Annual Report and Accounts

Air China Ld 11 April 2007 Air China Limited is the only national flag carrier and a leading provider of air passenger, air cargo and airline related services in China. Air China Limited is primarily based in Beijing, China, one of the most important hubs for air transportation in China. Taking advantage of its balanced network of extensive and complementary domestic, international and regional routes serving 77 domestic and 43 international destinations and 1 regional destination, Air China Limited aims to become the best partner of all passengers in providing safe, convenient, comfortable and customised services. Air China Limited's mission is to become the favored airline for mainstream passengers, the most valuable and profitable airline in China, and an airline with international competitiveness. Contents 2 Corporate Information 3 Summary of Financial Information 4 Summary of Operating Data 6 Chairman's Statement 9 Business Overview 14 Management's Discussion and Analysis of Financial Position and Operating Results 20 Corporate Governance Report 30 Report of the Directors 48 Report of the Supervisory Committee 49 Profile of Directors, Supervisors and Senior Management Financial Statements prepared under International Financial Reporting Standards 53 - Report of the Independent Auditors 55 - Consolidated Income Statement 56 - Consolidated Balance Sheet 58 - Consolidated Statement of Changes in Equity 59 - Consolidated Cash Flow Statement 61 - Balance Sheet 63 - Notes to Financial Statements Financial Statements prepared under PRC Accounting Standards and Regulations 134 - Consolidated Balance Sheet 136 - Consolidated Income Statement 137 - Consolidated Profit Appropriation Statement 138 Supplementary Information 148 Glossary of Technical Terms Corporate Information REGISTERED CHINESE NAME ENGLISH NAME Air China Limited REGISTERED OFFICE 9/F, Blue Sky Mansion 28 Tianzhu Road Zone A, Tianzhu Airport Industrial Zone Shunyi District Beijing China PRINCIPAL PLACE OF BUSINESS IN HONG KONG 5th Floor, CNAC House 12 Tung Fai Road Hong Kong International Airport Hong Kong WEBSITE ADDRESS www.airchina.com.cn DIRECTORS Li Jiaxiang Kong Dong Wang Shixiang Yao Weiting Christopher Dale Pratt Ma Xulun Cai Jianjiang Fan Cheng Hu Hung Lick, Henry Wu Zhipan Zhang Ke Jia Kang SUPERVISORS Zhang Xianlin Liao Wei Zhang Huilan Liu Feng Liu Guo Qing LEGAL REPRESENTATIVE OF THE COMPANY Li Jiaxiang JOINT COMPANY SECRETARIES Zheng Baoan Li Man Kit (ACIS, ACS) QUALIFIED ACCOUNTANT David Tze-kin Ng (CPA) AUTHORISED REPRESENTATIVES Cai Jianjiang Li Man Kit LEGAL ADVISER TO THE COMPANY Haiwen & Partners (as to PRC Law) Freshfields Bruckhaus Deringer (as to Hong Kong and English Law) INTERNATIONAL AUDITORS Ernst & Young H SHARE REGISTRAR AND TRANSFER OFFICE Computershare Hong Kong Investor Services Limited Rooms 1712-1716, 17th Floor Hopewell Centre 183 Queen's Road East Wanchai Hong Kong LISTING VENUES Hong Kong, London and Shanghai Summary of Financial Information (RMB'000) 2006 2005 2004 2003 2002 Operating Revenue 44,936,606 38,290,966 33,520,757 24,641,405 24,983,677 Profit from operations 2,517,704 3,673,816 4,485,251 2,284,264 3,284,379 Profit before tax 3,929,221 3,374,254 3,559,559 178,279 1,039,826 Profit after tax (including profit attributable to minority 3,305,097 2,470,380 2,548,695 88,498 670,753 shareholders) Profit attributable to minority shareholders 617,256 64,124 162,731 (71,106) 171,143 Profit attributable to shareholders of the 2,687,841 2,406,256 2,385,964 159,604 499,610 Company EBITDA(1) 7,813,232 8,186,496 7,948,503 5,661,736 6,535,950 EBITDAR(2) 10,206,623 9,928,427 9,207,230 6,753,854 7,391,360 Earnings per share attributable to shareholders of the 0.262 0.255 0.360 N/A N/A Company (RMB) Return on shareholders' 9.04 11.98 14.42 2.32 9.95 equity (%) (1) EBITDA represents earnings before finance revenue (including interest income, net exchange gains, net gains on fuel derivatives and dividend income from available-for-sale investments), finance costs, enterprise income taxes, gain on disposal of an associate, share of profits and losses of associates, depreciation and amortisation as computed under the International Financial Reporting Standards. (2) EBITDAR represents EBITDA less operating lease expenses on aircraft and engines as well as other operating lease expenses. (RMB'000) 31 31 31 31 31 December December December December December 2006 2005 2004 2003 2002 Total assets 83,963,601 68,201,943 66,689,269 56,397,062 57,394,612 Total liabilities 52,227,908 46,651,337 48,660,727 48,081,813 50,866,224 Minority interests 2,011,435 1,458,365 1,480,287 1,422,380 1,508,125 Shareholders' equity (excluding minority interests) 29,724,258 20,092,241 16,548,255 6,892,869 5,020,263 Shareholders' equity per 2.43 2.13 1.83 N/A N/A share (RMB) Summary of Operating Data 2006 2005 Increase/ (decrease) Traffic RPK (in millions) 63,361.6 54,854.6 15.5% International 27,120.1 23,173.6 17.0% Mainland China 32,970.3 28,884.1 14.1% Hong Kong and Macau 3,271.1 2,796.9 17.0% RFTK (in millions) 3,477.5 2,929.6 18.7% International 2,603.6 2,160.2 20.5% Mainland China 723.9 636.6 13.7% Hong Kong and Macau 150.1 132.8 13.0% Passengers (in thousands) 33,971.2 29,754.3 14.2% International 6,696.0 5,876.3 13.9% Mainland China 25,253.2 22,162.1 13.9% Hong Kong and Macau 2,022.0 1,715.9 17.8% Cargos and mails carried (tonnes) 1,019,359.3 884,908.1 15.2% Kilometers flown (in millions) 484.9 415.2 16.8% Block hours (in thousands) 755.2 642.3 17.6% Number of flights 280,814.0 241,633.0 16.2% International 50,753.0 44,539.0 14.0% Mainland China 209,656.0 178,414.0 17.5% Hong Kong and Macau 20,405.0 18,680.0 9.2% RTK (in millions) 9,174.2 7,855.0 16.8% Capacity ASK (in millions) 83,492.3 74,086.8 12.7% International 36,038.0 31,508.1 14.4% Mainland China 42,902.2 38,385.7 11.8% Hong Kong and Macau 4,551.9 4,193.1 8.6% AFTK (in millions) 6,404.4 5,319.4 20.4% International 4,615.4 3,733.0 23.6% Mainland China 1,524.6 1,347.9 13.1% Hong Kong and Macau 264.4 238.5 10.9% ATK (in millions) 13,959.2 12,021.5 16.1% 2006 2005 Increase/ (decrease) Load factor Passenger load factor (RPK/ASK) 75.9% 74.0% 1.9 ppt International 75.2% 73.6% 1.6 ppt Mainland China 76.9% 75.3% 1.6 ppt Hong Kong and Macau 71.9% 66.7% 5.2 ppt Cargo and mail load factor (RFTK/AFTK) 54.3% 55.1% (0.8) ppt International 56.4% 57.9% (1.5) ppt Mainland China 47.5% 47.2% 0.3 ppt Hong Kong and Macau 56.8% 55.7% 1.1 ppt Yield Yield per RPK (RMB) 0.5929 0.5758 3.0% International 0.5629 0.5498 2.4% Mainland China 0.6082 0.5903 3.0% Hong Kong and Macau 0.6875 0.6415 7.2% Yield per RFTK (RMB) 2.0577 2.2090 (6.8%) International 2.1260 2.3057 (7.8%) Mainland China 1.3183 1.4067 (6.3%) Hong Kong and Macau 4.4393 4.4739 (0.8%) Fleet Total aircraft in service at year end 225 194 16.0% Daily utilization (block hours per day 10.1 10.1 - per aircraft) Unit cost Operating expenses per ASK (RMB) 0.52 0.48 8.3% Operating expenses per ATK (RMB) 3.14 2.96 6.1% The above summary of operating data for the year ended 31 December 2006 includes the entire Air China Cargo Co., Ltd. ('Air China Cargo') and Air Macau Company Limited ('Air Macau'). Accordingly, the summary of operating data for the year ended 31 December 2005 has been adjusted to conform to the basis of the current year's presentation. Chairman's Statement During 2006, Air China Limited (the 'Air China' or the 'Company'), its subsidiaries and joint ventures (collectively the 'Group') continued to secure a leading position in the aviation industry in the Mainland China and maintain a proactive approach for improvement in all aspects such as flight safety, operating performance, capital operation, brand building and corporate restructuring. While proactively coping with the rising jet fuel price and intense market competition, the Company has completed the restructuring of the shareholdings of the Company, Cathay Pacific Airways Limited ('Cathay'), China National Aviation Company Limited ('CNAC', a subsidiary of the Company), CITIC Pacific Limited and Swire Pacific Limited in Cathay and Hong Kong Dragon Airlines Limited ('Dragonair') and the listing of its A shares, and has made substantial progress in joining airline alliance. With the change in our growth mode, our ability to resist risks has been further enhanced. During the reporting period, the Company recorded 704,000 hours of safe flight, representing an increase of 17.9% as compared to the corresponding period last year. In order to ensure flight safety, the Company has implemented the systematic safety management step by step, strengthened flight training, improved operating organization and boosted the level of aircraft maintenance. During the reporting period, the Company, together with Air China Cargo and Air Macau recorded a total traffic turnover of 9.174 billion tonne kilometres and carried 33,971,200 passengers and handled 1,019,359 tonnes of cargos and mails, representing an increase of 16.8%, 14.2% and 15.2% respectively as compared to the corresponding period last year. The Group's total revenue from business operations amounted to RMB44.937 billion, representing an increase of 17.4% as compared to RMB38.291 billion for the corresponding period last year. The operating profit was RMB2.518 billion, representing a decrease of 31.5% as compared to RMB3.674 billion for the corresponding period last year. Profit attributable to shareholders was RMB2.688 billion, representing an increase of 11.7% from RMB2.406 billion in 2005. We continued to maintain a leading position among fellow airlines in the Mainland China in terms of profitability. During the reporting period, the Group (including Air China Cargo and Air Macau) experienced a net increase in the number of aircraft by 31 during the year such that the total number of aircraft amounted to 225. The Company focused on enhancing the flight capacity while constructing hubs and network. As network operation capability was strengthened, the available seat kilometres in international routes increased by 12.7% as compared to last year. The establishment of the South China base, the south-western marketing centre and the regional headquarters in Japan, Europe and Western America marked new progress in developing sales channels. The progress in adopting the systematic management of budgeting workflow and the establishment and implementation of 14 management divisions at the Company level resulted in a noticeable increase in revenue and reduction in cost and evidenced new achievements in cost control. During the reporting period, the Company continuously strengthened its service and brand management. By adhering to the notion of providing safe, convenient, comfortable and satisfactory services to passengers (the 'SCCS Services'), the Company continued to develop and improve new products in the first and business class cabins, and offered a series of services and products in connection with the Olympic Games for its passenger cabins. The Company developed its in-flight entertainment products, implemented the plan of improving service details and promoted fine service by fine management. The Company expanded its one-stop boarding services, carried out comprehensive service reform and endeavoured to perfect operation quality. For the continuous improvement of our brand recognition, the Company won 17 influential brand-name-related awards, among which the Company was awarded the 'Best Airline of the Year' by the Asia Pacific Aviation Centre and won the 'Passengers Satisfaction Award' for the third consecutive year in travelers' satisfaction survey. The Company was also entitled the 'Top 25 Model Brand Enterprises in China' in the joint press release of the Overall Ranking List of China Brand Name and the China Summit Forum. The Company made positive progress in corporate restructuring. The Company has set up a preliminary new model for business management and control, under which a framework of vertical management of four major systems, namely the business, flight, transportation control and information systems, was initially developed and the efficiency achieved through the consolidation of strategic resources emerged. Upon the announcement of the new organizational structure and system of the Company, the organization and management systems that met the strategic requirements of the Company were generally established. There was a balanced growth in the interests of the Group's shareholders, the Company and its staff during 2006. Meanwhile, the Company's development and reform also entered into a critical stage. Looking into 2007, the Company will remain focused on enhancing its profitability and to plan various operating activities in a scientific manner; optimize and strengthen its principal business and improve the harmonious development of its ancillary businesses along with its principal businesses; promote hubs-building outside and inside China; implement the strategy of 'forming airline partnerships for better development and effecting internal integration for improving capability'; ardently provide the SCCS services to enhance its brand competence; proactively increase incomes and reduce expenses by making market-oriented initiatives; implement the teambuilding strategy for further development of the Company; and lay a solid foundation for further development to guard against various risks. In addition, the Company will attempt to complete the following eight goals by closely adhering to the eight strategies set forth above: to complete the corporate restructuring in a satisfactory manner; to significantly enhance the operating quality; to effect a fundamental reform on the European and American routes; to obtain actual benefits via the 'Two Stars' co-operation (i.e. by joining the Star Alliance and the completion of Project Star); to break through the IT bottleneck; to accelerate the regional integration and regional hub construction; to substantially increase the cargo transport capacity; to promote the brand awareness of the Company by offering products relating to the Olympic Games. The Company will also fully take advantage of the business opportunities arising from the 2008 Olympic Games to be held in Beijing, the entry to Star Alliance and the business cooperation with Cathay. The Company will also proactively promote the five strategies, namely strategies in relation to the hub network, cost advantage, balanced development of cargo and passenger services, brand, alliance and cooperation strategies. The Company is committed to become the most valuable and profitable airline in China, and the favored airline for mainstream passengers with international competitiveness. Lastly, on behalf of the board of directors, I would like to extend my gratitude to our shareholders for their trust and support as well as to our management team and staff for their dedication in offering professional and quality services. Li Jiaxiang Chairman Beijing, PRC 19 March 2007 To view the full text of this press release, paste the following link into your web browser: http://www.rns-pdf.londonstockexchange.com/rns/5713u_-2007-4-11.pdf This information is provided by RNS The company news service from the London Stock Exchange

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