2013, respectively

Loans for working capital   Floating interest rates ranging from 4.54% to 4.94% and 4.54% 2,528,869 2,931,230 2,171,800
                          to 5.73% per annum at 31 December 2004 and 2003 with maturities
                                                      through 2007 and 2004, respectively

Loans for purchases of      Floating interest rate at 4.94% per annum at 31 December 2003         -    72,000         -
properties                                                   with maturities through 2004

United States dollars
denominated loans:
Loans for purchases of     Fixed interest rates ranging from 5.40% to 10.17% and 4.94% to 7,155,311 8,397,835 7,155,311
aircraft and related        10.17% per annum at 31 December 2004 and 2003 with maturities
equipment                                                                    through 2012


34.     BANK AND OTHER LOANS #
                                                                                              Group             Company
Nature                                                                 Interest rate        2004        2003       2004
                                                                  and final maturity     RMB'000     RMB'000    RMB'000

Loans for purchases of         Floating interest rates at six months LIBOR + 0.4% to   1,270,236      81,487  1,270,236
aircraft and related                0.7% per annum at 31 December 2004 and 2003 with
equipment                             maturities through 2014 and 2009, respectively

Loans for working capital      Floating interest rates at six months LIBOR + 0.6% to   5,365,271   4,072,432  5,171,984
                               0.8% and three to ten months LIBOR + 0.3% to 0.9% per
                                  annum at 31 December 2004 and 2003 with maturities
                                                 through 2007 and 2004, respectively

Japanese yen denominated
loans:
Loans for purchases of          Fixed interest rates ranging from 4.84% to 5.30% per           -     139,067          -
aircraft and related          annum at 31 December 2003 with maturities through 2004
equipment

                                                                                      21,702,673  22,056,495 21,152,317
Less: Loans due within one                                               (8,806,051) (9,236,674) (8,255,695)
year classified as current
liabilities

Loans due after one year                                                  12,896,622  12,819,821  12,896,622
classified as long-term
portion

The interest rates of RMB denominated loans are set and subject to change by the
People's Bank of China.

The Group's and the Company's bank loans of approximately RMB13,710 million as
at 31 December 2004 (2003: RMB14,252 million) were secured by:

(a)      mortgages over certain of the Group's and the Company's aircraft and
related equipment, which had an aggregate carrying value of approximately
RMB16,586 million as at 31 December 2004 (2003: RMB16,422 million) (note 16);

34.     BANK AND OTHER LOANS #

(b)      the pledges of certain of the Group's and the Company's bank deposits
amounting to RMB64 million as at 31 December 2004 (2003: RMB1,177 million) (note
26);

(c)      guarantees by certain commercial banks amounting to RMB8,294 million
(2003: RMB10,934 million); and

(d)      guarantees by Air China International Corporation and CNAC (PRC) of Nil
(2003: RMB396 million) and Nil (2003: RMB380 million), respectively.

As at 31 December 2004, certain PRC state-owned banks provided
counter-guarantees in an aggregate amount of RMB5,943 million (2003: RMB7,244
million) to one of these commercial banks as mentioned in note 34 (c) above.
CNAHC and CNAF have, in turn, provided counter-guarantees to certain of these
PRC state-owned banks in the amounts of RMB1,455 million (2003: RMB3,198
million) and RMB761 million (2003: RMB907 million) (note 46), respectively.

35.     LONG-TERM PAYABLES#

Long-term payables mainly represent custom duties and value-added tax payable
after one year to the PRC government in respect of the acquisition of aircraft
and related equipment under finance leases. The custom duties and value-added
tax are payable upon repayment of the corresponding finance lease instalments.
Set out below are details of the custom duties and value-added tax payable
further analysed into non-current and current portions:
                                                                                           Group                Company
                                                                                         2004       2003           2004
                                                                                      RMB'000    RMB'000        RMB'000

Custom duties and value-added tax payable                                             539,121    975,712        539,121
Others                                                                                  8,992          -            258

                                                                                      548,113    975,712        539,379
Less: Portion classified as current liabilities (note 31)                           (101,802)  (174,363)      (101,802)

Long-term portion                                                                     446,311    801,349        437,577


36.     DEFERRED INCOME#

In 2000, the Group acquired an aircraft which was funded by the PRC government,
and a further aircraft was injected into the Group by the PRC government during
2004. In accordance with IAS 20 'Accounting for Government Grants and Disclosure
of Government Assistance', the Group recorded these aircraft purchased in 2000
and received in 2004 as property, plant and equipment with the corresponding
amounts of government grant recorded as deferred income at the respective dates
of the delivery of the aircraft. As such, the government subsidies in relation
to the aforesaid aircraft purchased in 2000 and the aircraft received in 2004
are recorded in deferred income of the Group in 2000 and 2004, respectively. The
deferred income is recognised as income over the expected useful life of the
relevant aircraft on the straight-line basis.

The movements of deferred income as stated under current and non-current
liabilities are as follows:
                                                                                           Group                Company
                                                                                         2004       2003           2004
                                                                                      RMB'000    RMB'000        RMB'000

Deferred income:
At beginning of year                                                                1,157,880  1,157,880              -
Transferred to the Company upon its                                                         -          -      1,462,667
incorporation (note 1)
Addition during the year                                                              304,787          -              -

At end of year                                                                      1,462,667  1,157,880      1,462,667

Accumulated income recognised as other operating revenues:
At beginning of year                                                                  212,278    154,384              -
Transferred to the Company upon its incorporation (note 1)                                  -          -        263,636
Credit during the year (note 5)                                                        70,593     57,894         19,235

At end of year                                                                        282,871    212,278        282,871

Net amount                                                                          1,179,796    945,602      1,179,796
Less: Portion classified as current liabilities (note 31)                            (76,943)   (57,894)       (76,943)

Long-term portion                                                                   1,102,853    887,708      1,102,853


37.     SHARE CAPITAL#
                                                                               Number of shares           Nominal value
                                                                                           2004                    2004
                                                                                                                RMB'000

Company and Group
Registered, issued and fully paid
- State legal person shares of RMB1.00 each                                       4,855,945,675               4,855,946
- Non-H Foreign Shares of RMB1.00 each                                            1,388,992,507               1,388,992
- H shares of RMB1.00 each                                                        2,805,680,000               2,805,680

                                                                                  9,050,618,182               9,050,618

A summary of the movements in the Company's issued share capital for the period
from 30 September 2004 (date of incorporation of the Company) to 31 December
2004 was as follows:
                                                                                    Number of shares      Nominal value
                                                                                                2004               2004
                                                                                                                RMB'000

Restructuring (note 37 (a))                                                            6,500,000,000          6,500,000
State legal person shares converted into H shares (note 37 (b))                        (198,331,240)          (198,331)
Non-H Foreign Shares converted into H shares (note 37 (b))                              (56,730,578)           (56,731)
Share placement and public offer (note 37 (c))                                         2,805,680,000          2,805,680

                                                                                       9,050,618,182          9,050,618

The Company was incorporated on 30 September 2004 with an initial registered
share capital of RMB6,500,000,000, divided into 6,500,000,000 shares with par
value of RMB1.00 each. 5,054,276,915 State legal person shares and 1,445,723,085
non-H Foreign Shares with a par value of RMB1.00 each were issued to CNAHC and
CNACG, respectively, all of which were credited as fully paid, in consideration
for the transfer of the Relevant Businesses and interests in the Relevant
Companies to the Company pursuant to the Restructuring referred to in note 1 to
these financial statements.

Notes:

(a)      As part of the Restructuring in preparation for the listing of the
Company's H shares on the Hong Kong Stock Exchange and the London Stock
Exchange, CNAHC and through its wholly-owned subsidiaries, transferred the
Relevant Businesses and interests in the Relevant Companies to the Company (note
1). In consideration of the above, the Company issued 5,054,276,915 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.

37.     SHARE CAPITAL #

Notes:

(b)      The Company's H shares were listed on the Hong Kong Stock Exchange and
the London Stock Exchange on 15 December 2004 and 2,805,680,000 H shares,
consisting of 2,550,618,182 new shares, 198,331,240 shares converted from State
legal person shares and 56,730,578 shares converted from non-H Foreign Shares,
with a par value of RMB1.00 each were issued to the public by way of placement
and offer at HK$2.98 (equivalent to approximately RMB3.17072) each. The proceeds
from the sale of the 198,331,240 State legal person shares and 56,730,578 non-H
Foreign Shares aggregating approximately RMB759 million, after deducting the
portion of share issuing expenses of approximately RMB50 million which were
borne by the Social Security Fund in connection with these sales of State legal
person shares and non-H Foreign Shares, were remitted to the Social Security
Fund.

(c)      As referred to in note 37 (b) above, the Company issued 2,805,680,000 H
shares to the public by way of placement and offer. After deducting aggregate
net proceeds of approximately RMB759 million from the sale of 198,331,240 H
shares converted from State legal person shares and 56,730,578 H shares
converted from non-H Foreign Shares which were remitted to the Social Security
Fund as referred to in note 37 (b) above and share issuing expenses of
approximately RMB536 million (before deducting share issuing expenses of
approximately RMB50 million borne by the Social Security Fund as referred to in
note 37 (b) above), the Company raised net proceeds of approximately RMB7,601
million, of which paid-up share capital amounted to approximately RMB2,551
million and capital reserve amounted to approximately RMB5,050 million.

The H shares rank pari passu, in all material respects, with the State legal
person shares and non-H Foreign Shares of the Company.

38.     RESERVES#

Group

The amounts of the Group's reserves and the movements therein for each of the
two years ended 31 December 2004 are presented in the consolidated statement of
changes in equity on page 47 of these financial statements.

Company
                                                               Capital      Statutory reserve        Retained     Total
                                                               reserve                  funds         profits
                                                               RMB'000                RMB'000         RMB'000   RMB'000

Upon incorporation of the Company (note 38 (a))              (627,464)                      -          34,813 (592,651)
Profit for the period from 1 October 2004 to 31                      -                      -       1,229,603 1,229,603
December 2004
Distributions (note 38 (b))                                          -                      -       (377,550) (377,550)
Transfer to statutory reserve funds (note 14)                        -                 51,908        (51,908)         -
Issue of new shares upon listing (note 37 (c))               5,536,678                      -               - 5,536,678
Share issuing expenses (note 37 (c))                         (486,457)                      -               - (486,457)

At 31 December 2004                                          4,422,757                 51,908         834,958 5,309,623

38.       RESERVES #

Company

Notes:

(a)      As described in note 1 to these financial statements, the financial
statements of the Group for the years ended 31 December 2003 and 2004 have been
prepared as if the Group had been in existence throughout the period and as if
the Relevant Businesses and the interests in the Relevant Companies were
transferred to the Company at 1 January 2003. Upon incorporation of the Company
on 30 September 2004, the historical net asset value of the Relevant Businesses
and the interests in the Relevant Companies transferred to the Company were
converted into the Company's registered capital as described in note 37 (a) to
these financial statements with all the then existing reserves eliminated and
the resulting difference dealt with in the capital reserve and retained profits.
Accordingly, the aggregate of the capital reserve and retained profits amounts,
being the difference between the amount of share capital issued and the
historical net asset value of the Relevant Businesses and the interests in the
Relevant Companies transferred to the Company as at 30 September 2004, were
presented in the reserves of both the Group and the Company.

Retained profits of the Company and the Group upon incorporation of the Company
represent the amounts set aside for distributions, details of which are set out
in note 14 to these financial statements. Therefore, these amounts were not
capitalised by the Company and the Group upon the Company's incorporation.

(b)      Details of the distributions are set out in note 14 to these financial
statements.

39.     LONG-TERM COMPENSATION PLAN#

The Company has adopted a long-term compensation plan (the 'Plan') which was
approved by the shareholders on 18 October 2004 for the purpose of motivating
its employees. The Plan provides for the grant of share appreciation rights ('
SARs') to eligible participants, including the Company's Directors (excluding
independent non-executive Directors), supervisors (excluding independent
supervisors), president, vice presidents, heads of key departments in the
Company's headquarters, general managers and general deputy managers of
principal branches and subsidiaries as well as selected senior professionals and
key specialists. In any event, SARs will be granted to no more than 200
individuals. The Plan will remain in force unless otherwise cancelled or
amended.

Under the Plan, the holders of SARs are entitled the rights to receive an amount
in respect of the appreciation in market value of the Company's H shares from
the date of grant of SARs and the date of exercise. No shares will be issued
under the Plan and therefore the Company's equity interests will not be diluted
as a result of the issuance of SARs. The maximum number of unexercised SARs
permitted to be granted under the Plan is, upon their exercise, limited to 2% of
the Company's H shares in issue at any time during each year. The maximum number
of SARs granted to eligible participants under the Plan within any 12-month
period is, upon their exercise, limited to 0.4% of the Company's H shares in
issue at any time during each year. The maximum number of SARs granted to any
eligible participant is limited to 10% of the total number of unexercised SARs
in issue at any time during each year. Any further grant of SARs in excess of
the above limits is subject to shareholders' approval in general meetings.

The exercise period of all SARs commences after a vesting period and ends on a
date which is not later than five years from the date of grant of the SARs. As
of each of the last day of the second, third and fourth anniversary of the date
of grant, the total number of SARs exercisable will not exceed 30%, 70% and
100%, respectively, of the total SARs granted to the respective eligible
participants.

39.     LONG-TERM COMPENSATION PLAN #

The exercise price of SARs will be equal to the average closing price of the
Company's H shares on the Hong Kong Stock Exchange for the five consecutive
trading days immediately preceding the date of the grant.

As of 31 December 2004, no SARs had been issued under the Plan.

40.     DISTRIBUTABLE RESERVES#

As at 31 December 2004, in accordance with the PRC Company Law, an amount of
approximately RMB7,703.5 million standing to the credit of the Company's capital
reserve account, and an amount of approximately RMB51.9 million standing to the
credit of the Company's statutory reserve funds, as determined in accordance
with the PRC GAAP, were available for distribution by way of future
capitalisation issue. In addition, the Company had retained profits of
approximately RMB207.6 million, as determined in accordance with the PRC GAAP
and being the lesser amount of the retained profits determined in accordance
with the PRC GAAP and IFRS, available for distribution as dividend.

41.     CONTINGENT LIABILITIES#

Pursuant to the Restructuring, the following legal matters and litigation set
out in items (a) to (c) below were transferred to or assumed by the Company upon
its incorporation. As of 31 December 2004, the Group had the following
contingent liabilities:

(a)      Pursuant to the agreement for the Restructuring entered into by the
Company with CNAHC and CNACG, except for liabilities constituting or arising out
of or relating to business undertaken by the Company after the Restructuring, no
other liabilities were assumed by the Company and the Company is not liable,
whether severally, or jointly and severally, for debts and obligations incurred
prior to the Restructuring by CNAHC and CNACG. The Company has also undertaken
to indemnify CNAHC and CNACG in respect of any damage suffered or incurred by
CNAHC and CNACG as a result of any breach by the Company of any provision of the
Restructuring Agreement.

(b)      On 15 April 2002, Flight CA129 crashed on approach to Gimhae
International Airport, South Korea. There were 129 fatalities including 121
passengers and 8 crew members aboard the crashed aircraft. An investigation was
conducted by the Chinese and the Korean civil aviation authorities, but the
cause of the accident has yet to be released at the date of these financial
statements. Certain injured passengers and families of the deceased passengers
have commenced proceedings in Korean courts seeking damages against Air China
International Corporation. The Group cannot predict the timing of the courts'
judgements or the possible outcome of the lawsuits nor any possible appeal
actions. Up to 31 December 2004, the Company, Air China International
Corporation and the Company's insurer had paid an aggregate amount of RMB190
million in respect of passenger liability and other auxiliary costs. Included in
the RMB190 million is an amount of RMB173 million borne by the Company's
insurer. As part of the Restructuring, CNAHC has agreed to indemnify the Group
for any liabilities relating to the crash of Flight CA129, excluding the
compensation already paid up to 30 September 2004 (being the date of
incorporation of the Company). The Directors of the Company believe that there
will not be any material adverse impact to the Group's financial position.

41.     CONTINGENT LIABILITIES #

(c)      Air China International Corporation is one of the defendants in a civil
litigation in the High Court of Hong Kong (Action No. 515 of 2001) (the '
Litigation'). United Aero-Supplies System of China Limited ('UASSC') had entered
into an agreement with the defendants for the exclusive purchase of aviation
equipment consigned to UASSC for sale and, that as the defendants failed to
perform the agreement, UASSC has the right to compensation. Since UASSC is in
the course of its winding up proceedings, all the rights and benefits of UASSC
in connection with the claim have been transferred to New Link Consultants
Limited ('NLC'). Air China International Corporation, as one of the defendants
to the Litigation, was claimed by NLC for compensation of HK$60,000,000
(equivalent to approximately RMB63,600,000) for failing to perform the above
agreement. Air China International Corporation has filed an objection in respect
of the jurisdiction of the court, and has requested the court to transfer the
case to Mainland China for trial. Air China International Corporation received
an order in respect of this application on 3 May 2004. The judge granted the
application and ordered that the action against Air China International
Corporation be dismissed. Subsequent to this order, NLC has filed an appeal. The
date of hearing for the appeal has been fixed on 28 July 2005. After considering
the aforesaid order granted by the judge and consulting the legal counsel, the
Directors of the Company consider that Air China International Corporation has a
reasonable chance of success in its defence to the claim. Accordingly, the
Directors of the Company consider that a provision for such claim and/or the
associated legal costs is not required.

(d)      The Group and the Company have issued guarantees to banks in respect of
the bank loans granted to the following parties:
                                                                   Group                                       Company
                                                                 2004                   2003                      2004
                                                              RMB'000                RMB'000                   RMB'000

Joint ventures                                                      -                 18,750                         -
Associates                                                    214,002                380,521                    26,021
Related party                                                       -                  7,500                         -
Third parties                                                       -                149,170                         -

                                                              214,002                555,941                    26,021


41.     CONTINGENT LIABILITIES #

(e)      In addition to the counter-guarantees provided by CNAF in respect of
the Group's finance lease obligations and bank loans of RMB4,737 million (2003:
RMB5,413 million) as disclosed in note 46 to these financial statements, the
Group's associates have issued guarantees to banks in respect of the bank loans
granted to the following parties:
                                                                                      Group
                                                                                    2004                           2003
                                                                                 RMB'000                        RMB'000

Related parties                                                                   37,608                         40,537
Third parties                                                                    160,778                         20,722

                                                                                 198,386                         61,259

42.     COMMITMENTS#

(a)      Capital commitments

The Group had the following amounts of contractual commitments for the
acquisition and construction of plant, property and equipment:
                                                                               Group                           Company
                                                                             2004            2003                 2004
                                                                          RMB'000         RMB'000              RMB'000

Contracted, but not provided for:
Aircraft and flight equipment                                          12,738,066       8,315,908           11,260,840
Buildings                                                                 544,855         348,400              211,607
Others                                                                      8,426          40,082                8,426

                                                                       13,291,347       8,704,390           11,480,873
Authorised, but not contracted for:
Buildings                                                               2,528,544       2,762,531            2,528,544
Others                                                                          -         200,062                    -

                                                                        2,528,544       2,962,593            2,528,544

Total capital commitments                                              15,819,891      11,666,983           14,009,417

42.       COMMITMENTS #

(b)      Investment commitment

As at 31 December 2004, the Company committed to make a capital contribution of
approximately RMB422 million (US$51 million) (2003: Nil) to its joint venture.

(c)      Operating lease commitments

The Group leases certain of its office premises, aircraft and related equipment
under operating lease arrangements. Leases for these assets are negotiated for
terms ranging from 1 to 20 years.

The Group and the Company had the following future minimum lease payments under
non-cancellable operating leases:
                                                                                    Group                       Company
                                                                                  2004          2003               2004
                                                                               RMB'000       RMB'000            RMB'000

Within one year                                                              1,140,228       908,204            748,202
In the second to fifth years, inclusive                                      3,215,879     2,626,283          2,111,282
Over five years                                                              1,000,319     1,317,788            566,585

                                                                             5,356,426     4,852,275          3,426,069

43.     FINANCIAL INSTRUMENTS#

Financial assets of the Group and the Company mainly include cash and cash
equivalents, pledged assets, trade receivables, other investments, deposits and
other receivables. Financial liabilities of the Group and the Company mainly
include bank and other loans, obligations under finance leases, trade payables,
other payables, bills payable and air traffic liabilities.

The carrying amounts of the Group's and the Company's financial instruments
approximated their fair value as at the balance sheet date. Fair value estimates
are made at a specific point in time and based on relevant market information
about the financial instruments. These estimates are subjective in nature and
involve uncertainties and matters of significant judgement and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.

44.     CONCENTRATION OF RISK#

(a)      Financial risk management objectives and policies

The Group operates globally and generates revenues in various currencies. The
Group's airline operations are exposed to business risk, liquidity risk, jet
fuel price risk, foreign currency risk, interest rate risk and credit risk. The
Group's overall risk management approach is to moderate the effects of such
volatility on its financial performance.

Financial risk management policies are periodically reviewed and approved by the
Board of Directors.

(b)      Business risk

The operations of the air transportation industry are substantially influenced
by global political and economic development. Factors such as accidents and wars
may have a material impact on the Group's operations or the industry as a whole.
In addition, the Group primarily conducts its principal operations in the PRC
and accordingly is subject to special consideration and significant risks not
typically associated with companies in the United States of America and Western
Europe. These include risks associated with, among other things, the political,
economic and legal environment, competition and influence of the CAAC in the
Chinese civil aviation industry.

(c)      Liquidity risk

The Group's net current liabilities amounted to approximately RMB6,860 million
as at 31 December 2004 (2003: RMB12,384 million). The Group recorded a net cash
inflow from operating activities of approximately RMB6,151 million for the year
ended 31 December 2004 (2003: RMB5,425 million). For the same period, the Group
had a net cash outflow from investing activities of approximately RMB4,974
million (2003: RMB4,360 million). The Group also recorded a net cash inflow from
financing activities of approximately RMB5,620 million for the year ended 31
December 2004 and a net cash outflow from financing activities of approximately
RMB2,207 million for the year ended 31 December 2003. The Group has recorded an
increase in cash and cash equivalents of approximately RMB6,824 million for the
year ended 31 December 2004 but a decrease in cash and cash equivalents of
approximately RMB1,057 million for the year ended 31 December 2003.

With regards to 2005 and thereafter, the liquidity of the Group is primarily
dependent on its ability to maintain adequate cash inflow from operations to
meet its debt obligations as they fall due, and on its ability to obtain
external financing to meet its committed future capital expenditures. With
regards to its future capital commitments and other financing requirements, the
Company has already obtained several banking facilities with several PRC banks
of up to an amount of RMB71,700 million as at 31 December 2004, of which an
amount of approximately RMB40,183 million was utilised.

44.     CONCENTRATION OF RISK #

(c)      Liquidity risk

The Directors of the Company have carried out a detailed review of the cash flow
forecast of the Group for the year ending 31 December 2005. Based on such
forecast, the Directors have determined that adequate liquidity exists to
finance the working capital and capital expenditure requirements of the Group
during 2005. In preparing the cash flow forecast, the Directors have considered
historical cash requirements of the Group as well as other key factors,
including the availability of the above-mentioned loans financing which may
impact the operations of the Group prior to the end of 2005. The Directors are
of the opinion that the assumptions and sensitivities which are included in the
cash flow forecast are reasonable. However, as with all assumptions in regard to
future events, these are subject to inherent limitations and uncertainties and
some or all of these assumptions may not be realised.

(d)      Jet fuel price risk

The Group's strategy for managing the risk on jet fuel price aims to provide the
Group with protection against sudden and significant increases in prices. In
meeting these objectives, the Group allows for the judicious use of approved
derivative instruments such as swaps and collars with approved counter-parties
and within approved limits.

Moreover, counter-party credit risk is generally restricted to any gains on
changes in fair value from time to time, and not the principal amount of the
instrument. Therefore, the possibility of material loss arising in the event of
non-performance by a counter-party is considered to be unlikely.

The fair values of derivative instruments of the Group and the Company at the
balance sheet date are as follows:
                                                             Group and Company                        Group
                                                             2004                    2004        2003              2003
                                                           Assets             Liabilities      Assets       Liabilities
                                                          RMB'000                 RMB'000     RMB'000           RMB'000

Swaps and collars expiring:
Within 6 months                                                 -                       -       8,000           (2,400)
Over 6 months to 21 months                                      -                       -      26,000           (3,600)

                                                                -                       -      34,000           (6,000)

Fair values of derivative instruments, denominated in United States dollars, are
obtained from quoted market prices, dealer price quotations, discounted cash
flow models and option pricing models, which consider current market and
contractual prices for the underlying instruments, as well as time value of
money, yield curve and volatility of the underlying instruments.

44.     CONCENTRATION OF RISK #

(e)      Foreign currency risk

The Group's finance lease obligations as well as certain bank and other loans
are denominated in United States dollars and Japanese yen, and certain expenses
of the Group are denominated in currencies other than RMB. The Group generates
foreign currency revenues from ticket sales made in overseas offices and would
normally generate sufficient foreign currencies after payment of foreign
currency expenses, to meet its foreign currency liabilities repayable within one
year. RMB against United States dollars and Hong Kong dollars have been
comparatively stable in the past. However, RMB against Japanese yen had
experienced a significant level of fluctuation over 2004 which is the major
reason for the significant exchange difference recognised by the Group for 2004.

(f)       Interest rate risk

The Group's earnings are also affected by changes in interest rates due to the
impact of such changes on interest income and expense from short-term deposits
and other interest-bearing financial assets and liabilities. A significant
portion of the Group's interest-bearing financial liabilities with maturities
above one year have predominately fixed rates of interest and are denominated in
United States dollars and Japanese yen.

The Group's short-term deposits and other interest-bearing financial assets and
liabilities are predominately denominated in RMB, United States dollars and Hong
Kong dollars.

(g)      Credit risk

The Group's cash and cash equivalents are deposited with PRC banks, overseas
banks and an associate. The Group has policies in place to limit the exposure to
any one financial institution.

A significant portion of the Group's air tickets are sold by agents
participating in the Billing and Settlements Plan ('BSP'), a clearing system
between airlines and sales agents organised by the International Air
Transportation Association. The balance due from BSP agents amounted to
approximately RMB531 million as at 31 December 2004 (2003: RMB342 million).

Except for the above, the Group has no significant concentration of credit risk,
with exposure spread over a number of counter-parties.

45.     CONSOLIDATED CASH FLOW STATEMENT#

(a)      Analysis of balances of cash and cash equivalents is as follows:
                                                                                                         Group
                                                                                                       2004        2003
                                                                                                    RMB'000     RMB'000

Cash and cash equivalents for balance sheet (note 26)                                             9,734,074   2,620,221

Less: Non-pledged time deposits with original maturity of more than three months when acquired    (320,850)    (30,826)

Cash and cash equivalents for consolidated cash flow statement                                    9,413,224   2,589,395

(b)      Establishment of a joint venture

The establishment of a joint venture has been shown in the consolidated cash
flow statement as a single item. The cash flow effect can be analysed as
follows:
                                                                                                                   2004
                                                                                                                RMB'000

Cash and bank balances                                                                                          561,509
Trade receivables                                                                                                16,844
Other receivables                                                                                                 2,778
Property, plant and equipment (note 16)                                                                         565,840
Inventories                                                                                                         352
Trade payables                                                                                                 (40,018)
Other payables and accruals                                                                                   (357,517)
Air traffic liabilities                                                                                         (2,010)

Net assets attributable to the joint venture partners                                                           747,778
Dilution gain on investment (note 9)                                                                            330,222

Cash contribution from the joint venture partners                                                             1,078,000
Less: Cash attributable to the joint venture partners                                                         (561,509)

Cash flow on establishment of a joint venture,                                                                  516,491
net of cash attributable to the joint venture partners


45.     CONSOLIDATED CASH FLOW STATEMENT #

(c)      Major non-cash transactions

(i)       During the year, the Group received an aircraft injected by the PRC
government amounting to RMB304,787,000 (note 36). This amount has been recorded
in property, plant and equipment.

(ii)      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.

46.     RELATED PARTY TRANSACTIONS#

The Group is part of a larger group of companies under CNAHC and has extensive
transactions and relationships with members of CNAHC. As such, it is possible
that the terms of these transactions are not the same as those that would result
from transactions among wholly unrelated parties. Related parties refer to
corporations in which CNAHC is a shareholder and is able to exercise control or
significant influence. The transactions were made at prices and terms mutually
agreed between the parties.

In addition to the Restructuring, further details of which are set out in note 1
to these financial statements, and transactions and balances detailed elsewhere
in these financial statements, the Group had the following significant recurring
transactions carried out in the ordinary course of business between the Group
and (i) CNAHC, its subsidiaries (other than the Group), joint ventures and
associates (collectively known as 'CNAHC Group'); (ii) its joint ventures; and
(iii) its associates:
                                                                                                    Group
                                                                                                  2004             2003
                                                                                               RMB'000          RMB'000

A.            Included in air traffic revenues
Sale of air tickets
CNAHC Group                                                                                     17,227           23,477
Associates                                                                                       2,154            1,363

                                                                                                19,381           24,840

Sale of cargo space
CNAHC Group                                                                                    213,836          282,895


46.     RELATED PARTY TRANSACTIONS #
                                                                                                   Group
                                                                                                   2004            2003
                                                                                                RMB'000         RMB'000

B.            Included in other operating revenues
Aircraft and related equipment lease income
CNAHC Group                                                                                       1,912           9,983

Aircraft engineering income
Associates                                                                                        9,876          14,511

Ground services income
Joint ventures                                                                                      942               -
Associates                                                                                       19,849          15,281

                                                                                                 20,791          15,281

Bellyhold income
Joint ventures                                                                                1,384,457               -

Others
CNAHC Group                                                                                       5,734           1,100
Joint ventures                                                                                   14,424             100
Associates                                                                                       11,484             622

                                                                                                 31,642           1,822
C.            Included in finance costs
Interest income
Associates                                                                                        3,409           8,736
Interest expense
Associates                                                                                       21,843          21,268


46.     RELATED PARTY TRANSACTIONS #
                                                                                                       Group
                                                                                                     2004          2003
                                                                                                  RMB'000       RMB'000

D.            Included in operating expenses
Airport ground services, take-off, landing and depot expenses
CNAHC Group                                                                                        97,183        76,802
Associates                                                                                        210,103       165,551

                                                                                                  307,286       242,353

Air catering charges
CNAHC Group                                                                                        43,241        42,401
Joint ventures                                                                                     85,874        58,913
Associates                                                                                          5,123             -

                                                                                                  134,238       101,314

Repair and maintenance costs
Joint ventures                                                                                    472,378       324,470
Associates                                                                                        107,508        45,095

                                                                                                  579,886       369,565

Sale commission expenses
CNAHC Group                                                                                        25,913        16,357

Management fees
CNAHC Group                                                                                        44,080        36,493

Others
CNAHC Group                                                                                        71,729        47,846
Associates                                                                                          9,050             -

                                                                                                   80,779        47,846

46.     RELATED PARTY TRANSACTIONS #
                                                                                            Group               Company
                                                                                         2004        2003          2004
                                                                                      RMB'000     RMB'000       RMB'000

E.             Deposits, loans and bills payable
Deposits placed with an associate                                                     566,985   1,457,103       519,655
Loans from an associate                                                               481,132     297,484       364,400
Bills payable to an associate                                                               -     692,372             -

(a)      In addition to the above, on 18 October 1997, CNAC entered into a
licence agreement with CNAC (PRC) pursuant to which CNAC (PRC) had agreed to
grant a licence to CNAC, free of royalty, for the right to use certain
trademarks in Hong Kong, the Taiwan region and Macau so long as CNAC is a
subsidiary of CNACG. No royalty charge was levied in respect for the use of
these trademarks during each of the two years ended 31 December 2004.

On 25 August 2004, CNAC (PRC) entered into two assignment agreements with CNACG
pursuant to which CNAC (PRC) has agreed to assign, free of royalty, the
above-mentioned trademarks to CNACG for use in Hong Kong and Macau,
respectively. On 25 August 2004, CNACG entered into two licence agreements with
CNAC pursuant to which CNACG has agreed to grant licences to CNAC, free of
royalty, for the rights to use those trademarks in Hong Kong and Macau,
respectively, so long as CNAC is a direct or indirect subsidiary of CNAHC. These
licence agreements supersede the licence agreement entered into between CNAC
(PRC) and CNAC on 18 October 1997.

46.     RELATED PARTY TRANSACTIONS #

(b)      Pursuant to certain of the Company's aircraft leasing arrangements and
bank loan arrangements, the overseas lessors and lenders require guarantees to
be given by some major PRC state-owned banks. In giving such guarantees, the PRC
state-owned banks in turn require CNAHC and CNAF to provide counter-guarantees
in favour of the banks. As at the balance sheet date, the amounts of such
counter-guarantees provided by CNAHC and CNAF were as follows:
                                                                                       Group
                                                                                     2004                         2003
                                                                                  RMB'000                      RMB'000

CNAHC:
Finance leases (note 33)                                                          921,000                    5,355,000
Operating leases                                                                        -                    3,891,000
Bank loans (note 34)                                                            1,455,000                    3,198,000

                                                                                2,376,000                   12,444,000
CNAF:
Finance leases (note 33)                                                        3,976,000                    4,506,000
Bank loans (note 34)                                                              761,000                      907,000

                                                                               4,737,000*                    5,413,000

                                                                                7,113,000                   17,857,000

*        Subsequent to 31 December 2004, these counter-guarantees provided by
CNAF amounting to RMB4,737 million in favour of the banks have been fully
released.

Certain of the Group's bank loans from the PRC banks are guaranteed by Air China
International Corporation and other related parties, further details of which
are set out in note 34 to these financial statements.

(c)      In connection with the Restructuring, the Company entered into several
agreements with CNAHC which govern the use of trademarks granted by the Company
to CNAHC, the provision of financial services by CNAF, the provision of
construction project management services by China National Aviation Construction
and Development Company, the subcontracting of charter-flight services to CNAHC,
the leasing of properties from and to CNAHC, the provision of air ticketing and
cargo services, media and advertising services arrangement to China National
Aviation Media and Advertising Co., Ltd., the tourism services co-operation
agreement with CNAHC, the comprehensive services agreement with CNAHC, and the
provision of maintenance and other ground services by China Aircraft Services
Limited.

46.     RELATED PARTY TRANSACTIONS #

(d)      On 19 August 2004, Fly Top Limited, a wholly-owned subsidiary of CNAC,
entered into the following acquisition agreements:

(i)       a sale and purchase agreement with CNACG in relation to the
acquisition of approximately 16% of the issued share capital of LSGHK, a company
incorporated in Hong Kong with limited liability ('CNACG Agreement'); and

(ii)      a sale and purchase agreement with Hong Kong International Air
Catering Limited ('HKIAC'), a company incorporated in Hong Kong with limited
liability and in which Air China International Corporation has a 25% equity
interest, in relation to the acquisition of approximately 4.2% of the issued
share capital of LSGHK ('HKIAC Agreement').

The total consideration of the above acquisitions is approximately RMB122
million. Immediately after the completion of the CNACG Agreement and HKIAC
Agreement, the Group's effective shareholding interests in LSGHK is
approximately 14%.

(e)      All pension payments relating to the Supplementary Pension Benefits of
approximately RMB39 million for the year ended 31 December 2004 (2003: RMB54
million) were borne by CNAHC (note 11).

The Directors of the Company are of the opinion that the above transactions with
related parties were conducted in the usual course of business.

47.     EVENTS AFTER THE BALANCE SHEET DATE #

(a)      On 11 January 2005, upon the exercise of the over-allotment option, the
Company issued to the public by way of placement of 420,852,000 H Shares,
consisting of 382,592,727 new shares and 29,749,686 State legal person shares
and 8,509,587 non-H Foreign Shares, with a par value of RMB1.00 each at HK2.98
(equivalent to approximately RMB3.17072) per share. After deducting net proceeds
of approximately RMB117 million received from the sale of these State legal
person shares and non-H Foreign Shares, the amount of which should be remitted
to the Social Security Fund, and share issue expenses of approximately RMB47
million (before deducting share issue expenses of approximately RMB4 million
borne by the Social Security Fund as mentioned above), the Company raised net
proceeds of approximately RMB1,170 million, of which paid-up share capital
amounted to approximately RMB383 million and capital reserve amounted to
approximately RMB787 million. The above H shares rank pari passu, in all
material respects, with the State legal person shares and non-H Foreign Shares
of the Company.

47.     EVENTS AFTER THE BALANCE SHEET DATE #

(b)      On 26 January 2005, the Company and AIE entered into an agreement with
Airbus S.A.S. ('Airbus'), pursuant to which the Company has agreed to purchase
20 A330-200 aircraft (the 'Airbus Aircraft') from Airbus for an aggregate
consideration of approximately US$2.86 billion (equivalent to approximately
RMB23.68 billion). The aggregate consideration for the acquisition of Airbus
Aircraft is payable in cash by instalments. The Airbus Aircraft are scheduled to
be delivered in stages to the Company from mid-2006 to end of 2008. Pursuant to
the relevant Chinese regulations, the acquisition of Airbus Aircraft is
conditional upon the PRC government's approval. As of the date of approval of
these financial statements, the said government approval has not been obtained
by the Company.

(c)      On 28 January 2005, the Company, other contracting Chinese airlines,
China Aviation Supplies Import and Export Group Corporation ('CASGC') and Boeing
Company entered into an agreement (the 'Framework Agreement'), pursuant to which
CASGC agreed to purchase (as an agent of the Company and other contracting
Chinese airlines) 60 Boeing 7E7 aircraft. The aggregate catalog price of the
aircraft is approximately US$7.3 billion (equivalent to approximately RMB60.42
billion). Pursuant to the Framework Agreement, the Company expects to enter into
a specific purchase agreement with CASGC and Boeing Company in respect of the
purchase of 15 Boeing 7E7 aircraft (the 'Boeing Aircraft'). The aggregate
consideration for the acquisition of the Boeing Aircraft is expected to be lower
than the catalog price. The delivery of the Boeing Aircraft is expected to take
place in stages from mid-2008. The specific purchase agreement has not been
finalised as at the date of approval of these financial statements.

48.     APPROVAL OF THE FINANCIAL STATEMENTS#

The financial statements were approved and authorised for issue by the Board of
Directors on 12 April 2005.

Capacity Measurements#
'available seat kilometres' or '              the number of seats available for sale multiplied by the kilometres flown
ASKs'
'available freight                        the number of tonnes of capacity available for the carriage of cargo and mail
tonne-kilometres' or 'AFTKs'                                                         multiplied by the kilometres flown
'available tonne kilometres' or '     the number of tonnes of capacity available for the transportation of revenue load
ATKs'                                                         (passengers and cargo) multiplied by the kilometres flown
'tonne'                                                                      a metric ton, equivalent to 2,204.6 pounds

Traffic Measurements#
'revenue passenger kilometres' or 'RPKs'    the number of revenue passengers carried multiplied by the kilometres flown
'passenger traffic'                                                        measured in RPKs, unless otherwise specified
'revenue freight tonne-kilometres' or '    the revenue cargo and mail load in tonnes multiplied by the kilometres flown
RFTKs'
'cargo traffic'                                                           measured in RFTKs, unless otherwise specified
'revenue tonne kilometres' or 'RTKs'                 the revenue load (passenger and cargo) in tonnes multiplied by the
                                                                                                       kilometres flown

Yield Measurements#
'passenger yield'                                                    revenues from passenger operations divided by RPKs
'cargo yield'                                                           revenues from cargo operations divided by RFTKs

Load Factors#
'cargo load factor'                                                            RFTKs expressed as a percentage of AFTKs
'passenger load factor'                                                          RPKs expressed as a percentage of ASKs
'overall load factor'                                                            RTKs expressed as a percentage of ATKs

Utilisation
'block       each whole or partial hour elapsing from the moment the chocks are removed from the wheels of the aircraft
hours'                               for flights until the chocks are next again returned to the wheels of the aircraft






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