Interim Report 2005
Air China Ld
26 September 2005
AIR CHINA LIMITED
INTERIM REPORT 2005
Air China Limited >> Interim Report 2005
Contents
CORPORATE INFORMATION 2
HIGHLIGHT OF FINANCIAL
INFORMATION AND OPERATING DATA 4
CHAIRMAN'S STATEMENT 7
REVIEW FOR THE FIRST HALF OF 2005 10
MANAGEMENT DISCUSSION AND ANALYSIS 15
CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS 21
CORPORATE GOVERNANCE 46
MISCELLANEOUS 48
GLOSSARY OF TECHNICAL TERMS 52
2 Air China Limited >> Interim Report 2005
Corporate Information
Chinese Registered Name :
English Name : Air China Limited
Registered Office : 9/F, Blue Sky Mansion
28 Tianzhu Road
Zone A, Tianzhu Airport Industrial Zone
Shunyi District
Beijing, China
Principal Place of
Business in Hong Kong : 5th Floor, CNAC House
12 Tung Fai Road
Hong Kong International Airport
Hong Kong
Website Address : www.airchina.com.cn
Directors : Li Jiaxiang
Kong Dong
Wang Shixiang
Yao Weiting
David Muir Turnbull
Ma Xulun
Cai Jianjiang
Fan Cheng
Hu Hung Lick, Henry
Wu Zhipan
Zhang Ke
Supervisors : Zhang Xianlin
Liao Wei
Zhang Huilan
Liu Feng
Liu Guo Qing Legal
Representative of
the Company : Li Jiaxiang
Joint Company Secretaries : Fan Cheng
Li Man Kit (ACIS, ACS)
Qualified Accountant : Chan Wei Kwong, Joel (FCCA, CPA)
Authorised Representatives : Cai Jianjiang
Li Man Kit
Air China Limited >> Interim Report 2005 3
Corporate Information
Legal Adviser to
the Company : Haiwen & Partners (as to PRC Law)
Freshfields Bruckhaus Deringer
(as to Hong Kong and English Law)
Independent Auditors : Ernst & Young
H Share Registrar and
Transfer Office : Computershare Hong Kong Investor
Services Limited
Rooms 1712-1716
17th Floor Hopewell Centre
183 Queen's Road East
Wanchai
Hong Kong
Listing Venues : Hong Kong and London
4 Air China Limited >> Interim Report 2005
Highlight of Financial Information and Operating Data
1. MAJOR ACCOUNTING FIGURES AND FINANCIAL INDICATORS
For the For the
six months six months
ended ended
30 June 2005 30 June 2004 Change
RMB'000 RMB'000 (%)
Operating revenues 16,938,532 14,773,359 14.7
Profit from operations 1,397,345 1,790,742 -22.0
Profit before tax 912,721 1,193,237 -23.5
Net profit after tax (including
minority interests) 642,392 834,435 -23.0
Minority interests 51,139 46,083 11.0
Net profit attributable to
equity holders of the parent 591,253 788,352 -25.0
Earnings per share - Basic (RMB) 6.3 cents 12.1 cents -47.9
Return on owners' equity (%) 3.23% 10.30% -68.6
As at As at
30 June 31 December
2005 2004 Change
RMB'000 RMB'000 (%)
Total assets 66,795,197 66,689,269 0.2
Total liabilities 47,009,428 48,660,727 -3.4
Minority interests 1,476,165 1,480,287 -0.3
Owners' equity
(excluding minority interests) 18,309,604 16,548,255 10.6
Owners' equity per share (RMB) 1.95 2.50 -22.0
Air China Limited >> Interim Report 2005 5
Highlight of Financial Information and Operating Data
2. SUMMARY OF MAJOR OPERATING DATA
(Including entire Air China Cargo Co., Ltd. ('Air China Cargo') and excluding
Air Macau Company Limited ('Air Macau'))
For the For the
six months six months
ended ended Change
30 June 2005 30 June 2004 (%)
Traffic
RPK (in millions) 23,906.6 21,141.2 13.1
International 9,914.7 8,652.6 14.6
Domestic 13,177.4 11,835.4 11.3
Hong Kong and Macau 814.5 653.2 24.7
RFTK (in millions) 1,280.1 1,225.2 4.5
International 956.7 943.7 1.4
Domestic 295.6 253.7 16.5
Hong Kong and Macau 27.8 27.9 -0.4
Passengers carried
(in thousands) 12,588.5 11,135.8 13.0
International 2,141.0 1,814.2 18.0
Domestic 10,041.5 8,999.0 11.6
Hong Kong and Macau 406.0 322.6 25.9
Cargo and mail (in tonnes) 340,889.0 312,605.0 9.0
Kilometers flown (in millions) 181.0 159.6 13.4
Block hours (in thousands) 278.4 239.2 16.4
Number of flights 100,489 87,844 14.4
International 14,611 13,076 11.7
Domestic 82,083 71,654 14.6
Hong Kong and Macau 3,795 3,114 21.9
RTK (in millions) 3,416.6 3,116.9 9.6
Capacity
ASK (in millions) 33,245.0 30,815.8 7.9
International 13,800.0 12,955.0 6.5
Domestic 18,191.2 16,761.3 8.5
Hong Kong and Macau 1,253.8 1,099.5 14.0
AFTK (in millions) 2,390.6 2,315.9 3.2
International 1,696.2 1,644.0 3.2
Domestic 636.6 621.7 2.4
Hong Kong and Macau 57.8 50.2 15.1
ATK (in millions) 5,382.6 5,089.3 5.8
6 Air China Limited >> Interim Report 2005
Highlight of Financial Information and Operating Data
2. SUMMARY OF MAJOR OPERATING DATA (Continued)
(Including entire Air China Cargo and excluding Air Macau)
For the For the
six months six months
ended ended Change
30 June 2005 30 June 2004 (%)
Load factor
Passenger load factor (RPK/ASK) 71.9% 68.6% 3.3 ppt
International 71.8% 66.8% 5.0 ppt
Domestic 72.4% 70.6% 1.8 ppt
Hong Kong and Macau 65.0% 59.4% 5.6 ppt
Cargo and mail load factor
(RFTK/AFTK) 53.5% 52.9% 0.6 ppt
International 56.4% 57.4% -1.0 ppt
Domestic 46.4% 40.8% 5.6 ppt
Hong Kong and Macau 48.1% 55.6% -7.5 ppt
Yield
Yield per RPK (RMB) 0.55 0.54 1.9
International 0.50 0.48 4.2
Domestic 0.58 0.58 0
Hong Kong and Macau 0.67 0.68 -1.5
Yield per RFTK (RMB) 1.03 0.98 5.1
International 1.09 1.03 5.8
Domestic 0.70 0.66 6.1
Hong Kong and Macau 2.16 1.87 15.5
Fleet
Total number of aircraft in service
at period end 160 136 17.6
Daily utilization
(block hours per day per aircraft) 10.2 10.1 1.0
Air China Limited >> Interim Report 2005 7
Chairman's Statement
Dear shareholders,
2005 is the first year following the restructuring and listing of the Company.
Shares offered under the international offering and the Hong Kong public
offering at the end of last year were 40 times and 21 times oversubscribed
respectively. 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, marking the successful conclusion of our H share offering. On
behalf of the board of directors, I would like to express our sincere gratitude
to you, as our shareholders, for your support and trust.
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 and at
the same time, ensuring flight safety. For the six months ended 30 June 2005,
the Group (including the Company, its subsidiaries and joint ventures) recorded
operating revenues of RMB16.939 billion, representing a growth of 14.7% compared
to the corresponding period last year. Passenger services and cargo and mail
operations performed well, with passenger traffic reaching 12.5885 million
persons and cargo traffic of 340,889 tonnes, representing an increase of 13.0%
and 9.0% respectively, compared to the corresponding period last year. However,
rising jet fuel prices and increasing competition have significantly affected
the operations and profitability of the Group. During the first six months of
2005, the profit from operations of the Group was RMB1,397 million, representing
a decrease of 22.0% compared to the corresponding period last year. Although jet
fuel prices remain high, the Company managed to maintain the highest
profitability among other domestic airlines in the aviation market in China.
This was achieved through adopting various effective measures to improve cost
controls, budget management and marketing initiatives.
The Company has continued to value safe services and accident prevention and is
committed to establishing a mechanism for maintaining long-term operational
safety. In the first half of 2005, the Company recorded 278,000 accident-free
flight hours, representing an increase of 16.4%, compared to the same period
last year. Incident rate per 10,000 flight hours and material error rate per
10,000 flight hours decreased by 89% and 63% respectively, compared to the
corresponding period last year. To improve the Company's safety management
standards and to ensure that its record of providing safe services is
maintained, the Company will continue to establish a long- term operational
safety mechanism, further develop its safety standards and its safety management
system, as well as further invest in promoting flight safety.
8 Air China Limited >> Interim Report 2005
Chairman's Statement
Since the listing of its shares, the Company has been steadily expanding its
hubs and network with a particular focus on strengthening its key bases in
Beijing, Shanghai and Chengdu and shifting its capacity to its major markets.
The Company also firmly believes in the growth potential of the aviation market
between PRC and Hong Kong and Macau and has been actively enhancing its presence
in these markets through improving connection between the two aviation markets.
The Company and Cathy Pacific entered into a Marketing Cooperation Memorandum on
19 May 2005, pursuant to which the two parties made code share arrangements for
their Beijing-Hong Kong flights. These developments have reinforced the
competitiveness and network connections of the Company, thereby further
consolidating the synergy between international, domestic and regional flight
routes. With Beijing as its central hub, the Company will further optimise its
flight routes with a balanced focus on both international and domestic as well
as passenger and cargo operations.
The Company is committed to establishing a sales network that effectively
complements its flight routes. While maintaining the development efforts in its
dominant regions, the Company focused on reinforcing sales in the eastern,
south-western and north-eastern parts of the PRC. On the international level,
the Company concentrated on increasing sales in Japan, Korea and Europe through
implementing a system that coordinates seat control, pricing and revenue. The
Company enhanced the overall profitability of its network through strengthening
sales of connecting flights tickets, enhancing direct sales, promoting
electronic tickets and expanding its regular customers base.
The Company continued to reinforce its cooperation with peer companies. At
present, the Company has entered into code-sharing arrangements with 18 airlines
and is making steady progress in the formation of an alliance.
In the first half of 2005, the Company commenced the upgrade project for the
first class and business class cabins of 15 wide body aircraft. Besides, it
continued to improve its service quality by providing safe, convenient,
comfortable and customised services to passengers. The Company's ability to
leverage on brand name recognition has been further enhanced with increasing
awareness of its brand. The brand value and influence of the Company were
further boosted after it became the sole airline partner of the 2008 Beijing
Olympics.
The Company continued its restructuring to optimise its internal management and
organisation structure. For the first half of 2005, the Company successfully
completed the consolidation of its business segments by streamlining its
management structure and by improving its human resources management system.
Building on this, the Company will continue to restructure and reform, so as to
reinforce operational control and enhance the overall management standard and
operational efficiency of the Company.
Air China Limited >> Interim Report 2005 9
Chairman's Statement
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 remain profitable. 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.
Lastly, on behalf of the board of directors, I would like to express my
gratitude to our management and staff for their professionalism and dedication
while creating value for the shareholders.
Li Jiaxiang
Chairman
Beijing, 5 September 2005
10 Air China Limited >> Interim Report 2005
Review for the First Half of 2005
REVIEW OF OPERATIONS
During the first half of 2005, the Chinese economy and the aviation market
continued to grow, thereby maintaining 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 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. 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
Air China Limited >> Interim Report 2005
Review for the First Half of 2005
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, a 51%- owned joint venture of the Company),
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.
For the six months ended 30 June 2005, operating expenses of the Group was
RMB15.541 billion, representing an increase of RMB2.559 billion compared to the
corresponding period last year. Among the operating expenses, jet fuel costs
were RMB5.062 billion, representing an increase of RMB1.449 billion compared to
the corresponding period last year. Jet fuel costs as a percentage of operating
expenses increased from 27.8% in 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.
BUSINESS REVIEW
Network Construction: 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), 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. We mainly allocated our capacity to major markets. For
international routes, the Company has increased flight frequency for the more
profitable routes and has introduced a new route between Weihai and Seoul. As
for regional operations, a new flight route serving Hangzhou and Hong Kong was
opened, and the Lhasa - Chengdu - Hong Kong route was re-established. For
domestic routes, the Company has strengthened the transport capacity for routes
between the central hub of Beijing and other bases, routes originating from
Beijing, as well as routes that complement our network and routes that are
relatively profitable.
Hubs Building: The Company further strengthened its influence in the Beijing
aviation hub through adjusting its transport capacity, improving flights
connection and allocating appropriate aircraft models. For the six months ended
30 June 2005, the Company increased the number of aircraft serving the Beijing
hub to 97 aircraft and has secured 350 more time slots per week in the Beijing
Capital International Airport compared to the corresponding period last year.
The Company had a market share of 44.1% in Beijing during the first six months
of 2005, representing an increase of 0.4 percentage point compared to the
corresponding period last year. Meanwhile, the Company continued to optimize
its network connection around Chengdu. Three CRJ aircraft were wet- leased from
Shandong Airlines to expand the western PRC market with a base in Chengdu. We
also reinforced our operations in our Shanghai base in line with the continuing
trend of Shanghai's development into an important hub in the international air
traffic network. The Company has further expanded its transport capacity of
routes originating from Shanghai. In addition, the Company secured the rights to
operate 5 new domestic routes, including one between Shanghai and Kunming. New
flight routes in operation include the Shanghai - Guangzhou and Shanghai -
Kunming routes, which further reinforce Shanghai's role as an important hub and
cargo base for the Company.
12 Air China Limited >> Interim Report 2005
Review for the First Half of 2005
Fleet Maintenance: 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 the entire Air China Cargo) operated a fleet of 160
aircraft with an average age of 8.3 years.
Finance Operating
Self-owned Lease Lease Wet Lease Custody Total
Boeing 64 38 25 - - 127
Airbus 14 8 5 1 - 28
CRJ-200 - - - 3 - 3
Business jets - - 1 - 1 2
Total 78 46 31 4 1 160
Note: The Boeing aircraft include five cargo freighters of Air China Cargo.
On 26 January 2005, the Company and Air China Group Import and Export Trading
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 28 January 2005, the Company, other PRC
airlines, China Aviation Supplies Import and Export Group Corporation, and
Boeing Company entered into a framework agreement regarding the acquisition of
Boeing 787 aircraft. On 8 August 2005, the Company and Boeing Company entered
into a formal agreement for the purchase of 15 Boeing 787 aircraft. On the same
date, the board of directors resolved to place orders for 4 A319 aircraft from
Airbus S.A.S. On 8 August 2005, the Company and Hong Kong Dragon Airlines
Limited ('Dragonair') entered into an agreement whereby the Company wet leased 1
A330 and 1 A320 aircraft from Dragonair. In the first half of 2005, the Company
also signed a letter of intent with each of GECAS, Sunrock and ILFC, pursuant to
which the Company will lease a total of 12 Boeing 737-800 aircraft from these
companies. The above proposed purchase and lease of aircraft will further
enhance the passenger traffic capacity of the Company's fleet, and thereby
providing more comfortable services to passengers.
Market Expansion: The Company has been actively enhancing its marketing efforts.
The Company has actively promoted the sales of connecting flight tickets,
increased transit flights and established a pricing scheme for connecting
flights. For the years ended 2003 and 2004 and the six months ended 30 June
2005, income from connecting flights was RMB2.7 billion, RMB7.6 billion and
RMB3.8 billion respectively. It is expected that such income will continue to
grow rapidly. The Company has been actively acquiring major customers and has
secured 458 new direct sales customers. The electronic tickets business also
enjoyed steady growth. Electronic tickets were offered in 60 airports within
the PRC and in Hong Kong, while preparation for electronic tickets sales points
in the US was completed. In addition, our frequent flyers membership continued
to expand to 2.47 million members.
Air China Limited >> Interim Report 2005
Review for the First Half of 2005
In a travellers' satisfaction survey held in early 2004, the Company was granted
the Excellence Award for Travellers' Satisfaction and Excellence Award for
Service Brand in the category of airlines carrying over 15 million passengers.
In a public aviation service evaluation survey in 2005, the Company was honoured
with the highest award of 'Benchmark Brand Name for the Year'. In a survey on
freighter's service quality, Air China Cargo was awarded the Best Integrated
Services Award for Air Freighters.
EMPLOYEES
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 implemented a
comprehensive training programme. Under the programme, expert technicians
received special operational training, 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.
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,
in respect of the over-allotment 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 to cover the over-allocations in the
international offering. The Company issued and allotted, and China National
Aviation Holding Company ('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.
14 Air China Limited >> Interim Report 2005
Review for the First Half of 2005
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 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 position of the Group.
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.
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.
Air China Limited >> Interim Report 2005
Management Discussion and Analysis
The unaudited condensed consolidated interim financial statements of the Group
set out from pages 21 to 45 of this Interim Report, comprising the condensed
consolidated income statement, condensed consolidated balance sheet, condensed
consolidated statement of changes in equity, condensed consolidated cash flow
statement and notes to the condensed consolidated interim financial statements,
were prepared in accordance with International Financial Reporting Standards
('IFRS'). The following discussion and analysis are designed to assist the
reader in understanding the information provided in this Interim Report so as to
fully comprehend the financial results and financial position of the Group as a
whole.
PROFIT FROM OPERATIONS AND NET PROFIT ATTRIBUTABLE TO EQUITY HOLDERS OF THE
PARENT
For the six months ended 30 June 2005, the Group's profit from operations was
RMB1,397 million, representing 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 Dragonair and Shenzhen Airlines.
16 Air China Limited >> Interim Report 2005
Management Discussion and Analysis
PROFIT CONTRIBUTION BY BUSINESS SEGMENTS
For the six months ended 30 June
2005 2004 Change
RMB'000 RMB'000 (%)
Airline operations 1,213,647 1,670,086 -27.3
Engineering services 96,697 41,585 132.5
Airport terminal services 61,945 53,444 15.9
Others 25,056 25,627 -2.2
Profit from operations 1,397,345 1,790,742 -22.0
EARNINGS PER SHARE
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 RMB0.12 for 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 offering 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. Details of earnings per share
are set out in note 7 to the unaudited condensed consolidated interim financial
statements.
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. 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.
REVENUE CONTRIBUTION BY BUSINESS SEGMENTS
For the six months ended 30 June
2005 2004 Change
RMB'000 RMB'000 (%)
Airline operations 16,569,472 14,410,881 15.0
Of which:
Passenger 13,927,279 12,151,881 14.6
Cargo and mail 1,675,433 1,384,951 21.0
Engineering services 131,518 128,798 2.1
Airport terminal services 131,484 109,381 20.2
Others 106,058 124,299 -14.7
Operating revenue 16,938,532 14,773,359 14.7
Air China Limited >> Interim Report 2005
Management Discussion and Analysis
REVENUE CONTRIBUTION BY GEOGRAPHICAL SEGMENTS
For the six months ended 30 June
2005 2004 Change
RMB'000 RMB'000 (%)
Domestic 8,521,194 7,820,767 9.0
Hong Kong/Macau 1,165,547 843,209 38.2
Europe 2,321,126 1,834,105 26.6
North America 1,326,233 1,214,476 9.2
Japan/Korea 2,047,609 1,576,652 29.9
Asia Pacific, others 1,556,823 1,484,150 4.9
Operating revenue 16,938,532 14,773,359 14.7
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 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.
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 unaudited condensed
consolidated interim financial statements.
18 Air China Limited >> Interim Report 2005
Management Discussion and Analysis
PRINCIPAL OPERATING EXPENSES
For the six months ended 30 June
2005 2004 Change
RMB'000 RMB'000 (%)
Jet fuel 5,061,760 3,612,602 40.1
Take-off, landing and depot charges 2,172,296 2,042,489 6.4
Depreciation 2,456,709 1,676,308 46.6
Aircraft maintenance, repair and overhaul 548,508 1,239,339 -55.7
Employee compensation costs 1,413,632 1,263,777 11.9
Air catering expenses 610,343 532,535 14.6
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.
MANAGEMENT OF EXCHANGE RISK
The foreign exchange income and expenses of the Company are generally the same.
The Company achieved a matching structure of income and expenses by adjusting
the proportion of its liabilities in foreign currencies, such that no hedging is
required. The Company will continue to avoid exposure to exchange risks by
adopting a strategy that corresponds the income and payment of certain principal
currencies.
Since foreign liabilities constitute a larger proportion of the Group's
liabilities, appreciation of the Renminbi will benefit the Company with exchange
gains.
ANALYSIS OF ASSETS
As at 30 June 2005, the Group had total assets of RMB66.795 billion,
representing an increase of 0.2% from 31 December 2004. Of the total assets,
current assets accounted for 22.9%, or RMB15.311 billion, while non-current
assets accounted for 77.1%, or RMB51.484 billion. Among the current assets, cash
and cash equivalents decreased by 25.8% to RMB7.220 billion from 31 December
2004 to 30 June 2005, while trade receivables increased by 11.3% to RMB2.631
billion from 31 December 2004 to 30 June 2005. Among the non-current assets,
property, plant and equipment accounted for RMB43.249 billion, representing a
decrease of 0.4% from 31 December 2004.
Air China Limited >> Interim Report 2005
Management Discussion and Analysis
ASSETS 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.
Details of the mortgage are set out in note 10 to the unaudited condensed
consolidated interim financial statements.
As at 30 June 2005, certain of the Group's bank deposits 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.
Details of external guarantees of the Group are set out in note 17 to the
unaudited condensed consolidated interim financial statements.
DEBT STRUCTURE OF THE GROUP
Bank and other loans Obligations under finance leases
As at As at As at As at
30 June 31 December 30 June 31 December
2005 2004 2005 2004
RMB RMB RMB RMB
billion billion billion billion
Short-term 9.220 8.806 2.048 1.705
Long-term 11.441 12.897 9.180 10.576
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.
INTEREST EXPENSE
For the six months ended 30 June 2005, interest expense of the Group decreased
from RMB917 million in the corresponding period last year to RMB903 million,
primarily due to the repayment of bank loans and decrease in obligations under
finance leases.
INTEREST COVER
For the six months ended 30 June 2005, interest cover, representing net profit
attributable to equity holders of the parent excluding interest expenses, taxes,
depreciation and amortization ('EBITDA') divided by interest expense, was 4.7
times, compared to 4.1 times for the corresponding period in 2004. The increase
in interest cover was attributable to the decrease in interest expense and rise
in EBITDA.
20 Air China Limited >> Interim Report 2005
Management Discussion and Analysis
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.
Details of capital commitments of the Group as at 30 June 2005 are set out in
note 18 to the unaudited condensed consolidated interim financial statements.
In respect of the civil litigation in the High Court of Hong Kong (Action No.
515 of 2001) as disclosed in paragraph (c) of Note 41 to the consolidated
financial statements for the year ended 31 December 2004 in the Company's 2004
annual report, Air China International Corporation, AIE and other parties
entered into a settlement agreement with New Link Consultants Limited ('NLC') on
20 July 2005, pursuant to which AIE agreed to pay a settlement amount of
US$195,250 to NLC. The settlement amount was fully paid by AIE to NLC on 10
August 2005.
Save as disclosed above and in note 17 to the unaudited condensed consolidated
interim financial statements, there have been no material adverse changes in the
contingent liabilities of the Group since 31 December 2004.
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, in particular, a RMB2.514 billion
decrease in cash and cash equivalents.
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
involved 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.
DISCLOSURE REQUIRED BY THE HONG KONG STOCK EXCHANGE LISTING RULES
In compliance with paragraph 40(2) 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 32 of Appendix 16 to the Listing Rules from
the information in relation to the matters disclosed in the 2004 Annual Report
of the Company.
Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
CONDENSED CONSOLIDATED INCOME STATEMENT
For the six months ended 30 June 2005
INTERIM RESULTS
These condensed consolidated interim financial statements have not been audited,
but have been reviewed by the Company's audit committee.
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 10 (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 9 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 - -
22 Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEET
As at 30 June 2005
30 June 31 December
2005 2004
RMB'000 RMB'000
Notes (Unaudited) (Audited)
NON-CURRENT ASSETS
Property, plant and equipment 10 43,249,405 43,441,637
Lease prepayments 11 918,719 933,898
Interests in associates 3,883,988 4,001,521
Advance payments for aircraft and related equipment 2,113,727 632,154
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 12 2,631,351 2,364,816
Inventories 820,881 743,288
Prepayments, deposits and other receivables 13 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 14 5,059,258 4,443,608
Bills payable 818,344 362,033
Other payables and accruals 15 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
Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
30 June 31 December
2005 2004
RMB'000 RMB'000
Notes (Unaudited) (Audited)
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 obligations 192,297 195,188
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 16 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
24 Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the six months ended 30 June 2005
Attributable to equity holders of the parent
Issued Statutory
Owners' share Capital reserve Retained Minority Total
(Unaudited) equity capital reserve funds profits Total interests equity
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
As at 1 January 2005 - 9,050,618 6,942,422 93,020 462,195 16,548,255 1,480,287 18,028,542
Profit for the period - - - - 591,253 591,253 51,139 642,392
Issue of new shares
(note 16 (b)) - 382,593 787,503 - - 1,170,096 - 1,170,096
Dividend paid - - - - - - (55,261) (55,261)
As at 30 June 2005 - 9,433,211 7,729,925 93,020 1,053,448 18,309,604 1,476,165 19,785,769
Attributable to equity holders of the parent
Issued Statutory
Owners' share Capital reserve Retained Minority Total
(Audited) equity capital reserve funds profits Total interests equity
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(note a)
As at 1 January 2004 6,892,869 - - - - 6,892,869 1,422,380 8,315,249
Capital contributions 17,084 - - - - 17,084 - 17,084
Profit for the period 788,352 - - - - 788,352 46,083 834,435
Distribution (note 8) (40,969) - - - - (40,969) (6,125) (47,094)
As at 30 June 2004 7,657,336 - - - - 7,657,336 1,462,338 9,119,674
Note:
(a) Pursuant to the Restructuring as set out in note 1 and note 16 to the
unaudited condensed consolidated interim financial statements, the owners'
equity at 30 June 2004 was converted into part of the Company's share capital of
RMB6,500 million of RMB1.00 each and capital reserve upon the incorporation of
the Company on 30 September 2004.
Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
For the six months ended 30 June 2005
Six months ended 30 June
2005 2004
RMB'000 RMB'000
(Unaudited) (Audited)
(Restated)
NET CASH INFLOW FROM OPERATING ACTIVITIES 4,693,402 2,069,019
NET CASH OUTFLOW FROM INVESTING ACTIVITIES (5,086,756) (695,128)
NET CASH OUTFLOW FROM FINANCING ACTIVITIES (2,119,154) (1,781,076)
Effect of exchange rate changes on cash
and cash equivalents 3,775 27,726
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,508,733) (379,459)
Cash and cash equivalents at beginning of period 9,413,224 2,589,395
Cash and cash equivalents at end of period 6,904,491 2,209,936
Analysis of balances of cash and cash equivalents:
Cash and cash equivalents for balance sheet 7,220,306 3,255,763
Less: Non-pledged time deposits with original maturity of
more than three months when acquired (315,815) (1,045,827)
Cash and cash equivalents for condensed consolidated
cash flow statement 6,904,491 2,209,936
26 Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
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 and consolidated cash flows for the six months ended 30
June 2004 include the Group's results of operations and cash flows as if the
Relevant Businesses and interests in the Relevant Companies had been transferred
to the Group at 1 January 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 consolidated income
statement and consolidated cash flow statement prepared on this basis present
fairly the consolidated results and consolidated cash flows of the Group as a
whole.
The unaudited condensed consolidated interim financial statements 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 interim financial statements 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 interim financial statements 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.
Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (Continued)
The principal accounting policies used in the preparation of the unaudited
condensed consolidated interim financial statements 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.
28 Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (Continued)
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
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.
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.
Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
2. SEGMENT INFORMATION (Continued)
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 external customers 16,569,472 131,518 131,484 106,058 - 16,938,532
Intersegment sales - 407,386 - 86,140 (493,526) -
Total revenues 16,569,472 538,904 131,484 192,198 (493,526) 16,938,532
PROFIT FROM OPERATIONS
Segment results 1,213,647 96,697 61,945 25,056 - 1,397,345
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 external customers 14,410,881 128,798 109,381 124,299 - 14,773,359
Intersegment sales - 314,367 - 70,319 (384,686) -
Total revenues 14,410,881 443,165 109,381 194,618 (384,686) 14,773,359
PROFIT FROM OPERATIONS
Segment results 1,670,086 41,585 53,444 25,627 - 1,790,742
30 Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
2. SEGMENT INFORMATION (Continued)
Geographical segments
The following tables present consolidated revenue information by geographical
segments for the periods ended 30 June 2005 and 30 June 2004:
For the period ended North Asia Pacific,
30 June 2005 Domestic HK/Macau Europe America Japan/Korea others Total
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(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
For the period ended North Asia Pacific,
30 June 2004 Domestic HK/Macau Europe America Japan/Korea others Total
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(Audited) (Audited) (Audited) (Audited) (Audited) (Audited) (Audited)
(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.
Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
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.
32 Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
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
temporary differences 215,521 346,650
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. DIVIDEND/DISTRIBUTION
In accordance with the articles of association of the Company, the net profit
after tax of the Company for the purpose of dividend payment is based on the
lesser of (i) the net profit determined in accordance with the accounting
principles and the financial regulations applicable in the PRC; and (ii) the net
profit determined in accordance with IFRSs.
The Board of directors of the Company does not recommend the payment of an
interim dividend for the six months ended 30 June 2005.
The Company had a profit distribution of RMB40,969,000 (audited) for the six
months ended 30 June 2004.
Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
9. 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 equipment 222,000 15,948
Amortisation of lease prepayments 9,780 111
10. PROPERTY, PLANT AND EQUIPMENT
Aircraft and Transportation Office Construction
flight equipment Buildings Machinery equipment equipment in progress Total
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
At 1 January 2005, net of
accumulated depreciation 38,718,863 2,684,860 963,467 315,542 92,055 666,850 43,441,637
Additions 2,112,611 770 38,822 6,540 6,225 356,178 2,521,146
Disposals (231,775) (20,703) (1,519) (259) (2,413) - (256,669)
Transfer from construction
in progress 389,412 22,999 8,172 793 301 (421,677) -
Depreciation charge
for the period (2,258,095) (54,438) (97,198) (33,655) (13,323) - (2,456,709)
At 30 June 2005, net of
accumulated depreciation 38,731,016 2,633,488 911,744 288,961 82,845 601,351 43,249,405
At 30 June 2005
Cost 66,073,160 3,669,673 2,084,959 1,070,719 226,743 601,351 73,726,605
Accumulated depreciation (27,342,144) (1,036,185) (1,173,215) (781,758) (143,898) -(30,477,200)
Net carrying amount 38,731,016 2,633,488 911,744 288,961 82,845 601,351 43,249,405
34 Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
10. PROPERTY, PLANT AND EQUIPMENT (Continued)
Trans-
Aircraft and portation Office Construction
flight equipment Buildings Machinery equipment equipment in progress Total
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(Audited) (Audited) (Audited) (Audited) (Audited) (Audited) (Audited)
At 1 January 2004, net of
accumulated depreciation 37,789,877 2,715,540 1,051,602 293,144 90,268 483,489 42,423,920
Establishment of a joint venture
(note a) (267,119) (186,169) (86,932) (21,673) - (3,947) (565,840)
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 construction
in progress 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
accumulated depreciation 38,718,863 2,684,860 963,467 315,542 92,055 666,850 43,441,637
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
Note:
(a) Upon the establishment of Air China Cargo Co., Ltd. ('Air China Cargo'),
a 51%-owned joint venture of the Company, the entire air cargo business and
relevant air cargo assets and liabilities were transferred to Air China Cargo in
2004 in the form of the Company's capital contribution and advance to Air China
Cargo.
Certain of the Group's bank and other loans are secured by certain of the
Group's aircraft, which had an aggregate carrying amount of approximately
RMB16,158 million (unaudited) as at 30 June 2005 (31 December 2004: RMB16,586
million (audited)).
The carrying amount of the aircraft held under finance leases as at 30 June 2005
was approximately RMB10,923 million (unaudited) (31 December 2004: RMB11,999
million (audited)). Leased assets are pledged as security for the related
finance lease liabilities.
As at 30 June 2005, the Group was in the process of applying for the title
certificates for certain of its buildings with an aggregate carrying amount of
approximately RMB597 million (unaudited) (31 December 2004: RMB2,178 million
(audited)). 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 30 June
2005.
11. LEASE PREPAYMENTS
As at 30 June 2005, the Group was in the process of applying for the title
certificates for certain of its land use rights with an aggregate carrying
amount of approximately RMB106 million (unaudited) (31 December 2004: RMB920
million (audited)). The directors of the Company are of the view that the Group
is entitled to lawfully and validly occupy and use the above-mentioned lands.
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 30 June
2005.
Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
12. 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 of
the Group, based on invoice date and net of provision for doubtful debts, is as
follows:
30 June 31 December
2005 2004
RMB'000 RMB'000
(Unaudited) (Audited)
Within 30 days 1,803,369 1,838,756
31 to 60 days 168,310 280,382
61 to 90 days 128,378 152,548
Over 90 days 531,294 93,130
At end of period/year 2,631,351 2,364,816
Included in the Group's trade receivables is the following amount due from a
joint venture:
30 June 31 December
2005 2004
RMB'000 RMB'000
(Unaudited) (Audited)
Joint venture 462,497 412,539
13. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES
Set out below is a breakdown of the Group's prepayments, deposits and other
receivables:
30 June 31 December
2005 2004
RMB'000 RMB'000
(Unaudited) (Audited)
Advance payments for aircraft and related
equipment acquisitions 3,591,296 2,193,458
Advances and others 400,904 324,655
Manufacturers' credits on aircraft acquisition receivable 69,069 74,518
Prepaid aircraft operating lease rentals 101,125 95,681
Receivables from sale of staff quarters 23,403 24,681
Miscellaneous deposits 188,377 395,595
4,374,174 3,108,588
36 Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
14. TRADE PAYABLES
An aged analysis of the Group's trade payables, based on invoice date, is as
follows:
30 June 31 December
2005 2004
RMB'000 RMB'000
(Unaudited) (Audited)
Within 30 days 2,581,907 3,108,028
31 to 60 days 1,104,110 805,858
61 to 90 days 599,494 304,943
Over 90 days 773,747 224,779
At end of period/year 5,059,258 4,443,608
Included in the Group's trade payables is the following amount due to a joint
venture:
30 June 31 December
2005 2004
RMB'000 RMB'000
(Unaudited) (Audited)
Joint venture 158,645 179,934
15. OTHER PAYABLES AND ACCRUALS
Set out below is a breakdown of the Group's other payables and accruals:
30 June 31 December
2005 2004
RMB'000 RMB'000
(Unaudited) (Audited)
Provision for staff housing benefits 352,263 469,617
Accrued salaries, wages and benefits 581,378 692,510
Payable to the Social Security Bureau 876,404 -
Interest expense payable 260,358 269,928
Accruals for share issuing expenses 240 208,644
Custom duties and levies payable 819,586 742,201
Current portion of long-term payables 108,425 101,802
Current portion of deferred income 76,943 76,943
Advances from customers 270,604 294,798
Accrued operating expenses 793,771 716,548
Others 411,387 347,296
4,551,359 3,920,287
Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
16. SHARE CAPITAL
Number of shares Nominal value Number of shares Nominal value
30 June 2005 30 June 2005 31 December 2004 31 December 2004
RMB'000 RMB'000
(Unaudited) (Audited)
Registered, issued and fully paid
- State legal person shares of
RMB1.00 each 4,826,195,989 4,826,196 4,855,945,675 4,855,946
- Non-H foreign shares of
RMB1.00 each 1,380,482,920 1,380,483 1,388,992,507 1,388,992
- H shares of RMB1.00 each 3,226,532,000 3,226,532 2,805,680,000 2,805,680
9,433,210,909 9,433,211 9,050,618,182 9,050,618
A summary of the movements in the Company's issued share capital for the six
months ended 30 June 2005 is as follows:
Number of shares Nominal value
RMB'000
(Unaudited)
At beginning of period 9,050,618,182 9,050,618
State legal person shares converted
into H shares (note 16 (a)) (29,749,686) (29,750)
Non-H foreign shares converted
into H shares (note 16 (a)) (8,509,587) (8,509)
Share placement (note 16 (b)) 420,852,000 420,852
At end of period 9,433,210,909 9,433,211
Pursuant to the Restructuring, and the basis of presentation thereof, as
discussed in note 1, the owners' equity of the Company in the consolidated
balance sheet as at 30 September 2004, the date of incorporation of the Company,
was converted into the Company's share capital of RMB6,500 million of RMB1.00
each with the rest as capital reserve.
A summary of the movements in the Company's issued share capital for the period
from 30 September 2004 (date of incorporation) to 31 December 2004 is as
follows:
Number of shares Nominal value
RMB'000
(Audited)
At date of incorporation 6,500,000,000 6,500,000
State legal person shares converted
into H shares (198,331,240) (198,331)
Non-H foreign shares converted into H shares (56,730,578) (56,731)
Share placement and public offer 2,805,680,000 2,805,680
At end of the year 9,050,618,182 9,050,618
38 Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
16. SHARE CAPITAL (Continued)
Notes:
(a) In January 2005, upon the exercise of the over-allotment options granted
to international underwriters, the Company issued 420,852,000 H shares,
consisting of 382,592,727 new shares, 29,749,686 H shares converted from State
legal person shares and 8,509,587 H shares converted from non-H foreign shares,
with a par value of RMB1.00 each at HK2.98 (equivalent to RMB3.17072) per share.
The proceeds from the sale of the State legal person shares and non-H foreign
shares aggregating approximately RMB117 million, after deducting share issue
expenses of approximately RMB4 million which were borne by the Social Security
Fund in connection with the sale of the State legal person shares and non-H
foreign shares, were remitted to the Social Security Fund.
(b) As referred to in note 16 (a) above, the Company issued 420,852,000 H
shares upon the exercise of the over-allotment options granted to international
underwriters. After deducting aggregate net proceeds of approximately RMB117
million from the sale of 29,749,686 H shares converted from State legal person
shares and 8,509,587 H shares converted from non-H foreign shares, which were
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), 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 H shares rank pari passu, in all material respects, with the State legal
person shares and non-H foreign shares of the Company.
17. CONTINGENT LIABILITIES
As at 30 June 2005, the Group had the following contingent liabilities:
(a) Pursuant to the Restructuring of CNAHC, in preparation for the listing
of the Company's H shares on the Hong Kong Stock Exchange and the London Stock
Exchange, the Company entered into a restructuring agreement with CNAHC and
China National Aviation Corporation (Group) Limited ('CNACG'), one of the
minority shareholders of the Company and is a Hong Kong incorporated company
wholly owned by CNAHC, 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 unaudited
condensed consolidated interim 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
predecessor of the Company. The Group cannot predict the timing of the courts'
judgements or the possible outcome of the lawsuits nor any possible appeal
actions. Up to 30 June 2005, the Company, Air China International Corporation
and the Company's insurer had paid an aggregate amount of approximately RMB190
million in respect of passenger liability and other auxiliary costs. Included in
the RMB190 million is an amount of approximately 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 on the Group's financial position.
Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
17. CONTINGENT LIABILITIES (Continued)
(c) 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 these unaudited condensed consolidated
interim financial statements, 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.
(d) The Group has issued guarantees to banks in respect of the bank loan
facilities granted to the following parties:
30 June 31 December
2005 2004
RMB'000 RMB'000
(Unaudited) (Audited)
Joint venture 115,000 -
Associates 179,000 214,002
294,000 214,002
18. COMMITMENTS
(a) Capital commitments
The Group had the following amounts of contractual commitments for the
acquisition and construction of property, plant and equipment:
30 June 31 December
2005 2004
RMB'000 RMB'000
(Unaudited) (Audited)
Contracted, but not provided for:
Aircraft and flight equipment 20,580,667 8,750,195
Buildings 111,975 544,855
Others 31,602 8,426
20,724,244 9,303,476
Authorised, but not contracted for:
Buildings 2,425,181 2,528,544
Total capital commitments 23,149,425 11,832,020
40 Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
18. COMMITMENTS (Continued)
(b) Investment commitment
As at 30 June 2005, the Company committed to make a capital contribution of
approximately RMB372 million (US$45 million) (31 December 2004: RMB422 million)
to a 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 had the following future minimum lease payments under non-cancellable
operating leases:
30 June 31 December
2005 2004
RMB'000 RMB'000
(Unaudited) (Audited)
Within one year 1,703,995 1,140,228
In the second to fifth years, inclusive 6,063,470 3,215,879
Over five years 3,160,822 1,000,319
10,928,287 5,356,426
19. 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
joint control. The transactions were made at prices and terms mutually agreed
between the parties. The directors of the Company are of the opinion that the
transactions with related parties were conducted in the usual course of
business.
Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
19. RELATED PARTY TRANSACTIONS (Continued)
The Group had the following significant transactions carried out in the ordinary
course of business between the Group and (i) CNAHC, its subsidiaries (other than
the Group) and joint ventures (collectively known as 'CNAHC Group'); (ii) its
joint ventures; and (iii) its associates:
Six months ended 30 June
2005 2004
RMB'000 RMB'000
(Unaudited) (Audited)
(Restated)
A. Included in air traffic revenues
Sale of air tickets
CNAHC Group 6,010 9,050
Associates 617 2,233
6,627 11,283
Sale of cargo space
CNAHC Group 95,671 91,895
Charter flight service
CNAHC Group 186,690 -
B. Included in other operating revenues
Aircraft and related equipment lease income
CNAHC Group - 450
Joint ventures 1,735 -
1,735 450
Aircraft engineering income
Associates 4,750 9,474
Ground services income
CNAHC Group 488 -
Associates 13,384 9,547
13,872 9,547
Bellyhold income
Joint venture 711,910 670,145
Others
CNAHC Group 11,042 281
Joint ventures 8,122 50
Associates 3,576 266
22,740 597
C. Included in finance costs
Interest income
Associates 1,024 1,224
Interest expense
Associates 8,965 9,947
42 Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
19. RELATED PARTY TRANSACTIONS (Continued)
Six months ended 30 June
2005 2004
RMB'000 RMB'000
(Unaudited) (Audited)
(Restated)
D. Included in operating expenses
Airport ground services, take-off,
landing and depot expenses
CNAHC Group 45,047 50,450
Associates 111,678 103,157
156,725 153,607
Air catering charges
CNAHC Group 24,338 18,607
Joint ventures 50,657 38,527
Associates 3,048 -
78,043 57,134
Repair and maintenance costs
Joint ventures 197,616 209,578
Associates 40,837 13,491
238,453 223,069
Sale commission expenses
CNAHC Group 14,950 10,790
Management fees
CNAHC Group 5,088 5,088
Others
CNAHC Group 47,643 22,609
Associates 59,551 -
107,194 22,609
Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
19. RELATED PARTY TRANSACTIONS (Continued)
30 June 2005 31 December 2004
RMB'000 RMB'000
(Unaudited) (Audited)
E. Deposits, loans and bills payable
Deposits placed with an associate 478,119 566,985
Loans from an associate 193,028 481,132
Bills payable to an associate 97,705 -
F. Outstanding balance with related parties
Due from CNAHC (long-term) 581,813 631,813
Due from other CNAHC group companies 28,839 44,916
Due from associates 109,208 90,842
Due from a joint venture 462,497 412,539
Due to associates 71,473 81,591
Due to shareholders 967,835 2,256,117
Due to other CNAHC group companies 29,561 49,617
Due to a joint venture 158,645 179,934
Except for the long-term amount due from CNAHC, the outstanding balances with
related parties are unsecured, interest-free and have no fixed terms of
repayment. The long-term amount due from CNAHC is unsecured, interest- free and
is not repayable within one year from the balance sheet date.
Six months ended 30 June
2005 2004
RMB'000 RMB'000
(Unaudited) (Audited)
G. Compensation of key management personnel of the Group
Short term employee benefit 2,110 1,907
Post-employment benefit 60 44
Total compensation paid to key management personnel 2,170 1,951
(a) In addition to the above, on 18 October 1997, China National Aviation
Company Limited ('CNAC'), a company incorporated in Hong Kong which is 69%-owned
by the Company, entered into a licence agreement with China National Aviation
Corporation ('CNAC (PRC)') pursuant to which CNAC (PRC) has 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.
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.
No royalty charge was levied in respect for the use of the above trademarks
during the six months ended 30 June 2005 and the year ended 31 December 2004.
44 Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
19. RELATED PARTY TRANSACTIONS (Continued)
(b) Pursuant to certain of the Company's aircraft leasing arrangements and
bank loans arrangements, the overseas lessors and lenders require guarantees to
be given by major PRC state-owned banks. In giving such guarantees, the PRC
state-owned banks in turn require CNAHC and China National Aviation Finance Co.,
Ltd. ('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:
30 June 2005 31 December 2004
RMB'000 RMB'000
(Unaudited) (Audited)
CNAHC:
Finance leases - 921,000
Bank loans - 1,455,000
- 2,376,000
CNAF:
Finance leases - 3,976,000
Bank loans - 761,000
- 4,737,000
- 7,113,000
(c) 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.
(d) There were no pension payments relating to the Supplementary Pension
Benefits of the Group for the six months ended 30 June 2005. All pension
payments relating to the Supplementary Pension Benefits of RMB26 million for the
six months ended 30 June 2004 were borne by CNAHC.
Apart from the transactions detailed above and elsewhere in the unaudited
condensed consolidated interim financial statements, the Group also conducts
business with the PRC government and enterprises directly or indirectly owned or
controlled by the PRC government but not controlled by CNAHC (collectively
'Other State-owned Enterprises'). In the opinion of the directors, since the
Group considers itself as a profit-oriented private enterprise when doing
business with Other State-owned Enterprises, transactions with Other State-
owned Enterprises are not considered as transactions, which require disclosures
under the requirements of IAS 24 (revised 2003) Related Party Disclosures.
Air China Limited >> Interim Report 2005
Condensed Consolidated Interim Financial Statements
20. EVENTS AFTER THE BALANCE SHEET DATE
(a) On 7 July 2005, the Group has approved an increase of RMB50,000,000 in
the share capital of Southwest Air Catering Company Limited ('SWACL'), a 60%-
owned jointly-controlled entity of CNAC. The purpose of the increase in share
capital is for SWACL's further investment and development. CNAC's share in the
additional capital contribution in SWACL of RMB30,000,000 has not been injected
as of the date of these unaudited condensed consolidated interim financial
statements.
(b) On 21 July 2005, the People's Bank of China announced that the Renminbi
exchange rate regime was reformed to a floating exchange rate regime based on
market demand and supply with reference to a basket of foreign currencies. As a
result, the exchange rate of US dollar against Renminbi was adjusted to RMB8.11
per US dollar effective from the close of business on 21 July 2005. The
directors of the Company are of the view that the aforesaid appreciation of
Renminbi would not have adverse impact on the operations and financial position
of the Group.
(c) On 28 July 2005, CNAC and CNAHG renewed the management service agreement
with the same terms under the management service agreement dated 27 August 2003.
Pursuant to the renewed management service agreement, CNACG has agreed to
provide secretarial, personnel, accounting and general office administrative
services to CNAC and its subsidiaries for a period of three years from 1 July
2005 to 30 June 2008 at a monthly fee of HK$500,000 (equivalent to approximately
RMB530,000).
(d) Subsequent to 30 June 2005, airlines companies in the PRC, including the
Company, have obtained government approval to impose fuel surcharges on domestic
routes (not including those flying between Mainland China, Hong Kong and Macau)
to deflect a portion of the increasing jet fuel cost, the principal operating
cost of airlines. From 1 August 2005 to 31 December 2005, airlines companies in
the PRC will collect RMB20 from each passenger travelling less than 800
kilometres and RMB40 from each traveller on flights exceeding that distance.
(e) On 8 August 2005, the Company and Air China Group Import and Export
Trading Co. entered into an agreement with Boeing Company, pursuant to which the
Company has agreed to purchase 15 Boeing 787 aircraft (formerly known as
'Boeing 7E7 aircraft') (the 'Boeing Aircraft') from Boeing Company for an
aggregate consideration of approximately US$2.16 billion (equivalent to
approximately RMB18 billion). The aggregate consideration for the acquisition of
the Boeing Aircraft is payable by cash in instalments. The Boeing Aircraft are
scheduled to be delivered in stages from mid-2008 to the end of 2010.
21. COMPARATIVE FIGURES
In 2004, 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. 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.
22. APPROVAL OF THE INTERIM FINANCIAL REPORT
These unaudited condensed consolidated interim financial statements were
approved and authorised for issue by the Board of directors on 5 September 2005.
46 Air China Limited >> Interim Report 2005
Corporate Governance
1. COMPLIANCE WITH THE CODE ON CORPORATE GOVERNANCE PRACTICES
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
Listing Rules throughout the first half of 2005, except for the following
deviations:
Relevant code provision
1 Code provision A.5.4 requires, among others, the board should
establish written guidelines on no less exacting terms than the Model Code
for Securities Transactions by Directors of Listed Issuers (the 'Model
Code') Companies for relevant employees in respect of their dealings in the
securities of the issuer.
Deviation and considered reasons
or subsequent compliance
A code of conduct regarding directors, supervisors, and relevant employees'
securities transactions on terms no less exacting than the required standard set
out in the Model Code was adopted by the Company on 5 September 2005.
2 Code provision E.1.2 requires, among others, the chairman of the board
should attend the annual general meeting.
Deviation and considered reasons
or subsequent compliance
Our Chairman, Mr. Li Jiaxiang, who is a member of the Chinese government
delegation, was required to attend the 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. require for, among others, specific
written terms of reference of the remuneration committee and audit
committee, respectively.
Deviation and considered reasons
or subsequent compliance
Written terms of reference of the remuneration committee and audit
committee, as required by the relevant Code provisions, were adopted by the
Company on 12 April 2005.
Air China Limited >> Interim Report 2005
Corporate Governance
2. COMPLIANCE WITH THE MODEL CODE
After having made specific enquiry, the Company confirms that all of its
directors and supervisors have complied with the required standard set out in
the Model Code contained in Appendix 10 to the Listing Rules throughout the
first half of 2005.
On 5 September 2005, the Company adopted its own code of conduct regarding
directors' securities transactions on terms no less exacting than the required
standard set out in the Model Code. The Company's own code also applies to its
supervisors and relevant employees.
CNAC, which is a subsidiary of the Company listed in Hong Kong, confirms that
all of its directors have complied with the required standard set out in the
Model Code throughout the first half of 2005.
48 Air China Limited >> Interim Report 2005
Miscellaneous
1. PURCHASE, SALE OR REDEMPTION OF 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.
2. DISCLOSURE OF INTERESTS OF DIRECTORS AND SUPERVISORS
As at 30 June 2005, Mr. Zhang Xianlin, a supervisor of the Company, had
interests in 33,126,000 shares, which represents approximately 1% of the share
capital of CNAC.
Save as the above mentioned, none of our directors, supervisors and chief
executive has any interests or short positions in the shares, underlying shares
or debentures of the Company or its any associated corporations (within the
meaning of Part XV of the Securities and Futures Ordinance (the 'SFO')), or
recorded in the register required to be kept under section 352 of the SFO or as
otherwise notified to the Company and the Hong Kong Stock Exchange pursuant to
the Model Code.
Air China Limited >> Interim Report 2005 49
Miscellaneous
SIGNIFICANT INTERESTS AND SHORT POSITIONS IN SHARES AND UNDERLYING SHARES
As at 30 June 2005, to the knowledge of the directors, chief executive and
supervisors of the Company the interests and short positions of the following
persons (other than the Company's directors, supervisors or chief executive) in
the shares and underlying shares of the Company as recorded in the register of
the Company required to be kept under Section 336 of the SFO were as follows:
Type and Percentage of Percentage of
number of Percentage of the total the total issued Percentage
of shares of the total issued domestic non-H foreign the total issued
Name of Type of the Company issued share capital shares of shares of H shares of Short
shareholder interests held of the Company the Company the Company the Company position
CNAHC Beneficial 4,826,195,989 51.16% 100% - - -
owner domestic shares
CNAHC(1) Attributable 1,380,482,920 14.63% - 100% - -
interests non-H foreign
shares
China National
Aviation Beneficial 1,380,482,920 14.63% - 100% - -
Corporation
(Group) owner non-H
Limited foreign shares
Cathay Pacific Beneficial 943,321,091 10.00% - - 29.24% -
owner H shares
Swire Pacific
Limited(2) Attributable 943,321,091 10.00% - - 29.24% -
interests H shares
John Swire
& Sons Attributable 943,321,091 10.00% - - 29.24% -
(H.K.)
Limited(2) interests H shares
John Swire
& Sons Attributable 943,321,091 10.00% - - 29.24% -
Limited(2) interests H shares
Wellington
Management Investment 153,112,100 1.62% - - 4.75% -
Company, LLP(3) manager H shares
Temasek
Holdings Attributable 400,450,000 4.25% - - 12.41% -
(Private)
Limited(4) interests H shares
50 Air China Limited >> Interim Report 2005
Miscellaneous
Note:
1. By virtue of CNAHC's 100% interest in China National Aviation Corporation
(Group) Limited, CNAHC is deemed to be interested in the 1,380,482,920 non-H
foreign shares of the Company directly held by China National Aviation
Corporation (Group) Limited.
2. By virtue of John Swire & Sons Limited's 100% interest in John Swire &
Sons (H.K.) Limited, John Swire & Son's (H.K.) Limited's 51.91% interest in
Swire Pacific Limited, John Swire & Sons Limited's 52.86% interest in Swire
Pacific Limited and Swire Pacific Limited's 46.48% interest in Cathy Pacific,
each of John Swire & Son Limited, John Swire & Sons (H.K.) Limited and Swire
Pacific Limited are deemed to be interested in the 943,321,091 H shares of the
Company directly held by Cathy Pacific.
3. Pursuant to the last notification filed by Wellington Management Company,
LLP dated 20 December 2005, it had an interest of 5.45% of the total issued H
shares of the Company. Given subsequent issuance of H shares pursuant to the
over-allotment option in January 2005, we believe the interests of Wellington
Management Company, LLP in the total issued shares and in the total issued H
shares of the Company have been reduced to 1.62% and 4.75%, respectively, as at
30 June 2005.
4. Temasek Holdings (Private) Limited, through its controlled entities, had
an attributable interest in 400,450,000 H shares of the Company, out of which
the interest in 292,500,000 H shares (representing approximately 9.07% of the
total issued H shares) was held directly by Aranda Investment (Mauritius) Pte
Ltd. and the interest in the remaining 107,950,000 H shares was held directly by
Dahlia Investments Ptd Ltd, FPL Alpha Investment Pte Ltd and Fullerton (Private)
Limited.
As at June 30, 2005, to the knowledge of the directors, chief executive and
supervisors of the Company, the interests and short positions of the following
persons in the shares and underlying shares of CNAC, as recorded in the register
of CNAC, required to be kept under Section 336 of the SFO were as follows:
Percentage of
the issued
Capacity No. of shares share capital
CNAHC(1) Attributable interest 2,264,628,000 68.4
The Company(2) Beneficial owner 2,264,628,000 68.4
Best Strikes Limited Beneficial owner 187,656,000 5.6
On Ling Investments Attributable interest 322,856,000 9.7
Limited(3)
Novel Investments Attributable interest 322,856,000 9.7
Holdings Limited(3)
Novel Enterprises
Limited(3) Attributable interest 322,856,000 9.7
Novel Enterprises (BVI) Attributable interest 322,856,000 9.7
Limited(3)
Novel Credit Limited(3) Attributable interest 322,856,000 9.7
Novel Holdings (BVI) Attributable interest 322,856,000 9.7
Limited(3)
Westleigh Limited(3) Attributable interest 322,856,000 9.7
Air China Limited >> Interim Report 2005 51
Miscellaneous
Notes:
1. CNAHC owns approximately 51.16 per cent of the total issued share capital
of the Company and the entire issued share capital of CNACG, a company
incorporated in Hong Kong, which in turn owns approximately 14.64 per cent of
the total issued share capital of the Company. Accordingly, its interests in
CNAC duplicate with those interest of the Company.
2. CNACG, CNAC's former immediate controlling shareholder, transferred its
approximately 69 per cent shareholding interest in CNAC to the Company in
September 2004 by way of a capital contribution in return for the Company's non-
H foreign shares, as such the Company becomes the immediate controlling
shareholder of CNAC. Its interest in CNAC duplicates with those interests of
CNAHC.
3. 5.6% of the interest held by each of these companies in CNAC duplicates
with Best Strikes Limited's interest in CNAC. The interests of these companies
in CNAC also duplicate each other.
Save as disclosed above, as at 30 June 2005, to the knowledge of the directors,
chief executive and supervisors of the Company, no other person had an interest
or short position in the shares and underlying shares of the Company that was
required to be recorded in the register maintained pursuant to section 336 of
the SFO.
3. 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.
4. REVIEW BY AUDIT COMMITTEE
The audit committee of the Company has reviewed the interim report for the six
months ended 30 June 2005 and the Company's interim unaudited condensed
consolidated financial statements and the accounting policies and practices
adopted by the Group.
52 Air China Limited >> Interim Report 2005
Glossary of Technical Terms
CAPACITY MEASUREMENTS
'available seat kilometres' or 'ASKs' the number of seats available for sale multiplied by the kilometres flown
'available freight tonne kilometres'
or 'AFTKs' the number of tonnes of capacity available for the carriage of cargo and mail
multiplied by the kilometres flown
'available tonne kilometres' or 'ATKs' the number of tonnes of capacity available for the transportation of revenue
load (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 'RFTKs' the revenue cargo and mail load in tonnes multiplied by the kilometres flown
'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
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 hours' each whole or partial hour elapsing from the moment the chocks are removed
from the wheels of the aircraft for flights until the chocks are next again
returned to the wheels of the aircraft
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