Circ re. Major Transaction
Air China Ld
30 August 2005
Part 1
If you are in any doubt as to any aspect of this circular, you should consult a
stockbroker or other registered dealer in securities, bank manager, solicitor,
professional accountant or other professional adviser.
If you have sold or transferred all your shares of Air China Limited, you should
at once hand this circular to the purchaser or transferee or to the bank,
stockbroker or other agent through whom the sale was effected for transmission
to the purchaser or the transferee.
(1)The Stock Exchange of Hong Kong Limited takes no responsibility for the
contents of this circular, makes no representation as to its accuracy or
completeness and expressly disclaims any liability whatsoever for any loss
however arising from or in reliance upon the whole or any part of the contents
of this circular.
AIR CHINA LIMITED
(a joint stock limited company incorporated in the People's Republic of China
with limited liability)
(Stock Code: 753)
PURCHASE OF 15 BOEING 787 AIRCRAFT
MAJOR TRANSACTION
Page
Definitions 1
Letter from the Board
1. Introduction 3
2. The Boeing Aircraft Purchase Agreement 4
3. Effect of the Transaction 5
4. Financial and Operational Prospects 5
5. Working Capital 6
6. Additional Information 6
Appendix I Financial Information of the Group 7
Appendix II General Information 75
In this circular, the following expressions have the following meanings, unless
the context requires otherwise:
''AIE'' Air China Group Import and Export Trading Co. (/raster(90%,p)='c02'/raster(90%,p)='c02a'), a
company incorporated under the laws of the People's Republic of China and a wholly-owned
subsidiary of the Company as at the date of this circular
''Air China Cargo'' Air China Cargo Co., Ltd. (/raster(90%,p)='c03'), a company with limited liability incorporated
under the laws of the People's Republic of China and with 51% of its registered capital owned by
the Company as at the date of this circular
''Air Macau'' Air Macau Company Limited, a company with limited liability incorporated under the laws of Macau
and with 51.0% of its share capital owned by CNAC (Macau) as at the date of this circular
''Ameco'' Aircraft Maintenance and Engineering Corporation, Beijing (/raster(90%,p)='c04'), a company with
limited liability incorporated under the laws of the People's Republic of China and with 60% of
its registered capital owned by the Company as at the date of this circular
''Board'' the board of directors of the Company
''Boeing Aircraft'' 15 Boeing 787 aircraft to be purchased by the Company pursuant to the Boeing Aircraft Purchase
Agreement
''Boeing Aircraft the aircraft acquisition agreement dated 8 August 2005 pursuant to which the Company has agreed
Purchase Agreement'' to acquire and Boeing Company has agreed to sell the Boeing Aircraft
''Boeing Company'' Boeing Company, a company incorporated under the laws of Delaware of the United States
''Cathay Pacific'' Cathay Pacific Airways Limited
''CNAC'' China National Aviation Company Limited, a company with limited liability incorporated under the
laws of Hong Kong and listed on The Stock Exchange of Hong Kong Limited with stock code 1110 and
with approximately 68.36% of its share capital owned by the Company as at the date of this
circular
''CNACG'' China National Aviation Corporation (Group) Limited, a company incorporated under the laws of
Hong Kong and a wholly-owned subsidiary of CNAHC as at the date of this circular
''CNAC (Macau)'' China National Aviation Corporation (Macau) Company Limited, a company with limited liability
incorporated under laws of Macau and a wholly-owned subsidiary of CNAC as at the date of this
circular
''the Company'' Air China Limited, a company incorporated under the laws of the People's Republic of China with
primary listing on The Stock Exchange of Hong Kong Limited with stock code 753 and secondary
listing on the Official List of the UK Listing Authority
''CNAHC'' China National Aviation Holding Company, a company incorporated under the laws of the People's
Republic of China which currently directly owns approximately 51.16% of the Company's share
capital as at the date of this circular
''Director(s)'' the director(s) of the Company
''Group'' the Company and its subsidiaries and joint ventures
''Latest Practicable 24 August 2005, being the latest practicable date prior to the printing of this circular for
Date'' ascertaining certain information contained herein
''Listing Rules'' The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited
''PRC'' People's Republic of China excluding, for the purpose of this circular only, Hong Kong, Macau and
Taiwan
''SFO'' the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), as amended,
supplemented or otherwise modified from time to time
''Stock Exchange'' The Stock Exchange of Hong Kong Limited
''Supervisor(s)'' the supervisor(s) of the Company
''Transaction'' the acquisition by the Company of the Boeing Aircraft pursuant to the Boeing Aircraft Purchase
Agreement
AIR CHINA LIMITED
(a joint stock limited company incorporated in the People's Republic of China
with limited liability)
Directors:
Non-executive Directors:
Li Jiaxiang (Chairman, Non-executive Director)
(2)Kong Dong (Vice Chairman, Non-executive Director)
Wang Shixiang
(Vice Chairman, Non-executive Director)
Yao Weiting (Non-executive Director)
David Muir Turnbull (Non-executive Director)
Executive Directors:
Ma Xulun (Executive Director)
Cai Jianjiang (Executive Director)
Fan Cheng (Executive Director)
Independent Non-Executive Directors:
Hu Hung Lick, Henry
Wu Zhi Pan
Zhang Ke
Registered address:
9/F, Blue Sky Mansion 28 Tianzhu Road
Zone A, Tian zhu 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
30 August 2005
To the Shareholders
Dear Sir or Madam,
MAJOR TRANSACTION
1. INTRODUCTION
(3)On 8 August 2005 the Company announced that on the same date the Company and
AIE entered into the Boeing Aircraft Purchase Agreement with Boeing Company,
pursuant to which the Company has agreed to purchase 15 Boeing 787 (which was
formerly known as Boeing 7E7) aircraft from Boeing Company.
The Transaction constitutes a major transaction of the Company under the Listing
Rules.
The purpose of this circular is to set out further details of the Transaction.
2. THE BOEING AIRCRAFT PURCHASE AGREEMENT
(4)(1) Date of the Transaction
8 August 2005
(2) Parties to the Transaction
(5)(i) the Company, as the purchaser, the principal business activity of
which is air passenger, air cargo and airline-related services;
(ii) AIE, as the import agent for the Company; and
(iii) Boeing Company, as the vendor, one of whose principal business
activity is aircraft manufacturing.
(6)The Company confirms that, to the best of the Directors' knowledge,
information and belief having made all reasonable enquiry, Boeing Company and
each of the ultimate beneficial owner of Boeing Company are independent third
parties and not connected persons (as defined in the Listing Rules) of the
Company.
(3) Aircraft to be acquired
(7)Boeing Aircraft, i.e.15 Boeing 787 aircraft
As at the Latest Practicable Date, the Company operated a fleet of 167 aircraft,
including 160 passenger aircraft, 5 freighters and two corporate jets.
(8)(4) Consideration
(9)According to the information provided to the Company by Boeing Company, the
catalog price of the Boeing Aircraft in aggregate is approximately US$2.16
billion. The aggregate consideration payable for the Boeing Aircraft, which is
determined after arm's length negotiation between the parties, is lower than
such catalog price.
As the relevant percentage ratio under Rule 14.07 of the Listing Rules for the
Transaction is above 25% but less than 100%, the Transaction constitutes a major
transaction and is therefore subject to approval by the Company's shareholders
under the Listing Rules.
(5) Payment and delivery terms
The aggregate consideration for the acquisition of Boeing Aircraft is payable by
cash in eight instalments, with the first seven instalments to be paid prior to
delivery of each Boeing Aircraft and the remaining balance, being a substantial
portion of the consideration, to be paid upon delivery of each Boeing Aircraft.
The Company is expecting to take delivery of the Boeing Aircraft in stages from
mid 2008 to end 2010.
(6) Source of funding
The Transaction will be funded through cash generated from the Company's
business operations, commercial bank loans and other debt instruments of the
Company. No proceeds from the Company's global offering in December 2004 will be
used to finance the Transaction.
(7) Reasons for and benefits of the Transaction
(10)The Boeing Aircraft will expand the fleet capacity of the Company and they
will principally serve long distance international destinations in North
America, Europe and Australia. The Company expects the Boeing Aircraft will
deliver more cost-efficient performance and provide more comfortable services to
passengers. The Transaction is consistent with the aircraft procurement policy
of the Company. Further details of the aircraft procurement and disposal policy
of the Company were set out in the section headed ''Business --- Fleet'' in the
Company's prospectus dated 3 December 2004.
The Directors believe that the terms of the Transaction are fair and reasonable
and in the interests of the shareholders of the Company as a whole.
(8) Shareholders' approval
As the relevant percentage ratio for the Transaction as calculated under Rule
14.07 of the Listing Rules is above 25%, but less than 100%, the Transaction
constitutes a major transaction and is therefore subject to approval by the
Company's shareholders under the Listing Rules.
(11)CNAHC currently directly owns approximately 51.16% of the total issued share
capital of the Company. Each of CNAHC and its associates (as defined in the
Listing Rules) does not have any interest in the Transaction other than as a
shareholder of the Company (where applicable). No shareholder of the Company is
required to abstain from voting if the Company was to convene a general meeting
for the approval of the Transaction. CNAHC has approved the Transaction by way
of a written approval pursuant to Rule 14.44 of the Listing Rules and therefore
the Company will not be convening a shareholders' meeting to approve the
Transaction.
(12)3. EFFECT OF TRANSACTION
Based on the technical specifications of the Boeing Aircraft, the Company
expects the Boeing Aircraft to operate with a higher utilization rate, more
efficient jet fuel consumption and relatively low maintenance cost. This will
enable the Company to operate on a cost-efficient basis and would potentially
have a positive effect on the earnings of the Company.
As mentioned above, the Transaction will be partly financed by commercial bank
loans and other debt instruments of the Company. The Transaction will therefore
increase the Group's fixed assets and liabilities. The Transaction may also
result in an increase in the Group's debt-to-equity ratio. The total cash
outflow of the Company in 2005 in respect of the Transaction is approximately
RMB182 million. However, the Company does not expect the Transaction to have any
material negative impact on its cash-flow position or its business operations.
Save as described above, the Transaction is not expected to have any material
impact on earnings, assets and liabilities of the Group.
(13)4. FINANCIAL AND Operational PROSPECTS
As disclosed in the 2004 annual report of the Company dated 12 April 2005, for
the financial year ended 31 December 2004, air traffic revenue and other
operating revenue reached RMB30,835 million and RMB2,686 million respectively,
representing increases of 31.6% and 120.4% over 2003. The Directors believe that
rising aviation fuel prices and increasing competition in the airline business
will present new challenges for the Group in 2005. However, the Directors view
the future prospects during the current financial year of the Company with
confidence and believe that the Group is well placed to continue to develop its
business in line with its strategy.
(14)5. WORKING CAPITAL
Taking into account the net proceeds to the Company from its global offering in
December 2004, cash generated from the Group's operations, the issuance of
commercial papers of RMB2 billion in May 2005 by the Company and the available
bank facilities, the Directors are of the opinion that the Group will have
sufficient working capital for the next 12 months following the date of this
circular.
6. ADDITIONAL INFORMATION
Your attention is drawn to the additional information set out in the appendices
to this circular.
By Order of the Board
Li Jiaxiang
Chairman
Beijing
(15)I. SUMMARY OF CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated income statements of the Group for the three years
ended 31 December 2004 and the consolidated balance sheets of the Group as at 31
December 2004, 2003 and 2002 are extracted from Appendix I to the Company's
prospectus dated 3 December 2004 and annual report for the year ended 31
December 2004.
Consolidated income statements
For the years ended 31 December
2004 2003 2002
RMB'000 RMB'000 RMB'000
Air traffic revenues 30,834,822 23,422,660 23,846,712
Other operating revenues 2,685,935 1,218,745 1,136,965
33,520,757 24,641,405 24,983,677
Operating expenses
Jet fuel (8,353,752) (5,425,059) (4,978,719)
Take-off, landing and depot charges (4,230,349) (3,449,769) (3,359,565)
Depreciation (3,463,252) (3,377,472) (3,251,571)
Aircraft maintenance, repair and overhaul (2,835,648) (2,149,353) (2,384,865)
Employee compensation costs (2,921,322) (2,379,102) (2,030,526)
Air catering charges (1,171,784) (842,743) (919,180)
Aircraft and jet engines operating lease expenses (1,071,256) (910,134) (711,979)
Other operating lease expenses (187,471) (181,984) (143,431)
Other flight operation expenses (2,698,234) (2,112,432) (2,237,430)
Selling and marketing expenses (1,387,088) (1,057,630) (1,220,086)
General and administrative expenses (715,350) (471,463) (461,946)
Total operating expenses (29,035,506) (22,357,141) (21,699,298)
Profit from operations 4,485,251 2,284,264 3,284,379
Finance costs (1,799,873) (2,349,078) (2,777,087)
Dilution gains on investments 410,137 --- 106,040
Share of profits less losses from associates 561,018 243,093 426,494
Profit before tax 3,656,533 178,279 1,039,826
Tax (1,107,838) (89,781) (369,073)
Profit for the year 2,548,695 88,498 670,753
For the years ended 31 December
2004 2003 2002
RMB'000 RMB'000 RMB'000
Attributable to:
Equity holders of the parent 2,385,964 159,604 499,610
Minority interests 162,731 (71,106) 171,143
2,548,695 88,498 670,753
Earnings per share
--- Basic 36.0 cents 2.5 cents 7.7 cents
--- Diluted 36.0 cents --- ---
Consolidated balance sheets
Audited
As at 31 December
2004 2003 2002
RMB'000 RMB'000 RMB'000
NON-CURRENT ASSETS
Property, plant and equipment 43,441,637 42,423,920 42,876,169
Lease prepayments 933,898 29,807 24,868
Interests in associates 4,001,521 3,067,846 2,902,840
Advance payments for aircraft and related equipment 632,154 744,404 511,027
Government grant receivable --- 764,422 841,760
Due from CNAHC 631,813 --- ---
Deposits for aircraft under operating leases 137,583 145,483 164,771
Other investments 21,666 21,930 21,930
Deferred tax assets 776,084 590,153 624,000
50,576,356 47,787,965 47,967,365
CURRENT ASSETS
Financial assets --- 34,000 69,000
Trade receivables 2,364,816 1,955,592 1,874,452
Inventories 743,288 712,451 738,769
Prepayments, deposits and other receivables 3,108,588 1,977,363 1,348,887
Pledged deposits 117,231 1,245,542 391,584
Cash and cash equivalents 9,734,074 2,620,221 3,699,520
Due from CNAHC --- --- 1,273,416
Due from other CNAHC group companies 44,916 63,928 31,619
16,112,913 8,609,097 9,427,247
TOTAL ASSETS 66,689,269 56,397,062 57,394,612
CURRENT LIABILITIES
Financial liabilities --- (6,000) (110,000)
Trade payables (4,443,608) (4,214,981) (3,408,104)
Bills payable (362,033) (1,317,220) (416,400)
Other payables and accruals (3,920,287) (3,240,545) (3,198,869)
Provision for major overhauls (28,130) (115,346) (21,414)
Air traffic liabilities (1,215,770) (1,165,116) (888,233)
Tax payable (186,055) (53,929) (63,044)
Obligations under finance leases (1,705,146) (1,607,056) (1,961,181)
Bank and other loans (8,806,051) (9,236,674) (10,941,831)
Due to shareholders (2,256,117) (2,968) ---
Due to other CNAHC group companies (49,617) (33,073) (39,074)
(22,972,814) (20,992,908) (21,048,150)
NET CURRENT LIABILITIES (6,859,901) (12,383,811) (11,620,903)
TOTAL ASSETS LESS CURRENT LIABILITIES 43,716,455 35,404,154 36,346,462
NON-CURRENT LIABILITIES
Obligations under finance leases (10,576,241) (12,091,837) (13,242,796)
Bank and other loans (12,896,622) (12,819,821) (14,280,454)
Long-term payables (446,311) (801,349) (933,858)
Deferred income (1,102,853) (887,708) (945,602)
Provision for major overhauls (470,698) (289,593) (232,039)
Provision for early retirement benefits obligations (195,188) (198,597) (183,325)
(25,687,913) (27,088,905) (29,818,074)
NET ASSETS 18,028,542 8,315,249 6,528,388
Represented by:
EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT
Owners' equity --- 6,892,869 5,020,263
Issued share capital 9,050,618 --- ---
Reserves 7,497,637 --- ---
16,548,255 6,892,869 5,020,263
MINORITY INTERESTS 1,480,287 1,422,380 1,508,125
TOTAL EQUITY 18,028,542 8,315,249 6,528,388
II. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004
The following audited financial statements of the Group are extracted from the
Company's annual report for the year ended 31 December 2004.
Consolidated Income Statement
Year ended 31 December 2004
2004 2003
Notes RMB'000 RMB'000
Air traffic revenues 4 30,834,822 23,422,660
Other operating revenues 5 2,685,935 1,218,745
33,520,757 24,641,405
Operating expenses
Jet fuel (8,353,752) (5,425,059)
Take-off, landing and depot charges (4,230,349) (3,449,769)
Depreciation (3,463,252) (3,377,472)
Aircraft maintenance, repair and overhaul (2,835,648) (2,149,353)
Employee compensation costs 7 (2,921,322) (2,379,102)
Air catering charges (1,171,784) (842,743)
Aircraft and jet engines operating lease expenses (1,071,256) (910,134)
Other operating lease expenses (187,471) (181,984)
Other flight operation expenses (2,698,234) (2,112,432)
Selling and marketing expenses (1,387,088) (1,057,630)
General and administrative expenses (715,350) (471,463)
Total operating expenses (29,035,506) (22,357,141)
Profit from operations 6 4,485,251 2,284,264
Finance costs 8 (1,799,873) (2,349,078)
Dilution gains on investments 9 410,137 ---
Share of profits less losses from associates 561,018 243,093
Profit before tax 3,656,533 178,279
Tax 12 (1,107,838) (89,781)
Profit for the year 2,548,695 88,498
Attributable to:
Equity holders of the parent 2,385,964 159,604
Minority interests 162,731 (71,106)
2,548,695 88,498
Earnings per share
--- Basic 15 36.0 cents 2.5 cents
--- Diluted 15 36.0 cents ---
Consolidated Balance Sheet
31 December 2004
2004 2003
Notes RMB'000 RMB'000
NON-CURRENT ASSETS
Property, plant and equipment 16 43,441,637 42,423,920
Lease prepayments 933,898 29,807
Interests in associates 19 4,001,521 3,067,846
Advance payments for aircraft and related equipment 632,154 744,404
Government grant receivable --- 764,422
Due from CNAHC 20 631,813 ---
Deposits for aircraft under operating leases 137,583 145,483
Other investments 21 21,666 21,930
Deferred tax assets 22 776,084 590,153
50,576,356 47,787,965
CURRENT ASSETS
Financial assets 44 (iv) --- 34,000
Trade receivables 23 2,364,816 1,955,592
Inventories 24 743,288 712,451
Prepayments, deposits and other receivables 25 3,108,588 1,977,363
Pledged deposits 26 117,231 1,245,542
Cash and cash equivalents 26 9,734,074 2,620,221
Due from other CNAHC group companies 28 44,916 63,928
16,112,913 8,609,097
TOTAL ASSETS 66,689,269 56,397,062
CURRENT LIABILITIES
Financial liabilities 44 (iv) --- (6,000)
Trade payables 29 (4,443,608) (4,214,981)
Bills payable 30 (362,033) (1,317,220)
Other payables and accruals 31 (3,920,287) (3,240,545)
Provision for major overhauls 32 (28,130) (115,346)
Air traffic liabilities (1,215,770) (1,165,116)
Tax payable (186,055) (53,929)
Obligations under finance leases 33 (1,705,146) (1,607,056)
Bank and other loans 34 (8,806,051) (9,236,674)
Due to shareholders 27 (2,256,117) (2,968)
Due to other CNAHC group companies 28 (49,617) (33,073)
(22,972,814) (20,992,908)
2004 2003
Notes RMB'000 RMB'000
NET CURRENT LIABILITIES (6,859,901) (12,383,811)
TOTAL ASSETS LESS CURRENT LIABILITIES 43,716,455 35,404,154
NON-CURRENT LIABILITIES
Obligations under finance leases 33 (10,576,241) (12,091,837)
Bank and other loans 34 (12,896,622) (12,819,821)
Long-term payables 35 (446,311) (801,349)
Deferred income 36 (1,102,853) (887,708)
Provision for major overhauls 32 (470,698) (289,593)
Provision for early retirement benefits obligations (195,188) (198,597)
(25,687,913) (27,088,905)
NET ASSETS 18,028,542 8,315,249
Represented by:
EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT
Owners' equity --- 6,892,869
Issued share capital 37 9,050,618 ---
Reserves 7,497,637 ---
16,548,255 6,892,869
MINORITY INTERESTS 1,480,287 1,422,380
TOTAL EQUITY 18,028,542 8,315,249
Consolidated Statement of Changes in Equity
Year ended 31 December 2004
Attributable to equity holders of the Company
Owners' Issued Capital Statutory Retained Total Minority Total
equity share reserve reserve profits interests equity
capital funds
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
As at 1 January 2003 5,020,263 --- --- --- --- 5,020,263 1,508,125 6,528,388
Profit for the year 159,604 --- --- --- --- 159,604 (71,106) 88,498
Capital contributions 2,055,845 --- --- --- --- 2,055,845 --- 2,055,845
Dividends paid (26,690) --- --- --- --- (26,690) (14,639) (41,329)
Distributions (note 14) (316,153) --- --- --- --- (316,153) --- (316,153)
As at 31 December 2003 and 6,892,869 --- --- --- --- 6,892,869 1,422,380 8,315,249
1 January 2004
Capital contribution of 560,782 --- --- --- --- 560,782 --- 560,782
cash
(note a)
Capital contribution of 885,626 --- --- --- --- 885,626 --- 885,626
land use rights (note b)
Capitalisation of amount 17,965 --- --- --- --- 17,965 --- 17,965
payable to CNAHC (note c)
Deferred taxation (note 22) 793,755 --- --- --- --- 793,755 --- 793,755
Profit from 1 January 2004 1,758,879 --- --- --- --- 1,758,879 117,506 1,876,385
to
30 September 2004
Dividends paid (29,074) --- --- --- --- (29,074) (24,909) (53,983)
Distributions (note d) (2,182,921) --- --- --- --- (2,182,921) --- (2,182,921)
Capitalisation upon (8,697,881) 6,500,000 1,892,201 --- 305,680 --- --- ---
reorganisation of the
Company
Profit from 1 October 2004 --- --- --- --- 627,085 627,085 45,225 672,310
to 31 December 2004
Distributions (note e) --- --- --- --- (377,550) (377,550) --- (377,550)
Dilution of interest (note --- --- --- --- --- --- (79,915) (79,915)
9)
Transfer to statutory --- --- --- 93,020 (93,020) --- --- ---
reserve funds (note 14)
Issue of new shares upon --- 2,550,618 5,536,678 --- --- 8,087,296 --- 8,087,296
listing
(note 37 (c))
Share issuing expenses --- --- (486,457) --- --- (486,457) --- (486,457)
(note 37 (c))
As at 31 December 2004 --- 9,050,618 6,942,422 93,020 462,195 16,548,255 1,480,287 18,028,542
Notes:
a. In September 2004, China National Aviation Holding Company (''CNAHC'')
made a cash contribution of RMB560,782,100 to the Company.
b. Upon incorporation of the Company, CNAHC effected the transfer of
certain land use rights in an aggregate amount of approximately RMB885,626,000
to the Company.
c. This represented payable of approximately RMB17,965,000 of the Company
assumed by CNAHC in 2004 which was accounted for as a capital contribution.
d. In accordance with the (/raster(70%,p)='c41') ''Provisional Regulations
Relating to Corporate Reorganisation of Enterprises and Related Management of
State-owned Capital and Financial Treatment'' notice issued by the Ministry of
Finance and pursuant to the Restructuring as set out in note 1 to these
financial statements, after the Company's incorporation, the Company is required
to make a distribution to CNAHC and China National Aviation Corporation (Group)
Limited (''CNACG'' and which is a Hong Kong incorporated company wholly owned by
CNAHC), details of which are set out in note 14 (b) to these financial
statements. The total amount of distributions made to CNAHC and CNACG pursuant
to this notice is approximately RMB2,143,785,000. Details of the distributions
are set out in note 14 (b) to these financial statements.
In addition, the distributions include an amount of approximately RMB39,136,000
which represents the net assets which have been carved-out and treated as deemed
distribution pursuant to the Restructuring as set out in note 1 to these
financial statements.
e. As a result of the completion of BACL Agreement, SWACL Agreement and
HKSACL Agreement, details of which are set out in note 14 (a) to these financial
statements, the Group made a payment of approximately RMB377,550,000 to CNAHC.
This payment has been made to CNAHC and accounted for as a special distribution
to CNAHC by the Company.
Consolidated Cash Flow Statement
Year ended 31 December 2004
2004 2003
RMB'000 RMB'000
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before tax 3,656,533 178,279
Adjustments for:
Exchange losses, net 161,824 370,148
(Gain)/loss on disposal of property, plant and equipment, net 33,872 (17,048)
Gains on trading of derivatives, net (41,036) (169,921)
Dilution gains on investments (410,137) ---
Depreciation 3,463,252 3,377,472
Share of profits less losses from associates (561,018) (243,093)
Dividend income on long-term investments (4,622) (406)
Interest income (33,703) (18,803)
Interest expense 1,824,392 2,241,166
Provision for/(write-back of) doubtful debts, net (988) 12,144
Provision for/(write-back of) inventories, net (11,508) 24,090
Operating profit before working capital changes 8,076,861 5,754,028
(Increase)/decrease in inventories (19,681) 2,228
Increase in trade receivables (425,080) (93,284)
(Increase)/decrease in amounts due from other CNAHC group companies 19,012 (32,309)
Increase in prepayments, deposits and other receivables (164,606) (77,792)
Decrease in deposits for aircraft under operating leases 18,581 19,288
Increase/(decrease) in amounts due to other CNAHC group companies 16,544 (6,001)
Increase in trade payables 268,645 806,877
Increase/(decrease) in bills payable (955,187) 900,820
Increase in other payables and accruals 1,154,425 41,676
Increase in provision for major overhauls 93,889 151,486
Increase in air traffic liabilities 52,664 276,883
Increase/(decrease) in provision for early retirement benefits (3,409) 15,272
Recognition of deferred income (70,593) (57,894)
Cash generated from operations 8,062,065 7,701,278
Interest paid (1,872,691) (2,248,996)
Tax paid:
Mainland China enterprise income tax paid (36,953) (17,032)
Overseas taxes paid (1,568) (10,550)
NET CASH INFLOW FROM OPERATING ACTIVITIES 6,150,853 5,424,700
2004 2003
RMB'000 RMB'000
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (5,270,777) (3,065,218)
Proceeds from disposal of property, plant and equipment 189,840 164,873
Increase in lease prepayments (18,465) (4,939)
Increase in advance payments for aircraft and related equipment (867,828) (784,061)
Net cash settlements of derivatives 69,036 100,921
(Increase)/decrease in amounts due from associates 4,461 (18,406)
Increase/(decrease) in amounts due to associates 58,796 (27,522)
(Increase)/decrease in time deposits with original maturity of (290,024) 22,587
more than three months
(Increase)/decrease in pledged deposits 1,128,311 (853,958)
Interest received 33,703 18,803
Capital contributions to associates (709,253) (4,000)
Dividends received on long-term investments 4,622 406
Dividends received from associates 176,365 90,551
Proceeds from disposal of long-term investments 264 ---
Net cash inflow of cash and cash equivalents in respect of the establishment of a joint 516,491 ---
venture (note 45 (b))
NET CASH OUTFLOW FROM INVESTING ACTIVITIES (4,974,458) (4,359,963)
NET CASH INFLOW BEFORE FINANCING ACTIVITIES 1,176,395 1,064,737
CASH FLOWS FROM FINANCING ACTIVITIES
New bank and other loans 10,146,285 10,205,236
Repayment of bank and other loans (10,500,107) (13,371,026)
Repayment of principal under finance lease obligations (1,607,056) (1,961,181)
Settlement of long-term payables (119,946) (132,509)
Increase/(decrease) in balance due to shareholders (468,789) 1,276,384
Contributions by CNAHC 560,782 2,055,845
Distributions to CNAHC --- (342,843)
Dividends paid to minority shareholders (24,909) (14,639)
Receipt of government grants 32,609 77,338
Net proceeds from issuance of new shares upon listing 7,600,839 ---
NET CASH INFLOW/(OUTFLOW) FROM FINANCING ACTIVITIES 5,619,708 (2,207,395)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 27,726 85,946
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 6,823,829 (1,056,712)
Cash and cash equivalents at beginning of year 2,589,395 3,646,107
CASH AND CASH EQUIVALENTS AT END OF YEAR 9,413,224 2,589,395
(note 45 (a))
Balance Sheet
31 December 2004
2004
Notes RMB'000
NON-CURRENT ASSETS
Property, plant and equipment 16 41,908,428
Lease prepayments 919,871
Interests in subsidiaries 17 176,929
Interests in joint ventures 18 1,392,388
Interests in associates 19 780,837
Advance payments for aircraft and related equipment 442,071
Due from CNAHC 20 631,813
Deposits for aircraft under operating leases 55,831
Other investments 21 816
Deferred tax assets 22 658,000
46,966,984
CURRENT ASSETS
Trade receivables 23 2,197,293
Inventories 24 468,930
Prepayments, deposits and other receivables 25 2,847,552
Pledged deposits 26 80,519
Cash and cash equivalents 26 8,421,859
Due from other CNAHC group companies 28 8,801
14,024,954
TOTAL ASSETS 60,991,938
CURRENT LIABILITIES
Trade payables 29 (3,819,353)
Bills payable 30 (362,033)
Other payables and accruals 31 (3,387,870)
Provision for major overhauls 32 (28,130)
Air traffic liabilities (1,087,838)
Tax payable (151,533)
Obligations under finance leases 33 (1,705,146)
Bank and other loans 34 (8,255,695)
Due to shareholders 27 (2,240,213)
Due to other CNAHC group companies 28 (12,163)
(21,049,974)
2004
Notes RMB'000
NET CURRENT LIABILITIES (7,025,020)
TOTAL ASSETS LESS CURRENT LIABILITIES 39,941,964
NON-CURRENT LIABILITIES
Obligations under finance leases 33 (10,576,241)
Bank and other loans 34 (12,896,622)
Long-term payables 35 (437,577)
Deferred income 36 (1,102,853)
Provision for major overhauls 32 (373,242)
Provision for early retirement benefits (195,188)
(25,581,723)
NET ASSETS 14,360,241
Represented by:
Issued share capital 37 9,050,618
Reserves 38 5,309,623
TOTAL EQUITY 14,360,241
Notes to Financial Statements
31 December 2004
1. GROUP REORGANISATION, PRINCIPAL ACTIVITIES AND BASIS OF PRESENTATION OF
FINANCIAL STATEMENTS
Air China Limited (the ''Company'') was incorporated on 30 September 2004 in
Beijing, the People's Republic of China (the ''PRC''), as a joint stock limited
company as part of the restructuring (the ''Restructuring'') of CNAHC, a PRC
state-owned enterprise under the supervision of the State Council, in
preparation for the listing of the Company's H shares on The Stock Exchange of
Hong Kong Limited (the ''Hong Kong Stock Exchange'') and the London Stock
Exchange as described below.
Pursuant to the Restructuring, CNAHC and through its wholly-owned subsidiaries,
effected the transfer of the following to the Company upon its incorporation:
(a) the assets, liabilities and undertakings which principally relate to
the business of the provision of airline operations (the ''Relevant
Businesses''); and
(b) the shareholding interests in certain subsidiaries, joint ventures and
associates which principally carry on the business of the provision of airline
operations, aircraft engineering services, air catering services, airport ground
handling services and other airline-related businesses (the ''Relevant
Companies'').
Pursuant to the Restructuring, the Company entered into a restructuring
agreement with CNAHC and CNACG on 20 November 2004 (the ''Restructuring
Agreement''). In accordance with the Restructuring Agreement, CNAHC transferred
to the Company, among other things, the following:
(a) all of the airline and airline-related businesses operated by Air China
International Corporation (/raster(70%,p)='c40'), the Company's immediate
predecessor;
(b) all related assets, including aircraft and other property, plant and
equipment of Air China International Corporation;
(c) all related liabilities, including Air China International
Corporation's bank loans; and
(d) the equity interests in various investees in airline and
airline-related businesses owned by Air China International Corporation,
including equity interests in Air China Cargo Co., Ltd. (''Air China Cargo''),
Aircraft Maintenance and Engineering Corporation, Beijing (''AMECO'') and
Shenzhen Airlines Co., Ltd. (''Shenzhen Airlines'').
In accordance with the Restructuring Agreement, CNACG transferred its
approximately 69% equity interests in China National Aviation Company Limited
(''CNAC'') to the Company by way of a capital contribution.
The effective date of the Restructuring was 30 September 2004, after which date
the Company assumed the rights and obligations of the businesses, assets and
liabilities transferred to the Company by CNAHC and CNACG.
As at the date of approval of these financial statements, the Group is in the
process of applying to the relevant government authorities to obtain the title
certificates of certain of the above-mentioned assets, primarily buildings and
land use rights, with an aggregate carrying value of approximately RMB3,098
million, and to register the already transferred equity interests in certain
investees, including equity interests in Air China Cargo, AMECO and Shenzhen
Airlines, from Air China International Corporation into the Company's name. The
Directors of the Company are of the view that the Group is entitled to lawfully
and validly occupy and use the above-mentioned assets and own the aforesaid
equity interests. The Directors of the Company are of the opinion that the
aforesaid matter will not have any significant impact on the Group's financial
position as at 31 December 2004.
In consideration for CNAHC and CNACG transferring the Relevant Businesses and
the Relevant Companies to the Company, the Company issued 5,054,276,915 domestic
shares (in the form of State legal person shares) and 1,445,723,085 non-H
Foreign Shares with a par value of RMB1.00 each to CNAHC and CNACG, respectively
(note 37 (a)). The shares issued to CNAHC and CNACG represented the then entire
registered and issued share capital of the Company upon its incorporation.
Prior to the incorporation of the Company, the Relevant Businesses and the
Relevant Companies were held by two subsidiaries of CNAHC, namely, Air China
International Corporation and CNAC, a Hong Kong incorporated company with its
shares publicly traded on the Hong Kong Stock Exchange. Air China International
Corporation is a state-owned enterprise established in the PRC on 1 July 1988
and was subject to the supervision and regulation of the General Administration
of Civil Aviation of China, formerly known as the Civil Aviation Administration
of China (''CAAC''), a regulatory authority of the civil aviation industry in
the PRC. Pursuant to the documents issued by the State Council and the Ministry
of Finance dated 14 July 2002 and 9 August 2002, respectively, the PRC
government approved the formation of CNAHC, a state-owned enterprise under the
supervision of the State Council, which then held, inter alia, a 100% direct
interest in Air China International Corporation, a 100% direct interest in China
Southwest Airlines (''CSWA''), a 100% direct interest in China National Aviation
Corporation (''CNAC (PRC)''), which owned 100% interest in CNAC Zhejiang
Airlines (''ZJA'') and approximately a 69% indirect interest in CNAC. In 2003,
CNAHC undertook further reorganisation measures to merge the business operations
of CSWA and ZJA into Air China International Corporation, following which CSWA
and ZJA became branches of Air China International Corporation.
The Group's principal activities are airline and airline-related services,
including aircraft engineering services, air catering services and airport
ground handling services conducted mainly in the PRC, 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.
In the opinion of the Directors, the Company's ultimate holding company is
CNAHC.
Further details of the Restructuring are set out in the Company's prospectus
dated 3 December 2004 issued in respect of the listing of the Company's H shares
on the Hong Kong Stock Exchange and the London Stock Exchange.
On 15 December 2004, 2,805,680,000 new H shares in the Company, details of which
are set out in note 37 (b) to these financial statements, were listed on the
Hong Kong Stock Exchange and the London Stock Exchange. On 11 January 2005, an
additional 420,852,000 new H shares in the Company, details of which are set out
in note 47 (a) to these financial statements, were issued and listed on the Hong
Kong Stock Exchange and the London Stock Exchange upon the exercise of the
over-allotment option.
As CNAHC controlled the Relevant Businesses and Relevant Companies before the
Restructuring and continues to control the Company after the Restructuring, the
consolidated financial statements of the Group for the years ended 31 December
2003 and 2004 have been prepared as a reorganisation of companies under common
control in a manner similar to a pooling-of-interests. Accordingly, the assets
and liabilities of the Company are stated at historical amounts, except for the
measurement at fair value of financial instruments in accordance with IAS 39
(amended 2004).
The consolidated balance sheets as at 31 December 2003 and 2004 present the
Group's assets and liabilities as if the Restructuring had been completed at 1
January 2003. The consolidated results and consolidated cash flows include the
Group's results of operations and cash flows as if the Relevant Businesses and
interests in the Relevant Companies had been transferred to the Group at 1
January 2003. The Company's Directors are of the opinion that the consolidated
financial statements prepared on this basis present fairly the consolidated
financial position, consolidated results and consolidated cash flows of the
Group as a whole. Therefore, the net profit for the year ended 31 December 2004
includes the consolidated results before the Restructuring.
As the Company was only incorporated on 30 September 2004, there are no
comparative figures as at 31 December 2003 in the Company's balance sheet.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation
The consolidated financial statements of the Group have been prepared in
accordance with International Financial Reporting Standards (''IFRS'') which
comprise standards and interpretations approved by the International Accounting
Standards Board, and International Accounting Standards (''IAS'') and Standing
Interpretations Committee interpretations approved by the International
Accounting Standards Committee that remain in effect, except for the following
standards that have been early adopted as at 1 January 2001, which is the
earliest date for the preparation of the financial information in relation to
the listing of the Company's H shares:
• IFRS 1 (amended 2004), First-Time Adoption of International Financial
Reporting Standards;
• IFRS 3, Business Combinations;
• IFRS 5, Non-current Assets Held for Sale and Discontinued Operations;
• IAS 1 (amended 2004), Presentation of Financial Statements;
• IAS 2 (revised 2003), Inventories;
• IAS 7 (amended 2003), Cash Flow Statements;
• IAS 8 (revised 2003), Accounting Policies, Changes in Accounting
Estimates and Errors;
• IAS 10 (amended 2004), Events after the Balance Sheet Date;
• IAS 12 (amended 2004), Income Taxes;
• IAS 14 (amended 2004), Segmental Reporting;
• IAS 17 (amended 2004), Leases;
• IAS 18 (amended 2004), Revenue;
• IAS 19 (amended 2004), Employee Benefits;
• IAS 20 (revised 2003), Accounting for Government Grants and Disclosure
of Government Assistance;
• IAS 21 (revised 2003), The Effects of Changes in Foreign Exchange
Rates;
• IAS 23 (amended 2003), Borrowing Costs;
• IAS 27 (amended 2004), Consolidated and Separate Financial Statements;
• IAS 28 (amended 2004), Investments in Associates;
• IAS 31 (amended 2004), Interests in Joint Ventures;
• IAS 32 (amended 2004), Financial Instruments: Disclosure and
Presentation;
• IAS 33 (amended 2004), Earnings Per Share;
• IAS 36 (amended 2004), Impairment of Assets;
• IAS 37 (amended 2004), Provisions, Contingent Liabilities and
Contingent Assets;
• IAS 38 (amended 2004), Intangible Assets; and
• IAS 39 (amended 2004), Financial Instruments: Recognition and
Measurement.
The consolidated financial statements have been prepared on a historical cost
basis, except for the measurement at fair value of financial instruments in
accordance with IAS 39 (amended 2004).
Basis of consolidation
The consolidated financial statements comprise the financial statements of the
Company and all its subsidiaries. The financial statements of the subsidiaries
are prepared for the same reporting period as the parent company using
consistent accounting policies. Adjustments are made to bring into line any
dissimilar accounting policies that may exist.
Subsidiaries are consolidated from the date on which control is transferred to
the Group and cease to be consolidated from the date on which control is
transferred out of the Group. This control is normally evidenced when the Group
owns, either directly or indirectly, more than 50% of the voting rights of a
company's share or registered capital, is able to govern the financial and
operating policies of an enterprise so as to benefit from its activities. All
significant inter-company transactions and balances within the Group are
eliminated on consolidation.
Minority interests represent the interests of outside shareholders in the
results and net assets of the Company's subsidiaries, not held by the Group and
are presented in the consolidated balance sheet within equity, separately from
the shareholders' equity.
Foreign currencies
The Group's functional and presentation currency is Renminbi (''RMB''), except
for overseas subsidiaries, which use their local currencies.
Foreign currency transactions are recorded at the applicable exchange rates
ruling at the transaction dates as quoted by the People's Bank of China.
Monetary assets and liabilities denominated in foreign currencies at the balance
sheet date are translated into RMB at the applicable exchange rates ruling at
that date as quoted by the People's Bank of China. All exchange differences are
dealt with in the income statement.
On consolidation, the financial statements of overseas subsidiaries are
translated into RMB. The income statements of these subsidiaries are translated
into RMB at the weighted average exchange rates for the year, and the balance
sheets are translated into RMB at the exchange rates ruling at the balance sheet
date. The resulting translation differences are included in the exchange
fluctuation reserve.
For the purpose of the consolidated cash flow statement, the cash flows of the
overseas subsidiaries are translated into RMB at the exchange rates ruling at
the dates of the cash flows. Frequently recurring cash flows of overseas
subsidiaries, which arise throughout the year, are translated into RMB at the
weighted average exchange rates for the year.
Subsidiaries
A subsidiary is a company whose financial and operating policies the Company
controls, directly or indirectly, so as to obtain benefits from its activities.
A subsidiary is consolidated from the date the Company obtains control until
such time as control ceases.
The results of subsidiaries are included in the Company's income statement to
the extent of dividends received and receivable. In the Company's balance sheet,
the Company's interests in subsidiaries are stated at cost less any impairment
losses.
Interests in joint ventures
The Group's interests in its joint ventures are accounted for by proportionate
consolidation, which involves recognising a proportionate share of the joint
venture's assets, liabilities, income and expenses with similar items in the
consolidated financial statements on a line-by-line basis.
Interests in associates
The Group's investments in its associates are accounted for under the equity
method of accounting. An associate is an entity in which the Group has
significant influence and which is neither a subsidiary nor a joint venture of
the Group. The investments in associates are carried in the balance sheet at
cost plus post-acquisition changes in the Group's share of net assets of the
associates, less any impairment in value. The income statement reflects the
Group's share of the results of operations of the associates. The Group's
investments in its associates include goodwill (net of accumulated amortisation
and impairment) on acquisition, which is treated in accordance with the
accounting policy for goodwill stated below. When the Group's share of losses in
an associate equals or exceeds its interest in the associate, the Group does not
recognise further losses, unless the Group has incurred obligations or made
payments on behalf of the associates.
In the Company's balance sheet, the investments in associates are stated at cost
less any impairment losses. The results of associates are accounted for by the
Company on the basis of dividends received and receivable.
Property, plant and equipment
Property, plant and equipment, other than construction in progress (''CIP''),
are stated at cost less accumulated depreciation and any impairment in value.
The cost of an asset comprises its purchase price and any directly attributable
costs of bringing the asset to its working condition and location for its
intended use. Expenditure incurred after the assets have been put into
operation, such as repairs and maintenance, is normally charged to the income
statement in the period in which it is incurred. In situations where it can be
clearly demonstrated that the expenditure has resulted in an increase in the
future economic benefits expected to be obtained from the use of the asset, the
expenditure is capitalised as an additional cost of that asset.
Depreciation is calculated on the straight-line basis over the expected useful
life of the asset, after taking into account its estimated residual value, as
follows:
Depreciation life Residual value
Aircraft and flight equipment 10 to 20 years Nil--5%
Buildings 15 to 35 years 5%
Machinery, transportation equipment and office equipment 4 to 20 years 5%
The gain or loss on disposal or retirement of a property, plant and equipment
recognised in the income statement is the difference between the net sales
proceeds and the carrying amount of the relevant asset at the time of disposal.
CIP represents office buildings and various infrastructure projects under
construction and equipment pending installation in the aircraft and is stated at
cost less any impairment losses, and is not depreciated. Cost comprises the
direct costs of construction, the cost of equipment as well as finance charges
from borrowings used to finance these assets during the construction or
installation period. CIP is reclassified to the appropriate categories of
property, plant and equipment when completed and ready for use.
The carrying values of property, plant and equipment are reviewed for impairment
when events or changes in circumstances indicate that the carrying values may
not be recoverable. If any such indication exists and where the carrying values
exceed the estimated recoverable amounts, the assets or cash-generating units
are written down to their recoverable amounts. The recoverable amount of
property, plant and equipment is the greater of fair value less costs to sell
and value in use. In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific to
the asset. For an asset that does not generate largely independent cash inflows,
the recoverable amount is determined for the cash-generating unit to which the
asset belongs. Impairment losses are recognised in the income statement.
Lease prepayments
Lease prepayments represent acquisition costs of land use rights less
accumulated amortisation and impairment losses.
Goodwill
Goodwill represents the excess of cost over the fair value of the identifiable
assets, liabilities and contingent liabilities of acquired businesses. The Group
early adopted IFRS 3, Business Combinations, and applied the requirements of
IFRS 3 to goodwill existing at or acquired after, and to business combinations
occurring from 1 January 2001. In accordance with IFRS 3, the Group ceased
amortising goodwill as of 1 January 2001.
On disposal of subsidiaries, associates or joint ventures, the gain or loss on
disposal is calculated by reference to the net assets at the date of disposal,
including the attributable amount of goodwill which remains unamortised and any
relevant reserves, as appropriate.
IAS 36 (amended 2004) requires that goodwill be tested for impairment at the
cash-generating units on an annual basis and whenever there is an indication
that a unit may be impaired, by comparing the carrying amount of the unit,
including the goodwill, with the recoverable amount of the unit. An impairment
loss shall be recognised for a cash-generating unit if the recoverable amount of
the unit is less than the carrying amount of the unit. The impairment loss shall
be allocated to reduce the carrying amount of the assets of the unit (group of
units) in the following order: (i) first, to reduce the carrying amount of any
goodwill allocated to the cash-generating unit (group of units); and (ii) then,
to the other assets of the unit pro-rata on the basis of the carrying amount of
each asset in the unit. In allocating an impairment loss, the Group shall not
reduce the carrying amount of an asset below the highest of: (i) its fair value
less costs to sell (if determinable); (ii) its value in use (if determinable);
and (iii) zero.
Advance payments for aircraft and related equipment
Advance contract payments to aircraft manufacturers to secure deliveries of
aircraft and related equipment in future years, including attributable finance
costs, are included in assets. The advances are accounted for as part of the
cost of property, plant and equipment upon delivery of the aircraft.
Investments
All investments are initially recognised at cost, being the fair value of the
consideration given and including acquisition charges associated with the
investments.
After initial recognition, investments, except those investments which do not
have a quoted market price in an active market and whose fair value cannot be
reliably measured, are classified as available-for-sale and measured at fair
value through profit or loss. Gains or losses on available-for-sale investments
are recognised in the income statement. Investments that do not have a quoted
market price in an active market and whose fair value cannot be reliably
measured are stated at cost less impairment.
Leases
Finance leases which transfer to the Group substantially all the risks and
benefits of ownership of the leased item are capitalised at the inception of the
lease at the fair value of the leased properties or, if lower, at the present
value of the minimum lease payments. Lease payments are apportioned between the
finance charges and reduction of the lease liability so as to achieve a constant
rate of interest on the remaining balance of the liability. Finance charges are
charged directly against income. Capitalised leased assets are depreciated over
the estimated economic useful lives of the assets.
Leases where the lessor retains substantially all the risks and benefits of
ownership of the asset are classified as operating leases. Where the Group is
the lessor, assets leased by the Group under operating leases are included in
non-current assets and rentals receivables under the operating leases are
credited to the income statement on the straight-line basis over the lease
terms. Where the Group is the lessee, rentals payable under the operating leases
are charged to the income statement on the straight-line basis over the lease
terms.
Inventories
Inventories, which consist primarily of expendable spare parts and supplies, are
stated at cost less any provision for obsolescence, and are expensed when
consumed in operations. Cost is determined on the weighted average basis.
Work in progress represents material cost, labour cost and overhead cost
capitalised for the provision of aircraft engineering services and is stated at
the lower of cost, calculated on a weighted average basis, and net realisable
value. Net realisable value is determined on the basis of anticipated sales
proceeds less estimated costs to be incurred to completion and disposal.
Cash and cash equivalents
For the purpose of the consolidated cash flow statement, cash and cash
equivalents comprise cash on hand and demand deposits, and short term highly
liquid investments which are readily convertible into known amounts of cash and
which are subject to an insignificant risk of changes in value, and have a short
maturity of generally within three months when acquired, less bank overdrafts
which are repayable on demand and form an integral part of the Group's cash
management.
For the purpose of the balance sheet, cash and cash equivalents comprise cash on
hand and at banks and other financial institutions, including term deposits,
which are not restricted as to use.
Manufacturers' credits
In connection with the acquisition of certain aircraft and related equipment,
the Group receives various credits from the manufacturers. Such credits are
deferred until the aircraft and related equipment are delivered, at which time
they are applied as a reduction of the cost of acquiring the aircraft and
related equipment.
Employee benefits
(a) Pension obligations
The full-time employees of the Group are covered by various government-sponsored
pension plans under which the employees are entitled to a monthly pension based
on certain formulae. Certain government agencies are responsible for the pension
liability to these retired employees. The Group contributes on a monthly basis
to these pension plans. Under these plans, the Group has no legal or
constructive obligation for retirement benefits beyond the contributions made.
Contributions to these plans are expensed as incurred.
(b) Termination and early retirement benefits
Termination benefits are payable whenever an employee's employment is
voluntarily terminated before the normal retirement date or whenever an employee
accepts voluntary redundancy in exchange for these benefits. The Group
recognises termination benefits when it is demonstrably committed to either
terminating the employment of current employees according to a detailed formal
plan without possibility of withdrawal or to providing termination benefits as a
result of an offer made to encourage voluntary redundancy.
(c) Housing benefits
In prior periods, the Group sold staff quarters to its employees, subject to a
number of eligibility requirements, at below market prices. When staff quarters
are identified as being subject to sale under these arrangements, the carrying
value of the staff quarters is written down to the net recoverable amount. Upon
sale, any difference between sales proceeds and the carrying amount of the staff
quarters is charged to the income statement. The above staff quarters'
allocation scheme was phased out before the incorporation of the Company in
accordance with the policies of the PRC government.
In 1998, the State Council of the PRC issued a circular, which stipulated that
the sale of quarters to employees at preferential prices should be withdrawn. In
2000, the State Council further issued a circular stating that cash subsidies
should be made to the employees following the withdrawal of allocation of staff
quarters. However, the specific timetable and procedures to implement these
policies were to be determined by the individual provincial or municipal
government based on the particular situation of the province or municipality.
Based on the relevant detailed local government regulations promulgated, certain
entities within the Group have adopted cash housing subsidy plans, whereby, for
those eligible employees who have not been allocated with any quarters or who
have not been allocated with quarters up to the prescribed standards before the
staff quarters' allocation scheme was terminated, the Group will pay them
one-off cash housing subsidies based on their years of service, position and
other criteria. These cash housing subsidies are charged to the income statement
in the year in which it was determined that the payment of such subsidies is
probable and the amounts can be reasonably estimated.
In addition, all full-time employees of the Group are entitled to participate in
various government-sponsored housing funds. The Group contributes on a monthly
basis to these funds based on certain percentages of the salaries of the
employees. The Group's liability in respect of these funds is limited to the
contributions payable in each period.
Provisions
Provisions are recognised when the Group has a present obligation (legal or
constructive) as a result of a past event and it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation
provided that reliable estimate can be made of the amount of the obligation. If
the effect of the time value of money is material, provisions are determined by
discounting the expected future cash flows at a pre-tax rate that reflects
current market assessments of the time value of money and, where appropriate,
the risks specific to the liability. Where discounting is used, the increase in
the provision due to the passage of time is recognised as an interest expense.
Maintenance and overhaul costs
In respect of aircraft and engines under operating leases, the Group has the
responsibility to fulfil certain return conditions under the relevant operating
leases. In order to fulfil these return conditions, major overhauls are required
to be conducted on a regular basis. Accordingly, estimated costs of major
overhauls for aircraft and engines under operating leases are accrued and
charged to the income statement over the estimated period between overhauls
using the ratios of actual flying hours/cycles and estimated flying hours/cycles
between overhauls. The costs of major overhauls comprise mainly labour and
materials. Differences between the estimated costs and the actual costs of
overhauls are included in the income statement in the period of overhaul.
In respect of aircraft and engines owned by the Group or held under finance
leases, costs of major overhauls are charged to the income statement as and when
incurred.
All other routine repair and maintenance costs incurred in restoring such
property, plant and equipment to their normal working condition are charged to
the income statement as and when incurred.
Revenue recognition
Revenue is recognised when it is probable that the economic benefits will flow
to the Group and the revenue can be reliably measured on the following bases:
(a) Provision of airline and airline-related services
Passenger revenue is recognised either when transportation is provided or when a
ticket expires unused rather than when a ticket is sold. Unused tickets
generally expire one year from the date the ticket was sold, or for partially
used tickets, the date of first flight. Ticket sales for transportation not yet
provided are included in current liabilities as air traffic liabilities. In
addition, the Group has code-sharing agreements with other airlines under which
a carrier's flights can be marketed under the two-letter airline designator code
of another carrier. Revenues earned under these arrangements are allocated
between the code share partners based on existing contractual agreements and
airline industry standard pro-ratio formulae and are recognised as passenger
revenue when the transportation is provided.
Cargo and mail revenues are recognised when the transportation is provided.
Revenue from airline-related services is recognised when services are rendered.
Revenue was stated net of business tax and contributions to the CAAC
Infrastructure Development Fund prior to 1 January 2004. From 2004,
contributions to the CAAC Infrastructure Development Fund are included in other
flight operation expenses to reflect the change in the levy basis in accordance
with the related new policy promulgated by the PRC government.
(b) Sale of goods
Revenue is recognised when the significant risks and rewards of ownership have
been transferred to the buyer, provided that the Group maintains neither
managerial involvement to the degree usually associated with ownership, nor
effective control over the goods sold.
(c) Trading of investments
Revenue is recognised on a trade date basis.
(d) Interest income
Revenue is recognised on a time proportion basis taking into account the
principal outstanding and the effective rate of interest applicable.
(e) Dividends
Revenue is recognised when the owners' right to receive the payment has been
established.
(f) Rental income and aircraft and related equipment lease income
Revenue is recognised on a time proportion basis over the terms of the
respective leases.
Frequent flyer programme
For Air China Companion Club member accounts that have sufficient mileage
credits to claim the lowest level of free travel, the Group records a liability
for the estimated incremental costs associated with providing travel awards that
are expected to be redeemed. Incremental costs include the cost of incremental
fuel, meals and insurance but do not include any cost for aircraft ownership,
maintenance, labour or overhead allocation. The liability is adjusted
periodically based on awards earned, awards redeemed, changes in the incremental
costs and changes in the Air China Companion Club programme, and is included in
the balance sheet as a current liability.
Government grants
Government grants are recognised at their fair values when it is probable that
the grant will be received and all attaching conditions will be complied with.
When the grant relates to an expense item, it is recognised as income over the
periods necessary to match the grant on a systematic basis to the costs that it
is intended to compensate. Where the grant relates to an asset, the fair value
is credited to a deferred income account and is released to the income statement
over the expected useful life of the relevant asset by equal annual instalments.
Borrowing costs
Borrowing costs directly attributable to the acquisition of aircraft,
construction or production of qualifying assets, i.e. assets that necessarily
take a substantial period of time to get ready for their intended use, are
capitalised as part of the costs of those assets. The capitalisation of aircraft
borrowing costs ceases when the aircraft is placed into revenue earning services
and the capitalisation of other assets' borrowing costs ceases when the assets
are substantially ready for their intended use or sale.
Where funds have been borrowed generally, and used for the purpose of obtaining
qualifying assets, a capitalisation rate ranging between 5.58% and 5.76% has
been applied to the expenditure on the individual asset.
All other borrowing costs are charged to the income statement in the period in
which they are incurred.
Income tax
Income tax comprises current and deferred income tax. Income tax is recognised
in the income statement, or in equity if it relates to items that are recognised
in the same or a different period directly in equity.
Deferred income tax is provided, using the liability method, on all temporary
differences at the balance sheet date between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes.
Deferred income tax liabilities are recognised for all taxable temporary
differences:
• except where the deferred income tax liability arises from goodwill
amortisation or the initial recognition of an asset or liability in a
transaction that is not a business combination and, at the time of the
transaction, affects neither the accounting profit nor taxable profit or loss;
and
• in respect of taxable temporary differences associated with
investments in subsidiaries, associates and interests in joint ventures, except
where the timing of the reversal of the temporary differences can be controlled
and it is probable that the temporary differences will not reverse in the
foreseeable future.
Deferred income tax assets are recognised for all deductible temporary
differences, carry-forward of unused tax assets and unused tax losses, to the
extent that it is probable that taxable profit will be available against which
the deductible temporary differences, and the carry-forward of unused tax assets
and unused tax losses can be utilised:
• except where the deferred income tax asset relating to the deductible
temporary difference arises from the initial recognition of an asset or
liability in a transaction that is not a business combination and, at the time
of the transaction, affects neither the accounting profit nor taxable profit or
loss; and
• in respect of deductible temporary differences associated with
investments in subsidiaries, associates and interests in joint ventures,
deferred tax assets are only recognised to the extent that it is probable that
the temporary differences will be reversed in the foreseeable future and taxable
profit will be available against which the temporary differences can be
utilised.
The carrying amount of deferred income tax assets is reviewed at each balance
sheet date and reduced to the extent that it is no longer probable that
sufficient taxable profit will be available to allow all or part of the deferred
income tax asset to be utilised. Deferred income tax assets and liabilities are
measured at the tax rates that are expected to apply to the period when the
asset is realised or the liability is settled based on tax rates (and tax laws)
that have been enacted or substantively enacted at the balance sheet date.
Derivative financial instruments
The Group uses derivative financial instruments to hedge its exposure to fuel
prices. In accordance with IAS 39, such derivative financial instruments are
carried in the balance sheet at fair value as financial assets or financial
liabilities.
For the purposes of hedge accounting, hedges are classified as either fair value
hedges where they hedge the exposure to changes in the fair value of a
recognised asset or liability; or cash flow hedges where they hedge exposure to
variability in cash flows that is either attributable to a particular risk
associated with a recognised asset or liability or a forecasted transaction.
Changes in the fair value of derivatives that are designated and qualify as fair
value hedges and that are highly effective are recorded in the income statement,
along with any changes in the fair value of the hedged assets or liabilities
that are attributable to the hedged risk. In relation to fair value hedges
(interest rate swaps) which meet the conditions for special hedge accounting,
any gain or loss from remeasuring the hedging instrument at fair value is
recognised immediately in the income statement. Any gain or loss on the hedged
item attributable to the hedged risk is adjusted against the carrying amount of
the hedged item and recognised in the income statement. Where the adjustment is
to the carrying amount of a hedged interest-bearing financial instrument, the
adjustment is amortised to the income statement such that it is fully amortised
by maturity. In relation to cash flow hedges (forward foreign currency
contracts) to hedge firm commitments which meet the conditions for special hedge
accounting, the portion of the gain or loss on the hedging instrument that is
determined to be an effective hedge is recognised directly in equity and the
ineffective portion is recognised in the income statement.
When the hedged firm commitment results in the recognition of an asset or a
liability, then, at the time the asset or liability is recognised, the
associated gains or losses that had previously been recognised in equity are
included in the initial measurement of the acquisition cost or other carrying
amount of the asset or liability.
For all other cash flow hedges, the gains or losses that are recognised in
equity are transferred to the income statement in the same year in which the
hedged firm commitment affects the income statement, for example when the future
sale actually occurs.
For derivatives that do not qualify for special hedge accounting, any gains or
losses arising from changes in fair value are taken directly to the income
statement for the year. Hedge accounting is discontinued when the hedging
instrument expires or is sold, terminated or exercised, or no longer qualifies
for special hedge accounting. At that point in time, any cumulative gain or loss
on the hedging instrument recognised in equity is kept in equity until the
forecasted transaction occurs. If a hedged transaction is no longer expected to
occur, the net cumulative gain or loss recognised in equity is transferred to
the income statement for the year.
Use of estimates
The preparation of the financial statements of the Group in accordance with IFRS
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Related parties
Parties are considered to be related if one party has the ability, directly or
indirectly, to control the other party or exercise significant influence over
the other party in making financial and operating decisions. Parties are also
considered to be related if they are subject to common control or common
significant influence. Related parties may be individuals or corporate entities.
Recoverable amount of non-current assets
At each reporting date, the Group assesses whether there is any indication that
an asset may be impaired. Where an indicator of impairment exists, the Group
makes a formal estimate of the recoverable amount. Where the carrying amount of
an asset exceeds its recoverable amount, the asset is considered impaired and is
written down to its recoverable amount. Recoverable amount is the higher of an
asset's or cash-generating unit's fair value less costs to sell and its value in
use and is determined for an individual asset, unless the asset does not
generate cash inflows that are largely independent of those from other assets or
groups of assets.
Trade and other receivables
Trade receivables, which generally have 30 to 90 day terms, are recognised and
carried at original invoice amount less an allowance for any uncollectible
amounts. An estimate for doubtful debts is made when collection of the full
amount is no longer probable. Bad debts are written off when identified.
Other receivables are recognised and carried at cost less allowances for any
uncollectible amounts.
Interest-bearing loans and borrowings
All loans and borrowings are initially recognised at cost, being the fair value
of the consideration received net of issue costs associated with the borrowings.
After initial recognition, interest-bearing loans and borrowings are
subsequently measured at amortised cost using the effective interest rate
method. Amortised cost is calculated by taking into account any issue costs, and
any discount or premium on settlement.
Gains and losses are recognised in the income statement when the liabilities are
derecognised or impaired, as well as through the amortisation process.
Derecognition of financial instruments
The derecognition of a financial instrument takes place when the Group no longer
controls the contractual rights that comprise the financial instrument, which is
normally the case when the instrument is sold, or all the cash flows
attributable to the instrument are passed through to an independent third party.
Impact of recently issued accounting standards
IFRS 2, Share-based Payment, is applicable for accounting periods beginning on
or after 1 January 2005 and requires the Group to recognise share-based payment
transactions in its financial statements, including transactions with employees
or other parties to be settled in cash, other assets, or equity instruments of
the entity. For equity-settled share-based payment transactions, IFRS 2 requires
an entity to measure the goods or services received, and the corresponding
increase in equity, directly, at the fair value of the goods or services
received, unless that fair value cannot be estimated reliably. If the Group
cannot estimate reliably the fair value of the goods or services received, the
Group is required to measure their value, and the corresponding increase in
equity, indirectly, by reference to the fair value of the equity instruments
granted. For cash-settled share-based payment transactions, IFRS 2 requires an
entity to measure the goods or services acquired and the liability incurred at
the fair value of the liability. Until the liability is settled, the Group is
required to re-measure the fair value of the liability at each reporting date
and at the date of settlement, with any changes in value recognised in the
income statement for the period. For share-based payment transactions in which
the terms of the arrangement provide either the Group or the supplier of goods
or services with a choice of whether the Group settles the transaction in cash
or by issuing equity instruments, the Group is required to account for that
transaction, or the components of that transaction, as a cash-settled
share-based payment transaction if, and to the extent that, the Group has
incurred a liability to settle in cash (or other assets), or as an equity
settled share-based payment transaction if, and to the extent that, no such
liability has been incurred. The provisions of IFRS 2 will apply for grants of
shares, share options or other equity instruments that were granted after 7
November 2002 and had not yet vested at the beginning on or after 1 January
2005. The Group does not expect IFRS 2 to have a material effect on its results
of operations and financial position.
IAS 16 (amended 2004), Property, Plant and Equipment, replaces IAS 16 (revised
1998), Property, Plant and Equipment, and is applicable for accounting periods
beginning on or after 1 January 2005. There are a number of differences between
the amended standard and the previous version. These include that the amended
standard requires an entity to evaluate under the general recognition principle
all property, plant and equipment costs at the time they are incurred. Those
costs include costs incurred initially to acquire or construct an item of
property, plant and equipment and costs incurred subsequently to add to, replace
part of, or service an item. The previous version of IAS 16 contained specific
recognition principles for accounting for subsequent costs. Further, the amended
standard requires that the cost of an item of property, plant and equipment
includes the costs of its dismantlement, removal or restoration, and the
obligation for which an entity incurs as a consequence of installing the item.
Its cost also includes the costs of its dismantlement, removal or restoration,
and the obligation for which an entity incurs as a consequence of using the item
during a particular period for purposes other than to produce inventories during
that period. The previous version included within its scope only the costs
incurred as a consequence of installing the item. In addition, under the amended
standard an entity is required to determine the depreciation charge separately
for each significant part of an item of property, plant and equipment, a
requirement which was not clearly set out in the previous version. Also, under
the amended standard, an entity is required to measure the residual value of an
item of property, plant and equipment as the amount that it estimates it would
currently receive for the asset if the asset was already of the age and in the
condition expected at the end of its useful life. The previous version of IAS 16
did not specify whether the residual value was to be this amount or the amount,
inclusive of the effects of inflation, that an entity expected to receive in the
future on the asset's actual retirement date. The Group does not expect the
adoption of new policies arising from the amended standard, when implemented,
will have a material effect on its results of operations and financial position.
IAS 24 (revised 2003), Related Party Disclosures, replaces IAS 24 Related Party
Disclosures (reformatted in 1994) and is applicable for accounting periods
beginning on or after 1 January 2005. The main objective of such revision was to
provide additional guidance and clarity in the scope of IAS 24 for the
definitions and the disclosures for related parties. The wording of IAS 24's
objective was amended to clarify that the Group's financial statements should
contain the disclosures necessary to draw attention to the possibility that the
financial position and the income statement may have been affected by the
existence of related parties and by transactions and outstanding balances with
them. Since IAS 24 is a standard for disclosure requirements only, there is no
material effect on the Group's results of operations and financial position upon
adoption.
3. SEGMENT INFORMATION
Segment information 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.
Currently, the Group's business segment information is divided into four
business segments --- airline operations, engineering services, airport terminal
services and other businesses (''others''). Segment net profit represents
revenues less expenses directly attributable to a segment and the relevant
portion of enterprise revenues less expenses that can be allocated on a
reasonable basis to a segment, whether from external transactions or from
transactions with other segments of the Group.
Segment assets and liabilities mainly comprise those operating assets and
liabilities that are directly attributable to the segment or can be allocated to
the segment on a reasonable basis.
In determining the Group's geographical segments, revenues are attributed to the
segments based on origin and destination of each flight segment. Assets, which
consist principally of flight and ground equipment, supporting the entire
worldwide transportation system, are mainly located in the PRC. An analysis of
assets and capital expenditure of the Group by geographical distribution has
therefore not been included.
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.
Business segments
The following table presents revenue, profit and certain asset, liability and
expenditure information for the Group's business segments for the year ended 31
December 2004:
Airline Engineering Airport terminal Others Eliminations Total
operations services services
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
REVENUES
Sales to external customers 32,766,164 296,775 287,905 169,913 --- 33,520,757
Intersegment sales --- 731,589 --- 131,299 (862,888) ---
Total revenues 32,766,164 1,028,364 287,905 301,212 (862,888) 33,520,757
PROFIT FROM OPERATIONS
Segment results 4,146,402 824,858 203,133 173,746 (862,888) 4,485,251
Finance costs (1,785,196) (14,541) (1,978) 1,842 --- (1,799,873)
Dilution gains on investments 330,222 --- --- 79,915 --- 410,137
Share of profits less losses from 416,813 (4,649) 191,323 (42,469) --- 561,018
associates
Profit before tax 3,108,241 805,668 392,478 213,034 (862,888) 3,656,533
Tax (1,107,838)
Minority interests (162,731)
Net profit attributable to equity 2,385,964
holders of the parent
ASSETS
Segment assets 62,308,593 1,077,748 160,087 379,390 (2,014,154) 61,911,664
Interests in associates 3,589,574 25,539 186,056 200,352 --- 4,001,521
Unallocated assets 776,084
Total assets 66,689,269
LIABILITIES
Segment liabilities (48,845,870) (652,749) (312,765) (677,442) 2,014,154 (48,474,672)
Unallocated liabilities (186,055)
Total liabilities (48,660,727)
OTHER INFORMATION
Capital expenditures --- property, 6,046,355 32,697 25,912 33,641 --- 6,138,605
plant and equipment
Depreciation of property, plant and 3,395,049 35,797 19,247 13,159 --- 3,463,252
equipment
Provision for/(write-back of) (4,483) 2,642 --- 853 --- (988)
doubtful debts, net
Provision for/(write-back of) 12,492 (24,000) --- --- --- (11,508)
inventories, net
The following table presents revenue, profit/(loss) and certain asset, liability
and expenditure information for the Group's business segments for the year ended
31 December 2003:
Airline Engineering Airport terminal Others Eliminations Total
operations services services
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
REVENUES
Sales to external customers 23,910,300 285,493 251,266 194,346 --- 24,641,405
Intersegment sales --- 486,705 --- 126,485 (613,190) ---
Total revenues 23,910,300 772,198 251,266 320,831 (613,190) 24,641,405
PROFIT FROM OPERATIONS
Segment results 1,995,224 571,448 173,290 157,492 (613,190) 2,284,264
Finance costs (2,326,582) (17,631) (1,160) (3,705) --- (2,349,078)
Share of profits less losses from 172,016 (18,660) 104,043 (14,306) --- 243,093
associates
Profit/(loss) before tax (159,342) 535,157 276,173 139,481 (613,190) 178,279
Tax (89,781)
Minority interests 71,106
Net profit attributable to equity 159,604
holders of the parent
ASSETS
Segment assets 51,284,337 1,076,308 250,923 746,182 (618,687) 52,739,063
Interests in associates 2,747,942 6,984 124,398 188,522 --- 3,067,846
Unallocated assets 590,153
Total assets 56,397,062
LIABILITIES
Segment liabilities (47,237,228) (683,204) (174,326) (551,813) 618,687 (48,027,884)
Unallocated liabilities (53,929)
Total liabilities (48,081,813)
OTHER INFORMATION
Capital expenditures --- property, 3,703,236 20,332 38,986 86,725 --- 3,849,279
plant and equipment
Depreciation of property, plant and 3,309,582 37,119 13,661 17,110 --- 3,377,472
equipment
Provision for/(write-back of) 13,824 (1,562) --- (118) --- 12,144
doubtful debts, net
Provision for inventories, net 90 24,000 --- --- --- 24,090
Geographical segments
The following tables present consolidated revenue information by geographical
segments for each of the two years ended 31 December 2004:
For the year ended Domestic HK/Macau Europe North Japan/ Asia Pacific, Total
31 December 2004 America Korea others
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
REVENUES
Sales to external customers and total 18,482,949 1,744,590 4,232,489 2,477,214 3,846,973 2,736,542 33,520,757
revenues
For the year ended Domestic HK/Macau Europe North Japan/ Asia Pacific, Total
31 December 2003 America Korea others
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
REVENUES
Sales to external customers and total 12,926,434 1,572,902 3,547,743 2,336,207 2,287,004 1,971,115 24,641,405
revenues
4. AIR TRAFFIC REVENUES
Air traffic revenues comprise revenues from the airline business and is stated
net of business tax and contributions to the CAAC Infrastructure Development
Fund. The CAAC Infrastructure Development Fund, which was netted against gross
air traffic revenues for the year ended 31 December 2003, was included in other
flight operation expenses for the year ended 31 December 2004 to reflect the
change in the levy basis in accordance with the related new policy promulgated
by the PRC government. An analysis of air traffic revenues is as follows:
Group
2004 2003
RMB'000 RMB'000
Passenger 27,665,018 19,030,187
Cargo and mail 3,169,804 4,392,473
30,834,822 23,422,660
(a) Pursuant to various PRC business tax rules and regulations, the Group
is required to pay business tax to the local tax bureaus at the following rates:
Type of revenue Applicable business tax rate
Air traffic 3% of air traffic revenues. All inbound international and Hong Kong and Macau regional flights are
revenues exempted from business tax.
Other revenues 3% of commission income and ground services income, and 3% to 5% of other revenues.
PRC business tax incurred for the two years ended 31 December 2003 and 2004,
netted against air traffic revenues, amounted to approximately RMB240 million
and RMB711 million, respectively.
For the period from 1 May 2003 to 31 December 2003, PRC business tax for all
domestic, international and regional passenger traffic revenues of the Group was
waived by the PRC government in order to subsidise for the airlines' loss of
revenue due to the outbreak of Severe Acute Respiratory Syndrome (''SARS'') in
the region.
(b) In addition, the Group was required to pay contributions to the CAAC
Infrastructure Development Fund which was calculated at the rates of 5% and 2%
on the domestic and international/Hong Kong and Macau regional air traffic
revenues, respectively, for the year ended 31 December 2003.
For the period from 1 May 2003 to 31 December 2003, CAAC Infrastructure
Development Fund for all domestic, international and regional passenger, cargo
and mail traffic revenues of the Group was waived by the PRC government in order
to subsidise for the airlines' loss of revenue due to the outbreak of SARS in
the region.
For the period from 1 January 2004 to 31 March 2004, the CAAC Infrastructure
Development Fund was suspended by the PRC government. As such, no CAAC
Infrastructure Development Fund was charged to the income statement of the Group
for the three-month period ended 31 March 2004. Effective from 1 April 2004, the
Group is required to pay contributions to the CAAC Infrastructure Development
Fund calculated on the basis of the usage of domestic routes and domestic
segments of international routes, geographic area and length of routes and
aircraft weight.
Contributions to the CAAC Infrastructure Development Fund payable by the Group
for the two years ended 31 December 2003 and 2004 amounted to approximately
RMB247 million and RMB353 million, respectively.
5. OTHER OPERATING REVENUES
Group
2004 2003
RMB'000 RMB'000
Bellyhold income 1,384,457 ---
Aircraft engineering income 296,775 285,493
Ground services income 287,905 251,266
General aviation income 159,990 152,574
Air catering income 118,140 102,133
Government grants:
(i) Recognition of deferred income (note 36) 70,593 57,894
(ii) Fixed cash subsidy 37,500 50,000
(iii) Others 44,853 1,525
Service charges on return of unused flight tickets 63,821 51,678
Cargo handling service income 49,850 90,021
Sale of materials 33,008 20,699
Import and export service income 29,767 23,589
Training service income 23,761 17,915
Aircraft and related equipment lease income 11,516 33,519
Gain on disposal of property, plant and equipment, net --- 17,048
Others 73,999 63,391
2,685,935 1,218,745
6. PROFIT FROM OPERATIONS
The Group's profit from operations is arrived at after charging/(crediting):
Group
2004 2003
RMB'000 RMB'000
Repair and maintenance costs 3,608,348 2,804,507
Depreciation (note 16) 3,463,252 3,377,472
Employee compensation costs (note 7) 2,921,322 2,379,102
Minimum lease payments under operating leases:
Aircraft and jet engines 1,071,256 910,134
Land and buildings 187,471 181,984
(Gain)/loss on disposal of property, plant and equipment, net 33,872 (17,048)
Auditors' remuneration 7,206 1,614
Provision for/(write-back of) doubtful debts, net (988) 12,144
Provision for/(write-back of) inventories, net (11,508) 24,090
7. EMPLOYEE COMPENSATION COSTS
Group
2004 2003
RMB'000 RMB'000
Employee compensation costs (including Directors', supervisors' and management's emoluments):
Wages, salaries and social security costs 2,732,927 2,200,916
Retirement benefit costs (note 11) 188,395 178,186
2,921,322 2,379,102
The Group had 26,881 and 25,236 employees as at 31 December 2003 and 31 December
2004, respectively.
8. FINANCE COSTS
Group
2004 2003
RMB'000 RMB'000
Interest expense 1,827,002 2,248,996
Less: Interest capitalised (2,610) (7,830)
1,824,392 2,241,166
Less: Interest income (33,703) (18,803)
Exchange losses, net 54,842 297,042
Gains on fuel derivatives, net (41,036) (169,921)
Dividend income on long-term investments (4,622) (406)
1,799,873 2,349,078
The interest capitalisation rate represented the cost of capital from raising
the related borrowings and it ranged from 5.58% to 5.76% per annum.
9. DILUTION GAINS ON INVESTMENTS
Group
2004 2003
RMB'000 RMB'000
Dilution gain on investment in Air Cargo Business (note 9 (a)) 330,222 ---
Dilution gains on investments in BACL and SWACL (note 9 (b)) 79,915 ---
410,137 ---
Notes:
(a) Pursuant to the Restructuring, the air cargo business and relevant air
cargo assets and liabilities (the ''Air Cargo Business'') were operated and
owned solely by the Group as if it had been directly held by the Group as of 1
January 2003 in accordance with the basis of presentation as set out in note 1
to these financial statements. In 2004, the entire Air Cargo Business was
transferred to Air China Cargo, a 51% owned joint venture of the Company, in the
form of the Company's capital contribution and advance to Air China Cargo.
Subsequent to the transfer of Air Cargo Business to Air China Cargo, the Group's
effective interest in the Air Cargo Business was diluted from 100% to 51% and,
accordingly, a gain on dilution of investment in Air Cargo Business of
approximately RMB330 million arose.
(b) In accordance with the basis of presentation as set out in note 1 to
these financial statements, 60% shareholding interest in Beijing Air Catering
Co., Ltd. (''BACL'') and 75% shareholding interest in Southwest Air Catering
Company Limited (''SWACL'') were deemed to be held by the Group as of 1 January
2003.
During 2004, the Group transferred its entire 60% shareholding interest in BACL
and 60% shareholding interest in SWACL to Fly Top Limited, a wholly-owned
subsidiary of CNAC, for a consideration of RMB294 million and RMB67 million,
respectively.
In addition to the above, the Group also transferred its remaining 15%
shareholding interest in SWACL to Hongkong Southwest Air Catering Limited
(''HKSACL''), the minority shareholder of SWACL, for a consideration of
approximately RMB17 million.
Subsequent to the completion of the above transactions, the Group's effective
shareholding interests in BACL and SWACL were diluted from 60% and 75% to
approximately 41% and 41%, respectively and, accordingly, gains on dilution of
investments in BACL and SWACL aggregating approximately RMB80 million arose.
10. DIRECTORS', SUPERVISORS' AND SENIOR MANAGEMENT'S EMOLUMENTS
Directors' and supervisors' remuneration for the year disclosed pursuant to the
Rules Governing the Listing of Securities on the Hong Kong Stock Exchange and
Section 161 of the Hong Kong Companies Ordinance, is as follows:
Group
2004 2003
RMB'000 RMB'000
Fees 29 ---
Basic salaries, housing benefits, other allowances and benefits in kind 4,279 4,390
Discretionary bonuses 636 508
Pension scheme contributions 43 45
4,987 4,943
The number of Directors and supervisors whose remuneration fell within the
following bands is as follows:
Group
2004 2003
Number of Directors and Number of Directors and
supervisors supervisors
Nil to HK$1,000,000 (RMB1,060,000 equivalent) 13 13
HK$1,500,001 to HK$2,000,000 (RMB2,120,000 1 1
equivalent)
HK$2,000,001 to HK$2,500,000 (RMB2,650,000 1 1
equivalent)
15 15
Fees of approximately RMB29,000 (2003: Nil) are wholly payable to the
independent non-executive Directors. There were no other emoluments payable to
the independent non-executive Directors during the year (2003: Nil).
An analysis of the five individuals whose remuneration was the highest in the
Group was as follows:
Group
2004 2003
Number of individuals Number of individuals
Director 1 1
Supervisor 1 1
Employees 3 3
The emoluments paid to the three non-director, non-supervisor and highest paid
individuals are as follows:
Group
2004 2003
RMB'000 RMB'000
Basic salaries, housing benefits, other allowances and benefits in kind 5,360 4,240
Discretionary bonuses --- 30
Pension scheme contributions 164 180
5,524 4,450
The remuneration of the three highest paid individuals for the year fell within
the following bands:
Group
2004 2003
Number of individuals Number of individuals
HK$1,000,001 to HK$1,500,000 (RMB1,590,000 equivalent) 1 3
HK$1,500,001 to HK$2,000,000 (RMB2,120,000 equivalent) 2 ---
3 3
There was no arrangement under which a Director or a supervisor or any of the
five highest paid individuals waived or agreed to waive any remuneration during
the year (2003: Nil).
There was no emolument paid by the Group to any of the Directors or supervisors
or any of the five highest paid individuals as an inducement to join or upon
joining the Group or as compensation for loss of office during the year (2003:
Nil).
11. RETIREMENT BENEFITS
All of the Group's full-time employees in the PRC are covered by a
government-regulated defined contribution retirement scheme, and are entitled to
an annual pension determined by their basic salaries upon their retirement. The
PRC government is responsible for the pension liabilities to these retired
employees. The Group is required to make annual contributions to the
government-regulated defined contribution retirement scheme at rates ranging
from 15% to 20% of the employees' basic salaries during the year and has no
further obligation for post-retirement benefits in respect of the above. This
defined contribution plan continues to be available to the Group's employees
after the Restructuring. The related pension costs are expensed as incurred.
Prior to the Restructuring, the Group also paid certain supplementary pension
benefits (the ''Supplementary Pension Benefits'') to its employees who retired
before the formation of the Company. Pursuant to the Restructuring, CNAHC has
agreed to assume past payments and future liabilities in respect of the
Supplementary Pension Benefits for those employees who retired before the
formation of the Company for nil consideration. The pension payments relating to
the Supplementary Pension Benefits borne by CNAHC was approximately RMB39
million for the year ended 31 December 2004 (2003: RMB54 million) (note 46). The
Group's employees who retire after the formation of the Company are not entitled
to the Supplementary Pension Benefits. CNAHC has agreed to indemnify the Group
against losses from any claims for the Supplementary Pension Benefits.
Further, the Group implemented an early retirement plan for certain employees in
addition to the benefits under the government-regulated defined contribution
retirement scheme and the Supplementary Pension Benefits described above. The
benefits of the early retirement plan are calculated based on factors including
the remaining number of years of services from date of early retirement to
normal retirement date and the salary amount on the date of early retirement of
the employees. The costs of early retirement benefits were recognised in the
period when employees opted for early retirement. Where the effect of
discounting is material, the amount recognised for early retirement benefits is
the present value at the balance sheet date of the future cash flows expected to
be required to settle the obligation. The increase in the discounted present
value amount arising from the passage of time is included in finance costs in
the income statement.
The expenses attributed to the PRC government-regulated defined contribution
retirement scheme and the early retirement benefits are as follows:
Group
2004 2003
RMB'000 RMB'000
Contributions to PRC government-regulated defined 179,740 154,728
contribution retirement scheme
Early retirement benefits 8,655 23,458
Total (note 7) 188,395 178,186
Forfeited contribution totaling RMB1,579,000 (2003: RMB983,000) was utilised
during the year. At 31 December 2004, the Group had no forfeited contributions
available to reduce its contributions to the pension scheme in future years
(2003: RMB54,000).
12. TAX
According to the PRC Enterprise Income Tax Law, the Company, its subsidiaries,
joint ventures and associates established in the PRC are subject to the
enterprise income tax at a rate of 33% (2003: 33%) on their taxable income.
Hong Kong profits tax has been provided at the rate of 17.5% (2003: 17.5%) on
the estimated assessable profits arising in Hong Kong during the year.
The Group is subject to income tax on an entity basis on profits arising in or
derived from the jurisdictions in which members of the Group are domiciled and
operate. In accordance with an approval document issued by the relevant tax
authorities, the filing of tax returns of the Relevant Businesses and all
wholly-owned PRC-established subsidiaries of the Company prior to its
incorporation on 30 September 2004 was handled by CNAHC on a consolidated group
basis. The share of the income tax liability of the Relevant Businesses and all
wholly-owned PRC-established subsidiaries of the Company prior to its
incorporation was calculated at the applicable tax rate on their profits
determined in accordance with PRC accounting principles and after the relevant
adjustments made under the prevailing PRC Enterprise Income Tax Law as
applicable to domestic enterprises. Such tax was payable to CNAHC which in turn
would settle the tax liability with the relevant tax bureau. Similarly, the net
profit attributable to CNAHC for the period from 1 January 2004 to 30 September
2004 (the date of incorporation of the Company) referred to in note 14 (b) to
these financial statements will be calculated after deducting the amount of
income tax payable to CNAHC, which in turn will settle any tax liability on
profit arisen during that period with the relevant tax bureau.
Following the incorporation of the Company, the Company will settle its tax
liability by itself with the respective tax bureaus.
The determination of current and deferred income tax was based on enacted tax
rates. Major components of income tax charge are as follows:
Group
2004 2003
RMB'000 RMB'000
Current income tax
Current income tax charge
--- Mainland China 398,944 18,313
--- Hong Kong 4,096 154
Deferred income tax
Relating to origination and reversal of temporary differences (note 22) 607,824 33,847
1,010,864 52,314
Share of tax attributable to associates 96,974 37,467
Income tax charge for the year 1,107,838 89,781
A reconciliation of income tax expense applicable to profit before income tax at
the statutory income tax rate in the PRC to income tax expense at the Group's
effective income tax rate, and a reconciliation of the applicable rates (i.e.,
the statutory tax rates) to the effective tax rates, are as follows:
Group
2004 2003
RMB'000 % RMB'000 %
Profit before income tax 3,656,533 178,279
At statutory income tax rate of 33% 1,206,656 33.0 58,832 33.0
Lower income tax rates of other territories (109,440) (3.0) 2,610 1.5
Income not subject to tax (145,333) (4.0) (35,388) (19.8)
Expenses not deductible for tax purposes 155,955 4.3 70,164 39.4
Effect on opening deferred income tax of increase in other territories' income tax --- --- 9,542 5.4
rates
Share of adjustments in income tax of previous periods attributable to associates --- --- (15,979) (9.0)
Tax charge at Group's effective income tax rate 1,107,838 30.3 89,781 50.5
At 31 December 2004, there was no significant unrecognised deferred tax
liability (2003: Nil) for taxes that would be payable on the un-remitted
earnings of certain of the Group's subsidiaries and joint ventures, as the
Directors of the Company do not have intention to remit any significant amount
of earnings to the Company in the foreseeable future.
There are no income tax consequences attaching to the payment of dividends by
the Company to its shareholders.
13. Net Profit ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT
The net profit attributable to equity holders of the parent for the period from
1 October 2004 to 31 December 2004 dealt with in the financial statements of the
Company was approximately RMB1,230 million (note 38).
14. APPROPRIATIONS
Set out below are the details of distributions made by the Company for the two
years ended 31 December 2004:
Group
2004 2003
RMB'000 RMB'000
Carved-out of net assets (note 14 (c)) 39,136 316,153
Dividends paid (note 14 (c)) 29,074 26,690
Distribution to CNAHC (note 14 (a)) 377,550 ---
Distribution to CNAHC (note 14 (b)) 2,025,105 ---
Distribution to CNACG (note 14 (b)) 118,680 ---
Total 2,589,545 342,843
(a) On 21 April 2004, Fly Top Limited, a wholly-owned subsidiary of CNAC,
entered into the following acquisition agreements which were supplemented on 26
April 2004:
(i) a share purchase agreement with Air China International Corporation in
relation to the acquisition of 60% of the equity interest in BACL (''BACL
Agreement'') for a consideration of RMB294 million; and
(ii) a share purchase agreement with Air China International Corporation in
relation to the acquisition of 60% of the equity interest in SWACL (''SWACL
Agreement'') for a consideration of RMB67 million.
On 12 November 2004, all the pre-completion undertakings of BACL Agreement and
SWACL Agreement were completed and these two acquisition agreements were
effective on that date accordingly.
On 20 April 2004, Air China International Corporation entered into a stock
transfer agreement with HKSACL (''HKSACL Agreement''), the minority shareholder
of SWACL, pursuant to which, Air China International Corporation disposed of 15%
of the equity interest in SWACL to HKSACL for a consideration of approximately
RMB17 million. On 12 November 2004, all the pre-completion undertakings of
HKSACL Agreement were completed and this agreement was effective on that date
accordingly.
Immediately after the completion of BACL Agreement, SWACL Agreement and HKSACL
Agreement, the Group's effective shareholding interests in BACL and SWACL were
diluted from 60% and 75% to approximately 41% and 41%, respectively.
As a result of the completion of BACL Agreement, SWACL Agreement and HKSACL
Agreement, the Group made a payment of approximately RMB378 million to CNAHC,
representing the total consideration payable by CNAC and HKSACL for the
acquisitions of the entire shareholding interests held by the Group in BACL and
SWACL pursuant to the Restructuring as set out in note 1 to these financial
statements. This payment has been made to CNAHC and accounted for as a special
distribution to CNAHC by the Company.
(b) In accordance with the (/raster(70%,p)='c04') ''Provisional Regulations
Relating to Corporate Reorganisation of Enterprises and Related Management of
State-owned Capital and Financial Treatment'' notice issued by the Ministry of
Finance (the English title is a direct translation of the Chinese title of the
notice), which became effective from 27 August 2002, and pursuant to the
Restructuring, after the Company's incorporation, the Company is required to
make a distribution to CNAHC, which represents an amount equal to the net profit
attributable to shareholders, as determined based on the audited accounts
prepared in accordance with the accounting principles and the financial
regulations applicable in the PRC (the ''PRC GAAP''), generated during the
period from 1 January 2004 to 30 September 2004 (the date of incorporation of
the Company) by the businesses and operations (excluding those of CNAC)
contributed to the Group by CNAHC after giving effect to relevant necessary
adjustments. The net profit attributable to shareholders mentioned above for the
said period is calculated after deducting the amount of income tax payable to
CNAHC of approximately RMB191,721,000 which in turn will settle the tax
liability on profit arisen during that period with the relevant tax bureau as
detailed in note 12 to these financial statements.
In addition, in accordance with (/raster(70%,p)='c04') ''Provisional Regulations
Relating to Corporate Reorganisation of Enterprises and Related Management of
State-owned Capital and Financial Treatment'' notice issued by the Ministry of
Finance and pursuant to the Restructuring, after the Company's incorporation,
the Company is required to make a distribution to CNACG, which represents an
amount equal to the net profit attributable to shareholders, as determined based
on audited accounts prepared in accordance with the PRC GAAP, generated during
the period from 1 January 2004 to 30 September 2004 (the date of incorporation
of the Company) by the businesses and operations (excluding those directly
contributed by CNAHC) contributed to the Group by the CNAC group, less the 2003
final dividend and 2004 interim dividend amounts already paid by CNAC to CNACG.
(c) The profit distributions made prior to the incorporation of the Company
represent the net assets which have been carved-out and treated as deemed
distributions pursuant to the Restructuring set out in note 1 to these financial
statements and dividends paid during that period.
The rates of dividend and the number of shares ranking for dividends are not
presented in this footnote for those profit distributions made prior to the
incorporation of the Company as such information is not considered meaningful.
Cash dividends to shareholders in Hong Kong will be paid in Hong Kong dollars.
Following the incorporation of the Company, under the PRC Company Law and the
Company's articles of association, net profit after tax as reported in the PRC
statutory financial statements can only be distributed as dividends after
allowance has been made for the following:
(i) Making up prior years' cumulative losses, if any;
(ii) Allocations to the statutory common reserve fund of at least 10% of
after-tax profit, until the fund aggregates 50% of the Company's registered
capital. For the purpose of calculating the transfer to reserves, the profit
after tax shall be the amount determined under the PRC GAAP. The transfer to
this reserve must be made before any distribution of dividends to shareholders.
The statutory common reserve fund can be used to offset previous years' losses,
if any, and part of the statutory common reserve fund can be capitalised as the
Company's share capital provided that the amount of such reserve remaining after
the capitalisation shall not be less than 25% of the share capital of the
Company;
(iii) Allocations of 5% to 10% of after-tax profit, as determined under PRC
GAAP, to the Company's statutory public welfare fund, which will be established
for the purpose of providing for the Company's employees collective welfare
benefits such as the construction of dormitories, canteens and other staff
welfare facilities. The fund forms part of the shareholders' equity as only
individual employees can use these facilities, while the title of such
facilities is held by the Company. The transfer to this fund must be made before
any distribution of dividends to shareholders; and
(iv) Allocations to the discretionary common reserve if approved by the
shareholders.
The above reserves cannot be used for purposes other than those for which they
are created and are not distributable as cash dividends.
In accordance with the articles of association of the Company, the net profit
after tax of the Company for the purpose of dividends payment is based on the
lesser of (i) the net profit determined in accordance with the PRC GAAP; and
(ii) the net profit determined in accordance with IFRS.
Prior to the incorporation of the Company on 30 September 2004, no profit
appropriation to the aforesaid reserve funds was required.
15. EARNINGS PER SHARE
The calculation of basic earnings per share for the year ended 31 December 2004
is based on the net profit attributable to equity holders of the parent for the
year ended 31 December 2004 of approximately RMB2,385,964,000, and the weighted
average of approximately 6,618,795,915 shares in issue during the year on the
assumption that the 6,500,000,000 shares issued as at 30 September 2004 had been
in issue throughout the year ended 31 December 2004, and as adjusted to reflect
the new issue of 2,550,618,182 shares by way of placing and public offering in
connection with the public listing of the Company's H shares on 15 December
2004.
The calculation of basic earnings per share for the year ended 31 December 2003
is based on the net profit attributable to equity holders of the parent for the
year ended 31 December 2003 of approximately RMB159,604,000, and the number of
shares in issue during 2003 on the assumption that the 6,500,000,000 shares
issued as at 30 September 2004 had been in issue throughout the year ended 31
December 2003.
The calculation of diluted earnings per share is based on the net profit
attributable to equity holders of the parent for the year ended 31 December 2004
of approximately RMB2,385,964,000. The weighted average number of ordinary
shares used in the calculation is the 6,618,795,915 shares in issue during the
year, as used in the basic earnings per share calculation and the weighted
average of 556,132 ordinary shares assumed to have been issued at no
consideration on the deemed exercise of all over-allotment options granted to
international underwriters to subscribe for the H shares of the Company during
the year.
Diluted earnings per share for the year ended 31 December 2003 has not been
calculated because no diluting events existed during 2003.
16. PROPERTY, PLANT AND EQUIPMENT
Group
Aircraft Buildings Machinery Transportation Office Construction Total
and flight equipment equipment in progress
equipment
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
At 1 January 2003, net of 38,631,760 2,447,368 930,637 263,866 82,644 519,894 42,876,169
accumulated depreciation
Additions 2,226,754 23,773 102,500 111,797 27,458 580,766 3,073,048
Disposals (80,803) (54,426) (7,052) (2,461) (3,083) --- (147,825)
Transfer from CIP --- 421,311 195,250 --- 610 (617,171) ---
Depreciation charge for the year (2,987,834) (122,486) (169,733) (80,058) (17,361) --- (3,377,472)
At 31 December 2003 and 1 January 37,789,877 2,715,540 1,051,602 293,144 90,268 483,489 42,423,920
2004, net of accumulated
depreciation
Establishment of a joint venture (267,119) (186,169) (86,932) (21,673) --- (3,947) (565,840)
(note 45 (b))
Additions 4,479,459 42,515 109,019 135,909 77,244 734,028 5,578,174
Disposals (424,064) (49,111) (28,705) (7,170) (22,315) --- (531,365)
Transfer from CIP 164,788 285,156 91,393 5,177 206 (546,720) ---
Depreciation charge for the year (3,024,078) (123,071) (172,910) (89,845) (53,348) --- (3,463,252)
At 31 December 2004, net of 38,718,863 2,684,860 963,467 315,542 92,055 666,850 43,441,637
accumulated depreciation
At 31 December 2003 and 1 January
2004
Cost 61,008,650 3,605,551 2,027,910 1,031,027 192,815 483,489 68,349,442
Accumulated depreciation (23,218,773) (890,011) (976,308) (737,883) (102,547) --- (25,925,522)
Net carrying amount 37,789,877 2,715,540 1,051,602 293,144 90,268 483,489 42,423,920
At 31 December 2004
Cost 63,813,626 3,674,146 2,045,002 1,068,502 223,531 666,850 71,491,657
Accumulated depreciation (25,094,763) (989,286) (1,081,535) (752,960) (131,476) --- (28,050,020)
Net carrying amount 38,718,863 2,684,860 963,467 315,542 92,055 666,850 43,441,637
Company
Aircraft Buildings Machinery Transportation Office Construction Total
and flight equipment equipment in progress
equipment
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Transferred to the Company upon 38,595,577 1,858,577 784,743 182,711 76,724 583,635 42,081,967
its incorporation (note 1)
Additions 372,799 --- 25,547 42,916 27,182 308,493 776,937
Disposals (9,216) (32) (31,158) (1,650) (148) --- (42,204)
Transfer from CIP --- 219,934 17,770 176 --- (237,880) ---
Depreciation charge for the (804,864) (23,307) (29,053) (20,021) (31,027) --- (908,272)
period
At 31 December 2004, net of 38,154,296 2,055,172 767,849 204,132 72,731 654,248 41,908,428
accumulated depreciation
At 31 December 2004
Cost 61,842,914 2,820,374 1,520,769 830,178 131,321 654,248 67,799,804
Accumulated depreciation (23,688,618) (765,202) (752,920) (626,046) (58,590) --- (25,891,376)
Net carrying amount 38,154,296 2,055,172 767,849 204,132 72,731 654,248 41,908,428
Certain of the Group's and the Company's bank loans are secured by certain of
the Group's and the Company's aircraft and flight equipment, which has an
aggregate carrying amount of approximately RMB16,586 million as at 31 December
2004 (2003: RMB16,422 million) (note 34).
The carrying amount of aircraft held under finance leases as at 31 December 2004
is approximately RMB11,999 million (2003: RMB13,310 million) (note 33). Leased
assets are pledged as security for the related finance lease liabilities.
As at 31 December 2004, the Group is in the process of applying to obtain the
title certificates of certain of its buildings with an aggregate carrying amount
of approximately RMB2,178 million, further details of which are set out in note
1 to these financial statements. The Directors of the Company are of the view
that the Group is entitled to lawfully and validly occupy and use the
above-mentioned buildings. The Directors of the Company are of the opinion that
the aforesaid matter will not have any significant impact on the Group's
financial position as at 31 December 2004.
17. INTERESTS IN SUBSIDIARIES
Company
2004
RMB'000
Listed shares in Hong Kong, at cost 579,472
Unlisted investments, at cost 134,647
Due from subsidiaries 22,513
Due to subsidiaries (559,703)
176,929
Market value of listed shares 3,161,997
The balances with the subsidiaries are unsecured, interest-free and have no
fixed terms of repayment.
Particulars of the principal subsidiaries at 31 December 2004 are as follows:
Company name Place of Legal Nominal Percentage of Principal activities
incorporation/ status value of equity interests
establishment and paid-up attributable
operations capital to the Company
Direct Indirect
(in
thousands)
Subsidiaries
CNAC Hong Kong Limited HK$331,268 69 --- Investment holding
(/raster(60%,p)='c05') liability
company
Air Macau Company Limited Macau Limited MOP400,000 --- 35.2 Airline operator
(''Air Macau'')* liability
(/raster(60%,p)='c06') company
Air China Group Import and PRC Limited RMB90,000 100 --- Import and export trading
Export Trading Co. (''AIE'') liability
(/raster(60%,p)='c07') company
/raster(60%,p)='c08' PRC Limited RMB20,000 100 --- Provision of airline
(Zhejiang Air Services Co., liability catering and shuttle bus
Ltd.)** company services
Beijing Aviation Passenger PRC Limited RMB3,000 100 --- Provision of passenger
Service Corporation liability transportation services
(/raster(60%,p)='c09') company
Air China Shantou Industrial PRC Limited RMB12,000 51 --- Manufacture and retail of
Development Company liability aircraft supplies
(/raster(60%,p)='c10') company
China National Aviation Air PRC Limited RMB6,980 100 ---
Passenger and Cargo Services liability
Agency Company company
(/raster(60%,p)='c11')
/raster(60%,p)='c12' PRC Limited RMB1,000 100 --- Provision of information
(Sichuan Southwest Aviation liability system consultancy services
Information Service Centre)** company
Beijing Air China Engineering PRC Limited RMB1,500 100 --- Provision of engineering
Technology Development Centre liability consultancy services
(/raster(60%,p)='c13') company
Beijing Civil Aviation Blue PRC Limited RMB5,533 100 --- Provision of travel agency
Sky Air Travel Services liability services
Company company
(/raster(60%,p)='c14')
Sichuan Southwest Air PRC Limited RMB1,000 100 --- Provision of wholesale and
Equipment and Supplies Centre liability retail services
(/raster(60%,p)='c15') company
Air China Development Hong Kong Limited HK$500 95 --- Provision of air ticketing
Corporation (Hong Kong) liability services
Limited company
(/raster(60%,p)='c16')
/raster(60%,p)='c17' PRC Limited RMB2,000 100 --- Provision of ground
(Shanghai Air China Base liability services, air passenger,
Development Centre)** company cargo and consultancy
services
* Air Macau is a 51% subsidiary of CNAC.
** The English names are direct translations of the company's Chinese
names.
The above table lists the subsidiaries of the Company which, in the opinion of
the Directors, principally affected the results for the year ended 31 December
2004 or formed a substantial portion of the net assets of the Group at 31
December 2004. To give details of other subsidiaries would, in the opinion of
the Directors, result in particulars of excessive length.
18. INTERESTS IN JOINT VENTURES
Company
2004
RMB'000
Unlisted investments, at cost 1,392,388
Particulars of the joint ventures at 31 December 2004 of the Group are set out
below:
Company Place of incorporation/ Legal status Nominal value of Percentage of equity Principal activities
name establishment and paid-up capital interests
operations attributable
to the Group
Direct Indirect
(in thousands)
Joint
ventures
AMECO PRC Limited US$102,533 60 --- Provision of aircraft
(/raster liability overhaul and maintenance
(60%,p)= company services
'c18')
Air China PRC Limited RMB2,200,000 51 --- Provision of cargo carriage
Cargo liability services
(/raster company
(60%,p)=
'c19')
(note)
BACL PRC Limited US$8,000 --- 41.4 Provision of airline
(/raster liability catering services
(60%,p)= company
'c20')
SWACL PRC Limited RMB20,000 --- 41.4 Provision of airline
(/raster liability catering services
(60%,p)= company
'c21')
Note: During the year, the Company has reclassified its interest in Air China
Cargo from a subsidiary to a joint venture upon the termination of a discussion
to acquire additional equity interests in Air China Cargo from another joint
venture partner.
As at the balance sheet date and for the two years ended 31 December 2004, the
Group's proportionate share of the assets, liabilities, and the Group's
proportionate share of the revenues and expenses of the joint ventures are as
follows:
Group
2004 2003
RMB'000 RMB'000
Current assets 1,606,903 610,502
Non-current assets 1,706,734 633,369
Total assets 3,313,637 1,243,871
Current liabilities (1,578,665) (728,033)
Non-current liabilities (8,734) ---
Net assets attributable to the Group 1,726,238 515,838
Revenues 3,944,633 959,938
Operating expenses (3,748,389) (848,222)
Finance costs (16,137) (21,919)
Share of profits less losses from associates 1,006 1,111
Profit before tax 181,113 90,908
Tax (51,976) (16,427)
Net profit attributable to the Group 129,137 74,481
As at the date of approval of these financial statements, the Group is in the
process of applying to change the registered shareholder name of certain
investees, including Air China Cargo and AMECO. Further details are set out in
note 1 to these financial statements.
19. INTERESTS IN ASSOCIATES
Group Company
2004 2003 2004
RMB'000 RMB'000 RMB'000
Unlisted shares, at cost --- --- 845,641
Share of net assets 2,587,304 1,789,948 ---
Goodwill 1,404,966 1,205,390 ---
Due from associates 106,520 110,981 17,305
Due to associates (97,269) (38,473) (82,109)
4,001,521 3,067,846 780,837
The balances with the associates are unsecured, interest-free and have no fixed
terms of repayment.
Movements of goodwill are as follows:
Group
2004 2003
RMB'000 RMB'000
Goodwill at beginning of the year (note 19 (a)) 1,205,390 1,205,390
Additions (note 19 (b)) 199,576 ---
Goodwill at end of the year 1,404,966 1,205,390
Accumulated impairment --- ---
Notes:
(a) The goodwill brought forward from 2003 related to the acquisition of
shareholding interests of 35.86% and 7.43% in Hong Kong Dragon Airlines Limited
(''Dragonair'') by CNACG and its then wholly-owned subsidiary, CNAC, in June
1996 and October 1997, respectively. The aggregate goodwill arising from these
two acquisitions was approximately RMB2,130 million and subsequently reduced to
approximately RMB1,205 million through deemed disposal upon the initial public
offering of CNAC and the accumulated amortisation on the straight-line basis
over a period of 20 years until 1 January 2001 (the date of adoption of IFRS 3
by the Group).
(b) The goodwill arose in the current year related to the acquisitions of
effective shareholding interests of 48.0% in Shandong Aviation Group Corporation
(''Shandong Aviation''), 22.8% in Shandong Airlines Co., Ltd. (''Shandong
Airlines'') and 13.9% in LSG Lufthansa Service Hong Kong Limited (''LSGHK'') by
the Group, resulting in an aggregate goodwill amount of approximately RMB200
million.
Impairment testing of goodwill attributable to Dragonair
Goodwill acquired through the business combination in relation to the
acquisition of shareholding interest in Dragonair has been allocated to the
cash-generating unit, Dragonair, within the airline operations segment.
The recoverable amount of Dragonair has been determined based on a value in use
calculation. To calculate this, cash flow projections are based on financial
budgets approved by management covering a one-year period. The discount rate
applied to the cash flow projections beyond the one-year period is 5.0%. No
growth has been projected beyond the one-year period.
Key assumptions used in the value in use calculation of Dragonair
The following describes each key assumption on which management has based its
cash flow projections when undertaking the impairment testing of goodwill
attributable to Dragonair:
Passenger revenues --- the bases used to determine the value assigned to the
budgeted passenger revenues are available seat kilometers, passenger traffic,
passenger load factor and passenger yield. Values assigned to the key
assumptions reflect past experience and are consistent with external information
sources.
Operating expenses --- the bases used to determine the values assigned are staff
headcount, scheduled flight hours, passenger traffic and jet fuel consumption.
Values assigned to the key assumptions reflect past experience and are
consistent with external information sources.
Summarised financial information of the Group's associates is as follows:
Group
2004 2003
RMB'000 RMB'000
Aggregate of associates' financial positions:
Total assets 27,767,944 21,918,291
Total liabilities (20,747,807) (17,215,202)
Aggregate of associates' results:
Revenues 16,770,072 9,639,481
Net profit 1,330,066 639,579
Share of profits less losses after tax from associates:
Dragonair 279,801 43,336
Others 184,243 162,290
464,044 205,626
Particulars of the associates at 31 December 2004 are as follows:
Name Business Place of Percentage of Principal activities
structure incorporation/ equity interests
establishment and attributable
operations to the Group
Shenzhen Airlines (/raster(70%,p)='c22') Corporate PRC 25 Airline operator
Dragonair# (/raster(70%,p)='c23') Corporate Hong Kong 29.9 Airline operator
Shandong Aviation (/raster(70%,p)='c24') Corporate PRC 48 Investment holding
Shandong Airlines (/raster(70%,p)='c25') Corporate PRC 22.8 Airline operator
Sichuan SNECMA Aeroengine Maintenance Corporate PRC 40.3 Provision of maintenance and
Co., Ltd. (/raster(70%,p)='c26') repair services for aircraft
engines
Chengdu Falcon Aircraft Engineering Corporate PRC 35.6 Provision of maintenance and
Service Co., Ltd. repair services for aircraft
(/raster(70%,p)='c27') engines
Yunan Airport Aircraft Maintenance Corporate PRC 40 Provision of maintenance and
Services Co., Ltd. repair services
(/raster(70%,p)='c28')
Macau Aircraft Repair and Conversion Corporate Macau 17.3 Provision of aircraft repair
Company Limited# (/raster(70%,p)='c29') and conversion services
Jardine Airport Services Limited# Corporate Hong Kong 34.5 Provision of airport ground
(/raster(70%,p)='c30') handling services
Menzies Macau Airport Services Limited# Corporate Macau 23.2 Provision of airport ground
(/raster(70%,p)='c31') handling services
Guangzhou Baiyun International Airport Corporate PRC 21 Provision of airport ground
Ground Handling Service Company Limited handling services
(/raster(70%,p)='c32')
/raster(70%,p)='c33' Corporate PRC 40 Provision of airport ground
(Sanya World Trade Development Company handling services
Limited)*
CAAC Data Communications Co., Ltd. (/ Corporate PRC 23.2 Provision of aviation data
raster(70%,p)='c34') communication services
CAAC Cares Chongqing Co., Ltd. Corporate PRC 24.5 Provision of airline-related
(/raster(70%,p)='c35') information system services
/raster(70%,p)='c36' Corporate PRC 35 Provision of airline-related
(Chengdu CAAC Southwest Cares Co., Ltd.) information system services
*
Tradeport Hong Kong Limited# Corporate Hong Kong 17.3 Provision of services for
(/raster(70%,p)='c37') developing and operating
logistics centre
LSGHK# (/raster(70%,p)='c38') Corporate Hong Kong 13.9 Provision of airline
catering services
China National Aviation Finance Co., Corporate PRC 40.7 Provision of financial
Ltd. (''CNAF'') (/raster(70%,p)='c39')** services
# Shareholding interests are held indirectly through subsidiaries of the
Company.
* The English names are direct translations of the company's Chinese
names.
** 30% of the Group's equity interests in CNAF is held directly by the
Company, while the remaining 10.7% is held indirectly through subsidiaries of
the Company.
As at the date of approval of these financial statements, the Group is in the
process of applying to change the registered shareholder name of certain
associates, including Shenzhen Airlines. Further details are set out in note 1
to these financial statements.
20. LONG TERM RECEIVABLE FROM CNAHC
On 30 September 2004, the Company entered into an agreement with CNAHC whereby
CNAHC agreed to assume the obligation to settle an aggregate amount of
approximately RMB757 million, which was recorded by the Group as government
grant receivable as at 31 December 2003 of RMB842 million, consisting of long
term portion and short term portion of RMB764 million and RMB78 million,
respectively. This receivable from CNAHC is unsecured, interest-free and
repayable over eight years commencing from 31 December 2004 by 16 semi-annual
instalments to be made by 30 June and 31 December each year. Pursuant to the
relevant agreement, the first instalment amount of RMB25 million was settled by
31 December 2004 and the final instalment amount of approximately RMB32 million
should be settled by 30 June 2012, with the remaining 14 semi-annual instalment
amounts of RMB50 million each to be settled by 30 June and 31 December each year
between 30 June 2005 and 31 December 2011.
21. OTHER INVESTMENTS
Other investments consist of unlisted equity investments.
22. DEFERRED TAX ASSETS
Group Company
2004 2003 2004
RMB'000 RMB'000 RMB'000
Balance at beginning of year 590,153 624,000 ---
Transferred to the Company upon its incorporation --- --- 660,349
(note 1)
Charge for the year (note 12) (607,824) (33,847) (2,349)
Credited to equity 793,755 --- ---
Balance at end of year 776,084 590,153 658,000
The principal components of the Group's and the Company's deferred income tax
are as follows:
Group Company
2004 2003 2004
RMB'000 RMB'000 RMB'000
Deferred income tax liabilities:
Accelerated depreciation for tax purposes (441,441) (826,000) (426,000)
Differences in air traffic revenues recognition --- (27,000) ---
Other deferred income tax liabilities (47,000) (52,000) (47,000)
Gross deferred income tax liabilities (488,441) (905,000) (473,000)
Deferred income tax assets:
Additional tax deduction on revaluation surplus arising 714,000 --- 606,000
from the Restructuring
Provisions and accruals 384,000 675,000 381,000
Losses available for offset against future taxable income 20,525 685,153 ---
Other deferred income tax assets 146,000 135,000 144,000
Gross deferred income tax assets 1,264,525 1,495,153 1,131,000
Net deferred income tax assets 776,084 590,153 658,000
There was no material un-provided deferred income tax during the year (2003:
Nil).
23. TRADE RECEIVABLES
The Group normally allows a credit period ranging from 30 days to 90 days to its
sales agents and other customers. An aged analysis of the trade receivables, net
of provision for doubtful debts, of the Group and the Company is analysed as
follows:
Group Company
2004 2003 2004
RMB'000 RMB'000 RMB'000
Within 30 days 1,838,756 1,257,040 2,067,875
31 to 60 days 280,382 465,109 102,938
61 to 90 days 152,548 106,603 14,949
Over 90 days 93,130 126,840 11,531
At end of year 2,364,816 1,955,592 2,197,293
Included in the Group's and the Company's trade receivables was the following
amount due from a joint venture:
Group Company
2004 2003 2004
RMB'000 RMB'000 RMB'000
Joint venture 412,539 --- 841,916
24. INVENTORIES
Inventories primarily consist of materials and supplies.
Set out below is the breakdown of materials and supplies:
Group Company
2004 2003 2004
RMB'000 RMB'000 RMB'000
Flight equipment spare parts 680,039 577,478 454,220
Work in progress 38,061 104,338 1,621
Catering supplies 25,188 30,635 13,089
743,288 712,451 468,930
25. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES
Set out below is the breakdown of prepayments, deposits and other receivables:
Group Company
2004 2003 2004
RMB'000 RMB'000 RMB'000
Advance payments for aircraft and related equipment 2,193,458 1,213,380 1,958,515
Advances and others 324,655 191,448 322,047
Manufacturers' credits on aircraft acquisition receivable 74,518 84,935 74,518
Government grant receivable --- 77,338 ---
Prepaid aircraft operating lease rentals 95,681 65,790 79,260
Receivables from the sale of staff quarters 24,681 57,962 24,681
Miscellaneous deposits 395,595 286,510 388,531
3,108,588 1,977,363 2,847,552
26. CASH AND CASH EQUIVALENTS AND PLEDGED DEPOSITS
Group Company
2004 2003 2004
RMB'000 RMB'000 RMB'000
Cash and bank balances 8,635,653 2,147,434 7,888,436
Cash placed with CNAF 261,904 1,457,103 219,655
8,897,557 3,604,537 8,108,091
Time deposits placed with banks 648,667 261,226 94,287
Time deposits placed with CNAF 305,081 --- 300,000
953,748 261,226 394,287
Less: Pledged deposits against
Bank loans (note 34) 64,242 1,177,064 64,242
Finance leases (note 33) 16,277 41,500 16,277
Others* 36,712 26,978 ---
Pledged deposits 117,231 1,245,542 80,519
Cash and cash equivalents (note 45 (a)) 9,734,074 2,620,221 8,421,859
* Includes deposits pledged against the Group's aircraft operating leases
and financial derivatives.
Cash at banks earns interest at floating rates based on daily bank deposit
rates. Time deposits are made for terms of between three days and one year
depending on the immediate cash requirements of the Group and the Company.
27. DUE TO SHAREHOLDERS
Set out below is the breakdown of the amounts due to shareholders:
Group Company
2004 2003 2004
RMB'000 RMB'000 RMB'000
Due to CNAHC 2,137,437 2,968 2,121,533
Due to CNACG 118,680 --- 118,680
2,256,117 2,968 2,240,213
The amounts due to shareholders are unsecured, interest-free and have no fixed
terms of repayment. The amounts mainly represented distributions payable by the
Company as detailed in note 14 to these financial statements.
28. BALANCES WITH OTHER CNAHC GROUP COMPANIES
The balances with other CNAHC group companies are unsecured, interest-free and
have no fixed terms of repayment.
This information is provided by RNS
The company news service from the London Stock Exchange
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