Interim Results
Air China Ld
06 September 2005
Air China Limited
(a joint stock limited company incorporated in the People's Republic of China
with limited liability)
(Stock Code: 753)
ANNOUNCEMENT OF INTERIM RESULTS
FOR THE SIX MONTHS ENDED 30 JUNE 2005
The board of directors (the 'Board') of Air China Limited (the 'Company')
announced the unaudited interim results of the Company, its subsidiaries and
joint ventures (collectively, the 'Group') for the six months ended 30 June
2005, with comparative figures for the corresponding period of last year, as
follows:
FINANCIAL INFORMATION
Condensed consolidated income statement
For the six months ended 30 June 2005
Six months ended 30 June
2005 2004
RMB'000 RMB'000
Notes (Unaudited) (Audited)
(Restated)
Air traffic revenues 3 15,602,712 13,536,832
Other operating revenues 4 1,335,820 1,236,527
Turnover 16,938,532 14,773,359
Operating expenses
Jet fuel (5,061,760) (3,612,602)
Take-off, landing and depot charges (2,172,296) (2,042,489)
Depreciation (2,456,709) (1,676,308)
Aircraft maintenance, repair and overhaul (548,508) (1,239,339)
Employee compensation costs (1,413,632) (1,263,777)
Air catering charges (610,343) (532,535)
Aircraft and jet engines operating lease expenses (637,757) (490,511)
Other operating lease expenses (118,011) (87,248)
Other flight operation expenses (1,572,899) (1,130,826)
Selling and marketing expenses (692,452) (658,412)
General and administrative expenses (256,820) (248,570)
Total operating expenses (15,541,187) (12,982,617)
Profit from operations 8 1,397,345 1,790,742
Finance costs 5 (635,925) (788,561)
Share of profits less losses from associates 151,301 191,056
Profit before tax 912,721 1,193,237
Tax 6 (270,329) (358,802)
Profit for the period 642,392 834,435
Attributable to:
Equity holders of the parent 591,253 788,352
Minority interests 51,139 46,083
642,392 834,435
Earnings per share - Basic 7 6.3 cents 12.1 cents
- Diluted 7 - -
Condensed consolidated balance sheet
As at 30 June 2005
30 June 31 December
2005 2004
RMB'000 RMB'000
(Unaudited) (Audited)
NON-CURRENT ASSETS
Property, plant and equipment 43,249,405 43,441,637
Lease prepayments 918,719 933,898
Interests in associates 3,883,988 4,001,521
Advance payments for aircraft and related 2,113,727 632,154
equipment
Due from CNAHC 581,813 631,813
Deposits for aircraft under operating leases 154,387 137,583
Other investments 21,666 21,666
Deferred tax assets 560,563 776,084
51,484,268 50,576,356
CURRENT ASSETS
Financial assets 71,055 -
Trade receivables 2,631,351 2,364,816
Inventories 820,881 743,288
Prepayments, deposits and other receivables 4,374,174 3,108,588
Due from other CNAHC group companies 28,839 44,916
Pledged deposits 164,323 117,231
Cash and cash equivalents 7,220,306 9,734,074
15,310,929 16,112,913
TOTAL ASSETS 66,795,197 66,689,269
CURRENT LIABILITIES
Trade payables 5,059,258 4,443,608
Bills payable 818,344 362,033
Other payables and accruals 4,551,359 3,920,287
Provision for major overhauls 23,767 28,130
Air traffic liabilities 1,372,271 1,215,770
Tax payable 65,581 186,055
Obligations under finance leases 2,047,703 1,705,146
Bank and other loans 9,219,576 8,806,051
Due to shareholders 967,835 2,256,117
Due to other CNAHC group companies 29,561 49,617
24,155,255 22,972,814
NET CURRENT LIABILITIES 8,844,326 6,859,901
TOTAL ASSETS LESS CURRENT LIABILITIES 42,639,942 43,716,455
NON-CURRENT LIABILITIES
Obligations under finance leases 9,179,897 10,576,241
Bank and other loans 11,441,276 12,896,622
Long-term payables 376,078 446,311
Deferred income 1,064,381 1,102,853
Provision for major overhauls 600,244 470,698
Provision for early retirement benefits 192,297 195,188
obligations
22,854,173 25,687,913
NET ASSETS 19,785,769 18,028,542
Represented by:
EQUITY ATTRIBUTABLE TO EQUITY
HOLDERS OF THE PARENT
Issued share capital 9,433,211 9,050,618
Reserves 8,876,393 7,497,637
18,309,604 16,548,255
MINORITY INTERESTS 1,476,165 1,480,287
TOTAL EQUITY 19,785,769 18,028,542
Notes:
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Air China Limited (the 'Company') was incorporated on 30 September 2004 in
Beijing, the People's Republic of China (the 'PRC'), as a joint stock
limited company as part of the restructuring (the 'Restructuring') of China
National Aviation Holding Company ('CNAHC'), a PRC state-owned enterprise
under the supervision of the State Council, in preparation for the listing of
the Company's H shares on The Stock Exchange of Hong Kong Limited (the 'Hong
Kong Stock Exchange') and the London Stock Exchange as described below.
As disclosed in the Company's prospectus dated 3 December 2004, pursuant to
the Restructuring, CNAHC and through its wholly-owned subsidiaries, effected the
transfer of the following to the Company upon its incorporation:
(i) the assets, liabilities and undertakings which principally relate to the
business of the provision of airline operations (the 'Relevant
Businesses'); and
(ii) the shareholding interests in certain subsidiaries, joint ventures and
associates which principally carry on the business of the provision of
airline operations, aircraft engineering services, air catering services,
airport ground handling services and other airline-related businesses (the
'Relevant Companies').
As CNAHC controlled the Relevant Businesses and Relevant Companies before the
Restructuring and continues to control the Company after the Restructuring, the
consolidated financial statements of the Group prior to the incorporation of the
Company on 30 September 2004 had been prepared as a reorganisation of companies
under common control in a manner similar to a pooling-of-interests.
The consolidated results for the six months ended 30 June 2004 include the Group
's results of operations as if the Relevant Businesses and interests in the
Relevant Companies had been transferred to the Group at 1 January 2001, which is
the earliest date for the preparation of the financial information in relation
to the listing of the Company's H shares. The Company's directors are of
the opinion that the condensed consolidated income statement prepared on this
basis presents fairly the consolidated results of the Group as a whole.
The unaudited condensed consolidated income statement and balance sheet of the
Group have been prepared in accordance with International Financial Reporting
Standards ('IFRSs') which comprise standards and interpretations approved by
the International Accounting Standards Board, and International Accounting
Standards ('IASs') and Standing Interpretations Committee interpretations
approved by the International Accounting Standards Committee that remain in
effect. In particular, the unaudited condensed consolidated income statement and
balance sheet of the Group comply with IAS 34 Interim Financial Reporting and
the disclosure requirements of the Rules Governing the Listing of Securities on
the Hong Kong Stock Exchange.
The unaudited condensed consolidated income statement and balance sheet of the
Group have been prepared on a historical cost basis, except for the measurement
at fair value of financial instruments in accordance with IAS 39 (amended 2004)
Financial Instruments: Recognition and Measurement.
The principal accounting policies used in the preparation of the unaudited
condensed consolidated income statement and balance sheet of the Group are
consistent with those used in the annual audited financial statements of the
Group for the year ended 31 December 2004, except for the following standards
which have taken effect as at 1 January 2005:
(a) IFRS 2 Share-based Payment 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 Group. 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 apply
to grants of shares, share options or other equity instruments that were
granted after 7 November 2002 and had not yet vested on or after 1 January
2005. The adoption of IFRS 2 did not give rise to any adjustment to the
opening balances of retained profits of the current and prior periods or to
any change in comparatives.
(b) IAS 16 (amended 2004) Property, Plant and Equipment replaces IAS 16
(revised 1998) Property, Plant and Equipment. There are a number of
differences between the amended standard and the previous version. Firstly,
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. Secondly, 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 of the standard included within
its scope only the costs incurred as a consequence of installing the item.
Thirdly, 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. In addition, 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
at the asset's actual retirement date. Furthermore, the amended standard
requires major inspection and overhaul costs to be recognised in the
carrying amount of an item of property, plant and equipment when performed.
The adoption of the revised treatment of IAS 16 (amended 2004) has been
accounted for prospectively, which resulted in the following:
(i) In prior years, the aircraft were depreciated over their estimated
useful lives of 20 years. With effect from 1 January 2005, the
estimated useful lives of certain components within the aircraft which
are subject to replacement during major overhauls have been reduced to
the life of the overhaul cycle. The change in accounting estimate has
increased the Group's depreciation charge for the six months ended 30
June 2005 by approximately RMB595 million. As a result, the profit
after tax of the Group for the six months ended 30 June 2005 has
decreased by approximately RMB399 million.
(ii) Major overhaul costs incurred for the six months ended 30 June 2005 of
approximately RMB1,243 million have been capitalised and depreciated
over the life of the overhaul cycle. Prior to 1 January 2005, such
costs have been charged to the income statement on an incurred basis.
In this respect, the costs of aircraft maintenance, repair and
overhaul of the Group charged to the income statement for the six
months ended 30 June 2005 decreased by RMB1,243 million. In addition,
the Group has derecognised and charged to the income statement for the
six months ended 30 June 2005 the carrying amount of certain
components of approximately RMB222 million which have been replaced
during the major overhaul. As a result, the profit after tax of the
Group for the six months ended 30 June 2005 has increased by
approximately RMB684 million.
(c) IAS 24 (revised 2003) Related Party Disclosures replaces IAS 24 Related
Party Disclosures (reformatted in 1994). The main objective of such
revision was to provide additional guidance and clarity in the scope of IAS
24 for the definition 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.
2. SEGMENT INFORMATION
Business segments
An analysis of the Group's revenue and operating results by business segments
for the six months ended 30 June 2005 is as follows:
Airport
Airline Engineering terminal
operations services services Others Eliminations Total
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES
Sales to 16,569,472 131,518 131,484 106,058 - 16,938,532
external
customers
Intersegment - 407,386 - 86,140 (493,526) -
sales
Total 16,569,472 538,904 131,484 192,198 (493,526) 16,938,532
revenues
PROFIT FROM
OPERATIONS
Segment 1,213,647 96,697 61,945 25,056 - 1,397,345
results
An analysis of the Group's revenue and operating results by business segments
for the six months ended 30 June 2004 is as follows:
Airport
Airline Engineering terminal
operations services services Others Eliminations Total
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(Audited) (Audited) (Audited) (Audited) (Audited) (Audited)
(Restated) (Restated) (Restated) (Restated) (Restated) (Restated)
REVENUES
Sales to 14,410,881 128,798 109,381 124,299 - 14,773,359
external
customers
Intersegment - 314,367 - 70,319 (384,686) -
sales
Total 14,410,881 443,165 109,381 194,618 (384,686) 14,773,359
revenues
PROFIT FROM
OPERATIONS
Segment 1,670,086 41,585 53,444 25,627 - 1,790,742
results
Geographical segments
The following tables present consolidated revenue information by geographical
segments for the periods ended 30 June 2005 and 30 June 2004:
Asia
For the North Japan/ Pacific,
period ended Domestic HK/Macau Europe America Korea others Total
30 June RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
2005 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES
Sales to
external
customers
and total
revenues 8,521,194 1,165,547 2,321,126 1,326,233 2,047,609 1,556,823 16,938,532
Asia
North Japan/ Pacific,
For the Domestic HK/Macau Europe America Korea others Total
period ended RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
30 June (Audited) (Audited) (Audited) (Audited) (Audited) (Audited) (Audited)
2004 (Restated) (Restated) (Restated) (Restated) (Restated) (Restated) (Restated)
REVENUES
Sales to
external
customers
and total
revenues 7,820,767 843,209 1,834,105 1,214,476 1,576,652 1,484,150 14,773,359
3. AIR TRAFFIC REVENUES
Air traffic revenues comprise revenues from the airline operations business and
are stated net of business tax. An analysis of air traffic revenues is as
follows:
Six months ended 30 June
2005 2004
RMB'000 RMB'000
(Unaudited) (Audited)
(Restated)
Passenger 13,927,279 12,151,881
Cargo and mail 1,675,433 1,384,951
15,602,712 13,536,832
Pursuant to various PRC business tax rules and regulations, the Group is
required to pay business tax to the local tax bureau at the following rates:
Type of revenue Applicable business tax rate
Air traffic revenues 3% of air traffic revenues. All inbound international
and Hong Kong and Macau regional flights are exempted
from business tax.
Other revenues 3% of ground services income, and 3% to 5% of other
revenues.
PRC business tax incurred for the six months ended 30 June 2004 and 2005, netted
against air traffic revenues, amounted to approximately RMB350 million (audited
and restated) and RMB372 million (unaudited), respectively.
4. OTHER OPERATING REVENUES
Six months ended 30 June
2005 2004
RMB'000 RMB'000
(Unaudited) (Audited)
(Restated)
Bellyhold income 711,910 670,145
Aircraft engineering income 131,518 128,798
Ground services income 131,484 109,381
General aviation income 94,522 87,225
Air catering income 65,539 64,945
Government grants:
(i) Recognition of deferred income 38,472 28,947
(ii) Fixed cash subsidy - 25,000
(iii) Others 9,676 771
Service charges on return of unused flight tickets 34,502 29,835
Cargo handling service income 33,005 20,319
Sale of materials 5,839 2,300
Import and export service income 5,974 13,099
Training service income 9,832 9,937
Aircraft and related equipment lease income 14,834 4,670
Gain on disposal of property, plant and equipment 170 -
Others 48,543 41,155
1,335,820 1,236,527
5. FINANCE COSTS
Six months ended 30 June
2005 2004
RMB'000 RMB'000
(Unaudited) (Audited)
(Restated)
Interest expense 903,392 917,080
Less: Interest capitalised - (2,610)
903,392 914,470
Less: Interest income (37,006) (6,032)
Exchange gains, net (175,459) (43,107)
Gain on fuel derivatives, net (55,002) (76,641)
Dividend income on long-term investment - (129)
635,925 788,561
The interest capitalisation rate represented the cost of capital from raising
the related borrowings and ranged from 5.58% to 5.76% per annum.
6. 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 rates ranging from 15% to 33% (2004: 15% to 33%) on
their taxable income.
Hong Kong profits tax has been provided at the rate of 17.5% (2004: 17.5%) on
the estimated assessable profits arising in Hong Kong during the period.
The determination of current and deferred income tax was based on enacted tax
rates. Major components of income tax charge are as follows:
Six months ended 30 June
2005 2004
RMB'000 RMB'000
(Unaudited) (Audited)
(Restated)
Current income tax:
Mainland China 50,204 11,034
Hong Kong 4,604 1,118
Deferred income tax:
Relating to origination and reversal of 215,521 346,650
temporary differences
Total income tax charge for the period 270,329 358,802
Share of tax attributable to associates amounting to RMB20,746,000 (2004:
RMB32,636,000) is included in 'Share of profits less losses from associates'
on the face of the unaudited condensed consolidated income statement.
7. EARNINGS PER SHARE
The calculation of basic earnings per share for the six months ended 30 June
2005 is based on the net profit attributable to equity holders of the parent for
the six months ended 30 June 2005 of approximately RMB591,253,000, and the
weighted average of approximately 9,412,073,189 shares in issue during the
period as adjusted to reflect the new issue of 382,592,727 H shares on the
exercise of the over-allotment options.
The calculation of basic earnings per share for the six months ended 30 June
2004 is based on the net profit attributable to equity holders of the parent for
the six months ended 30 June 2004 of approximately RMB788,352,000, and the
number of shares in issue during the period on the assumption that the
6,500,000,000 shares issued as at 30 September 2004, the date of incorporation
of the Company, had been in issue throughout the period.
Diluted earnings per share for the six months ended 30 June 2005 and 30 June
2004 has not been calculated because no diluting events existed during these
periods.
8. PROFIT FROM OPERATIONS
The Group's profit from operations is arrived at after charging:
Six months ended 30 June
2005 2004
RMB'000 RMB'000
(Unaudited) (Audited)
(Restated)
Loss on disposal of property, plant and 222,000 15,948
equipment
Amortisation of lease prepayments 9,780 111
9. COMPARATIVE FIGURES
In 2004, the Company has reclassified its interest in Air China Cargo Co., Ltd.
('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. Accordingly, certain comparative amounts for the
six months ended 30 June 2004 have been reclassified to conform with the
presentation of the annual audited financial statements of the Group for the
year ended 31 December 2004 and the current period's presentation.
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITIONS
Overview
During the first half of 2005, the Company maintained its leading position in
the aviation market in China while sustaining a strong and steady growth. For
the six months ended 30 June 2005, the Company operated a total of 100,489
flights (including all flights operated by Air China Cargo, a 51%-owned joint
venture of the Company), serving 72 domestic and 36 international and regional
destinations. We offered an average of 3,811 scheduled passenger flights and 34
scheduled cargo flights weekly. The fleet of the Company continued to expand. In
the first half of the year, a total of 9 aircraft were introduced into the
fleet. As at 30 June 2005, we (including Air China Cargo) operated a fleet of
160 aircraft, including 127 Boeing aircraft, 28 Airbus aircraft, 3 CRJ-200
Bombardiers and 2 business jets.
For the first half of 2005, the Chinese economy and the aviation market
continued to grow, thereby maintained the growth in the demand for airline
services. However, the sharp increase in jet fuel costs and seasonal
fluctuations of air travel exerted relatively substantial pressure on operations
in the aviation industry. The rising jet fuel price increased the operating
costs of the Group. Without compromising flight safety, the Group has adopted
various measures to improve cost controls and efficiency.
For the six months ended 30 June 2005, the Group's profit from operations was
RMB1,397 million, a decrease of 22.0% compared to the corresponding period in
2004. Net profit attributable to equity holders of the parent amounted to RMB591
million, representing a decrease of 25.0% compared to the corresponding period
in 2004. The decreases in profit from operations and net profit attributable to
equity holders of the parent were mainly due to the rising jet fuel price.
The consolidated income statement includes the operating results of all
associates of the Group. For the six months ended 30 June 2005, share of profits
less losses from associates was RMB151 million, representing a decrease of 20.8%
from the corresponding period last year, primarily due to the decrease in
profits from two associates, namely Dragon Airlines Limited and Shenzhen
Airlines.
For the six months ended 30 June 2005, the Group's interim earnings per share
was RMB0.06, a decrease of 47.9% compared to the corresponding period in 2004.
This was mainly due to a 25.0% decrease in the net profit attributable to equity
holders of the parent compared to the same period in 2004 and the initial public
offer of 2,550,618,182 shares upon the Company's listing in late 2004 and the
issue of 382,592,727 additional shares in the beginning of 2005, which increased
the weighted average number of shares compared to the corresponding period last
year.
As at 30 June 2005, the Company had 18,289 employees and its subsidiaries and
joint ventures had 10,026 employees. For the six months ended 30 June 2005, the
Company has put in place a comprehensive training programme. Under the
programme, expert technicians received special operational trainings, while
management of various departments at the deputy general manager level or above
also received training in rotation. In addition, relevant training programmes
were also arranged for other staff.
Operating Revenues
For the six months ended 30 June 2005, the Group's operating revenue was
RMB16.939 billion, representing an increase of 14.7% compared to the
corresponding period last year. Most of our operating revenues were generated
from air traffic businesses. In the first half of 2005, air traffic revenues
accounted for 92.1% of operating revenues. Among this, revenues from passenger
services and from cargo and mail services accounted for 82.2% and 9.9% of
operating revenues respectively.
During the first six months of 2005, revenues from passenger services were
RMB13.927 billion, representing an increase of 14.6% compared to the
corresponding period last year. The capacity of passenger traffic in available
seat kilometres ('ASKs') was 33.245 billion kilometres, representing an
increase of 7.9% compared to the corresponding period last year. Passenger load
factor was 71.9%, representing an increase of 3.3 percentage points compared to
the corresponding period last year. Revenues from passenger services of the
Group were subject to the seasonality of the aviation industry in the PRC. The
peak season of the aviation industry falls between July and October each year
with the highest demand for passenger services during that period. As such, the
Group's revenue from passenger services in the first half of the year is
generally lower than that in the second half.
During the first six months of 2005, revenues from cargo and mail services were
RMB1.675 billion, representing an increase of 21.0% compared to the
corresponding period last year. Cargo transport capacity in available freight
tonne-kilometres ('AFTKs') was 2.391 billion tonnes kilometres (including
entire cargo transport capacity in AFTKs of Air China Cargo), representing an
increase of 3.2% compared to the corresponding period last year. The cargo and
mail load factor was 53.5%, representing an increase of 0.6 percentage point
compared to the corresponding period last year. During the first six months of
2005, the daily utilization of aircraft was 10.2 hours, representing an increase
of 0.1 hour compared to the corresponding period last year. The load factor was
63.5%, representing an increase of 2.3 percentage points from the corresponding
period last year.
Operating Expenses
The operating expenses of the Group primarily comprise jet fuel costs, take-off,
landing and depot charges, depreciation, aircraft maintenance, repair and
overhaul expenses, employee compensation costs and air catering charges. For the
six months ended 30 June 2005, the Group recorded an increase in operating
expenses of RMB2.559 billion compared to the same period in 2004, primarily as a
result of the rising jet fuel costs and depreciation charge. The rise in jet
fuel costs was attributable to the increased fuel consumption and the
substantial increase in jet fuel prices. Among the operating expenses, jet fuel
costs accounted for RMB5.062 billion, representing an increase of RMB1.449
billion from the corresponding period last year. Jet fuel costs as a percentage
of operating expenses increased from 27.8% for the corresponding period last
year to 32.6% for the six months ended 30 June 2005. The Group endeavoured to
take measures to conserve fuel and enhance efficiency. Through reducing fuel
consumption and jet fuel hedging, the Group has successfully achieved a cost
savings of RMB93.53 million. In addition, the collection of fuel surcharge also
helped to relieve the pressure of rising jet fuel costs.
Depreciation charges increased due to the adoption of the revised treatment of
IAS 16 Property, Plant and Equipment and fleet expansion. The decrease in
aircraft maintenance, repair and overhaul expenses primarily arose from the
adoption of the revised treatment of IAS 16. Details on the accounting policies
and revised treatment of IAS 16 are set out in note 1 to the the section headed
'Financial Information' in this announcement.
Liquidity and Capital Resources
The Group finances its working capital needs through cash inflows from operating
activities and bank loans. Like many other airlines in the PRC, the Group has
been operating with a net current liabilities position. As at 31 December 2004
and 30 June 2005, net current liabilities of the Group were RMB6.860 billion and
RMB8.844 billion respectively. The increase in net current liabilities was
primarily due to a decrease in current assets, particularly a RMB2.514 billion
decrease in cash and cash equivalents, coupled with an increase in current
liabilities.
As at 31 December 2004 and 30 June 2005, the short term loans of the Group were
RMB8.806 billion and RMB9.220 billion respectively, while the long-term loans
were RMB12.897 billion and RMB11.441 billion respectively. As of 31 December
2004 and 30 June 2005, our short-term obligations under finance leases were
RMB1.705 billion and RMB2.048 billion, respectively, while our long-term
obligations under finance leases were RMB10.576 billion and RMB9.180 billion,
respectively. The Company has sufficient liquidity and expects to meet its
liabilities by internal resources, bank loans and other resources as they fall
due.
Gearing Ratio
As at 30 June 2005, the Group's gearing ratio, which represents total
liabilities divided by total assets, was 70.4%, dropped by 2.6 percentage
points, from 73.0% as at 31 December 2004.
Asset Mortgage
As at 30 June 2005, the Group mortgaged certain aircraft with an aggregate
carrying amount of approximately RMB27.081 billion (compared to RMB28.585
billion as at 31 December 2004) pursuant to certain loan and lease agreements.
As at 30 June 2005, certain of the Group's bank deposits in the amount of
approximately RMB165 million (compared to RMB117 million as at 31 December 2004)
were pledged against the Group's bank and other loans, and obligations in
respect of certain operating leases and financial derivatives.
Hedging Instruments
Pursuant to approval by the board of directors, the Company engaged in jet fuel
forward contracts to hedge its fuel exposure. The hedging position in oil and
oil-derivative products held by the Company in 2005 was restricted to a maximum
of 30% of its jet fuel consumption. As of 30 June 2005, the total jet fuel
hedging position of the Company was equivalent to 4.5% of its jet fuel
consumption in the first half of the year.
Capital Expenditure
During the six months ended 30 June 2005, the capital expenditure of the Company
amounted to RMB3.792 billion. The Company's total investment in aircraft was
RMB3.362 billion, including a prepayment of RMB2.682 billion for purchasing
aircraft from 2006 onwards.
Other investments in capital expenditure items were RMB430 million, which mainly
involve the improvement of first class and business class cabins of certain
aircraft, ancillary projects in No. 3 Terminal of Beijing International Airport,
as well as certain long-term investment projects.
Capital Commitments and Contingent Liabilities
As at 30 June 2005, the Group had capital commitments of approximately RMB23.149
billion, primarily for the purchase of certain aircraft and relevant flight
equipment to be delivered in the coming years, and for the construction of
certain properties.
As at 30 June 2005, the Group committed to make a capital contribution of
approximately RMB372 million (US$45 million) to a joint venture.
As at 30 June 2005, the Company is one of the defendants in a lawsuit pending in
the San Francisco Superior Court filed by Environmental World Watch Inc.
('EWW'). The complaint alleges that the Company and certain other commercial
airlines operating in California have violated the California Safe Drinking
Water and Toxic Enforcement Act (Health and Safety Code Section 25249.5). EWW
alleges that the Company and these other airlines caused environmental exposure
and occupational exposure from aircraft emissions without providing warnings
required by the statue. Up to the date of this announcement, the Company has not
been served with the complaint by EWW and, therefore, has not been required to
appear in the court to defend against the allegation. The status of the
proceedings is still preliminary and, therefore, the directors are of the view
that it is not possible to estimate the eventual outcome of the claim with
reasonable certainty at this stage. The directors are of the opinion that, based
on advice from the Company's lawyers in the United States, even if the
Company is served with the complaint and is therefore required to appear in the
court, it would appear to have valid defense against this litigation and,
accordingly, the directors consider that no provision for this complaint is
needed.
Save as disclosed above, there have been no material adverse changes in the
contingent liabilities of the Group since 31 December 2004.
Outlook for 2005
The Company has set its mission whereby it will strive to become one of the most
recognised mainstream airlines in the PRC, as well as being the leading airlines
company in terms of value, profitability and international competitiveness.
Despite the surge of jet fuel prices, the aviation industry in China maintains
its rapid growth and the Company expects to sustain its profitability. The
Company will continue to invest in its operations in order to leverage on
economies of scale to enhance its profits, focus on its strategy of
differentiating from its competitors and to maximise return for its shareholders
and the value of the Company.
Disclosure required by the Hong Kong Stock Exchange Listing Rules
In compliance with paragraph 46 of Appendix 16 to the Rules Governing the
Listing of Securities on The Stock Exchange of Hong Kong Limited (the 'Listing
Rules'), the Company confirms that, save as disclosed herein, there
has been no material change in the existing information regarding the Company in
relation to those matters set out in paragraph 46(3) of Appendix 16 to the Hong
Kong Stock Exchange Listing Rules from the information in relation to the
matters disclosed in the 2004 Annual Report of the Company.
INTERIM DIVIDEND
No interim dividend will be paid for the six months ended 30 June 2005. The
undistributed profit will be accumulated for a one-off payment by year end. It
is currently expected that the distribution ratio will range from 15% to 30% of
the distributable profit.
REPURCAHSE, SALE OR REDEMPTION OF THE COMPANY'S SECURITIES
Neither the Company nor any of its subsidiaries had purchased, sold or redeemed
any of the listed securities of the Company in the first half of 2005.
CORPORATE GOVERNANCE
So far as the Board is aware, the Company has complied with the code provisions
set out in the Code on Corporate Governance Practices (the 'Code') contained
in Appendix 14 to the Rules Governing the Listing of Securities on the Stock
Exchange of Hong Kong Limited throughout the first half of 2005, except for the
following deviations:
Deviation and considered reasons or
Relevant code provision subsequent compliance
1 Code provision A.5.4 requires, among A code of conduct regarding
others, directors,
the board should establish written supervisors, and relevant employees'
guidelines securities
on no less exacting terms than the transactions on terms no less
Model exacting than
Code for Securities Transactions by the required standard set out in the
Directors Model
of Listed Issuers (the 'Model Code') Code was adopted by the Company on
Companies for relevant employees in 5 September 2005.
respect of their dealings in the
securities of the issuer.
2 Code provision E.1.2 requires, among Our Chairman, Mr. Li Jiaxiang, who
others, the chairman of the board is a member of the Chinese government
should attend the annual general delegation, was required to attend the
meeting. annual meeting of the International
Air Transport Association and was
therefore unable to attend the annual
general meeting of the Company on 30
May 2005.
3 Code provisions B.1.3 and C.3.3. Written terms of reference of the
require for, remuneration
among others, specific written terms committee and audit committee, as
of required
reference of the remuneration by the relevant Code provisions,
committee and were
audit committee, respectively. adopted by the Company on 12 April
2005.
MATERIAL EVENTS
On 7 January 2005, the International Underwriters exercised in full the
over-allotment options referred to in the Company's prospectus dated 3
December 2004, involving the over-allocation of shares (equivalent to
approximately 15% of the H shares of the Company (the 'H Shares') initially
offered under the global offering of the H Shares) solely for satisfying the
over-allocation in the international offering. The Company issued and allotted,
and CNAHC and China National Aviation Corporation (Group) Limited ('CNACG')
offered, 382,592,727, 29,749,686 and 8,509,587 over-allotment shares
respectively, in each case at HK$2.98 per H Share (being the offer price per H
Share under the international offering, exclusive of brokerage, SFC transaction
levy, investor compensation levy and Stock Exchange trading fee). The net
proceeds of approximately HK$1.1 billion (net of various costs, which mainly
comprise underwriting commission, Stock Exchange trading fee, SFC transaction
levy and investor compensation levy) from the issue of 382,592,727
over-allotment shares will be used by the Company for the acquisition of various
aircraft and repayment of liabilities due within one year.
On 26 January 2005, the Company and Air China Group Import and Export Trading
Company Co. entered into a A330-200 aircraft purchase agreement with Airbus
S.A.S., pursuant to which the Company agreed to purchase 20 A330-200 aircraft
from Airbus S.A.S., mainly for serving routes to international destinations in
Europe, Australia and North America as well as certain major domestic routes to
destinations, such as Lhasa.
On 25 May 2005, the Company obtained confirmation from the People's Bank of
China regarding a proposed issue of short-term commercial papers. The Company
issued short-term commercial papers totalling RMB2 billion, which were listed
and traded on the inter-bank debenture markets. The proceeds from the issue of
short-term commercial papers will be applied as working capital.
On 30 May 2005, at the Annual General Meeting for the year ended 31 December
2004, Mr. David Muir Turnbull was elected a director of the Company.
POST BALANCE SHEET EVENTS
-Subsequent to 30 June 2005, domestic airlines within China, including the
Company, were permitted to levy fuel surcharges for domestic routes (excluding
routes between Mainland China and Hong Kong and Macau) to partially offset the
rise in jet fuel costs. For the period between 1 August 2005 to 31 December
2005, domestic airlines are permitted to levy fuel surcharges of RMB20 and RMB40
per person for passengers travelling a flight distance of below and over 800 km
respectively.
Since 5 July 2005, Mr. Zheng Baoan has been appointed in place of Mr. Fan Cheng
as a new joint company secretary of the Company. This change of joint company
secretary has been approved by the Board of the Company and was disclosed in an
announcement dated 11 July 2005.
On 8 August 2005, the Company and the Boeing Company entered into an agreement
in respect of the purchase of 15 Boeing 787 aircraft, which has been disclosed
in a public announcement. The transaction has been approved by the Board and
CNAHC, the controlling shareholder of the Company. A circular in this regard has
been despatched to the shareholders on 30 August 2005.
On 21 July 2005, the People's Bank of China announced the introduction of a
regulated, managed floating exchange rate system in the PRC based on market
supply and demand and with reference to a basket of currencies. Removal of the
peg to the US dollar allowed more flexibility for the exchange rate system of
the Renminbi. On 21 July 2005, the exchange rate between the US dollar and
Renminbi was adjusted to US$1 to RMB8.11. The Board of the Company believes that
such appreciation of RMB will not have any adverse effect on the operating
results and financial positions of the Group.
At the employees' representatives meeting held on 27 August 2005, Mr. Liu Guo
Qing has been appointed a supervisor of the Company. Upon his appointment, Mr.
Liu has become a representative of employees on the supervisory committee of the
Company. Such appointment of supervisor has been disclosed in an announcement
published on 31 August 2005.
REVIEW OF INTERIM RESULTS
The audit committee of the Company has reviewed the Company's unaudited
condensed consolidated interim financial statements for the six months ended 30
June 2005.
By Order of the Board
Air China Limited
Li Jiaxiang
Chairman
Beijing, 5 September 2005
As at the date of this announcement, the directors of the Company are Messrs Li
Jiaxiang, Kong Dong, Wang Shixiang, Yao Weiting, David Muir Turnbull, Ma Xulun,
Cai Jianjiang, Fan Cheng, Hu Hung Lick, Henry*, Wu Zhipan* and Zhang Ke*.
* Independent non-executive director of the Company
This information is provided by RNS
The company news service from the London Stock Exchange
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