Air China Regulatory News (AIRC)

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AIR CHINA LIMITED

 (a joint stock limited company incorporated in the People's Republic of China with limited liability)

(Stock Code: 00753)

2016 ANNUAL RESULTS

FINANCIAL HIGHLIGHTS:

• In 2016, the Group's total revenue was RMB115,145 million, representing an increase of RMB5,088 million or 4.62% as compared with last year. Among which, air traffic revenue was RMB108,585 million, representing an increase of RMB4,217 million or 4.04% over last year, other operating revenue was RMB6,560 million, representing a year-on-year increase of RMB871 million or 15.31%.

• The Group recorded a profit from operations of RMB17,533 million, representing an increase of RMB1,981 million or 12.74% as compared with last year. However, due to the offset by unfavorable factors including the depreciation of RMB against US dollars and the decrease in gains on investment, profit attributable to equity shareholders of the Company and earnings per share amounted to RMB6,809 million and RMB0.55 respectively, representing a year-on-year decrease of 3.60% and 3.60%, respectively.

• The Board recommends the payment of a cash dividend of RMB1.0771 (including tax) for every ten shares for the year 2016, totalling approximately RMB1,564 million calculated based on the current total issued shares of 14,524,815,185 shares of the Company.

2016 Annual Results

The Board hereby announces the audited consolidated financial results of the Group for the year ended 31 December 2016 together with the corresponding comparative figures for the year ended 31 December 2015 as follows:

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

For the year ended 31 December 2016

(Prepared under International Financial Reporting Standards)

Consolidated statement of profit or loss and other comprehensive income

For the year ended 31 December 2016

(Prepared under International Financial Reporting Standards)

Consolidated statement of financial position

At 31 December 2016

(Prepared under International Financial Reporting Standards)

Notes:

1 Basis of preparation

The Group's financial statements have been prepared in accordance with all applicable International Financial Reporting Standards ("IFRSs"), which collective term includes all applicable individual International Financial Reporting Standards, International Accounting Standards ("IASs") and Interpretations issued by the International Accounting Standards Board ("IASB"). The financial statements also comply with the disclosure requirements of the Hong Kong Companies Ordinance and the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. The financial statements have been approved and authorized for issue by the board of directors on 30 March 2017.

As at 31 December 2016, the Group's current liabilities exceeded its current assets by approximately RMB44,194 million. The liquidity of the Group is primarily dependent on its ability to maintain adequate cash inflows from operations and sufficient financing to meet its financial obligations as and when they fall due. Considering the Company's sources of liquidity and the unutilised bank facilities of RMB134,700 million as at 31 December 2016, the directors of the Company believe that adequate funding is available to fulfil the Group's debt obligations and capital expenditure requirements when preparing the financial statements for the year ended 31 December 2016. Accordingly, the financial statements have been prepared on a basis that the Group will be able to continue as a going concern.

The financial statements have been prepared on a historical cost basis, except for financial instruments classified as available-for-sale or as trading securities and derivatives, which are measured at fair value, and non-current assets held for sale, which are stated at the lower of their carrying amounts and fair value less costs of disposal. The financial statements are presented in Renminbi ("RMB") and all values are rounded to the nearest thousand except when otherwise indicated.

2 Changes in accounting policies

The IASB has issued a number of amendments to IFRSs that are first effective for the current accounting period of the Group. None of these developments have had a material effect on how the Group's results and financial position for the current or prior periods have been prepared or presented.

The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period.

3 Segment information

The Group's operating businesses are structured and managed separately, according to the nature of their operations and the services they provide. The Group has the following reportable operating segments:

(a) the "airline operations" segment which mainly comprises the provision of air passenger and air cargo services; and

(b) the "other operations" segment which comprises the provision of aircraft engineering, ground services and other airline-related services.

In determining the Group's geographical information, revenue is attributed to the segments based on the origin and destination of each flight. Assets, which consist principally of aircraft and ground equipment, supporting the Group's worldwide transportation network, are mainly registered/located in Mainland China. An analysis of the assets 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.

Operating segments

The following tables present the Group's consolidated revenue and profit before taxation regarding the Group's operating segments in accordance with the Accounting Standards for Business Enterprises of the PRC ("CASs") for the years ended 31 December 2016 and 2015 and the reconciliations of reportable segment revenue and profit before taxation to the Group's consolidated amounts under IFRSs:

Year ended 31 December 2016

Year ended 31 December 2015

The following tables present the segment assets of the Group's operating segments under CASs as at 31 December 2016 and 2015 and the reconciliations of reportable segment assets to the Group's consolidated amounts under IFRSs:

Geographical information

The following table presents the Group's consolidated revenue under IFRSs by geographical location for the years ended 31 December 2016 and 2015, respectively:

Year ended 31 December 2016

Year ended 31 December 2015

4 Air traffic revenue

Air traffic revenue represents revenue from the Group's airline operation business. An analysis of the Group's air traffic revenue during the year is as follows:

5 Other operating revenue

6 Profit from operations

The Group's profit from operations is arrived at after charging/(crediting):

7 Finance income and finance costs

An analysis of the Group's finance income and finance costs during the year is as follows:

Finance income

Finance costs

The borrowing costs have been capitalised at a rate of 1.03% - 4.62% per annum (2015: 0.77% - 6.55%).

8 Taxation

Under the relevant Corporate Income Tax Law and regulations in the PRC, except for two branches which are taxed at a preferential rate of 15% (2015: 15%) and a subsidiary which is exempted from the local income tax of the Inner Mongolia Autonomous Region from year 2013 to 2016, all group companies located in Mainland China are subject to a corporate income tax rate of 25% (2015: 25%) during the year. Subsidiaries in Hong Kong and Macau are taxed at corporate income tax rates of 16.5% and 12% (2015: 16.5% and 12%), respectively.

In respect of majority of the Group's overseas airline activities, the Group has either obtained exemptions from overseas taxation pursuant to the bilateral aviation agreements between the overseas governments and the PRC government, or has sustained tax losses in these overseas jurisdictions. Accordingly, no provision for overseas tax has been made for overseas airlines activities in the current and prior years.

9 Dividends

In accordance with the Company's articles of association, the profit after taxation of the Company for the purpose of dividend distribution is based on the lesser of (i) the profit determined in accordance with CASs; and (ii) the profit determined in accordance with IFRSs.

Pursuant to the shareholders' approval at the Annual General Meeting on 30 May 2016, a final dividend of RMB1.0700 (including tax) per ten shares totalling RMB1,400 million in respect of the year ended 31 December 2015 was paid out in 2016.

Pursuant to a resolution passed at the Directors' Meeting on 30 March 2017, a final dividend in respect of the year ended 31 December 2016 of RMB1,564 million (approximately RMB1.0771 (including tax) per ten shares calculated based on number of shares in issue at the date of the Directors' Meeting) was proposed for shareholders' approval at the Annual General Meeting. As the final dividend is declared after the balance sheet date, such dividend is not recognised as a liability as at 31 December 2016.

10 Earnings per share attributable to equity shareholders of the Company

The calculation of basic earnings per share for the year ended 31 December 2016 was based on the profit attributable to ordinary equity shareholders of the Company of RMB6,809 million (2015: RMB7,063 million) and the weighted average of 12,294,896,740 ordinary shares (2015: 12,294,896,740 ordinary shares) in issue during the year, as adjusted to reflect the weighted average number of treasury shares held by Cathay Pacific Airways Limited through reciprocal shareholding.

The Group had no potentially dilutive ordinary shares in issue during both years.

11 Accounts receivable

The Group normally allows a credit period of 30 to 90 days to its sales agents and other customers while some major customers are granted a credit period of up to six months or above. The Group seeks to maintain strict control over its outstanding receivables to minimise credit risk. Overdue balances are reviewed regularly by senior management. In view of the aforementioned and the fact that the Group's accounts receivable relate to a large number of diversified customers, there is no significant concentration of credit risk. The Group does not hold any collateral or other credit enhancements over its accounts receivable balances.

The ageing analysis of the accounts receivable as at the end of the reporting period, net of provision for impairment, is as follows:

12 Accounts payable

The ageing analysis of the accounts payable as at the end of the reporting period is as follows:

Consolidated Income Statement

For the year ended 31 December 2016

(Prepared under the Accounting Standards for Business Enterprises of the PRC)

Consolidated Balance Sheet

At 31 December 2016

(Prepared under the Accounting Standards for Business Enterprises of the PRC)

Effects of differences between IFRSs and CASs

The effects of differences between the consolidated financial statements of the Group prepared under IFRSs and CASs are as follows:

2016 Review

In 2016, while the global economy gradually regained its momentum, China managed to secure a steady economic growth. The demand in the global air passenger market remained strong as China's civil aviation industry continued its double-digit rapid growth, while the global air cargo market remained sluggish and trapped in a challenging operating environment. With the erupting geopolitical events, intensifying industrial competition and constantly appreciating US dollars, the challenges are getting even more severe. Firm and determined, the Group adhered to its guidelines of sound operation and sustainable development as it coped with the changes in the market with proper tactics, expanded its global presence and improved its operational efficiency with strict cost control, resulting in enhanced profitability of its principal businesses and a secured leading position in the industry.

During the reporting period, our capacity measured in ATK reached 33,777 million and RTK reached 23,698 million, representing an increase of 7.69% and 8.67% respectively, over the previous year. We carried 96.6059 million passengers, increased by 7.56% year-on-year. Our cargo and mail volume reached 1.7691 million tonnes, representing a year-on-year increase of 6.29%. Our revenue reached RMB115,145 million, representing a year-on-year increase of 4.62%, while our operating expenses reached RMB97,612 million, increased by 3.29% over the previous year, among which, fuel cost dropped by RMB2,061 million compared with that of last year. Although fluctuations of exchange rate caused an exchange loss of RMB4,234 million, owing to the satisfying profitability in the main business, we still recorded RMB6,809 million of profit attributable to equity shareholders, representing a year-on-year decrease of 3.60%.

In 2016, we introduced 54 aircraft, including 7 new B787-9 passenger aircraft, and phased out 21 aircraft, building up a fleet of 623 aircraft with an average age of 6.36 years. The Company sensibly allocated its capacity relying on its pre-judgment on market demand and concentrated its advantageous resources to support those profitable and crucial routes and those which are making greater contribution to its network, aiming to optimise the overall deployment structure. In response to the changes in the market demand triggered by the adverse factors such as the terrorist crisis in Europe, we sensibly reduced our international flights to the affected countries and relocated our wide-body aircraft to major domestic markets. While maintaining the investment and optimisation efforts at our international operations, we gradually increased our strength in the domestic market, and at the same time, steadily reduced the number of unprofitable routes through fine-tuning of our yield management system, which effectively supported overall yield improvement across all our routes.

Constantly advancing our hub network strategy. The Company launched 45 new routes, both domestic and international, during the year. As the largest carrier between China and Europe, and between China and U.S., our global network coverage has been continuously optimized, with increasingly improved the quality of flight connections and a significant growth of 49% in the volume of connecting passengers between international flights. Concerning our Beijing Hub, we launched the Beijing-Warsaw route while increasing the flight frequency for the Beijing-San Francisco route. Aiming to strengthen our penetration in the "One Belt, One Road" markets, we also launched new routes and increased flight frequency to Turpan and Yinchuan and so on, further enhancing the network influence of our Beijing Hub. As for our Shanghai Hub, we launched a new route to San Jose while optimising the scheduling for the domestic routes to Chengdu, Changchun and Hohhot, aiming to consolidate the status of Shanghai International Gateway. For our Chengdu Hub, we launched a new route to Sydney while increasing the frequency of domestic routes to Ningbo, Lanzhou and Guilin, aiming to reinforce our network structure. For our Shenzhen Hub, we launched an international route to Frankfurt as well as a Shenzhen - Beijing - Los Angeles route, which signified the first step of our international long-distance network coverage from South China.

Transforming and innovating our business models to improve our marketing ability from all aspects. The Company has decided on the path for business model transformation with the focus on frequent fliers, products with ancillary revenue and e-commerce based on the three major leads, i.e. customers, products and channels, in order to enhance its marketing capacity, and to create an air travel lifestyle ecosystem. We rolled out 12 iterative upgrades for our mobile app in respect of technology, service functions, customer experience and marketing capabilities, aiming to promote precise marketing and reinforce our e-commerce platform, which awarded us with a year-on-year increase of 54% in the revenue from our e-commerce platform.

Continuously enhancing our comprehensive service management expertise with the focus on passenger experience improvement. We enriched and innovated the food and beverages served on board to satisfy the changing demands of our customers. In order to improve the baggage transport and passenger transit service, we launched the global baggage query call centre. We established the emergency response mechanism for massive flight delay in Beijing to enhance the synergy with the airports in our main bases. We continued to promote the fast travel services, especially the self-service and online service functions, so as to use new technology to simplify the passenger boarding procedures and effectively enhance the passenger's travel experience.

Focusing on quality and efficiency improvement and strengthening cost control. As our business and operational scale continued to expand, we tried to achieve a year-on-year decrease in our transportation costs through a strict control of large-cost process management and structural cost adjustment. Our efforts in reducing the receivables and inventory met with encouraging results, while our efforts in increasing direct sales and reducing distribution costs were also carried on with remarkable momentum, as a result of which the percentage of our direct sales increased to 40.6% with a further reduction of distribution costs. To cope with the risk of exchange rate fluctuations, the Company adjusted the way it acquired aircraft to keep its interest-bearing US dollar debts under control while adjusting the structure of the debt currency within the permission of national policies, resulting in a significant decrease in its interest-bearing US dollar debts and the proportion thereof, thereby effectively reducing the impact of exchange rate fluctuations.

In 2016, facing a challenging operating environment, Air China Cargo steadily improved the quality of its business operation and achieved sustained profitability. Air China Cargo maintained a sharp sense of the market movements as it constantly adjusted the allocation of transport capacity to ensure that the high-yield areas were prioritised and the overall yield level were enhanced. It also strengthened the coordination of passenger and cargo transport resources, resulting in satisfactory belly space yield. Air China Cargo sustained profit growth in the cargo stations. While consolidating its traditional businesses, Air China Cargo accelerated its cooperation with couriers and e-commerce companies, which laid the foundation for the diversified development.

In 2017, the global economy will maintain its growth at a slow pace, while China will arrive at an important stage of economic "New Normal" in which the consumers' demands will continue to grow and the consumption structure will be upgraded at a faster speed with consumption itself playing a more important role in driving the economic growth. In this stage, the demand for air travel will continue to grow while fluctuations of oil prices and exchange rate as well as geopolitical situation and intensified competition in the industry may impose great challenges on our operation. The Group will continue its efforts to become a "large network airline with international competitive edge" while carrying on its reform, achieving a sound development, innovating marketing capability and consolidating competitive advantages, in order to reward its shareholders and society with better results.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS

The following discussion and analysis are based on the Group's consolidated financial statements and the notes thereto prepared in accordance with the IFRSs and are designed to assist readers in further understanding the information in this announcement and better understanding the financial position and results of operation of the Group as a whole.

PROFIT ANALYSIS

In 2016, the Group proactively responded to changes in the competitive landscape and market demand by adopting various measures such as optimising operational arrangement, enhancing marketing capabilities and strengthening cost management. The Group recorded a profit from operations of RMB17,533 million, representing an increase of RMB1,981 million or 12.74% as compared with last year. However, due to the offset by unfavorable factors including the depreciation of RMB against US dollars and the decrease in gains on investment, profit attributable to equity shareholders of the Company and earnings per share amounted to RMB6,809 million and RMB0.55 respectively, representing a year-on-year decrease of 3.60% and 3.60%, respectively.

REVENUE

In 2016, the Group's total revenue was RMB115,145 million, representing an increase of RMB5,088 million or 4.62% as compared with last year. Among which, air traffic revenue was RMB108,585 million, representing an increase of RMB4,217 million or 4.04% over last year; other operating revenue was RMB6,560 million, representing a year-on-year increase of RMB871 million or 15.31%.

REVENUE CONTRIBUTION BY GEOGRAPHICAL SEGMENTs