Major Transaction - Part 2b

Air China Ld 30 May 2006 40. DISTRIBUTABLE RESERVES As at 31 December 2005, in accordance with the PRC Company Law, an amount of approximately RMB8,505 million (2004: RMB7,704 million) standing to the credit of the Company's capital reserve account, and an amount of approximately RMB305 million (2004: RMB52 million) standing to the credit of the Company's reserve funds, as determined in accordance with PRC GAAP, were available for distribution by way of future capitalisation issue. In addition, the Company had retained earnings of approximately RMB1,641 million (2004: RMB208 million), as determined in accordance with PRC GAAP and being the lesser amount of the retained earnings determined in accordance with PRC GAAP and IFRSs, available for distribution as dividend. 41. CONTINGENT LIABILITIES Pursuant to the Restructuring, the following legal matters set out in items (a) and (b) below were transferred to or assumed by the Company upon its incorporation. As at 31 December 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 Hong Kong Stock Exchange and the London Stock Exchange, the Company entered into a restructuring agreement with CNAHC and CNACG on 20 November 2004 ('Restructuring Agreement'), except for liabilities constituting or arising out of or relating to business undertaken by the Company after the Restructuring, no other liabilities were assumed by the Company and the Company is not liable, whether severally, or jointly and severally, for debts and obligations incurred prior to the Restructuring by CNAHC and CNACG. The Company has also undertaken to indemnify CNAHC and CNACG in respect of any damage suffered or incurred by CNAHC and CNACG as a result of any breach by the Company of any provision of the Restructuring Agreement. (b) On 15 April 2002, Flight CA129 crashed on approach to Gimhae International Airport, South Korea. There were 129 fatalities including 121 passengers and 8 crew members aboard the crashed aircraft. An investigation was conducted by the Chinese and the Korean civil aviation authorities, but the cause of the accident has yet to be released at the date of these financial statements. Certain injured passengers and families of the deceased passengers have commenced proceedings in Korean courts seeking damages against Air China International Corporation, the 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 31 December 2005, the Company, Air China International Corporation and the Company's insurer had paid an aggregate amount of approximately RMB197 million in respect of passenger liability and other auxiliary costs. Included in the RMB197 million is an amount of approximately RMB179 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. (c) The Group and the Company have issued guarantees to banks in respect of the bank loans granted to the following parties: Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Joint ventures 91,000 - - - Associates 149,109 214,002 128,303 198,102 240,109 214,002 128,303 198,102 42. COMMITMENTS (a) Capital commitments The Group and the Company have the following amounts of contractual commitments for the acquisition and construction of plant, property and equipment: Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Contracted, but not provided for: Aircraft and flight 31,696,796 8,750,195 31,403,107 7,272,969 equipment Buildings 835,902 544,855 664,614 211,607 Others 22,339 8,426 22,339 8,426 32,555,037 9,303,476 32,090,060 7,493,002 Authorised, but not contracted for: Aircraft and flight 3,973,095 - 3,564,126 - equipment Buildings 1,920,079 2,528,544 1,920,079 2,528,544 Others 65,608 - - - Total capital commitments 38,513,819 11,832,020 37,574,265 10,021,546 (b) Investment commitments As at 31 December 2005, the Company is committed to make capital contributions of RMB358 million (equivalent to approximately US$45 million) (2004: RMB422 million) and RMB103 million (2004: Nil) to a joint venture and an associate, respectively. (c) Operating lease commitments The Group and the Company lease 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. At the balance sheet date, the Group and the Company have the following future minimum lease payments under non-cancellable operating leases: Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Within one year 1,507,057 1,140,228 760,230 748,202 In the second to fifth years, inclusive 2,862,349 3,215,879 1,657,353 2,111,282 Over five years 1,066,083 1,000,319 644,741 566,585 5,435,489 5,356,426 3,062,324 3,426,069 43. FINANCIAL INSTRUMENTS (a) Fair value Financial assets of the Group and the Company mainly include cash and cash equivalents, pledged deposits, trade receivables, available-for-sale investments, deposits and other receivables. Financial liabilities of the Group and the Company mainly include bank and other loans, obligations under finance leases, trade payables, other payables, bills payable and air traffic liabilities. The carrying amounts of the Group's and the Company's financial instruments approximated their fair value as at the balance sheet date. Fair value estimates are made at a specific point in time and based on relevant market information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (b) Interest rate risk The following table sets out the carrying amount, by maturity, of the Group's financial instruments that are exposed to interest rate risk: For the year ended 31 December 2005 Fixed rate In the third to fifth Within one In the years, Over five year second year inclusive years Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Obligations under finance leases 1,625,907 1,949,802 6,071,492 57,377 9,704,578 Bank and other loans 4,877,843 1,502,072 2,856,723 812,434 10,049,072 4.5% corporate bonds - - - 3,000,000 3,000,000 Bills payable 327,937 - - - 327,937 Cash assets 2,522,336 - - - 2,522,336 Floating rate In the third to fifth Within one In the years, Over five year second year inclusive years Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Obligations under finance leases 328,966 - - - 328,966 Bank and other loans 5,523,327 1,245,086 1,842,931 1,563,633 10,174,977 For the year ended 31 December 2004 Fixed rate In the third to fifth Within one In the years, Over five year second year inclusive years Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Obligations under finance leases 1,629,551 1,606,254 6,722,448 1,910,163 11,868,416 Bank and other loans 3,197,913 1,195,648 3,694,366 1,596,253 9,684,180 Bills payable 362,033 - - - 362,033 Cash assets 9,851,305 - - - 9,851,305 Floating rate In the third to fifth Within one In the years, Over five year second year inclusive years Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Obligations under finance leases 75,595 337,376 - - 412,971 Bank and other loans 5,608,138 1,868,251 2,520,893 2,021,211 12,018,493 Interest on financial instruments classified as floating rate is repriced at intervals of less than one year. Interest on financial instruments classified as fixed rate is fixed until the maturity of the instrument. The other financial instruments of the Group that are not included in the above tables are non-interest-bearing and are therefore not subject to interest rate risk. 44. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Group's principal financial instruments, other than derivatives, comprise bank and other loans, obligations under finance leases, cash and cash equivalents and pledged deposits. The main purpose of these financial instruments is to raise finance for the Group's operations. The Group has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. The Group also enters into derivative transactions, including principally swaps and collars contracts. The purpose is to manage the jet fuel price risk arising from the Group's operations. It is, and has been throughout the year under review, the Group's policy that no trading in financial instruments shall be undertaken. The Group operates globally and generates revenue in various currencies. The Group's airline operations are exposed to business risk, liquidity risk, jet fuel price risk, foreign currency risk, interest rate risk and credit risk. The Group's overall risk management approach is to moderate the effects of such volatility on its financial performance. Financial risk management policies are periodically reviewed and approved by the Board of Directors and they are summarised below. (a) Business risk The operations of the air transportation industry are substantially influenced by global political and economic development. Factors such as accidents and wars may have a material impact on the Group's operations or the industry as a whole. In addition, the Group primarily conducts its principal operations in Mainland China and accordingly is subject to special consideration and significant risks not typically associated with companies in the United States of America and Western Europe. These include risks associated with, among other things, the political, economic and legal environment, competition and influence of the CAAC in the Chinese civil aviation industry. (b) Liquidity risk The Group's net current liabilities amounted to approximately RMB16,006 million at 31 December 2005 (2004: RMB9,053 million). The Group recorded a net cash inflow from operating activities of approximately RMB6,048 million for the year ended 31 December 2005 (2004: RMB6,151 million). For the same period, the Group had a net cash outflow from investing activities of approximately RMB12,500 million (2004: RMB4,979 million). The Group also recorded a net cash outflow from financing activities of approximately RMB766 million and an inflow from financing activities of approximately RMB5,620 million for the years ended 31 December 2005 and 2004, respectively. The Group has recorded a decrease in cash and cash equivalents of approximately RMB7,165 million and an increase in cash and cash equivalents of approximately RMB6,824 million for the years ended 31 December 2005 and 2004, respectively. With regards to 2006 and thereafter, the liquidity of the Group is primarily dependent on its ability to maintain adequate cash inflow from operations to meet its debt obligations as they fall due, and on its ability to obtain external financing to meet its committed future capital expenditure. With regards to its future capital commitments and other financing requirements, the Company has already obtained several banking facilities with several PRC banks of up to an amount of RMB78,570 million as at 31 December 2005, of which an amount of approximately RMB33,476 million was utilised. The Directors of the Company have carried out a detailed review of the cash flow forecast of the Group for the year ending 31 December 2006. Based on such forecast, the Directors have determined that adequate liquidity exists to finance the working capital and capital expenditure requirements of the Group during 2006. In preparing the cash flow forecast, the Directors have considered historical cash requirements of the Group as well as other key factors, including the availability of the above-mentioned loans financing which may impact the operations of the Group prior to the end of 2006. The Directors are of the opinion that the assumptions and sensitivities which are included in the cash flow forecast are reasonable. However, as with all assumptions in regard to future events, these are subject to inherent limitations and uncertainties and some or all of these assumptions may not be realised. (c) Jet fuel price risk The Group's strategy for managing the risk on jet fuel price aims to provide the Group with protection against sudden and significant increases in prices. In meeting these objectives, the Group allows for the judicious use of approved derivative instruments such as swaps and collars with approved counter-parties and within approved limits. Moreover, counter-party credit risk is generally restricted to any gains on changes in fair value at any time, and not the principal amount of the instrument. Therefore, the possibility of material loss arising in the event of non-performance by a counter-party is considered to be unlikely. The fair values of derivative instruments of the Group and the Company at the balance sheet date are as follows: Group Group 2005 2005 2004 2004 Assets Liabilities Assets Liabilities RMB'000 RMB'000 RMB'000 RMB'000 Swaps and collars expiring: Within 6 months - - - - Over 6 months to 21 months 127,659 (1,791) - - 127,659 (1,791) - - Company Company 2005 2005 2004 2004 Assets Liabilities Assets Liabilities RMB'000 RMB'000 RMB'000 RMB'000 Swaps and collars expiring: Within 6 months - - - - Over 6 months to 21 months 115,220 (1,791) - - 115,220 (1,791) - - Fair values of derivative instruments, denominated in United States dollars, are obtained from quoted market prices, dealer price quotations, discounted cash flow models and option pricing models, which consider current market and contractual prices for the underlying instruments, as well as time value of money, yield curve and volatility of the underlying instruments. (d) Foreign currency risk The Group's finance lease obligations as well as certain bank and other loans are denominated in United States dollars and Japanese yen, and certain expenses of the Group are denominated in currencies other than RMB. The Group generates foreign currency revenue from ticket sales made in overseas offices and would normally generate sufficient foreign currencies after payment of foreign currency expenses, to meet its foreign currency liabilities repayable within one year. RMB against United States dollars and Hong Kong dollars have been comparatively stable in the past. However, RMB against Japanese yen had experienced a significant level of fluctuation during the year which is the major reason for the significant exchange difference recognised by the Group for the year. (e) Interest rate risk The Group's earnings are also affected by changes in interest rates due to the impact of such changes on interest income and expense from short-term deposits and other interest-bearing financial assets and liabilities. A significant portion of the Group's interest-bearing financial liabilities with maturities over one year have predominately fixed rates of interest and are denominated in United States dollars and Japanese yen. The Group's short-term deposits and other interest-bearing financial assets and liabilities are predominately denominated in RMB, United States dollars and Hong Kong dollars. (f) Credit risk The Group's cash and cash equivalents are deposited with banks in Mainland China, overseas banks and an associate. The Group has policies in place to limit the exposure to any one financial institution. A significant portion of the Group's air tickets are sold by agents participating in the Billing and Settlements Plan ('BSP'), a clearing system between airlines and sales agents organised by the International Air Transportation Association. The balance due from BSP agents amounted to approximately RMB529 million as at 31 December 2005 (2004: RMB531 million). Except for the above, the Group has no significant concentration of credit risk, with exposure spread over a number of counter-parties. 45. CONSOLIDATED CASH FLOW STATEMENT (a) Establishment of a joint venture For the year ended 31 December 2004, the establishment of a joint venture has been shown in the consolidated cash flow statement as a single item. The cash flow effect can be analysed as follows: 2004 RMB'000 Cash and bank balances 561,509 Trade receivables 16,844 Other receivables 2,778 Property, plant and equipment (note 15) 565,840 Inventories 352 Trade payables (40,018) Other payables and accruals (357,517) Air traffic liabilities (2,010) Net assets attributable to the joint venture 747,778 partners Dilution gain on an investment (note 9) 330,222 Cash contribution from the joint venture partners 1,078,000 Less: Cash attributable to the joint venture (561,509) partners Cash flow on establishment of a joint venture, net of cash attributable to the joint venture 516,491 partners (b) Major non-cash transactions Major non-cash transactions in 2004 were as follows: (i) In 2004, the Group received an aircraft injected by the PRC government amounting to RMB304,787,000 (note 36). This amount has been recorded in property, plant and equipment. (ii) Upon incorporation of the Company on 30 September 2004, CNAHC effected the transfer of certain land use rights in an aggregate amount of approximately RMB885,626,000 to the Company. 46. RELATED PARTY TRANSACTIONS The Group is part of a larger group of companies under CNAHC and has extensive transactions and relationships with members of CNAHC. As such, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly-unrelated parties. Related parties refer to corporations in which CNAHC is a shareholder and is able to exercise control or 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 (see below) were conducted in the usual course of business. The Group had the following significant transactions between the Group and (i) CNAHC, its subsidiaries (other than the Group) and joint ventures (collectively known as the 'CNAHC Group'); (ii) its joint ventures; and (iii) its associates: Group 2005 2004 RMB'000 RMB'000 A. Included in air traffic revenue Sale of air tickets CNAHC Group 9,836 17,227 Associates 1,463 2,154 11,299 19,381 Sale of cargo space CNAHC Group 200,273 213,836 Government charted flights CNAHC 407,048 - B. Included in other operating revenue Aircraft and related equipment lease income CNAHC Group - 1,912 Aircraft engineering income Associates 11,563 9,876 Ground services income CNAHC Group 1,061 - Joint ventures 23,417 942 Associates 34,401 19,849 58,879 20,791 Bellyhold income Joint venture 1,496,302 1,384,457 Others CNAHC Group 22,432 5,734 Joint ventures 33,406 14,424 Associates 35,568 11,484 91,406 31,642 Group 2005 2004 RMB'000 RMB'000 C. Included in finance revenue and finance costs Interest income Associate 2,363 3,409 Interest expense Associate 14,532 21,843 D. Included in operating expenses Airport ground services, take-off, landing and depot expenses CNAHC Group 92,836 97,183 Associates 248,128 210,103 340,964 307,286 Air catering charges CNAHC Group 49,695 43,241 Joint ventures 115,116 85,874 Associates 7,496 5,123 172,307 134,238 Repair and maintenance costs Joint ventures 363,181 472,378 Associates 125,717 107,508 488,898 579,886 Sale commission expenses CNAHC Group 7,571 25,913 Associates 6,119 - 13,690 25,913 Management fees CNAHC Group 10,096 44,080 Aircraft leasing fees Associate 201,388 - Others CNAHC Group 79,197 71,729 Associates 7,517 9,050 86,714 80,779 Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 E. Deposits, loans and bills payable Deposits placed with an 470,863 566,985 415,366 519,655 associate Loans from an associate 203,016 481,132 190,910 364,400 Bills payable to an 103,426 - 103,426 - associate F. Outstanding balance with related parties Due from CNAHC (long 531,813 631,813 531,813 631,813 term) Due from other CNAHC group companies 38,039 44,916 12,993 8,801 Due from associates 62,948 90,842 15,419 17,305 Due to associates (95,905) (81,591) (129,410) (82,109) Due from a joint venture 451,965 412,539 922,378 841,916 Due to CNAHC and CNACG (133,680) (2,256,117) (118,680) (2,240,213) Due to other CNAHC group companies (40,471) (49,617) (22,413) (12,163) Due to a joint venture (115,435) (179,934) (288,588) (449,835) Due from CNAHC 474,216 - 474,216 - Due from subsidiaries - - 11,519 22,513 Due to subsidiaries - - (588,623) (559,703) The long term amount due from CNAHC is unsecured, interest-free and is not repayable within one year from the balance sheet date. Except for the long term amount due from CNAHC, the outstanding balances with related parties are unsecured, interest-free and repayable within one year. Group 2005 2004 RMB'000 RMB'000 G. Compensation of key management personnel of the Group Short term 5,501 5,002 employee benefits Post-employment 142 93 benefits Total 5,643 5,095 compensation paid to key management personnel Further details of directors' emoluments are included in note 10 to the financial statements. Group 2005 2004 RMB'000 RMB'000 H. Disposal of a 20,737 - long term investment to CNAHC Group On 30 September 2005, Beijing Catering Co. Ltd., a 60% joint venture of the Group, sold its shares in CNAF to CNAHC for a total consideration of approximately RMB34 million. (a) In addition to the above, on 18 October 1997, CNAC entered into a licence agreement with China National Aviation Corporation ('CNAC (PRC)') pursuant to which CNAC (PRC) had agreed to grant a licence to CNAC, free of royalty, for the right to use certain trademarks in Hong Kong, the Taiwan region and Macau so long as CNAC is a subsidiary of CNACG. 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 these trademarks during each of the two years ended 31 December 2005. (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 some major PRC state-owned banks. In giving such guarantees, the PRC state-owned banks in turn require CNAHC and CNAF to provide counter-guarantees in favour of the banks. As at the balance sheet date, the amounts of such counter-guarantees provided by CNAHC and CNAF are as follows: Group 2005 2004 RMB'000 RMB'000 CNAHC: Finance leases (note 32) - 921,000 Bank loans (note 33) - 1,455,000 - 2,376,000 CNAF: Finance leases (note 32) - 3,976,000 Bank loans (note 33) - 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 year ended 31 December 2005. All pension payments relating to the Supplementary Pension Benefits of RMB39 million for the year ended 31 December 2004 were borne by CNAHC (note 11). (e) On 19 August 2004, Fly Top Limited, a wholly-owned subsidiary of CNAC, entered into the following acquisition agreements: (a) a sale and purchase agreement with CNACG in relation to the acquisition of approximately 16% of the issued share capital of LSGHK, a company incorporated in Hong Kong with limited liability (the 'CNACG Agreement'); and (b) a sale and purchase agreement with Hong Kong International Air Catering Limited ('HKIAC'), a company incorporated in Hong Kong with limited liability and in which Air China International Corporation has a 25% equity interest, in relation to the acquisition of approximately 4.2% of the issued share capital of LSGHK (the 'HKIAC Agreement'). The total consideration of the above acquisitions is approximately RMB122 million. Immediately after the completion of the CNACG Agreement and the HKIAC Agreement, the Group's effective shareholding interests in LSGHK is approximately 14%. The Group operates in an economic environment predominated by enterprises directly or indirectly owned or controlled by the PRC government through its numerous authorities, affiliates or other organisations (collectively 'State-owned Enterprises'). During the year, the Group had transactions with State-owned Enterprises including, but not limited to, the provision of air passenger and air cargo services and purchases of services. The Directors consider that transactions with other State-owned Enterprises are activities in the ordinary course of the Group's business and that the dealings of the Group have not been significantly or unduly affected by the fact that the Group and the other State-owned Enterprises are ultimately controlled or owned by the PRC government. The Group has also established pricing policies for products and services, and such pricing policies do not depend on whether or not the customers are State-owned Enterprises. Having due regard to the substance of the relationships, the Directors are of the opinion that none of these transactions are material related party transactions that require separate disclosure. 47. NET PROFIT ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT The net profit attributable to equity holders of the parent for the year ended 31 December 2005 and for the period from 1 October 2004 to 31 December 2004 dealt with in the financial statements of the Company was approximately RMB2,113 million and RMB1,230 million (note 38), respectively. 48. COMPARATIVE FIGURES The following comparative figures have been reclassified to conform to the current year's presentation: (a) Reclassification of profit and loss items: 2004 2005 Group Nature of item Classification Classification RMB'000 Share of tax attributable Tax Share of profits 96,974 to associates less losses from associates Finance revenue (which Finance costs Finance revenue 79,361 includes interest income, net gains on fuel derivatives, net and dividend income from available-for-sale investments) (b) Reclassification of balance sheet items: 2004 2005 Group Company Nature of item Classification Classification RMB'000 RMB'000 Non-pledged deposits Cash and cash Non-pledged 320,850 313,768 with equivalents deposits with maturity of more than maturity of three more months when acquired than three months when acquired Advance payments for Prepayments, Advance 2,193,458 1,958,515 aircraft payments and related equipment deposits and for aircraft and other related receivables equipment The Directors are of the view that the above changes would result in a more appropriate presentation of the Group's financial statements and better reflect the Group's financial performance and financial position. 49. EVENTS AFTER THE BALANCE SHEET DATE (a) On 17 January 2006, the Company and AIE, a wholly-owned subsidiary of the Company, entered into an aircraft purchase agreement with Boeing Company ('Boeing') pursuant to which the Company has agreed to purchase 10 Boeing 737-800 aircraft (the 'Boeing Aircraft') from Boeing for an aggregate consideration of US$655.2 million (equivalent to approximately RMB5,288 million). The aggregate consideration for the acquisition of the Boeing Aircraft is payable in cash by installments and the Boeing Aircraft are scheduled to be delivered in stages from 2007 to 2008. (b) On 24 January 2006, the Group, through a subsidiary and an associate of CNAC, entered into several agreements with Shun Tak Air Transport Limited and its subsidiaries (the 'Macau Asia Express Agreements') to establish Macau Asia Express Limited ('Macau Asia Express') to engage in the business of operating low cost model air transport services based in Macau. Pursuant to the Macau Asia Express Agreements, the Group will hold an indirect effective interest of 30% in Macau Asia Express. The aggregate initial investment to Macau Asia Express is up to approximately HK$234 million (equivalent to approximately RMB243 million) and in which the share of investment cost attributable to the Group, in an aggregate amount of approximately HK$161 million (equivalent to approximately RMB167 million), will be funded by internal resources. The completion of the establishment of Macau Asia Express is subject to certain conditions to be fulfilled. Macau Asia Express is a subsidiary of CNAC, as defined by the laws of Macau, but CNAC does not have unilateral control over the entity. Accordingly, it will be accounted for as a jointly controlled entity in the Group's financial statements accordance with IAS 31 Interests in Joint Ventures. 50. APPROVAL OF THE FINANCIAL STATEMENTS The financial statements were approved and authorised for issue by the Board of Directors on 18 April 2006. III. INDEBTEDNESS Borrowings The table below sets forth our total outstanding indebtedness as at 31 March 2006. As at 31 March 2006 Repayable Repayable Within After One Year One Year Total RMB RMB RMB Notes (in (in (in millions) millions) millions) Bank loans, other loans and corporate bonds (1) 12,411 12,739 25,150 Finance lease obligations (2) 2,017 6,979 8,996 Bills payable 756 - 756 Total 15,184 19,718 34,902 As at 31 March 2006 Total Indebtedness RMB (in millions) Indebtedness denominated in U.S. dollars (US$2,410 million) 19,321 Indebtedness denominated in Japanese (Japanese yen46,383 yen million) 3,166 Indebtedness denominated in HK dollars (HK$15 15 million) Indebtedness denominated in Renminbi 12,400 Total 34,902 Notes: (1) The Group's bank loans, other loans and corporate bonds of approximately RMB14,473 million were secured by mortgages over certain of the Group's assets (consisting of aircraft and bank deposits) in the amount of approximately RMB16,603 million as at 31 March 2006. Certain commercial banks have provided guarantees in the amount of approximately RMB9,461 million to which certain major PRC state-owned banks have provided counter-guarantees in the amount of approximately RMB4,707 million. (2) The Group's finance lease obligations of approximately RMB8,996 million were secured by certain of the Group's aircraft in the amount of approximately RMB9,205 million as at 31 March 2006. Certain commercial banks have provided guarantees in the amount of approximately RMB10,660 million to which certain major PRC state-owned banks have provided counter-guarantees of approximately RMB2,265 million. In addition to the above, as at 31 March 2006, certain of the Group's bank deposits in the amount of approximately RMB102 million were pledged against the Group's aircraft operating leases and financial derivatives. Contingent liabilities Pursuant to the restructuring of China National Aviation Holding Company ('CNAHC') for the listing of the Company's H shares on the Hong Kong Stock Exchange and the London Stock Exchange (the 'Restructuring'), the legal matters and litigation set out in items (i) and (ii) below were transferred to or assumed by the Company upon its incorporation. As at 31 March 2006, the Group had the following contingent liabilities: (i) Pursuant to the agreement for the Restructuring (the 'Restructuring Agreement') entered into by the Company with CNAHC and China National Aviation Corporation (Group) Limited ('CNACG'), except for liabilities constituting or arising out of or relating to businesses 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. (ii) On April 15, 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 officially released at the date of this letter. 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 can neither predict the timing of the courts' judgements nor the possible outcome of the lawsuits nor any possible appeal actions. Up to 31 March 2006, the Company, Air China International Corporation and the Company's insurer had paid an aggregate amount of approximately RMB200 million in respect of passenger liability and other auxiliary costs. Included in the RMB200 million is an amount of approximately RMB182 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 crashed aircraft, 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. (iii) The Group has issued guarantees to banks in respect of the bank loan facilities granted to the following parties: As at 31 March 2006 RMB (in millions) Joint venture 11 Associates 149 Total 160 Except as disclosed above, as at 31 March 2006, the Group did not have any outstanding mortgages, charges, pledges, debentures, loan capital, bank loans and overdrafts, debt securities or other similar indebtedness, finance leases or hire purchase commitments, acceptance liabilities or acceptance credits, any guarantees or other material contingent liabilities. Save as disclosed above, the directors have confirmed that there has been no material change in the indebtedness of the Group since 31 March 2006. APPENDIX II GENERAL INFORMATION 1. RESPONSIBILITY STATEMENT This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief there are no other facts the omission of which would make any statement herein misleading. 2. DISCLOSURE OF INTERESTS OF DIRECTORS AND SUPERVISORS As at the Latest Practicable Date, 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 disclosed above, as at the Latest Practicable Date, none of the Directors, Supervisors or chief executive of the Company has interests or short positions in the shares, underlying shares and/or debentures (as the case may be) of the Company or its associated corporations (within the meaning of Part XV of the SFO) which were notified to the Company and the Stock Exchange pursuant to SFO (including interests or short positions which he is taken or deemed to have under such provisions of the SFO), or recorded in the register maintained by the Company pursuant to Section 352 of the SFO, or which were notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of the Listed Companies. None of the Directors or Supervisors of the Company has any direct or indirect interest in any assets which have been, since 31 December 2005 (the date to which the latest published audited financial statements of the Group were made up), acquired or disposed of by or leased to any member of the Group or are proposed to be acquired or disposed of by or leased to, to any member of the Group. None of the Directors or Supervisors of the Company is materially interested in any contract or arrangement subsisting at the date of this circular and which is significant in relation to the business of the Group. None of the Directors or Supervisors of the Company and their respective associates (as defined in the Listing Rules) has any competing interests which would be required to be disclosed under Rule 8.10 of the Listing Rules if each of them were a controlling shareholder of the Company. 3. SUBSTANTIAL SHAREHOLDERS As at the Latest Practicable Date, to the knowledge of the Directors, Supervisors and chief executive of the Company, the interests and short positions of the following persons (other than a Director, Supervisor or chief executive of the Company) who have an interest or short position in the shares and underlying shares of the Company which would fall to be disclosed to the Company pursuant to the SFO, or who are, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any members of the Group are as follows: (a) Substantial interests in the Company Percentage Percentage of the Percentage of the total Percentage Type and of the total issued of the number total issued non-H total of shares issued domestic foreign issued H of the shares shares shares shares Type of Company of the of the of the of the Short Name interests concerned Company Company Company Company position CNAHC Beneficial 4,826,195,989 51.16% 100% - - - owner domestic shares CNAHC(1) Attributable 1,380,482,920 14.64% - 100% - - interests non-H foreign shares China National Beneficial 1,380,482,920 14.64% - 100% - - Aviation Corporation owner non-H foreign (Group) Limited shares Cathay Pacific Beneficial 943,321,091 10.00% - - 29.24% - owner H shares Swire Pacific Attributable 943,321,091 10.00% - - 29.24% - Limited(2) interests H shares John Swire & Sons Attributable 943,321,091 10.00% - - 29.24% - Limited(2) interests H shares John Swire & Sons Attributable 943,321,091 10.00% - - 29.24% - (H.K.) Limited(2) interests H shares Temasek Holdings Attributable 400,450,000 4.25% - - 12.41% - (Private) Limited interests H shares (3) HSBC Halbis Investment 163,840,000 1.74% - - 5.08% - Partners (Hong Kong) manager H shares Limtied Wellington Investment 201,314,500 2.13% - - 6.24% - Management Company, LLP manager H shares JPMorgan Chase & Investment 388,759,500 4.12% - - 12.05% - Co.(4) manager H shares 67,246,000 0.71% - - 2.08% - H shares (lending pool) Morgan Stanley(5) Investment 218,219,073 2.31% - - 6.76% - Manager 38,921,371 0.41% - - 1.21% - (short position) Note: Based on the information available to the Directors, chief executive and Supervisors of the Company (including such information as was available on the website of the Stock Exchange) and so far as the Directors, chief executive and Supervisors are aware, as at the Latest Practicable Date: 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 and their approximately 30% equity interest and 53% voting rights in Swire Pacific Limited, and Swire Pacific Limited's approximately 46% interest in Cathay Pacific, John Swire & Sons 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 Cathay Pacific. 3. 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. 4. JPMorgan Chase & Co, through its controlled entities, had an attributable interest in 388,759,500 H shares of the Company and 67,246,000 H shares of the Company as lending pool, out of which the interest in 67,246,000 H shares was held directly by JPMorgan Chase Bank, N.A., 278,248,000 H shares was held directly by JF Asset Management Limited, 9,644,000 H shares was held directly by JF International Management Inc., 347,500 H shares was held directly by J.P. Morgan Whitefriars Inc., 6,000,000 H shares was held directly by J.P. Morgan Securities Ltd., 26,266,000 H shares was held directly by JPMorgan Asset Management (Japan) Limted and 1,008,000 H shares was held directly by JF Asset Management (Singapore) Limited. 5. Morgan Stanley, through its controlled entities, had an attributable interest in 218,219,073 H shares of the Company and maintained a short position of 38,921,371 H shares of the Company, out of which Morgan Stanley Investment Management Company directly held 173,642,000 H shares, Morgan Stanley & Co International Limited directly held 5,132,831 H shares and maintained a short position of 3,074,833 H shares, Morgan Stanley Dean Witter Hong Kong Securities Limited directly held 16,092 H shares and maintained a short position of 78,000 H shares, Morgan Stanley Asset & Investment Trust Management Co., Limited directly held 3,352,000 H shares, Morgan Stanley Capital (Cayman Islands) Limited maintained a short position of 1,890,000 H shares, Morgan Stanley Capital Services Inc. directly held 119,155 H shares, Morgan Stanley Capital (Luxembourg) S.A. directly held 2,058,000 H shares, Morgan Stanley Hedging Co. Ltd. directly held 34,200 H shares and Morgan Stanley & Co. Inc. directly held 33,864,795 H shares and maintained a short position of 33,878,538 H shares. (b) Substantial interests in CNAC Percentage of the No. of issued share Capacity shares capital CNAHC(1) Attributable 2,264,628,000 68.36 interest The Company(2) Beneficial owner 2,264,628,000 68.36 Best Strikes Limited Beneficial owner 187,656,000 5.66 On Ling Investments Attributable 322,856,000 9.75 interest Limited(3) Novel Investments Attributable 322,856,000 9.75 interest Holdings Limited(3) Novel Enterprises Attributable 322,856,000 9.75 interest Limited(3) Novel Enterprises (BVI) Attributable 322,856,000 9.75 interest Limited(3) Novel Credit Limited(3) Attributable 322,856,000 9.75 interest Novel Holdings (BVI) Attributable 322,856,000 9.75 interest Limited(3) Westleigh Limited(3) Attributable 322,856,000 9.75 interest 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, the 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. (c) Substantial interests in other members of the Group Approximate Member of % of share the Group Name capital Air Macau CNAC 51% Air Macau Sociedale de Turismo e Diversaes de 14% Macau Air Macau Servico, Administracao e 20% Participacoes, Lda. Ameco Deutsche Lufthansa AG 40% Air China Cargo Capital Airport Holding Company 24% Air China Cargo CITIC Pacific Limited 25% Save as disclosed above, as at the Latest Practicable Date, to the knowledge of the Directors, chief executive and Supervisors of the Company, no other person (other than a Director, Supervisor or chief executive of the Company) had an interest or short position in the shares and underlying shares of the Company which would fall to be disclosed to the Company pursuant to the SFO, or otherwise was, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any members of the Group. 4. MATERIAL CONTRACTS The Group has entered into the following material contracts within the two years immediately preceding the date of this circular (Capitalised terms used in this section has the same meaning as those defined in the Company's prospectus dated 3 December 2004): (a) the Restructuring Agreement dated 20 November 2004 entered into between the Company, CNAHC and CNACG regarding the Restructuring referred to in the section headed 'Business - Connected Transactions' of the Company's prospectus dated 3 December 2004; (b) the Non-competition Agreement dated 20 November 2004 entered into between the Company and CNAHC regarding the arrangement of non-competition as referred to in the section headed 'Business - Connected Transactions' of the Company's prospectus dated 3 December 2004; (c) the Trademark Licence Agreement dated 1 November 2004 entered into between the Company and CNAHC regarding the licensing of the trademark bearing 'Air China' logo and other trademarks referred to in the section headed 'Business - Connected Transactions' of the Company's prospectus dated 3 December 2004; (d) the Comprehensive Services Agreement dated 1 November 2004 entered into between the Company and CNAHC regarding the general principle for the mutual provision of certain ancillary services to each other referred to in the section headed 'Business - Connected Transactions' of the Company's prospectus dated 3 December 2004; (e) the Financial Services Agreement dated 1 November 2004 entered into between the Company and CNAF regarding the general principle for the provision of a range of financial services to the Company by CNAF referred to in the section headed 'Business - Connected Transactions' of the Company's prospectus dated 3 December 2004. As at 30 September 2004, there were 3 loans denominated in RMB in the total outstanding principal amount of RMB210,000,000 and 2 loans denominated in USD in the total outstanding principal amount of USD19,550,000 which have been granted by CNAF to the Company and which are outstanding, details of which are set out below: Outstanding principal amount Annual interest rate Term RMB100,000,000 4.536% 30 August 2004 to 28 February 2005 RMB60,000,000 4.536% 30 August 2004 to 28 February 2005 RMB50,000,000 4.536% 17 August 2004 to 16 February 2005 US$10,600,000 LIBOR+0.75% 12 July 2004 to 7 January 2005 US$8,950,000 6 month LIBOR+0.4% 15 May 2002 to 14 May 2009 Outstanding principal amount Annual interest rate Term RMB100,000,000 4.536% 30 August 2004 to 28 February 2005 RMB60,000,000 4.536% 30 August 2004 to 28 February 2005 RMB50,000,000 4.536% 17 August 2004 to 16 February 2005 US$10,600,000 LIBOR+0.75% 12 July 2004 to 7 January 2005 US$8,950,000 6 month LIBOR+0.4% 15 May 2002 to 14 May 2009 (g) the Sale and Purchase Agreement dated 19 August 2004 between Fly Top Limited and Hong Kong International Air Catering Limited, a company incorporated in Hong Kong, regarding CNAC's acquisition through Fly Top Limited of approximately 4.2% of the issued share capital of LSGLS; the consideration for the acquisition is HK$24.5 million. Fly Top Limited shall not be obliged to complete this agreement unless the sale and purchase of the equity interest in each of (i) Beijing Air Catering Co., Ltd., (ii) SWACL and (iii) LSGLS as referred to in paragraph (f) above have completed or are completed simultaneously. Upon completion of the agreement, Fly Top Limited would execute the Deed of Adherence and Supplement referred to in paragraph (f) above. The agreement is governed by Hong Kong law; (h) the 2004 Amendment to the Joint Venture Contract for Ameco between the Company and Lufthansa dated 19 July 2004, which provides, among other things, that (1) the term of Ameco shall be extended for further 25 years since the date of the issuance of the new business license; (2) the registered capital shall be increased by US$100 million (the instalment subscription schedule is set out in paragraph 2B of this Appendix; (3) the Company undertakes, upon Ameco's actual need of financing, to arrange total loan facility of approximately RMB282.7 million and Lufthansa undertakes, upon Ameco's actual need of financing, to arrange total loan facility of approximately US$69.3 million and; (4) restrictions shall apply on transfer of registered capital and profit allocation (set out in paragraph 2A of 'Appendix IX -Statutory and General Information' of the Company's prospectus); (i) the Assignment Agreement between us and CNAHC on 8 October 2004 regarding the equity interests in Shandong Aviation Group and Shandong Airlines referred to in the section headed 'Business - Connected Transactions' of the Company's prospectus dated 3 December 2004. Pursuant to this agreement: (i) CNAHC agreed to transfer all of its rights and obligations under two transfer agreements according to which CNAHC agreed to acquire a 48.0% equity interest in Shandong Aviation Group and a 22.8% equity interest in Shandong Airlines; (ii) Since CNAHC has already paid part of the equity transfer amount and relevant fees under the two transfer agreements, we have agreed to pay the same amount to CNAHC. The Company also agreed to pay the outstanding amount under the two transfer agreements to Shandong Aviation Group and Shandong Airlines; (iii) the Company agreed to reimburse CNAHC for all the amounts and expenses that have been incurred and paid by CNAHC under the above two transfer agreements within seven (7) days of the effectiveness of the Assignment Agreement; (iv) CNAHC has given certain representations and warranties including that it has all the rights, power and authorisation to make such transfer and that such transfer will not result in the breach of any other agreements or documents that have been entered into by CNAHC; (v) CNAHC and the Company agreed to indemnify each other against all the damage and expenses arising from any breach of representations and warranties given by CNAHC or the Company, as the case may be; and (vi) the Assignment Agreement shall be effective after it is signed by both parties and approved by the relevant government authorities; (j) the Hong Kong Underwriting Agreement dated 2 December 2004 entered into among the Company, CNAHC, the Joint Global Coordinators, the Joint Sponsors, the Hong Kong Underwriters and HSBC Nominees (Hong Kong) Limited pursuant to which it is agreed, inter alia: (i) the Company agreed, subject to certain conditions, to issue and allot, at the Offer Price, the Offer Shares to be issued in connection with the Hong Kong Public Offering; (ii) the Hong Kong Underwriters agreed, subject to certain conditions, to procure subscribers (or subscribe themselves) for the Offer Shares; (iii) the Hong Kong Underwriters will be paid on admission to listing on the Hong Kong Stock Exchange a commission of 2.5% of the Offer Price multiplied by the number of Offer Shares allotted pursuant to the Hong Kong Public Offering; (iv) the obligations of the Hong Kong Underwriters to procure subscribers for, or failing which, themselves to subscribe for, Offer Shares are subject to certain conditions. These conditions include, amongst others, delivery of certain condition precedent documents and registering various documents with Registrar of Companies. In addition, the Hong Kong Underwriters have the right to terminate the Hong Kong Underwriting Agreement in certain circumstances prior to admission; (v) the Company agreed to pay certain costs, charges, fees and expenses of the Hong Kong Public Offering; (vi) each of the Company and CNAHC gave certain representations, warranties and other undertakings, subject to certain limits, to each of the Joint Global Coordinators, the Joint Sponsors and the Hong Kong Underwriters; (vii) the Company gave certain indemnities, subject to certain limits, to each of the Joint Global Coordinators, the Joint Sponsors and the Hong Kong Underwriters; (k) a Sponsor's Agreement dated 3 December 2004 between the Company and the London Sponsor pursuant to which the Company appoints the London Sponsor as the sponsor in connection with the London Listing in consideration for the Company agreeing to pay to Merrill Lynch Far East Limited as a Hong Kong Underwriter a commission under the Hong Kong Underwriting Agreement (See Paragraph (j) above) and all costs and expenses incurred in connection with the London Listing, provided that the London Sponsor will not commit or purport to commit the Company to pay any such amounts, save as agreed beforehand between the Company and the London Sponsor. The Company undertakes, among other things, to (i) procure that certain documents in connection with the London Listing are published, (ii) deliver the Prospectus to the UK Registrar of Companies and (iii) not make announcements regarding the London Listing without notifying the London Sponsor. The Sponsor's Agreement provides that the London Sponsor may terminate the Sponsor's Agreement if, among other things, (i) it comes to the attention of the London Sponsor that any statement in the Prospectus is untrue and (ii) the Company has not complied with the Sponsor's Agreement in any respect which is material in the context of the London Listing; (l) a Paying Agency Appointment Letter dated 3 December 2004 between the Company and Computershare Investor Services Plc ('Computershare') pursuant to which the Company appoints Computershare as paying agent in connection with the London Listing and in consideration for the Company agreeing to pay an initial fee of 4,000 and a minimum annual fee of 5,000, Computershare shall, among other things, (i) calculate the amount of any dividend payable to each UK shareholder and (ii) dispatch all payments, as instructed by the Company. The Paying Agency Agreement also provides that the Company shall, in certain circumstances, indemnify Computershare against, among other things, all actions, proceedings, liability and claims in to acting in accordance with the Company's instructions; (m) the strategic placing agreement dated 20 November 2004 between the Strategic Investor, the Joint Global Coordinators and our Company, pursuant to which the Strategic Investor has agreed to, among other things, subscribe at the Offer Price for such number of Offer Shares that would constitute, in aggregate, 10.0% of our total issued share capital immediately following the completion of the Global Offering referred to in the section headed 'Strategic Investor' of the Company's prospectus dated 3 December 2004; (n) the Short-term Commercial Paper Underwriting Agreement dated 26 April 2005 entered between the Company and Bank of China Limited, pursuant to which Bank of China Limited has agreed to be to form an underwriting syndicate and be the lead underwriter for the RMB2 billion short term commercial paper issued by the Company for a lump sum consulting fee of RMB3 million and a lead underwriting fee of 0.12% of the value of the commercial paper issued by the Company; (o) the A330-200 Purchase Agreement dated 26 January 2005 entered into between the Company. AIE and Airbus S.A.S. in relation to the purchase of 20 A330-200 aircraft, the details of the agreement are set out in Company's circular dated 4 March 2005; (p) the Boeing Aircraft Purchase Agreement dated 8 August 2005 entered into between the Company, AIE and Boeing Company in relation to the purchase of 15 Boeing 787 aircraft, the details of the agreement are set out in the Company's circular dated 30 August 2005; (q) the Boeing Aircraft Purchase Agreement dated 17 January 2006 entered into between the Company and AIE and Boeing Company in relation to the purchase of 10 Boeing 737 aircraft, the details of the agreement are set out in the Company's circular dated 29 March 2006; and (r) the Boeing Aircraft Purchase Agreement dated 19 April 2006 entered into between the Company and AIE and Boeing Company in relation to the purchase of 15 Boeing 737 aircraft, the details of the agreement are set out in the section headed 'Letter from the Board - The Boeing Aircraft Purchase Agreement' of this circular. Except as disclosed above, no other material contract has been entered into by the Group within the two years immediately preceding the date of this circular. 5. LITIGATION The litigation or claims of material importance pending or threatened against a member of the Group are as disclosed in the section headed 'Contingent liabilities' in 'Appendix I -Financial Information of the Group - III. Indebtedness Statement' to this circular. Except as disclosed above, as at the Latest Practical Date, there was no litigation or claims of material importance pending or threatened against any member of the Group. 6. SERVICE CONTRACTS Each of the Directors has entered into a service contract with the Company for a term of three years from 30 September 2004 other than Mr. Fan Cheng, whose service contract has a term of three years from 18 October 2005 and the service contract is thereafter subject to termination by either party giving written notice to the other party. None of the Directors has any existing or proposed service contract with any member of the Group which is not expiring or terminable by the Group within one year without payment of compensation (other than statutory compensation). 7. NO MATERIAL ADVERSE CHANGE The Directors confirm that there has been no material adverse change in the Group's financial or trading position since 31 December 2005, being the date to which the latest published audited accounts of the Group have been made up. 8. PROCEDURE FOR DEMANDING A POLL BY SHAREHOLDERS Pursuant to Article 72 of the Articles of Association of the Company, at any general meeting of shareholders of the Company a resolution shall be decided on a show of hands unless a poll is (before or after any vote by show of hands) demanded: • by the chairman of the meeting; • by at least two shareholders entitled to vote present in person or by proxy; or • by one or more shareholders present in person or by proxy and representing 10% or more of all shares carrying the right to vote at the meeting. The demand for a poll may be withdrawn by the person who makes such demand. Further details of the procedure for demanding a poll were set out in Appendix VIII 'Summary of Articles of Association' to the Company's prospectus dated 3 December 2004. 9. MISCELLANEOUS (a) The joint company secretaries of the Company are Zheng Baoan and Li Man Kit. Mr. Li is an associate member of the Institute of Chartered Secretaries and Administrators, UK and the Hong Kong Institute of Company Secretaries. (b) The qualified accountant of the Company is David Tze-kin Ng. Mr. Ng is a member of the Hong Kong Institute of Certified Public Accountants. (c) The registered address of the Company is at 9th Floor, Blue Sky Mansion, 28 Tianzhu Road, Zone A, Tianzhu Airport Industrial Zone, Shunyi District, Beijing, China. The head office of the Company is at South Terminal, Beijing Capital International Airport, Chaoyang District, Beijing, China. (d) The Hong Kong branch share registrar and transfer office of the Company is Computershare Hong Kong Investor Services Limited, Rooms 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong. 10. DOCUMENTS AVAILABLE FOR INSPECTION Copies of the following documents are available for inspection during normal business hours at the principal place of business of the Company in Hong Kong at 5th Floor, CNAC House 12 Tung Fai Road, Hong Kong International Airport, Hong Kong up to and including 13 June 2006: (a) the articles of association of the Company; (b) the 2005 audited financial statements of the Group, the text of which is set out in Appendix I to this circular; (c) major transaction circular dated 4 March 2005 issued by the Company in respect of the purchase of 20 A330-200 aircraft; (d) major transaction circular dated 30 August 2005 issued by the Company in respect of the purchase of 15 Boeing 787 aircraft; (e) discloseable transaction circular dated 29 March 2006 issued by the Company in respect of the purchase of 10 Boeing 737 aircraft; and (f) material contracts referred in the section headed 'Material Contracts' of this circular. This information is provided by RNS The company news service from the London Stock Exchange

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