Air China Limited - Interim R
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CONTENTS
Air China Limited • Interim Report 2008
Important Notice 2
Corporate Information 3
Summary of Financial Information 4
Summary of Operating Data 5
Chairman's Statement 7
Operating Results Review 9
Management Discussion and Analysis 12
Major Events 16
Shareholdings of Directors, Supervisors and Senior
Management and Substantial Shareholders of the Company 17
Corporate Governance 19
Miscellaneous 20
Independent Auditor's Report 21
Financial Statements prepared under International
Financial Reporting Standards
- Interim Condensed Consolidated Income Statement 22
- Interim Condensed Consolidated Balance Sheet 23
- Interim Condensed Consolidated Statement of
Changes in Equity 25
- Interim Condensed Consolidated Cash Flow Statement 26
- Notes to Interim Condensed Consolidated Financial Statements 27
Financial Statements prepared under Accounting Standards for
Business Enterprises
- Unaudited Interim Consolidated Income Statement 49
- Unaudited Interim Consolidated Balance Sheet 50
Supplementary Information 52
Glossary of Technical Terms 54
Important Notice
The board of directors (the 'Board') and directors ('Directors') of the Company hereby confirm that there are no false representations, misleading statements or material omissions in this report, and the Directors severally and jointly accept full responsibility for the truthfulness, accuracy and completeness of the contents of this report.
The Chairman Mr. Kong Dong, the Chief Financial Officer Mr. Fan Cheng and the General Manager of the Finance Department Mr. Li Youqiang of the Company hereby jointly declare that the unaudited interim condensed consolidated financial statements set out in this interim report is true and complete.
2
Corporate Information
CHINESE REGISTERED NAME
中國國際航空股份有限公司
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
Kong Dong
Wang Shixiang
Ma Xulun
Christopher Dale Pratt
Chen Nan Lok, Philip
Cai Jianjiang
Fan Cheng
Hu Hung Lick, Henry
Wu Zhipan
Zhang Ke
Jia Kang
SUPERVISORS
Sun Yude
Liao Wei
Zhou Guoyou
Liu Feng
Liu Guoqing
LEGAL REPRESENTATIVE OF THE
COMPANY
Kong Dong
JOINT COMPANY SECRETARIES
Huang Bin
Li Man Kit (ACIS, ACS)
QUALIFIED ACCOUNTANT
Tze-kin Ng, David (FCCA, CPA)
AUTHORISED REPRESENTATIVES
Cai Jianjiang
Li Man Kit
LEGAL ADVISER TO THE COMPANY
Haiwen & Partners (as to PRC Law)
Freshfields Bruckhaus Deringer
(as to Hong Kong and English Law)
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, London and Shanghai
3
Summary of Financial Information
(1) Operating revenue include air traffic revenue and other operating revenue.
(2) EBITDA represents earnings before finance revenue (including interest income, net exchange gains and net gains on fuel derivative instruments), finance costs, income taxes, share of profits less losses of associates and depreciation as computed under the International Financial Reporting Standards.
(3) EBITDAR represents EBITDA before deducting operating lease expenses on aircraft and engines as well as other operating lease expenses.
(4) Return on equity represents profit for the period attributable to the equity holders divided by the Group's equity at period end.
4
Summary of Operating Data
5
Summary of Operating Data
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For the six
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For the six
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months ended
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months ended
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30 June
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30 June
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Change
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2008
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2007
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(%)
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Load
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Passenger load factor (RPK/ASK)
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75.08%
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75.84%
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-0.76ppt
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International
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73.26%
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74.28%
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-1.02ppt
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Domestic
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77.22%
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77.77%
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-0.55ppt
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Hong Kong and Macau
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68.88%
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69.52%
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-0.64ppt
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Cargo and mail load factor (RFTK/AFTK)
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58.69%
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53.11%
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5.58ppt
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International
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61.50%
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54.29%
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7.21ppt
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Domestic
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49.74%
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48.37%
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1.37ppt
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Hong Kong and Macau
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62.94%
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58.71%
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4.23ppt
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Yield
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Yield per RPK (RMB)
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0.6135
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0.5939
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3.30
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International
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0.5832
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0.5747
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1.48
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Domestic
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0.6258
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0.5991
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4.46
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Hong Kong and Macau
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0.7686
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0.7107
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8.14
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Yield per RTFK (RMB)
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1.9831
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1.8377
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7.91
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International
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1.9073
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1.8196
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4.82
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Domestic
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1.8165
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1.4790
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22.82
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Hong Kong and Macau
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4.8573
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4.2618
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13.97
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Fleet
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Total aircraft in service at period end
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243
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230
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5.65
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Daily utilization (block hours per day per aircraft)
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9.44
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9.99
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-5.51
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6
Chairman's Statement
Dear Shareholders,
In the first half of 2008, due to the global economic downturn, increased inflationary pressure, soaring fuel prices and damaging natural disasters such as earthquakes, the global aviation industry, in particular, the Chinese aviation industry, experienced an unprecedented challenge.
In the first half of 2008, the Group's passenger capacity measured by available seat kilometres increased by 2.91% over the same period last year, with increase in revenue passenger kilometres by 1.89%, while the passenger load factor decreased by 0.76 percentage points and revenue increased by 5.24%. The cargo capacity measured by available freight tonne kilometres decreased by 10.66% over the same period of last year, with decrease in revenue freight tonne kilometres of 1.27% while the freight and mail load factor increased by 5.58 percentage points and revenue increased by 6.54%.
The Company has continued to strengthen the Beijing Hub construction coupled with measures taken to respond to the earthquakes, and plan the organization of market and production as a whole. After the earthquake, our transport capacity was adjusted accordingly to increase the transport capacity input in the Beijing hub. In the meantime, the excess of transport capacity of the Chengdu hub was alleviated and thus the Company's operating efficiency was improved as a whole.
In the first half of the year, the Company successfully completed the relocation to the new terminals of Beijing, Pudong, Shanghai and Tianjin, which demonstrated the Company's strong abilities of coordination and execution. After the relocation, the ability to access the service resources in these three areas is substantially augmented. In particular, following the relocation to Terminal 3 of the Beijing international airport, by the end of June, the flight schedule availability of the Company at the Beijing hub amounted to 40.8% and the passenger kilometre share amounted to 55.3%, which further consolidated the base of the Company's development in our strategic markets.
Eight routes including international and domestic routes such as those connecting Beijing and Pyongyang were newly launched in the first half of this year and the average number of flights to every provincial city reached three flights a day.
The Group has enriched its joint route services, leveraged on the advantages of the Beijing hub and relieved the pressure caused by the market downturn. During the first half of the year, the sales of international joint routes increased by 2.86% as compared with the same period of last year.
The Group continued to boost income through sales of the first class and business class and contractual customers. Notwithstanding the decrease of the overall demand in May and June, in the first half of the year, the sales of the first class and business class and contractual customers had increased by 17.25% and 48.27% respectively, compared to the same period of last year.
Our alliance cooperation achieved great success. We have newly signed alliance agreements with 16 customers, and 400,000 passengers were transported for us by members of Star Alliance which brought us an income of RMB423 million. The soaring fuel costs forced the Company to change the mode of cost control and improve our ability to reduce costs. The Company strengthened structural cost control, improved operating efficiency and reduced fuel consumption through adjustment of the transport capacity allocation model and optimization of air routes. The Company continued to enhance the control of controllable costs by launching the program named 'Increasing Income and Reducing Cost Management Points' ('IIRC Management Points'). We have identified 11 IIRC Management Points and have put in effect the requisite management responsibility.
The Company streamlined and optimized the fleet plan for the coming years, and managed and controlled the introduction and retirement of the fleet in a systematic manner. In the first half of the year, the Company introduced 10 aircraft; and concurrently speeded up the plan to sell and terminate the leases of old passenger aircrafts and freighters. The Company improved the operating efficiency and flexibility of the fleet through adjustment of the fleet structure so as to better adapt to market changes.
7
Chairman's Statement
As the sole airline partner of the Beijing 2008 Olympic Games, in the first half of the year, the Company overcame a number of difficulties and successfully completed charter flight services for the overseas Olympic torch relay which lasted for 33 days and traveled over 97,000 kilometres. The activity promoted the Olympics and China to the world and raised the Company's influence in the global market.
The Company initiated its internal emergency measures in response to the snowstorm earlier this year and the Wenchuan earthquake in May in a timely manner. The Company arranged more than 1,000 flights for disaster relief, which was not only a demonstration of the Company's devoted commitment to the society, but also a test of the Company's ability to cope with emergencies.
There was a significant improvement in the cargo services of Air China Cargo in the first half of the year. Through adjusting the allocation of traffic capacity and improving the linkage between the passenger and cargo aircraft, the Company has essentially maintained its output performance even when the transport capacity input decreased by 9.95%. This was especially attributable to the 10.12 percentage points increase in the overall load factor of its cargo aircraft and the significant improvement in the utilisation rate of cabin space. With the provision of comprehensive services and the increase in the relevance of our services to market demands, the sales from ordinary and express mail services increased by 21.5% and 7.4% respectively. The Company took efforts to expand its sales channels and increase the proportion of sales to contracted customers, which resulted in a year-on-year increase of 13.3% in the first half of this year.
Looking forward, although there are uncertainties in the development of the aviation industry, the PRC economy is still experiencing continued and steady growth, and the post-Olympics economy and the direct cross-strait flights will bring new opportunities to the PRC aviation industry. Concurrently, the changes which may be made to the industrial business landscape will also create new opportunities for us. Accordingly, the Company will timely follow and be guided by its strategies to proactively promote the establishment of Beijing as an aviation hub and build up the relevant network development. The Company will also forge its core competitive advantages, strengthen its marketing ability in the market, in particular the high-end market, and strengthen the innovation of products and services to better satisfy market demands. In addition, through management's IIRC Management Points, the Company will also strive to reduce its energy consumption to improve its costs efficiency. I believe that, with the Company's clear strategic objectives, accurate judgement of the situations and active response measures, we will definitely be able to grasp opportunities, overcome the transient difficulties and maintain our leading position in the industry.
Kong Dong
Chairman
Beijing, PRC
26 August 2008
8
Operating Results Review
REVIEW OF OPERATIONS OF THE COMPANY AND AIR CHINA CARGO
With respect to passenger traffic, the revenue passenger kilometres of the Company for the first half of 2008 was 32.53 billion, representing an increase of 2.27% as compared with the same period of last year; the number of passengers carried decreased by 0.75% to 16.561 million compared with the same period of last year; the average passenger load factor decreased by 0.5 percentage points from the same period of last year to 75.3%.
With respect to cargo traffic, the revenue freight tonne kilometres for the first half of 2008 decreased by 0.1% to 1.78 billion as compared with the same period of last year; cargo and mail carried decreased by 0.5% to 452,000 tonnes; cargo and mail load factor increased by 5.8 percentage points from the same period of last year to 58.3%.
BUSINESS REVIEW OF AIR MACAU
For the first half of 2008, the revenue passenger kilometres of Air Macau was 1.38 billion, representing a decrease of 6.4% as compared with the same period of last year; while passenger carried decreased by 11.9% from the same period of last year to 1.042 million; passenger load factor decreased by 5.3 percentage points from the same period of last year to 70.5%.
With respect to cargo business, due to the retirement of four freighters, revenue freight tonne kilometres decreased by 26.3 percentage points from the same period of last year to 62.316 million; cargo and mail carried decreased by 34.9% from the same period of last year to 53,000 tonnes; cargo and mail load factor increased by 4.4 percentage points from the same period of last year to 73.9%.
FLEET
For the first half of 2008, there was a net increase of 9 aircraft (10 aircraft were introduced and 1 aircraft was retired) for the Company and Air China Cargo. As at 30 June 2008, the Company and Air China Cargo operated a fleet of 229 aircraft in total with an average age of 7.6 years. Details of the fleet are set out in the table below:
As at 30 June 2008, Air Macau operated a total of 14 aircraft, which comprised 13 passenger aircraft and 1 freighter.
9
Operating Results Review
DEVELOPMENT OF ROUTE NETWORK
The Company continued with the development of its route network in the first half of the year. In response to the market changes brought about by severe snowstorm and Wenchuan earthquake, the Company further increased the operation capacity of Beijing Hub by making timely adjustment to its overall capacity allocation. As a result, the market power of Beijing Hub as well as fleet efficiency were improved.
During the first half of the year, the Company launched the Beijing-Pyongyang international route and seven domestic routes covering second-tier cities including Wuxi. The Company currently runs more than three daily scheduled flights from Beijing to the major provincial cities. The number of effective connecting flights increased 20.84% to over 20,000 per week, thus further strengthening the network of Beijing Hub. In the first half of 2008, the Company accounted for 55.3% of the total passenger kilometres of Beijing Hub. As a result of the effects from the earthquake disaster, the market share of Chengdu Hub shrank significantly. For the Shanghai Hub, its passenger kilometre market share by and large remained stable with slight increase in both the volume of transit passengers and the revenue from connecting flights.
As at 30 June 2008, the Company and Air China Cargo together operated 239 routes, of which 166 were domestic routes, 66 were international routes and 7 were regional routes. The regular flights of the Company have been connecting 32 countries and regions around the world, including 47 international cities, 81 domestic cities and 2 regions.
MARKET EXPANSION AND SALES
In response to the abrupt market change in the first half of 2008, the Company strengthened the synthesis between sales and revenue. Firstly, measures were taken to improve the flexibility of the product sales policies, adjust the life cycle of the products and strengthen the initiative policy and competitiveness. Secondly, the Company adjusted the policy on connecting flight operations in order to strengthen the coordination of the connecting flights and enrich the relevant products. Thirdly, the marketing efforts of the 'First and Business Class Cabins' were further increased to broaden the customer base, contributing an increase in revenue of 17.25% as compared with the same period of last year. Fourthly, marketing strategies targeted at contracted clients were formulated based on the geographical locations and needs of such clients, resulting in a 48.27% increase of revenue from contracted clients as compared with the same period of last year.
Sales through e-commerce was further expanded. The Company made an early move to implement IATA's 100% electronic ticketing under BSP and implemented the electronic ticketing in respect of connecting flights with 81 companies. Following the Company's full launch of its international website, the business volume generated by the call centres increased by 100% and the sales increased by 500%.
BUSINESS COOPERATION
The Company actively pressed on with the work that follows its entry into the Star Alliance and strengthened sales cooperation with its members. 16 new global clients from the Star Alliance were secured and member airlines carried 367,000 passengers for the Company. The Company's services and prices were added to the Star Alliance's system of services and prices. The Company also actively participated in the promotion of cross-strait direct flights. The weekend chartered flights for the Beijing-Taipei and Shanghai-Taipei routes will become the next target for market growth for the Company.
SERVICES
The Company has been dedicated towards improving its service quality and increasing its competitiveness in a sustained manner. The responsibility of each operating unit was defined clearly with respect to the dissemination of information in case of irregular flight arrangements and contingency plans were refined and strengthened. The luggage handling management system was enhanced. The Company also made better use of its terminal building to provide more services to its high-end travelers. In addition, integration of services with members of the Star Alliance with respect to check-in counters, lounges, boarding areas and luggage information counters were completed, thus achieving the goal of 'operating under the same roof'. The Company also accelerated the pace of restructuring its overseas departure system, improved its flight transit monitoring function and actively explored its one-stop boarding business. In addition, ground services training were strengthened to improve transit capabilities.
10
Operating Results Review
IT DEVELOPMENT
The Company focused on the consolidation of its internal IT resources by establishing a unified information platform and promoting electronic commerce. In the first half of the year, an IT strategic plan was introduced and implemented in response to the overall business development strategies of the Company. Greater effort was devoted to core system maintenance to ensure information security during the Olympic Games. The Company also continued with the development of ten major projects involving flight supplies, office automation, alliance system and data base II in order to lay the foundation for the formation of the six major information platforms covering operation, safe management system, sales and marketing, services, engineering and corporate management.
EMPLOYEES
As at 30 June 2008, the Company has 19,867 employees and its subsidiaries and joint ventures has 17,534 employees.
POST BALANCE SHEET EVENT
On 8 July 2008, the Company received the Official Reply Concerning the Approval of Offering New Shares by Air China Limited issued by China Securities Regulatory Commission (Zheng Jian Xu Ke 2008 No. 891) approving the Company to offer new A shares of not more than 400 million shares to the public. The approval shall be valid for a period of six months since the date of the Official Reply.
On 15 July 2008, the execution of an aircraft purchase agreement by the Company and Air China Import and Export Co. with Boeing Company for the purchase of 15 Boeing 777 and 30 Boeing 737 aircraft was approved at the fourteenth meeting of the second session of the board of directors of the Company.
On 13 August 2008, Ms. Wang Yinxiang was nominated as a candidate for the non-executive director of the Company at the sixteenth meeting of the second session of the board of directors of the Company and the nomination was proposed to be considered and approved at the shareholders' meeting. Mr. Yao Weiting resigned from his positions as a non- executive director and a member of the Audit and Risk Control Committee of the Company due to retirement.
11
Management Discussion and Analysis
The interim condensed consolidated financial statements of the Group set out from pages 22 to 48 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 financial statements, were prepared in accordance with International Financial Reporting Standards (IFRSs). The following discussion and analysis are designed to assist the reader in understanding the statutory information provided in this Interim Report so as to better comprehend the financial position of the Group as a whole.
ANALYSIS OF THE PROFITABILITY
For the six months ended 30 June 2008, the Group realized profit before tax of RMB1.407 billion, representing a decrease of RMB665 million or 32.1% from RMB2.072 billion in the same period in 2007. Profit attributable to shareholders was RMB1.244 billion, down RMB325 million or 20.7% from RMB1.569 billion in the same period in 2007 while earning per share was RMB0.105, representing a decrease of RMB0.027 or 20.5%.
The decrease in profit in the first half of the year was mainly due to an abrupt increase in jet fuel price, thus resulting in a loss in both operating revenue and share of profits of associates, representing a decrease of RMB1.703 billion and RMB574 million respectively as compared with the same period of last year. Among which, jet fuel cost increased RMB2.566 billion or 31.9% as compared with the same period of last year. On the other hand, benefiting from the appreciation of Renminbi against US dollar, an exchange gain of RMB1.923 billion was recorded for the first half of the year, representing an increase of RMB1.056 billion or 121.7% over the same period of 2007.
TURNOVER
For the six months ended 30 June 2008, the turnover of the Group was RMB25.646 billion, representing an increase of 9.82% as compared with the same period of 2007.
REVENUE CONTRIBUTION BY BUSINESS SEGMENT
For the six months ended 30 June 2008, the Group's revenue from airline operations increased 9.33%, mainly attributable to increase in yield per revenue tonne kilometre. Revenue from engineering services increased by 41.81%, mainly due to increase of engineering services provided to external parties.
12
Management Discussion and Analysis
REVENUE CONTRIBUTION BY GEOGRAPHICAL SEGMENT
OPERATING EXPENSES
For the six months ended 30 June 2008, the Group recorded operating expenses of RMB25.982 billion, representing an increase of RMB3.996 billion, or 18.18%, as compared with the same period of last year. The elements comprising the operating expenses are set out as follows:
• Jet fuel costs
During the first half of this year, the average purchase price of the jet fuel of the Group was RMB7,053 per tonne, representing an increase of RMB1,793 per tonne as compared with the same period of 2007, thereby resulting in an increase of jet fuel costs of RMB2.566 billion. In the first half of this year, the Group continued to adopt various fuel-saving measures, thus saving jet fuel costs of RMB245 million. The net income from fuel hedging was RMB313 million in the first six months, of which RMB215 million was realised. In addition, the Group recorded fuel surcharge income of RMB1.392 billion and RMB2.497 billion respectively in relation to domestic and international routes, representing an increase of RMB1.004 billion in aggregate as compared with the same period of last year, which partly offset the increased cost pressure from the increasing jet fuel price.
• Employee Compensation Costs
During the first half of this year, the employee compensation costs of the Group was RMB2.555 billion, an increase of RMB566 million or 28.5% as compared with the same period of 2007. The main reason for the increase was the inclusion of corporate annuity and the increase in compensation pursuant to the employee compensation reform for the current reporting period and such costs were not included in last year's presentation.
13
Management Discussion and Analysis
ANALYSIS OF ASSETS
As at 30 June 2008, the Group had total assets of RMB97.139 billion, representing an increase of 6.68% from 31 December 2007, in which current assets accounted for 11.32% of the total assets, or RMB10.996 billion, representing an increase of 11.85% from 31 December 2007; while non-current assets accounted for 88.68% of the total assets, or RMB86.143 billion, representing an increase of 6.05% from 31 December 2007.
Of the current assets, cash and cash equivalents constituted RMB4.592 billion, representing an increase of 17.54% from 31 December 2007; accounts receivable was RMB2.664 billion, similar with that as at 31 December 2007. Of the non- current assets, properties, plant and equipment amounted to RMB66.227 billion, representing an increase of 7.35% from 31 December 2007.
PLEDGED ASSETS
As at 30 June 2008, the Group pledged certain assets with an aggregate carrying amount of approximately RMB42.099 billion (compared with RMB41.968 billion as at 31 December 2007) pursuant to certain loan and lease agreements, among which the book value of aircraft and building construction accounted for RMB36.776 billion, bank deposits accounted for RMB108 million and certain number of shares in an associated company with an aggregate market value of accounted for approximately RMB5.215 billion.
DEBT STRUCTURE OF THE GROUP
CAPITAL COMMITMENTS AND CONTINGENT LIABILITIES
As at 30 June 2008, capital commitments of the Group, primarily used for the purchase of certain aircraft and relevant flight equipment to be delivered in the coming years and the construction of certain properties, was approximately RMB74.351 billion, which is an increase of 26.28% from RMB58.878 billion as at 31 December 2007.
As at 30 June 2008, details of the capital commitments and contingent liabilities of the Group in respect of bank loans and other guarantees and other matters arising in the ordinary course of business are set out in note 24 and 25 to the Group's audited interim consolidated financial statements prepared under IFRS.
CAPITAL EXPENDITURE
For the six months ended 30 June 2008, the capital expenditure of the Company amounted to RMB5.76 billion in total. Of the capital expenditure of the Company, the total investment in aircraft was RMB3.807 billion, including prepayments of RMB1.347 billion for the purchases of aircraft for the second half of 2008 and onwards.
Other capital expenditure amounted to RMB1.953 billion, which were mainly for the purposes of construction of infrastructure, construction of information system, purchase of ground facilities, as well as the cash portion of long-term investment projects.
14
Management Discussion and Analysis
CASH FLOW ANALYSIS
For the six months ended 30 June 2008, the Group's net cash inflow from operating activities decreased by RMB713 million or 23.18% from the same period of 2007 to RMB2.361 billion, primarily due to the substantial rise in operating costs. Net cash outflow from investment activities of the Group during the period decreased from the same period of 2007 by RMB4.948 billion or 66.91% to RMB2.448 billion. The reason for the substantial cash outflow in the same period in 2007 was primarily due to the expenses of the Group arising from the privatization of CNAC. The Group recorded a net cash inflow from financing activities of RMB2.192 billion, representing a decrease from the same period of 2007 of RMB1.193 billion or 35.24%, primarily due to more loans due for repayment during the current accounting period.
RISKS ANALYSIS
• Risk associated with the fluctuation in the jet fuel price
For the six months ended 30 June 2008, the aviation industry worldwide was hit hard as a result of rising international crude oil price and increasing jet fuel price. Since March 2001, the Group has been engaging in fuel hedging transactions in order to hedge substantial increases in jet fuel prices. The hedging instruments used were mainly Singapore Kerosene and derivatives of Brent crude oil and New York crude oil which are closely linked to the price of jet fuel. In the first six months, the Group applied hedging to 17.6% of the spot jet fuel procured during the period. The Group will continue to adopt hedging in future in order to monitor its risk exposure to fluctuation in jet fuel price.
• Risk associated with capital structure
As at 30 June 2008, the Group's gearing ratio, which represents total liabilities divided by total assets, was 67.4%, representing an increase of 2 percentage points from 65.4% as at 31 December 2007, primarily due to the introduction of additional aircraft and the increase of debt financing activities. Although the gearing ratio of the Group for the current period moved slightly upwards, its solvency position in the long term was relatively strong and it continued to dominate a leading position in the industry while the prevailing gearing ratios of other air carriers stood at a relatively high level.
• Risk associated with liquidity
As at 30 June 2008, the Group's current ratio, which represents current assets divided by current liabilities, was 0.3605, representing a decrease of 0.51 percentage point from 0.3656 as at 31 December 2007, while its EBITDA interest cover was 2.87 times, representing a decrease of 39.96% from 4.78 times as at 31 December 2007. The Company is in the process of optimizing both its long-term and short-term debt structures step by step to align them with the changes in the financial market. The Group has already obtained bank facilities with an aggregate amount of up to RMB80.172 billion from a number of banks in the PRC and is therefore in a position to fully meet its own demand on current capital. Meanwhile, the Company has also strengthened its financial centralization management system and increased the utilisation of Renminbi and other foreign currencies deposit.
• Risk associated with foreign exchange and interest rate
As at 30 June 2008, foreign currency denominated loans, mainly those denominated in US dollars, Hong Kong dollars and Japanese Yen, constitute a large proportion of the Group's loans. The Group basically maintained a balance of its foreign currency denominated incomes and expenditures. The movement of exchange rate of Renminbi to US dollar may greatly affect the exchange gain of the Company. The Company will continue to effectively eliminate any foreign exchange risk by means of financial derivative products based on the major trend of foreign exchange and in accordance with its forecast on its overall incomes and expenditures.
To manage risks associated with interest rates, the Group entered into certain standard contracts with counterparties in relation to interest rate hedging in the first half of the year. The Company will continue to attempt to make use of the swap transactions and other derivative products coupled with the use of fixed and floating interest rates relating to the interest-bearing debts so as to eliminate any risks arising from interest rate.
• Investment risk
As at 30 June 2008, the Group recorded losses for all air carriers that the Group had invested in, except Shandong Airlines. Despite the repurchase of 25% equity interests in Air China Cargo and the disposal of certain non-aviation interests held by CNAC in the first half of the year, there is still room for further consolidation and streamlining of the business of the investee companies and improve their financial situation and operating results.
15
Major Events
ANTITRUST INVESTIGATION
On 26 February 2007, the Eastern District Court of New York of the US Federal Courts issued summons to the Company and Air China Cargo in connection with the antitrust civil case relating to the air cargo services. Pursuant to such summons, various airlines, including the Company and Air China Cargo, were sued for their breach of the US Antitrust Law on the ground that these airlines were acting in concert in imposing excessive surcharges so as to impede the offering of discount that would be made available for the prices charged for air cargo services and that these airlines had reached an agreement on the allocation of revenues and consumers so as to achieve such purposes as setting, increasing, maintaining or stabilizing the air cargo prices. Insofar as the case is in the course of initial examination, our directors believe that at the present stage, they are unable to make a reasonable and reliable estimation on the ultimate results of the case and therefore no provisions has been made for such litigation for the time being.
16
Shareholdings of Directors, Supervisors and Senior Management and Substantial Shareholders of the Company
(I) DISCLOSURE OF INTERESTS OF DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
As at 30 June 2008, 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 any of its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance ('SFO')) which were notifiable to the Company and the Hong Kong 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 notifiable to the Company and the Hong Kong Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies.
Mr. Christopher Dale Pratt is a non-executive director of the Company and is concurrently the chairman and executive director of Cathay Pacific, which is a substantial shareholder of the Company and wholly owns Dragonair. Mr. Kong Dong is the chairman and a non-executive director of the Company and is concurrently a non-executive director of Cathay Pacific. Cathay Pacific and Dragonair compete or are likely to compete either directly or indirectly with some aspects of the business of the Company as they operate airline services to certain destinations, which are also served by the Company.
Save as above, 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.
(II) SUBSTANTIAL SHAREHOLDERS
SIGNIFICANT INTERESTS IN THE COMPANY
Pursuant to the record of the register kept in the Company under Section 336 of the SFO, as at 30 June 2008, to the knowledge of the Directors, supervisors and chief executive of the Company, the following persons (other than a Director, supervisor or chief executive of the Company) 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 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 as follows:
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
of the total
|
|
|
|
|
|
Type and
|
Percentage
|
Percentage of
|
issued foreign
|
Percentage of
|
|
|
|
|
number of
|
of the total
|
the total issued
|
shares (excluding
|
the total issued
|
|
|
|
|
shares held in
|
issued shares of
|
A shares of
|
H shares) of
|
H shares of
|
Short
|
|
Name
|
Type of Interests
|
the Company
|
the Company
|
the Company
|
the Company
|
the Company
|
position
|
|
|
|
|
|
|
|
|
|
|
CNAHC
|
Beneficial owner
|
4,949,066,567
|
40.40%
|
63.08%
|
–
|
–
|
–
|
|
|
|
A shares
|
|
|
|
|
|
|
CNAHC(1)
|
Attributable interests
|
1,380,482,920
|
11.26%
|
17.60%
|
–
|
–
|
–
|
|
|
|
A shares
|
|
|
|
|
|
|
China National Aviation
|
Beneficial owner
|
1,380,482,920
|
11.26%
|
17.60%
|
–
|
–
|
–
|
|
Corporation (Group) Limited
|
|
A shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cathay Pacific
|
Beneficial owner
|
2,217,617,455
|
18.10%
|
–
|
–
|
50.34%
|
–
|
|
|
|
H shares
|
|
|
|
|
|
|
Swire Pacific Limited(2)
|
Attributable interests
|
2,217,617,455
|
18.10%
|
–
|
–
|
50.34%
|
–
|
|
|
|
H shares
|
|
|
|
|
|
|
John Swire & Sons Limited(2)
|
Attributable interests
|
2,217,617,455
|
18.10%
|
–
|
–
|
50.34%
|
–
|
|
|
|
H shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Swire & Sons (H.K.) Limited(2)
|
Attributable interests
|
2,217,617,455
|
18.10%
|
–
|
–
|
50.34%
|
–
|
|
|
|
H shares
|
|
|
|
|
|
17
Shareholdings of Directors, Supervisors and Senior Management
and Substantial Shareholders of the Company
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 (i.e. 30 June 2008):
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 foreign shares (excluding H 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 36.50% equity interest and 55.74% voting rights in Swire Pacific Limited, and Swire Pacific Limited's approximately 39.99% interest in Cathay Pacific as at 30th June 2008, John Swire & Sons Limited, John Swire & Sons (H.K.) Limited and Swire Pacific Limited are deemed to be interested in the 2,217,617,455 H shares of the Company directly held by Cathay Pacific.
Save as disclosed above, as at 30 June 2008, 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.
18
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 2008.
2. COMPLIANCE WITH THE MODEL CODE
The Company adopted its own code of conduct regarding directors' securities transactions on terms no less exacting than the required standards set out in the Model Code. After having made the 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 2008.
The Company's own code also applies to its supervisors and relevant employees.
19
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 2008.
2. PUBLIC FLOAT
Pursuant to public information available to the Company and to the best knowledge of the Directors of the Company, during the reporting period, the Company has maintained a public float as required by the Listing Rules and agreed by the Hong Kong Stock Exchange throughout the period under review.
3. INTERIM DIVIDEND
No interim dividend will be paid for the six months ended 30 June 2008. 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 2008 and the Company's interim condensed consolidated financial statements and the accounting policies and practices adopted by the Group.
20
Independent Auditors' Report
18th Floor
Two International Finance Centre
8 Finance Street Central
Hong Kong
Phone: (852) 2846 9888
Fax: (852) 2868 4432
www.ey.com/china
To the shareholders of
Air China Limited
(Established in the People's Republic of China with limited liability)
INTRODUCTION
We have reviewed the interim financial information of Air China Limited (the 'Company'), its subsidiaries and joint ventures (collectively the 'Group') set out on pages 22 to 48 which comprises the Group's interim condensed consolidated balance sheet as at 30 June 2008 and the related interim condensed consolidated income statement, statement of changes in equity and cash flow statement for the six months then ended, and explanatory notes. The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited require the preparation of a report on interim financial information to be in compliance with the relevant provisions thereof and International Accounting Standard 34 'Interim Financial Reporting' ('IAS 34') issued by the International Accounting Standards Board.
The directors are responsible for the preparation and presentation of this interim financial information in accordance with IAS 34. Our responsibility is to express a conclusion on this interim financial information based on our review. Our report is made solely to you, as a body, in accordance with our agreed terms of engagement, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.
SCOPE OF REVIEW
We conducted our review in accordance with International Standard on Review Engagements 2410 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity'. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing. Consequently, it does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
CONCLUSION
Based on our review, nothing has come to our attention that causes us to believe that the interim financial information is not prepared, in all material respects, in accordance with IAS 34.
Ernst & Young
Certified Public Accountants
Hong Kong
26 August 2008
21
Interim Condensed Consolidated Income Statement
For the six months ended 30 June 2008
(Prepared under International Financial Reporting Standards)
22
Interim Condensed Consolidated Balance Sheet
At 30 June 2008
(Prepared under International Financial Reporting Standards)
23
Interim Condensed Consolidated Balance Sheet
At 30 June 2008
(Prepared under International Financial Reporting Standards)
Other payables and accruals 19 (4,366,605) (4,350,281)
Derivative financial instruments (27,604) (14,826)
Issued share capital 20 12,251,362 12,251,362
Treasury shares 21 (1,353,714) (1,283,492)
Reserves 20,268,895 19,551,280
24
Interim Condensed Consolidated Statement of Changes in Equity
For the six months ended 30 June 2008
(Prepared under International Financial Reporting Standards)
|
Attributable to equity holders of the Company
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
Issued
|
|
|
|
|
exchange
|
Proposed
|
|
|
|
|
|
shares
|
Treasury
|
Capital
|
Reserve
|
Retained
|
translation
|
final
|
|
Minority
|
Total
|
|
|
Capital
|
shares
|
reserve
|
funds
|
earnings
|
reserve
|
dividend
|
Total
|
interests
|
equity
|
|
|
RMB’000
|
RMB’000
|
RMB’000
|
RMB’000
|
RMB’000
|
RMB’000
|
RMB’000
|
RMB’000
|
RMB’000
|
RMB’000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
As at 1 January 2008
|
12,251,362
|
(1,283,492)
|
12,328,279*
|
1,351,000*
|
6,861,763*
|
(989,762)*
|
837,987
|
31,357,137
|
150,216
|
31,507,353
|
|
Profit for the period
|
–
|
–
|
–
|
–
|
1,244,073
|
–
|
–
|
1,244,073
|
(60,725)
|
1,183,348
|
|
Final 2007 dividend declared (note 10)
|
–
|
–
|
–
|
–
|
–
|
–
|
(837,987)
|
(837,987)
|
–
|
(837,987)
|
|
Transfer to reserve funds
|
–
|
–
|
–
|
264,700
|
(264,700)
|
–
|
–
|
–
|
–
|
–
|
|
Acquisition of additional interest
|
|
|
|
|
|
|
|
|
|
|
|
in a joint venture
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
400,568
|
400,568
|
|
Share of reserve movement of an associate
|
–
|
–
|
106,050
|
–
|
–
|
–
|
–
|
106,050
|
–
|
106,050
|
|
Disposal of subsidiaries
|
–
|
–
|
(5,375)
|
–
|
–
|
–
|
–
|
(5,375)
|
–
|
(5,375)
|
|
Elimination for reciprocal shareholding
|
|
|
|
|
|
|
|
|
|
|
|
(note 21)
|
–
|
(70,222)
|
–
|
–
|
–
|
–
|
–
|
(70,222)
|
–
|
(70,222)
|
|
Exchange realignment
|
–
|
–
|
–
|
–
|
–
|
(685,553)
|
–
|
(685,553)
|
(5,749)
|
(691,302)
|
|
Others
|
–
|
–
|
58, 420
|
–
|
–
|
–
|
–
|
58,420
|
–
|
58,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at 30 June 2008
|
12,251,362
|
(1,353,714)
|
12,487,374*
|
1,615,700*
|
7,841,136*
|
(1,675,315)*
|
–
|
31,166,543
|
484,310
|
31,650,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
As at 1 January 2007
|
12,251,362
|
(1,246,955)
|
13,484,123
|
768,398
|
4,053,354
|
(188,791)
|
602,767
|
29,724,258
|
2,011,435
|
31,735,693
|
|
Profit for the period
|
–
|
–
|
–
|
–
|
1,568,579
|
–
|
–
|
1,568,579
|
(92,544)
|
1,476,035
|
|
Final 2006 dividend declared (note 10)
|
–
|
–
|
–
|
–
|
–
|
–
|
(602,767)
|
(602,767)
|
–
|
(602,767)
|
|
Transfer to reserve funds
|
–
|
–
|
–
|
317,902
|
(317,902)
|
–
|
–
|
–
|
–
|
–
|
|
Acquisition of minority interest of
|
|
|
|
|
|
|
|
|
|
|
|
a subsidiary
|
–
|
–
|
(1,294,115)
|
–
|
–
|
–
|
–
|
(1,294,115)
|
(1,738,840)
|
(3,032,955)
|
|
Share of reserve movement of an associate
|
–
|
–
|
55,160
|
–
|
–
|
–
|
–
|
55,160
|
–
|
55,160
|
|
Exchange realignment
|
–
|
–
|
–
|
–
|
–
|
(330,984)
|
–
|
(330,984)
|
(5,344)
|
(336,328)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at 30 June 2007
|
12,251,362
|
(1,246,955)
|
12,245,168
|
1,086,300
|
5,304,031
|
(519,775)
|
–
|
29,120,131
|
174,707
|
29,294,838
|
* The aggregate of these reserve accounts represents the consolidated reserves of RMB20,268,895,000 (31 December 2007: RMB19,551,280,000) on the interim condensed consolidated balance sheet.
25
Interim Condensed Consolidated Cash Flow Statement
For the six months ended 30 June 2008
(Prepared under International Financial Reporting Standards)
26
Notes to Interim Condensed Consolidated Financial Statements
At 30 June 2008
(Prepared under International Financial Reporting Standards)
1. CORPORATE INFORMATION
Air China Limited (the 'Company') was incorporated as a joint stock limited company in Beijing, the People's Republic of China (the 'PRC'), on 30 September 2004. The Company's H shares are listed on the Hong Kong Stock Exchange ('HKSE') and London Stock Exchange while the Company's A shares are listed on the Shanghai Stock Exchange. In the opinion of the Directors, the Company's parent and ultimate holding company is China National Aviation Holding Company ('CNAHC'), a PRC state-owned enterprise under the supervision of the State Council.
On 3 January 2008, China National Aviation Company Limited ('CNAC' a wholly-owned subsidiary of the Company) entered into a sale and purchase agreement (the 'CITIC Agreement') with China International Trust and Investment Corporation Pacific Limited ('CITIC') and Gold Leaf Enterprises Holdings Ltd. ('Gold Leaf', a wholly-owned subsidiary of CITIC). Pursuant to the CITIC Agreement, CNAC agreed to purchase from Gold Leaf the entire issued share capital of Fine Star Enterprise Corporation (another wholly-owned subsidiary of CITIC), which in turn held 25% equity interest in the registered capital of Air China Cargo Co., Ltd. ('Air China Cargo'). The aggregate consideration paid by CNAC for the transaction amounted to approximately RMB857 million. Upon completion of the transaction, the Company's interest in Air China Cargo, including both direct and indirect interests, increased from 51% to 76%. Air China Cargo was then changed from a joint venture to a subsidiary of the Company.
On 10 June 2008, CNAC entered into another sale and purchase agreement together with an agreement for indebtedness assignment with China National Aviation Corporation (Group) Limited ('CNACG', a wholly-owned subsidiary of CNAHC) (collectively the 'CNACG Agreement'). Pursuant to the CNACG Agreement, CNAC agreed to sell to CNACG the entire issued share capital of each of Fly Top Limited ('Fly Top', a wholly-owned subsidiary of CNAC) and China National Aviation Logistics Company Limited ('CNAL', another wholly-owned subsidiary of CNAC) and 50% of the issued share capital of Jardine Airport Services Limited ('JASL', an associate of CNAC). Fly Top held 60% of the issued share capital of each of Southwest Air Catering Co., Ltd and Beijing Air Catering Co., Ltd (two joint ventures of CNAC) and 20.2% of the issued share capital of Lufthansa Services Hong Kong Limited ('LSG', an associate of CNAC). CNAL held 25% of the issued share capital of Tradeport Hong Kong Limited (another associate of CNAC). The aggregate consideration payable by CNACG was RMB850,000,000.
The principal activities of the Company, its subsidiaries and joint ventures (collectively the 'Group') and associates consist of the provision of airline, airline-related services, including aircraft engineering services, air catering services and airport ground handling services, mainly in Mainland China, Hong Kong and Macau.
The registered office of the Company is located at 9th Floor, Blue Sky Mansion, 28 Tianzhu Road, Zone A, Tianzhu Airport Industrial Zone, Shunyi District, Beijing 101312, the PRC.
27
Notes to Interim Condensed Consolidated Financial Statements
At 30 June 2008
(Prepared under International Financial Reporting Standards)
2. BASIS OF PREPARATION AND ACCOUNTING POLICIES
Basis of preparation
The interim condensed consolidated financial statements of the Group for the six months ended 30 June 2008 have been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' and the disclosure requirements of the Rules Governing the Listing of Securities on the Hong Kong Stock Exchange.
As at 30 June 2008, the Group's net current liabilities amounted to approximately RMB19,502 million, which comprised current assets of approximately RMB10,996 million and current liabilities of approximately RMB30,498 million. The liquidity of the Group is primarily dependent on its ability to maintain adequate cash inflow from operations and sufficient financing to meet its financial obligations as and when they fall due. In preparing the interim condensed consolidated financial statements for the six months ended 30 June 2008, the directors of the Company have considered the Group's sources of liquidity and believe that adequate funding is available to fulfill the Group's debt obligations and capital expenditure requirements. Accordingly, the interim condensed consolidated financial statements have been prepared on a basis that the Group will be able to continue as a going concern.
The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and therefore should be read in conjunction with the Group's annual financial statements for the year ended 31 December 2007.
Significant accounting policies
The principal accounting policies adopted in the preparation of the interim condensed consolidated financial statements of the Group are consistent with those followed in the preparation of the audited annual financial statements of the Group for the year ended 31 December 2007, except for the adoption of the following new International Financial Reporting Standards ('IFRSs', which comprise standards and interpretations approved by the International Accounting Standards Board, and International Accounting Standards and Standing Interpretations Committee interpretations approved by the International Accounting Standards Committee that remain in effect).
IFRIC-Int 11 IFRS 2 - Group and Treasury Share Transactions
IFRIC-Int 12 Service Concession Arrangements
IFRIC-Int 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction
(a) IFRIC-Int 11 IFRS 2 - Group and Treasury Share Transactions
This interpretation requires arrangements whereby an employee is granted rights to the Group's equity instruments, to be accounted for as an equity-settled scheme, even if the Group acquires the instruments from another party, or the shareholders provide the equity instruments needed. The interpretation also addresses the accounting for share-based payment transactions involving two or more entities within the Group.
(b) IFRIC-Int 12 Service Concession Arrangements
The interpretation requires an operator under public-to-private service concession arrangements to recognise the consideration received or receivables in exchange for the construction services as a financial asset and/ or an intangible asset, based on the terms of the contractual arrangements. The interpretation also address how an operator shall apply existing IFRSs to account for the obligations and the rights arising from service concession arrangements by which a government or a public sector entity grants a contract for the construction of infrastructure used to provide public services and/or for the supply of public service.
28
Notes to Interim Condensed Consolidated Financial Statements
At 30 June 2008
(Prepared under International Financial Reporting Standards)
2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (Continued)
Significant accounting policies (Continued)
(c) IFRIC-Int 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction
This interpretation provides guidance on how to assess the limit under IAS 19 Employee Benefits, on the amount of a refund or a reduction in future contributions in relation to a defined benefit scheme that can be recognised as an asset, in particular, when a minimum funding requirement exists.
The adoption of the above IFRSs has had no material impact on the Group's interim condensed consolidated financial statements for the six months ended 30 June 2008.
3. SEGMENT INFORMATION
Segment information of the Group is presented by way of two segment formats: (i) on a primary segment reporting basis, by business segment; and (ii) on a secondary segment reporting basis, by geographical segment.
The Group's operating businesses are structured and managed separately, according to the nature of their operations and the services they provide. Each of the Group's business segments represents a strategic business unit that offers services which are subject to risks and returns that are different from those of the other business segments. Summary details of the business segments are as follows:
(a) the airline operations segment comprises the provision of air passenger and air cargo services;
(b) the engineering services segment comprises the provision of aircraft engineering services which include aircraft maintenance, repair and overhaul services;
(c) the airport terminal services segment comprises the provision of ground services, which include check-in service, boarding service, premium class lounge service, ramp service, luggage handling service, loading and unloading services, cabin cleaning and transit services; and
(d) the 'others' segment comprises the provision of air catering services and other airline-related services.
In determining the Group's geographical segments, revenue is attributed to the segments based on the origin and destination of each flight segment.
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.
29
Notes to Interim Condensed Consolidated Financial Statements
At 30 June 2008
(Prepared under International Financial Reporting Standards)
3. SEGMENT INFORMATION (Continued)
Business segments
The following tables present the Group's consolidated revenue and profit from operations by business segment for the six months ended 30 June 2008 and 2007:
For the six months ended 30 June 2008
30
Notes to Interim Condensed Consolidated Financial Statements
At 30 June 2008
(Prepared under International Financial Reporting Standards)
3. SEGMENT INFORMATION (Continued)
Geographical segments
The following tables present the Group's consolidated revenue by geographical segment for the six months ended 30 June 2008 and 2007:
For the six months ended 30 June 2008
Hong Kong North Japan/ Asia Pacific
Domestic /Macau Europe America Korea and others Total
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUE
Sales to external customers
and total revenue 13,011,138 1,397,400 4,423,972 2,773,692 2,054,010 1,986,248 25,646,460
For the six months ended 30 June 2007
Hong Kong North Japan/ Asia Pacific
Domestic /Macau Europe America Korea and other Total
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUE
Sales to external customers
and total revenue 12,497,397 1,317,013 3,224,386 2,153,863 2,198,633 1,961,528 23,352,820
4. AIR TRAFFIC REVENUE
Air traffic revenue comprises revenue from the airline operations business and is stated net of business tax. An analysis of the Group's air traffic revenue is as follows:
For the six months ended
30 June 30 June
2008 2007
RMB'000 RMB'000
(Unaudited) (Unaudited)
Passenger 20,804,991 19,768,612
Cargo and mail 3,655,092 1,915,830
24,460,083 21,684,442
Pursuant to the relevant PRC business tax rules and regulations, air traffic revenue for all domestic and outbound international flights is subject to business tax at a rate of 3%. All inbound international, Hong Kong and Macau regional flights are exempted from business tax. Business tax incurred and set off against air traffic revenue for the six months ended 30 June 2008 and 30 June 2007 amounted to approximately RMB606 million and RMB551 million, respectively.
31
Notes to Interim Condensed Consolidated Financial Statements
At 30 June 2008
(Prepared under International Financial Reporting Standards)
5. OTHER OPERATING REVENUE
6. PROFIT FROM OPERATIONS
The Group's profit from operations is arrived at after charging:
32
Notes to Interim Condensed Consolidated Financial Statements
At 30 June 2008
(Prepared under International Financial Reporting Standards)
7. FINANCE REVENUE AND FINANCE COSTS
The interest capitalisation rate represents the cost of capital from raising the related borrowings and is approximately 3% to 7% (2007: 4.5% to 6%) per annum.
33
Notes to Interim Condensed Consolidated Financial Statements
At 30 June 2008
(Prepared under International Financial Reporting Standards)
8. DISPOSAL OF SUBSIDIARIES AND AN ASSOCIATE
9. TAX
On 16 March 2007, the National People's Congress approved the Corporate Income Tax Law of the People's Republic of China (the 'New CIT Law'), which was effective from 1 January 2008. Under the New CIT Law, the corporate income tax rate applicable to domestic companies from 1 January 2008 onwards will decrease from 33% to 25%. The Company, its subsidiaries, joint ventures and associates established in Mainland China are subject to enterprise income tax at rates ranging from 12.5% to 25% (2007: 12% to 33%) on their taxable income.
Hong Kong profits tax has been provided at the rate of 16.5% (2007: 17.5%) on the estimated assessable profits arising in Hong Kong during the period.
34
Notes to Interim Condensed Consolidated Financial Statements
At 30 June 2008
(Prepared under International Financial Reporting Standards)
9. TAX (Continued)
The determination of current and deferred income tax was based on enacted tax rates. Major components of income tax charge are as follows:
For the six months ended
30 June 30 June
2008 2007
RMB'000 RMB'000
(Unaudited) (Unaudited)
Current income tax - Mainland China (521,459) 421,920
Deferred income tax - origination and reversal of temporary differences 745,096 174,452
Income tax charge for the period 223,637 596,372
The share of tax attributable to joint ventures, which are accounted for in the Group's interim condensed consolidated financial statements through proportionate consolidation, amounting to RMB16,087,000 (unaudited) (2007: RMB11,117,000 (unaudited)) is included in the income tax charge for the period.
The share of tax attributable to associates amounting to RMB16,666,000 (unaudited) (2007: RMB99,331,000 (unaudited)) is included in the 'Share of profit and losses of associates' on the face of the condensed consolidated income statement for the six months ended 30 June 2008.
10. DIVIDEND
In accordance with the Company's articles of association, the profit after tax of the Company for the purpose of dividends payment is based on the lesser of (i) the profit determined in accordance with the Accounting Standards for Business Enterprises; and (ii) the profit determined in accordance with IFRSs.
The proposed final dividend for the year ended 31 December 2007 was approved by the Company's shareholders on 30 May 2008 and was fully paid by the end of 30 June 2008.
The Board of Directors of the Company does not recommend the payment of any interim dividend for the six months ended 30 June 2008 (six months ended 30 June 2007: Nil).
11. EARNINGS PER SHARE ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY
The calculation of basic earnings per share for the six months ended 30 June 2008 was based on the net profit attributable to equity holders of the Company for the six months ended 30 June 2008 of approximately RMB1,244,073,000 (unaudited), and the weighted average of approximately 11,865,149,750 ordinary shares in issue during the period, as adjusted to account for the effect of cross holding with Cathay Pacific Airways Limited ('Cathay Pacific').
The calculation of basic earnings per share for the six months ended 30 June 2007 was based on the net profit attributable to equity holders of the Company for the six months ended 30 June 2007 of approximately RMB1,568,579,000 (unaudited) and 11,879,594,685 ordinary shares in issue during the period, as adjusted to account for the effect of cross holding with Cathay Pacific.
Diluted earnings per share for the six months ended 30 June 2008 and 30 June 2007 have not been disclosed because no diluting events existed during those periods.
35
Notes to Interim Condensed Consolidated Financial Statements
At 30 June 2008
(Prepared under International Financial Reporting Standards)
|
|
|
|
|
|
|
|
|
|
|
Aircraft
|
|
|
|
|
|
|
|
|
and flight
|
|
|
Transportation
|
Office
|
Construction
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at 1 January 2008, net of
|
|
|
|
|
|
|
|
|
accumulated depreciation
|
53,751,163
|
2,699,680
|
958,028
|
586,469
|
149,855
|
3,546,478
|
61,691,673
|
|
Additions
|
4,186,237
|
5,477
|
23,754
|
19,771
|
25,255
|
2,310,595
|
6,571,089
|
|
Acquisition of additional interest in a joint venture
|
|
|
|
|
|
|
|
|
(note 23)
|
980,584
|
99,180
|
72,115
|
33,386
|
–
|
53,487
|
1,238,752
|
|
Disposals
|
(57,243)
|
(7,233)
|
(1,718)
|
(1,638)
|
(153)
|
–
|
(67,985)
|
|
Transfer from construction
|
|
|
|
|
|
|
|
|
in progress
|
923,629
|
545,559
|
265,056
|
191,918
|
9,793
|
(1,935,955)
|
–
|
|
Disposal of subsidiaries
|
|
|
|
|
|
|
|
|
(note 8)
|
–
|
(69,769)
|
(22,254)
|
(46,987)
|
(2,205)
|
(139,474)
|
(280,689)
|
|
Depreciation charged for
|
|
|
|
|
|
|
|
|
the period
|
(2,642,446)
|
(66,388)
|
(101,723)
|
(73,101)
|
(23,763)
|
–
|
(2,907,421)
|
|
Exchange realignment
|
(12,736)
|
(3,629)
|
–
|
(1,644)
|
–
|
–
|
(18,009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at 30 June 2008, net of
|
|
|
|
|
|
|
|
|
accumulated depreciation
|
57,129,188
|
3,202,877
|
1,193,258
|
708,174
|
158,782
|
3,835,131
|
66,227,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at 30 June 2008
|
|
|
|
|
|
|
|
|
Cost
|
94,842,737
|
4,607,478
|
2,907,996
|
1,746,215
|
403,871
|
3,835,131
|
108,343,428
|
|
Accumulated depreciation
|
(37,713,549)
|
(1,404,601)
|
(1,714,738)
|
(1,038,041)
|
(245,089)
|
–
|
(42,116,018)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
57,129,188
|
3,202,877
|
1,193,258
|
708,174
|
158,782
|
3,835,131
|
66,227,410
|
As at 30 June 2008, certain of the Group's aircraft and buildings with an aggregate net book value of approximately RMB12,205 million (unaudited) (31 December 2007: RMB12,255 million (audited)) were pledged to secure certain bank loans of the Group.
The aggregate net book value of aircraft held under finance leases included in the property, plant and equipment of the Group amounted to approximately RMB24,535 million (unaudited) (31 December 2007: RMB21,948 million
(audited)).
As at 30 June 2008, the Group was in the process of applying for the title certificates of certain buildings with an aggregate net book value of approximately RMB109 million (unaudited) (31 December 2007: RMB114 million (audited)) transferred from Air China International Corporation, the predecessor of the Company, upon incorporation of the Company. The Group was also in the process of applying for the title certificates of certain buildings acquired by the Group after incorporation with an aggregate net book value of approximately RMB339 million (unaudited) (2007: RMB384 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 also of the opinion that the aforesaid matter would therefore have no significant impact on the Group's financial position as at 30 June 2008.
36
Notes to Interim Condensed Consolidated Financial Statements
At 30 June 2008
(Prepared under International Financial Reporting Standards)
13. LEASE PREPAYMENTS
30 June
2008
RMB'000
(Unaudited)
Cost
At beginning of period 1,111,225
Additions 6,078
Acquisition of additional interest in a joint venture (note 23) 73,869
At end of period 1,191,172
Accumulated amortisation
At beginning of period (65,183)
Acquisition of additional interest in a joint venture (note 23) (2,591)
Amortisation for the period (note 6) (12,468)
At end of period (80,242)
Net book value
At end of period 1,110,930
As at 30 June 2008, certain of the Group's land use rights, which are accounted for as lease prepayments in the Group's interim condensed consolidated financial statements, with an aggregate net book value of approximately RMB36 million (unaudited) (31 December 2007: RMB37 million (audited)) were pledged to secure certain of the Group's bank loans.
As at 30 June 2008, the Group was in the process of applying for the title certificates of certain land use rights acquired by the Group after incorporation with an aggregate net book value of approximately RMB4.5 million (unaudited) (31 December 2007: RMB5 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 land use rights. The Directors of the Company are also of the opinion that the aforesaid matter would therefore have no significant impact on the Group's financial position as at 30 June 2008.
14. INTERESTS IN ASSOCIATES
As at 30 June 2008, the Group was in the process of completing the registration of its equity interests in certain associates with an aggregate investment cost of approximately RMB200 million (unaudited) (31 December 2007: RMB200 million (audited)) transferred from Air China International Corporation, upon the incorporation of the Company. The Directors of the Company are of the view that the aforesaid matter would have no significant impact on the Group's ownership in those equity interests and also the Group's financial position as at 30 June
2008.
37
Notes to Interim Condensed Consolidated Financial Statements
At 30 June 2008
(Prepared under International Financial Reporting Standards)
15. ACCOUNTS RECEIVABLE
The Group generally allows a credit period ranging from 30 days to 90 days to its sales agents and customers. An aged analysis of the Group's accounts receivable as at the balance sheet date, net of provision for doubtful debt, is as follows:
30 June 31 December
2008 2007
RMB'000 RMB'000
(Unaudited) (Audited)
Within 30 days 2,273,860 2,246,288
31 to 60 days 185,018 279,497
61 to 90 days 39,795 136,078
Over 90 days 165,473 132,417
2,664,146 2,794,280
Included in the Group's accounts receivable as at the balance sheet date is the following amount due from a joint venture:
30 June 31 December
2008 2007
RMB'000 RMB'000
(Unaudited) (Audited)
Joint venture - 306,831
16. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES
An analysis of the Group's prepayments, deposits and other receivables as at the balance sheet date is as follows:
30 June 31 December
2008 2007
RMB'000 RMB'000
(Unaudited) (Audited)
Advances and others 959,430 743,946
Manufacturers' credits on aircraft acquisition receivables 65,345 55,741
Prepaid aircraft operating lease rentals 183,782 195,970
Miscellaneous deposits 419,553 322,405
1,628,110 1,318,062
38
Notes to Interim Condensed Consolidated Financial Statements
At 30 June 2008
(Prepared under International Financial Reporting Standards)
17. CASH AND CASH EQUIVALENTS
30 June 31 December
2008 2007
RMB'000 RMB'000
(Unaudited) (Audited)
Cash and bank balances 2,572,402 1,586,380
Cash placed with China National Aviaion Finance Co., Ltd 247,767 387,962
2,820,169 1,974,342
Time deposits placed with banks 1,880,039 2,050,802
Less: Pledged deposits against aircraft operating leases and financial derivatives (108,414) (118,624)
Cash and cash equivalents 4,591,794 3,906,520
Less: Non-pledged deposits with maturity of more than
three months when acquired (62,677) (1,429,179)
4,529,117 2,477,341
18. ACCOUNTS PAYABLES
An aged analysis of the Group's accounts payable as at the balance sheet date is as follows:
30 June 31 December
2008 2007
RMB'000 RMB'000
(Unaudited) (Audited)
Within 30 days 5,071,522 4,249,353
31 to 60 days 953,852 788,374
61 to 90 days 439,892 412,435
Over 90 days 661,489 480,638
7,126,755 5,930,800
Included in the accounts payable as at the balance sheet date is the following amounts due to joint ventures:
30 June 31 December
2008 2007
RMB'000 RMB'000
(Unaudited) (Audited)
Joint ventures 63,960 141,419
39
Notes to Interim Condensed Consolidated Financial Statements
At 30 June 2008
(Prepared under International Financial Reporting Standards)
19. OTHER PAYABLES AND ACCRUALS
An analysis of the Group's other payables and accruals as at the balance sheet date is as follows:
30 June 31 December
2008 2007
RMB'000 RMB'000
(Unaudited) (Audited)
Provision for staff housing benefits 26,493 23,038
Accrued salaries, wages and benefits 1,222,026 1,213,017
Interest payable 352,283 287,886
Custom duties and levies payable 514,265 1,066,387
Current portion of long term payables 78,662 55,155
Current portion of deferred income 76,944 76,944
Deposits received from sales agents 508,952 404,796
Accrued operating expenses 1,070,345 725,303
Others 516,635 497,755
4,366,605 4,350,281
20. SHARE CAPITAL
The number of shares of the Company and their nominal value as at 30 June 2008 and 31 December 2007 are as follows:
Number of shares Nominal value
RMB'000
Registered, issued and fully paid:
State legal person shares of RMB1.00 each 4,826,195,989 4,826,196
Non-H foreign shares of RMB1.00 each 1,380,482,920 1,380,483
H shares of RMB1.00 each 4,405,683,364 4,405,683
A shares of RMB1.00 each 1,639,000,000 1,639,000
12,251,362,273 12,251,362
The H shares and A shares rank pari passu, in all material respects, with the state legalperson shares and non-H foreign shares of the Company.
21. RECIPROCAL SHAREHOLDING IN AN ASSOCIATE
As at 30 June 2008, the Group owned 17.5% (31 December 2007: 17.5%) equity interest in Cathay Pacific, which in turn owned 18.1% (31 December 2007: 17.64%) equity interest in the Company. Accordingly, the 17.5% of Cathay's shareholding in the Company was recorded in the Group's interim condensed consolidated financial statements as treasury shares through deduction from equity.
40
Notes to Interim Condensed Consolidated Financial Statements
At 30 June 2008
(Prepared under International Financial Reporting Standards)
22. SHARE APPRECIATION RIGHTS
The Company has adopted a share appreciation rights ('SARs') arrangement (the 'Plan') which was approved by the shareholders on 18 October 2004 for the purpose of motivating its employees. The Plan provides for the grant of SARs to eligible participants, including the Company's Directors (excluding independent non-executive Directors), supervisors (excluding independent supervisors), president, vice presidents, heads of key departments in the Company's headquarters, general managers and general deputy managers of principal branches and subsidiaries as well as selected senior professionals and key specialists. In any event, SARs will be granted to no more than 200 individuals.
Under the Plan, the holders of SARs are entitled the rights to receive an amount in respect of the appreciation in market value of the Company's H shares from the date of grant of SARs and the date of exercise. No shares will be issued under the Plan and therefore the Company's equity interests will not be diluted as a result of the issuance of SARs. The maximum number of unexercised SARs permitted to be granted under the Plan is, upon their exercise, limited to 2% of the Company's H shares in issue at any time during each year. The maximum number of SARs granted to eligible participants under the Plan within any 12-month period is, upon their exercise, limited to 0.4% of the Company's H shares in issue at any time during each year. The maximum number of SARs granted to any eligible participant is limited to 10% of the total number of unexercised SARs in issue at any time during each year. Any further grant of SARs in excess of the above limits is subject to shareholders' approval in general meetings.
The exercise period of all SARs commences after a vesting period and ends on a date which is not later than five years from the date of grant of the SARs. The exercise price of the SARs will be equal to the average closing price of the Company's H shares on the HKSE for the five consecutive trading days immediately preceding the date of the grant. On 15 June 2007, 14,939,900 SARs were granted to a total of 109 individuals at an exercise price of HK$2.98 per share. As at each of the last days of the second, third and fourth anniversaries of the date of grant, the total number of SARs exercisable will not exceed 30%, 70% and 100%, respectively, of the total SARs granted to the respective eligible participants. As at 30 June 2008, all SARs granted remained unexercised.
As at 30 June 2008, the fair value of the SARs granted during the year was RMB13,947,642, of which the Group reversed employee compensation expense of RMB10,038,558 during the period then ended.
23. BUSINESS COMBINATION
On 3 January 2008, the Group acquired 25% equity interest in the Air China Cargo in addition to the 51% equity interest it already held. Further details of the transaction are included in note 1 to the financial statements. The purchase consideration for the acquisition in the form of cash, RMB857,003,819 was paid on 3 January 2008.
By the end of reporting period, the fair value of the identifiable assets, liabilities and contingent liabilities of Air China Cargo as at the date of acquisition were determined provisionally based on the management's best estimates. The Company will recognise any adjustments to those provisional values after completing the initial accounting within twelve months of the acquisition date.
41
Notes to Interim Condensed Consolidated Financial Statements
At 30 June 2008
(Prepared under International Financial Reporting Standards)
23. BUSINESS COMBINATION (Continued)
The net assets attributable to the 25% equity interest in Air China Cargo acquired are as follows:
RMB'000
Property, plant and equipment 632,016
Lease prepayments 36,366
Deposits for aircraft under operating leases 2,438
Deferred tax assets 29,412
Aircraft held for sale 90,553
Inventories 2,605
Accounts receivable 178,088
Prepayments, deposits and other receivables 28,928
Cash and cash equivalents 74,109
Air traffic liabilities (7,911)
Accounts payable (121,820)
Other payables and accruals (212,518)
Bank and other loans (274,650)
Long term payables (17,504)
Provision for major overhauls (22,853)
Net assets 417,259
Goodwill on acquisition 439,745
Satisfied by cash 857,004
An analysis of the net outflow of cash and cash equivalent in respect of the acquisition of 25% equity interest in
Air China Cargo is as follows:
RMB'000
(Unaudited)
Cash consideration (857,004)
Net cash acquired from the transaction 145,254
Net outflow of cash and cash equivalents in respect of the acquisition of 25% equity interest
in Air China Cargo (711,750)
Since its acquisition, Air China Cargo has contributed RMB3,507 million to the Group's turnover and RMB103 million to the Group's consolidated net profit for the six months ended 30 June 2008.
Included in the goodwill of RMB439,745,000 recognised above is attributed to the expected synergies and other benefits from combining the assets and activities of Air China Cargo with those of the Group.
42
Notes to Interim Condensed Consolidated Financial Statements
At 30 June 2008
(Prepared under International Financial Reporting Standards)
24. CONTINGENT LIABILITIES
As at 30 June 2008, the Group had the following contingent liabilities:
(a) Pursuant to the restructuring of CNAHC for the listing of the Company's H shares on the HKSE and the London Stock Exchange, the Company entered into a restructuring agreement (the 'Restructuring Agreement') with CNAHC and CNACG on 20 November 2004. According to the Restructuring Agreement, except for liabilities constituting or arising out of or relating to businesses undertaken by the Company after the restructuring, no other liabilities would be assumed by the Company and the Company would not be liable, whether severally, or jointly and severally, for debts and obligations incurred by CNAHC and CNACG prior to the restructuring. The Company has also undertaken to indemnify CNAHC and CNACG against 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 airplane. Investigations were conducted by both the Chinese and civil aviation authorities and have yet to be concluded at the date of approval of these financia statements. Certain injured passengers and family members of the deceased passengers as well as crew members 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' judgments or the possible outcome of the lawsuits or any possible appeal actions. Up to 30 June 2008, the Company, Air China International Corporation and the Company's insurer had paid an aggregate amount of approximately RMB229 million in respect of passenger liability and other auxiliary costs. Included in the RMB229 million was an amount of approximately RMB221 million borne by the Company's insurer. As part of the above-mentioned 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 the accident will not be any material adverse impact on the Group's financial position.
(c) On 26 February 2007, the Federal Judiciary of the United States filed a civil summon against the Company and Air China Cargo claiming that they, together with a number of other airlines, have violated certain anti- trust regulations in respect of their air cargo operations in the United States and the European Union. The status of the proceedings is still in the preliminary stage and therefore the Directors of the Company are of the view that it is not possible to estimate the eventual outcome of the claim with reasonable certainty at this stage. Also, the Directors of the Company are of the view that there would be valid defense against this claim and consider that no provision for this claim is needed accordingly.
(d) The Group has issued guarantees to banks in respect of the bank loans granted to the following parties:
30 June 31 December
2008 2007
RMB'000 RMB'000
(Unaudited) (Audited)
Associates 106,666 132,857
43
Notes to Interim Condensed Consolidated Financial Statements
At 30 June 2008
(Prepared under International Financial Reporting Standards)
25. COMMITMENTS
(a) Capital commitments
The Group had the following amounts of contractual commitments for the acquisition and construction of property, plant and equipment as at the balance sheet date:
30 June 31 December
2008 2007
RMB'000 RMB'000
(Unaudited) (Audited)
Contracted, but not provided for:
Aircraft and flight equipment 69,458,583 53,897,381
Buildings 488,684 1,026,747
Others 66,532 248,388
70,013,799 55,172,516
Authorised, but not contracted for:
Aircraft and flight equipment 439,993 226,874
Buildings 3,251,775 3,006,501
Others 644,957 471,907
4,336,725 3,705,282
Total capital commitments 74,350,524 58,877,798
(b) Investment commitments
The Group had the following amounts of investment commitments as at the balance sheet date:
30 June 31 December
2008 2007
RMB'000 RMB'000
(Unaudited) (Audited)
Contracted, but not provided for:
Associate 50,862 54,165
(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.
As at the balance sheet date, the Group had the following future minimum lease payments under non- cancellable operating leases:
30 June 31 December
2008 2007
RMB'000 RMB'000
(Unaudited) (Audited)
Within one year 2,314,721 2,349,599
In the second to fifth years, inclusive 6,378,041 6,599,485
Over five years 3,110,078 3,860,049
11,802,840 12,809,133
44
Notes to Interim Condensed Consolidated Financial Statements
At 30 June 2008
(Prepared under International Financial Reporting Standards)
26. RELATED PARTY TRANSACTIONS
During the period, the Group had the following significant transactions with (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:
For the six months ended
30 June 30 June
2008 2007
RMB'000 RMB'000
(Unaudited) (Unaudited)
(a) Included in air traffic revenue
Sale of air tickets:
CNAHC Group 2,183 1,912
Associates 1,927 1,652
4,110 3,564
Sale of cargo space:
CNAHC Group 278,553 129,319
Government charter flights:
CNAHC Group 182,889 353,710
(b) Included in other operating revenue
Aircraft engineering income:
Associates 31,955 13,821
Ground services income:
CNAHC Group - 508
Joint ventures 28 1,256
Associates 33,532 36,447
33,560 38,211
Bellyhold income:
Joint venture (note 5) - 780,966
Others:
CNAHC Group 13,943 12,223
Joint ventures 3,512 3,932
Associates 16,500 16,795
33,955 32,950
(c) Included in finance revenue and finance costs
Interest income:
Associate 5,405 795
Interest expense:
Associate 10,269 1,421
45
Notes to Interim Condensed Consolidated Financial Statements
At 30 June 2008
(Prepared under International Financial Reporting Standards)
26. RELATED PARTY TRANSACTIONS (Continued)
For the six months ended
30 June 30 June
2008 2007
RMB'000 RMB'000
(Unaudited) (Unaudited)
(d) Included in gain on disposal of subsidiaries
CNAHC Group 850,000 -
(e) Included in operating expenses
Airport ground services, take-off, landing and depot expenses:
CNAHC Group 33,213 37,718
Associates 149,896 128,253
183,109 165,971
Air catering charges:
CNAHC Group 26,540 25,725
Joint ventures 65,048 64,122
Associates 10,708 11,228
102,296 101,075
Repair and maintenance costs:
Joint ventures 253,415 208,234
Associates 61,190 66,957
314,605 275,191
Sales commission expenses:
CNAHC Group 2,252 4,112
Associates 1,497 2,493
3,749 6,605
Management fees:
CNAHC Group 4,357 4,694
Aircraft leasing fees:
Associates 278,262 226,737
Others:
CNAHC Group 71,438 45,608
Joint venture 447 645
Associates 10,610 9,234
82,495 55,487
46
Notes to Interim Condensed Consolidated Financial Statements
At 30 June 2008
(Prepared under International Financial Reporting Standards)
26. RELATED PARTY TRANSACTIONS (Continued)
30 June 31 Decembeer
2008 2007
RMB'000 RMB'000
(Unaudited) (Audited)
(f) Deposits, loans and bills payable
Deposits placed with an associate 247,767 387,962
Loans from an associate 400,223 238,098
(g) Outstanding balances with related parties
Long term receivable from ultimate holding company 281,813 331,813
Due from ultimate holding company 360,727 335,129
Due from related companies 45,888 22,881
Due from associates 169,854 183,224
Due from a joint venture - 306,831
Due to related companies (58,950) (45,142)
Due to associates (100,962) (123,155)
Due to joint ventures (63,960) (141,419)
The long term receivable from ultimate holding company is unsecured, interest-free and is not repayable within one year from the balance sheet date. Except for the long term receivable from ultimate holding company, the outstanding balances with related parties are unsecured, interest-free and repayable within one year or have no fixed terms of repayment.
(h) An analysis of the compensation of key management personal of the Group is as follow:
For the six months ended
30 June 30 June
2008 2007
RMB'000 RMB'000
(Unaudited) (Unaudited)
Compensation of key management personnel of the Group
Short term employee benefits 1,807 1,941
Share-based benefit 3,331 -
Post-employment benefits 125 120
5,263 2,061
(i) On 25 August 2004, CNACG entered into two licences agreements with CNAC pursuant to which CNACG has agreed to grant licences to CNAC, free of royalty, for the rights to use certain trademarks in Hong Kong and Macau, respectively, so long as CNAC is a direct or indirect subsidiary of CNAHC. No royalty charge was levied in respect for the use of these trademarks during the six months ended 30 June 2008 and 2007.
(j) 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 China National Aviation Finance Co., Ltd.; 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.
47
Notes to Interim Condensed Consolidated Financial Statements
At 30 June 2008
(Prepared under International Financial Reporting Standards)
26. RELATED PARTY TRANSACTIONS (Continued)
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 the 'State-owned Enterprises'). During the period, the Group had transactions with the 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 of the Company are of the opinion that none of these transactions is a material related party transaction that requires separate disclosure.
27. EVENTS AFTER THE BALANCE SHEET DATE
On 15 July 2008, the Company and Air China Group Import and Export Trading Co. ('AIE', a wholly-owned subsidiary of the Company), entered into an aircraft purchase agreement with Boeing Company, pursuant to which the Company has agreed to purchase 15 Boeing 777 and 30 Boeing 737 aircraft (the 'Boeing Aircraft') from Boeing Company for an aggregate consideration of US$6,300 million (equivalent to approximately RMB43,212 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 early 2011 to 2015.
On 8 July 2008, the China Securities Regulatory Commission ('CSRS') approved the issue and public offering of not more than 400 million additional A shares (representing approximately 5.10% the A shares and 3.26% of the total number of shares of the Company currently in issue of the Company). After the CSRC's approval, there will be a window period of 6 months during which the Company can elect to issue the additional A shares. Up to the date of interim condensed consolidated financial statements, the date for additional issuance has yet to be decided.
28. APPROVAL OF THE INTERIM FINANCIAL REPORT
These interim condensed consolidated financial statements were approved and authorised for issue by the board of Directors on 26 August 2008.
48
Unaudited Interim Consolidated Income Statement
For the six months ended 30 June 2008
(Prepared under Accounting Standards for Business Enterprises)
For the six months ended
30 June 30 June
2008 2007
RMB'000 RMB'000
(Unaudited)(Unaudited)
Revenue from operations 25,760,238 22,744,019
Less: Cost of operations 23,134,131 19,162,370
Tax and surcharges 623,796 546,090
Selling expenses 1,610,461 1,370,680
Administrative expenses 673,303 501,452
Finance costs (996,332) 126,794
Impairment loss (880) -
Add: Gains from changes in fair value 84,886 253,858
Investment income 613,770 405,026
Including: Investment income from associates and joint ventures (66,458) 352,024
Profit from operations 1,414,415 1,695,517
Add: Non-operating income 146,399 76,328
Less: Non-operating expenses 135,108 71,842
Including: Loss on disposal of non-current assets 18,960 44,248
Total profit 1,425,706 1,700,003
Less: Income tax 216,949 476,942
Net profit 1,208,757 1,223,061
Net profit attributable to equity holders of the Company 1,282,317 1,300,297
Minority interests (73,560) (77,236)
49
Unaudited Interim Consolidated Balance Sheet
At 30 June 2008
(Prepared under Accounting Standards for Business Enterprises)
30 June 31 December
2008 2007
RMB'000 RMB'000
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and bank balances 4,558,193 3,787,152
Financial assets 104,157 6,493
Note receivables 1,553 1,599
Account receivables 2,933,199 2,812,327
Other receivables 1,102,765 997,205
Prepayments 385,723 311,784
Inventories 831,609 755,340
Total current assets 9,917,199 8,671,900
Non-current assets:
Long term receivables 259,383 255,340
Long-term equity investments 9,012,470 11,404,643
Fixed assets 61,100,806 55,000,376
Construction-in-progress 12,161,360 10,967,888
Intangible assets 1,747,235 1,396,620
Goodwill 511,309 131,945
Deferred tax assets 430,394 385,843
Long-term deferred assets 129,522 80,684
Total non-current assets 85,352,479 79,623,339
Total assets 95,269,678 88,295,239
50
Unaudited Interim Consolidated Balance Sheet
At 30 June 2008
(Prepared under Accounting Standards for Business Enterprises)
30 June 31 December
2008 2007
RMB'000 RMB'000
(Unaudited) (Audited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term loans 7,606,236 6,546,088
Financial liabilities 27,604 14,826
Accounts payables 7,934,562 6,338,341
Domestic air traffic liabilities 599,627 666,208
International traffic liabilities 1,828,805 1,888,548
Receipts in advance 91,979 53,778
Accrued employee compensations 349,238 254,073
Taxes payable 410,853 1,677,332
Interest payable 339,837 273,824
Other payables 2,138,970 2,035,038
Current portion of long-term liabilities 8,579,487 6,344,212
Total current liabilities 29,907,198 26,092,268
Non-current liablities:
Long-term loans 14,170,891 12,938,092
Corporate bonds 3,000,000 3,000,000
Long-term payables 1,416,378 1,301,844
Obligations under finance lease 14,117,596 13,328,193
Provisions 217,168 191,533
Deferred tax liabilities 776,000 5,000
Total non-current liabilities 33,698,033 30,764,662
Total liabilities 63,605,231 56,856,930
Shareholders' equity:
Share capital 12,251,362 12,251,362
Capital reserve 11,941,279 11,852,408
Reserve funds 1,563,914 1,299,214
Retained profits 7,068,473 6,888,843
Including: Discretionary reserve fund proposed by Board of Director - 264,700
Dividend proposed by Board of Directors - 837,987
Exchange differences arising on translation of
foreign currency denominated financial statements (1,690,021) (1,003,732)
Shareholder's equity attributable to the Company 31,135,007 31,288,095
Minority interests 529,440 150,214
Total shareholders' equity 31,664,447 31,438,309
Total liabilities and shareholders' equity 95,269,678 88,295,239
51
Supplementary Information
EFFECTS OF SIGNIFICANT DIFFERENCES BETWEEN IFRS AND ASBE
The effects of the significant differences between the consolidated financial statements of the Group prepared under ASBE and IFRS are as follows:
52
Supplementary Information
Notes:
(i) This mainly represents differences in deferred tax caused by other difference under IFRS and ASBE as explained below.
(ii) Differences in the costs of fixed assets mainly relate to fixed assets acquired in foreign currencies prior to 1 January 1994 and are stated at the equivalent amount of RMB translated at the then prevailing exchange rates prescribed by the government (i.e. the government-prescribed rates). Under IFRS, such differences are stated at the equivalent amount of RMB translated at the then prevailing market rate (i.e. the swap rate), resulting in differences in the costs of fixed assets between the financial statements prepared under IFRS and under ASBE.
(iii) In accordance with the accounting policies under IFRS, all assets are recorded at historical costs. Accordingly, the revaluation of assets and their amortisation recorded under ASBE are reversed in the financial statements prepared under IFRS.
(iv) Under both IFRS and ASBE, government grant or subsidies from government should be debited to receivables from government grant or the relevant assets, and time credited to deferred income in the balance sheet, which is amortised to the income statement on a straight-line basis. Assets received from government grant was debited to asset and credited to capital reserve while cash received was recognised in cash and cash equivalent and subsidy income. As the government grant had no significant impact on the Group's net profit and net assets, it was not adjusted in the group's financial statements prepared under ASBE.
(v) This represents timing differences on the adoption of component accounting under IFRS and ASBE. Component accounting was adopted by the Group on a prospective basis under IFRS in 2005 while it was adopted on a prospective basis under ASBE in 2007.
(vi) This represents the difference in the gain on disposal of the Group's interest in Dragonair to Cathay Pacific under IFRS and ASBE.
(vii) This represents the difference in the goodwill on acquisition of additional interests in Air China Cargo under IFRS and ASBE.
53
Glossary of Technical Terms
CAPACITY MEASUREMENTS
54
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