Announcement relating to the
Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.
(a joint stock limited company incorporated in the People's Republic of China with limited liability)
(Stock Code: 00753)
Announcement relating to the reply to the comments
of the Shanghai Stock Exchange on the
2008 Annual Report (A shares) of Air China Limited
(Overseas Regulatory Announcement)
This announcement is made pursuant to Rule 13.09 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.
Pursuant to comments of the Shanghai Stock Exchange on the 2008 annual report (A shares) ('Annual Report') of Air China Limited (the 'Company'), the Company hereby makes the following further explanation to the relevant matters in the Annual Report:
I. the use of fuel hedging to lower the oil price volatility OF THE COMPANY
The Company locked in part of its jet fuel cost to a hedged range through developing its fuel hedging activities, thereby stablising its major costs components and meeting its operating goals. In 2008, the jet fuel cost of the Company was RMB21.734 billion, representing an increase of 27.6% compared to 2007 and accounted for 42.7% of total operating costs, of which the jet fuel cost for the first half of 2008 was RMB10.122 billion, representing an increase of 27.36% compared to 2007 and accounted for 42.16% of the total operating costs. The jet fuel cost saved in effect through such aviation fuel hedging activities for the first half of 2008 was RMB215 million, which to a certain extent, helped to stabilise the cost budget. From September 2008, the international fuel prices experienced a sharp fall from its historic highs. As a result, the Company's fuel hedging contracts, which were entered into in July 2008, suffered fair value losses and incurred actual loss of RMB427 million from settlement of fuel hedging contracts in November and December 2008. The jet fuel cost for the same period however decreased by 2.05% compared to the same period in 2007 and international jet fuel cost decreased by RMB558 million compared to the same period in 2007.
II. the use of interest rate swaps to lower the interest rate risk OF THE COMPANY
The Company's interest rate risk mainly stems from its finance lease liabilities and bank borrowings with variable interest rates. The Company converted the variable interest rate obligations of part of the liabilities into fixed rates through interest rate swaps so as to control its interest rate exposure and lock in its interest cost for a prescribed future period. As at the end of 2008, the principal of the Company's interest rate swap contracts accounted for 13% of the variable interest rate obligations of the Company. According to the interest rate swap contracts, the Company's relevant variable interest rate obligations was converted from USD 6-month London Interbank Offered Rate (LIBOR) into a fixed rate for the period specified in the contracts so as to reduce the uncertain effects of future fluctuations in LIBOR on the Company's operation.
III. the use of exchange rate hedging to lower the exposure to foreign exchange risks OF THE COMPANY
The Company uses exchange rate hedging mainly for the purpose of reducing the foreign exchange risks associated with its revenue which are settled in foreign currency. The main foreign currency revenues of the Company are mainly denominated in United States dollar (USD), Japanese yen (Yen) and Euros. In order to reduce effects on the Company's foreign currency revenue which may be caused by any large fluctuations in foreign exchange rates, the Company engaged in simple exchange rate hedging in relation to a portion of its Euros revenue in 2007. The balance settled in 2008 accounted for 13% of the Company's net Euros revenue and the terms came to maturity in March 2008 and August 2008. Through locking in foreign exchange rates, the Company's overall foreign currency revenue is in a comparatively stable position.
IV. The decision-making procedures of the Company in relation to the DEVELOPMENT of fuel hedging AND interest swaps FOR THE YEAR 2008
(1) The decision-making procedures for the fuel hedging operation of the Company developed in 2008 are as follows:
At the beginning of the year, based on the proposal made by the fuel hedging operation team, the Fuel Risk Management Committee of the Company drafted the fuel hedging strategy for 2008, which was first submitted to the Senior Management Meeting for approval and after such approval to the Board for its review and approval. The contents of the fuel hedging strategy for 2008 included hedging proportion for the year (50%±10% of the budgeted spot purchases as estimated at the beginning of the year), hedging price range, selected tools, their costs and other factors. The fuel hedging operation team was authorised to build up positions for 2009 and 2010 when opportunities arise provided that the hedging price levels are not higher than those for 2008. Relevant authorisation was also granted to the members of the fuel hedging operation team.
Based on the above-mentioned annual strategy and authorisation, the fuel hedging operation team built up positions in three tranches in January, May and July 2008 respectively after making careful analysis on the trend of oil price, timing of trading, fuel categories and prices and the holding of specialised meetings to strategise the building up of positions. After the positions were built up, the operation team reported to the Fuel Risk Management Committee of the Company in accordance with relevant regulations.
(2) The interest swap operations of the Company in 2008 followed the following procedures:
1. The Board granted written authorisation to the signatory of a transaction in relation to transaction limits, product structure and transaction period and granted written authorisation to the traders and the risk controllers for carrying out their trading and supervisory responsibilities.
2. In April and May 2008, the Company conducted a special research on risk management plan relating to debts with USD variable interest rate obligations based on an analysis of long and short term historical movements of interest rates and projection of future economic development within the context of the debt interest rate structure of the Company.
3. On 16 May 2008, the 11th Senior Management Meeting of the Company approved the risk management plan relating to debts with USD variable interest rate obligations.
4. From the end of May 2008 to the beginning of September 2008, the Company conducted interest rate swap transactions in respect of 12 debt obligations with USD variable interest rate obligations based on the authorisation granted to the relevant personnel and the resolution adopted at the meeting of the Senior Management Meeting.
V. Reasons for the discrepancy between the fair value losses on hedging contracts as disclosed in the Annual Report and the previously disclosed loss of RMB6.8 billion
The amount of 'RMB6.8 billion' disclosed in the announcement published in January 2009 referred to the unaudited fair value of jet fuel derivatives as at the end of the relevant accounting period which is recorded as a balance sheet item in financial statements. The amount of 'RMB7.472 billion' disclosed in the Annual Report referred to the audited changes in fair value of jet fuel derivatives recorded as an income statement item in the audited financial statements for the year of 2008. The audited fair value of the jet fuel derivatives as at the end of the accounting period was RMB7.225 billion, representing a difference of 5.95% as compared with the amount of 'RMB6.8 billion' disclosed in the announcement published in January 2009. The unaudited changes in fair value of jet fuel derivatives for the year of 2008 was RMB7.066 billion, representing a difference of 5.75% as compared with the audited amount of 'RMB7.472 billion' of changes in fair value of jet fuel derivatives as stated in the Annual Report.
After publishing the profit warning announcement in January 2009, the Company communicated with an independent third party valuation firm on the parameters adopted in the valuation model - the volatility of oil price which was determined by taking a model calculation with reference to the same or similar types of contracts in the market. Due to the absence of contracts in the market of contracts similar to the ones held by the Company in terms of type, term and exercise price, such parameters computed would be affected by the similar contracts selection standard. The final selection standard adopted by the independent third party valuation firm was slightly different from the selection standard adopted for the previous announcement. Therefore, there were minor changes in the fair value of the contracts computed with the valuation model. The results of the fair value of the contracts computed with the valuation model have been approved by the auditor.
VI. Issues in relation to the provision of RMB107 million for impairment losses of fixed assets
On the balance sheet date, the Company and its subsidiaries (the 'Group') will decide if there is evidence of potential impairment in respect of its fixed assets. If there is evidence of any impairment, the Group will estimate its recoverable amount and conduct an impairment test. For every aircraft held for sale i.e. aircraft that has been contracted for sale but has not yet been sold as at the balance sheet date, the Group will make impairment provisions according to the book value less its fair value of such aircraft as at the balance sheet date.
In accordance with the abovementioned policy, the Group compared the contracted selling price net of estimated disposal cost (i.e. the fair value as at the balance sheet date) with the book value for each aircraft held for sale in 2008. The Group has made an impairment provision of RMB107 million for aircraft with fair value less than its book value. In subsequent years, the Group will also make impairment provisions for aircraft held for sale which as at the balance sheet date has a fair value (net of disposal cost) less than its book value.
By order of the Board
Air China Limited
Huang Bin Tam Shuit Mui
Joint Company Secretaries
Beijing, PRC, 13 May 2009
As at the date of this announcement, the Directors of the Company are Mr. Kong Dong, Ms. Wang Yinxiang, Mr. Wang Shixiang, Mr. Christopher Dale Pratt, Mr. Chen Nan Lok, Philip, Mr. Cai Jianjiang, Mr. Fan Cheng, Mr. Hu Hung Lick, Henry*, Mr. Wu Zhipan*, Mr. Zhang Ke* and Mr. Jia Kang*.
* Independent non-executive Director of the Company
This information is provided by RNS
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