Air China Regulatory News (AIRC)

13 Nov 2006 07:00

Air China Ld13 November 2006 The Stock Exchange of Hong Kong Limited takes no responsibility for the contentsof this announcement, makes no representation as to its accuracy or completenessand expressly disclaims any liability whatsoever for any loss whatsoever arisingfrom or in reliance upon the whole or any part of the contents of thisannouncement. AIR CHINA LIMITED (a joint stock limited company incorporated in the People's Republic of China with limited liability) (Stock Code: 753) CONTINUING CONNECTED TRANSACTIONS The Company was granted waivers from strict compliance with the relevantprovisions of the Hong Kong Listing Rules by the Hong Kong Stock Exchange withrespect to certain continuing connected transactions as disclosed in theProspectus. Such waivers will expire on 31 December 2006. After such date, theGroup must re-comply with the relevant provisions of the Hong Kong Listing Rulesin order to continue these continuing connected transactions. On 10 November 2006, the Board approved and ratified the continuing connectedtransactions as set out in this announcement, and the revised annual cap for2006 of certain continuing connected transaction, and annual caps for each ofthe three years ended 31 December 2007, 2008 and 2009. The Company will seekIndependent Shareholders' approval to the Non-exempt Continuing ConnectedTransactions and their respective proposed annual cap for each of the threeyears ended 31 December 2007, 2008 and 2009 in accordance with the Hong KongListing Rules. Except the Non-exempt Continuing Connected Transactions, as each of thePercentage Ratios (other than the profits ratio) of the other continuingconnected transactions (excluding the de minimis continuing connectedtransactions) set out in this announcement, on an annual basis, is higher than0.1% and less than 2.5%, they therefore fall under Rule 14A.34 of the Hong KongListing Rules. Accordingly, these transactions are subject to the reporting andannouncement requirements set out under Rules 14A.45 to 14A.47 of the Hong KongListing Rules, but are exempt from the requirements of independent shareholders' approval under Chapter 14A of the Hong Kong Listing Rules. The Board (including the independent non-executive directors of the Company)considers that the abovementioned continuing connected transactions have beenconducted on normal commercial terms or on terms no less favourable than thoseavailable to independent third parties and were entered into on a continuing andregular basis and in the ordinary and usual course of business of the Company,are fair and reasonable and in the interests of the Company and the Shareholdersas a whole, and that the revised annual cap of 2006 for certain continuingconnected transaction and annual caps for each of the future three years ended31 December 2007, 2008 and 2009 for the abovementioned continuing connectedtransactions are fair and reasonable. A circular containing, among other things, (i) details of the Non-exemptContinuing Connected Transactions; (ii) a letter from an independent financialadviser to the Independent Board Committee and the Independent Shareholderscontaining its advice on the Non-exempt Continuing Connected Transactions; and(iii) the recommendation of the Independent Board Committee in respect of theNon-exempt Continuing Connected Transactions, will be despatched to shareholdersin accordance with the Hong Kong Listing Rules as soon as practicable. 1. INTRODUCTION The Company was granted waivers from strict compliance with the relevantprovisions of the Hong Kong Listing Rules by the Hong Kong Stock Exchange withrespect to certain continuing connected transactions as disclosed in theProspectus. Such waivers will expire on 31 December 2006. After such date, theCompany must re-comply with the relevant provisions of the Hong Kong ListingRules in order to continue these continuing connected transactions. On 10 November 2006, the Board approved and ratified the continuing connectedtransactions as set out in this announcement, the revised annual cap for 2006 ofcertain continuing connected transaction and the relevant annual caps for eachof the three years ended 31 December 2007, 2008 and 2009. The Company will seekIndependent Shareholders' approval to the Non-exempt Continuing ConnectedTransactions and their respective proposed annual caps for each of the threeyears ended 31 December 2007, 2008 and 2009 in accordance with the Hong KongListing Rules. 2. PARTIES AND CONNECTION OF THE PARTIES The Company, whose principal business activity is air passenger, air cargo andairline-related services, has been conducting continuing connected transactionswith the following parties: • China National Aviation Holding Company ("CNAHC") and its associates ("CNAHC Group") CNAHC is a substantial shareholder of the Company and is therefore a connected person of the Company as defined under the Hong Kong Listing Rules. CNAHC is principally engaged in managing the holding company of CNAHC Group and the state-owned assets and equity it holds in various companies; aircraft lease; and aviation equipment maintenance, etc. • China National Aviation Construction and Development Company ("CNACD") CNACD is a wholly-owned subsidiary of CNAHC and is therefore a connected person of the Company as defined under the Hong Kong Listing Rules. CNACD is principally engaged in providing management services for infrastructure construction projects and technology reconstruction projects. • China National Aviation Media and Advertisement Co., Ltd. ("CNAMC") CNAMC is a wholly-owned subsidiary of CNAHC and is therefore a connected person of the Company as defined under the Hong Kong Listing Rules. CNAMC is principally engaged in media and advertising business. • China National Aviation Tourism Company ("CNATC") CNATC is a wholly-owned subsidiary of CNAHC and is therefore a connected person of the Company as defined under the Hong Kong Listing Rules. CNATC is principally engaged in tourism. • China Aircraft Services Limited ("CASL") CASL is a 40%-owned subsidiary of CNACG, which is a substantial shareholder of the Company, and is therefore a connected person of the Company as defined under the Hong Kong Listing Rules. CASL is principally engaged in providing aircraft line maintenance, cabin cleaning and ground support services at Hong Kong International Airport. • China National Aviation Finance Co., Ltd. ("CNAF") CNAF is a 74.89% held subsidiary of CNAHC and is therefore a connected person of the Company as defined under the Hong Kong Listing Rules. CNAF is principally engaged in providing financial services to the members of CNAHC Group. • Lufthansa and its associates ("Lufthansa Group") Lufthansa Group holds 40% equity interest in and is a substantial shareholder of Aircraft Maintenance and Engineering Corporation ("Ameco"), a subsidiary of the Company, and is therefore a connected person of the Company under the Hong Kong Listing Rules. Lufthansa is principally engaged in passenger traffic, logistics, MRO Services, catering, leisure travel and etc. • Capital Airports Holding Company and its associates ("Beijing Capital Airports Group") Capital Airports Holding Company holds 24% equity interest in and is a substantial shareholder of Air China Cargo, a subsidiary of the Company, and therefore is a connected person of the Company under the Hong Kong Listing Rules. Beijing Capital Airports Group is principally engaged in both aeronautical and non-aeronautical businesses at the Beijing Capital Airport. • Cathay Pacific Airways Limited ("Cathay Pacific") and its associates ("Cathay Pacific Group") Cathay Pacific holds approximately 17.3% of the total issued share capital of the Company and therefore is a connected person of the Company under the Hong Kong Listing Rules. Cathay Pacific is principally engaged in the operation of scheduled passenger and cargo airline services, principally to and from Hong Kong. 3. DE MINIMIS CONTINUING CONNECTED TRANSACTIONS 3.1 Media and Advertising Services The Company entered into a media and advertising services framework agreement(the "Advertising Services Framework Agreement") and a supplemental agreementthereto on 1 November 2004 and on 10 November 2006, respectively, with CNAMC. Description of transaction: Pursuant to the Advertising Services FrameworkAgreement and the supplemental agreement thereto, CNAMC will have the right toprocure advertisements and to retain all advertising revenues generated fromsuch advertisements that appear: • in the in-flight magazines, in-flight entertainment programmes, boarding passes and certain other items specified in the Advertising Services Framework Agreement (the "Specified Items"); and • on the potential items that may be developed from time to time (the "Potential Items"). As a consideration, CNAMC will pay the Company an annual concession fee for theSpecified Items and 20% of the total revenues generated from advertisementsappearing on the Potential Items. CNAMC has also agreed to: • according to the annual budget of the Company, provide the Company at nil charge with the in-flight items (except for in-flight entertainment programmes) and the Potential Items (for those not owned by the Company) on which the advertisements appear or will appear; • provide the Company with some in-flight entertainment programmes produced by it, the production cost and expense of which will be reimbursed by the Company; and • procure contents for the Company's in-flight entertainment programmes from independent third parties on a commission-free basis. In addition, CNAMC has the right to bid for advertisement agency and designservices to the Company. The Advertising Services Framework Agreement will expire on 31 December 2006 andas provided in its supplemental agreement, among others, its term has beenextended to 31 December 2009. Reasons for such transaction: The Directors believe that it is in the bestinterest of the Company to enter into above transaction with CNAMC because: • media and advertising business is not the core competency of the Company while CNAMC has extensive experience in in-flight advertising operation and has a proven network of advertising sponsors to draw upon; and • CNAMC has a better understanding of the culture of the Company than independent third party service providers, thus the in-flight magazines provided by CNAMC, the in-flight entertainment programs procured by CNAMC and advertisement designed by CNAMC can better fit the Company's public relationship strategy. Historical caps and amounts: The annual cap of the aggregate amount to be paid by CNAMC to the Company foreach of the three years ended December 31 2006 are RMB23 million, RMB24.7million and RMB26.6 million, respectively. The aggregate annual amount paid byCNAMC to the Company for each of the two years ended 31 December 2004 and 31December 2005 were approximately RMB4.3 million and RMB18.7 million,respectively. De Minimis Continuing Connected Transaction: The maximum aggregate annual amount to be paid by CNAMC under the AdvertisingServices Framework Agreement for each of the three years ended 31 December 2007,2008 and 2009 are expected to fall below the de minimis threshold as stipulatedunder Rule 14A.33(3) of the Hong Kong Listing Rules, therefore such transactionwill be exempt from the announcement and independent shareholders' approvalrequirement for connected transactions. 3.2 Continuing Connected Transactions with Cathay Pacific Group Description of transaction: The Company has entered into various transactionswith Cathay Pacific Group in the ordinary course of its business. Suchtransactions, which constitute an essential part of the daily operations of anairline business, include, among others: • provision of ground handling services by the Cathay Pacific Group to the Company; • provision of MRO Services by the Company to the Cathay Pacific Group; • provision of catering services by the Company to the Cathay Pacific Group; and • mutual provision of ticket sales agency services. The above transactions have been entered into on normal commercial terms basedon arm's length negotiations. Reasons for the transaction: The Company has entered into various transactionswith Cathay Pacific Group in the ordinary course of the Company's business. Historical caps and amounts: The annual cap of the aggregate amount to be paid by the Company to the CathayPacific Group for each of the three years ended December 31 2006 are RMB35million, RMB40 million and RMB45 million, respectively. The aggregate annualamount paid by the Company to Cathay Pacific Group for each of the two yearsended 31 December 2004 and 31 December 2005 were approximately RMB10.9 millionand RMB20.14 million, respectively. De Minimis Continuing Connected Transaction: The maximum aggregated annual amount to be paid by the Company to Cathay PacificGroup and that to be paid by Cathay Pacific Group to us for the abovetransactions for each of the three years ended 31 December 2007, 2008 and 2009are expected to fall below the de minimis threshold as stipulated under Rule14A.33(3) of the Hong Kong Listing Rules, therefore such transactions will beexempt from the announcement and independent shareholders' approvalrequirement for connected transactions. 4. CONTINUING CONNECTED TRANSACTIONS EXEMPT FROM THE INDEPENDENT SHAREHOLDERS' APPROVAL REQUIREMENTS 4.1 Construction Project Management Services The Company entered into a construction project management agreement (the "Construction Project Management Agreement") and a supplemental agreementthereto with CNACD on 1 November 2004 and on 10 November 2006, respectively. Description of transaction: Pursuant to the Construction Project ManagementAgreement and the supplemental agreement thereto: • CNACD will provide the Company project management services on projects involving the construction of any property or industrial plant/facility with budgeted costs of RMB20 million or above; • in return for its project management services, the Company shall pay CNACD a fee of up to 2% of the construction budget if the total budget of the project is RMB1 billion or more, and up to 2.5% if the total amount of the project is below RMB1 billion; • if the actual settlement price of the project managed by CNACD is higher than the total budget of the project agreed upon in the contract, CNACD will pay the Company the difference between the actual settlement price and the total budget of the project agreed upon in the contract, unless the difference is caused by (i) a change of government policies; (ii) factors attributed to the Company; or (iii) force majeure; and • if CNACD acquires land relating to a project on the Company's behalf, the Company will pay CNACD an agency fee of up to 2% of all the fees and expenses in relation to the land acquisition (including, among other things, land acquisition fee, formality fee, labour expenses and travelling expenses, but excluding land premium). The Construction Project Management Agreement will expire on 31 December 2006and as provided in its supplemental agreement, among others, its term has beenextended to 31 December 2009. Reasons for such transaction: It is customary to engage construction projectmanagement services provider for complex construction projects. The outsourcingof project management services allows the Company to focus on its core businessoperation. Since CNACD possesses aviation industry related experience andknowledge, which is not generally available from independent third partyservices providers, the Directors believe it is desirable to engage CNACD asproject manager by entering into such transaction. Historical Amounts and Proposed Caps: The management fee paid by the Company to CNACD for each of the two years ended31 December 2004 and 31 December 2005 and the first six months of 2006 were nil,approximately RMB1.18 million and RMB1.17 million, respectively. It is proposed that the maximum annual aggregate amount of the constructionproject management fee payable by the Company to CNACD for each of the threeyears ended 31 December 2007, 2008, 2009 will not exceed the annual limit ofRMB40 million, RMB30 million and RMB30 million, respectively. Transaction Historical Caps Historical Figures Future Caps Annual Annual Annual Actual Actual Unaudited Estimated Annual Annual Annual cap cap cap annual annual historical annual cap cap cap for the for the for the amount amount amount amount for the for the for the year year year for for the for the for the year year year ended ended ended the year period year ended ended ended ended 31 Dec 31 Dec 31 Dec year ended from 2004 2005 2006 ended 31 Dec 1 Jan to 31 Dec 2006 31 Dec 31 Dec 31 Dec 31 Dec 2005 30 Jun 2007 2008 2009 2004 2006 Construction RMB40 RMB40 RMB40 Nil RMB1.18 RMB1.17 RMB2 RMB40 RMB30 RMB30project million million million million million million million million millionmanagement fee Basis for such caps: In arriving at the above caps, the Directors considered particular situation ofcertain construction projects and the construction schedule of these projects inthe coming three years. In the past more than two years, the management fee the Company paid to CNACDwas low because: • In 2005 and 2006, the Company commissioned CNACD to provide project management service for the construction projects including the Air China part of the T3 terminal building in Beijing ("T3 Terminal") and aircrew office building of Zhejiang (branch) company ("Zhejiang Project"). As the T3 Terminal has not entered the construction stage yet, there was no management fee incurred for it. As for the Zhejiang Project, some management fee was incurred, but as the Company is strictly following the payment schedule based on the progress of construction, some management fee will be paid at the end of 2006; and • due to the prolonged construction designing and relevant PRC planning authorities' examination and approval procedures, in the past three years, construction of relatively few projects has been started and therefore the Company did not paid much construction management fee. However, with the continuing growth of our operation scale, our infrastructureconstruction will concentrate in the future three years, in particular, 2007 and2008, to reach a peak. Among the projects, whose construction term covers thefuture two or three years, are the stay-over building in Guangzhou, the aircrewoffice building in Chongqing, aircrew office building in Chengdu, the aircraftmaintenance center in Shanghai, warehouse project in Tianjin, T3 Terminal inBeijing and etc. The total budgeted amount of the above projects is about RMB4.3billion and the estimated budgeted amount for each of the future three years isapproximately RMB1.62 billion, RMB1.66 billion and RMB1.04 billion,respectively. Given the fact the Company may not be able to have full controlover the development process of certain large construction projects due tovarious reasons, the Company has considered the possibility that large amount ofcapital expenditure may be incurred within one single year. 4.2 Property Leasing The Company entered into a properties leasing framework agreement (the "Properties Leasing Framework Agreement") and a supplemental agreement theretowith CNAHC on 1 November 2004 and 10 November 2006, respectively. Description of transaction: Pursuant to the Properties Leasing FrameworkAgreement and the supplemental agreement thereto, the Company will lease fromCNAHC 16 properties covering an aggregate gross floor area of approximately59,318.88 sq.m. for various uses including as business premises, offices andstorage facilities. The Company will lease to the CNAHC Group a total of 6 properties covering anaggregate gross floor area of approximately 7,996.55 sq.m. for various usesincluding as business premises and offices. The rent payable under the Properties Leasing Framework Agreement currently is,and will continue to be determined in accordance with the relevant PRCregulations or market rates. In principle, the annual increase in rental ratewill not exceed 5%. The Properties Leasing Framework Agreement will expire on 31 December 2006 andas provided in its supplemental agreement, among others, its term has beenextended to 31 December 2009. Reasons for such transaction: In the ordinary course of business, the Companyhas entered into similar property leasing transactions with various partiesincluding both connected persons and independent third parties. Historical Amounts and Proposed Caps: The aggregate amount of rent paid by the Company to CNAHC for each of the twoyears ended 31 December 2004 and 31 December 2005 and the first six months of2006 were approximately RMB16.99 million, RMB29.89 million and RMB26.55 million,respectively. It is proposed that the maximum annual aggregate amount of rent payable by theCompany to CNAHC for each of the three years ended 31 December 2007, 2008, 2009will not exceed the annual limit of RMB55 million, RMB60 million and RM70million, respectively. The maximum annual aggregate amount of the rent payable by CNAHC to the Companyfor each of the next three years ended 31 December 2007, 2008 and 2009 areexpected to fall below the de minimis threshold as stipulated under Rule 14A.33(3) of the Hong Kong Listing Rules, therefore such transaction will be exemptfrom the announcement and independent shareholders' approval requirements forconnected transactions. Transaction Historical Caps Historical Figures Future Caps Annual Annual Annual Actual Actual Unaudited Estimated Annual Annual Annual cap cap cap annual annual historical annual cap cap cap for the for the for the amount amount amount amount for the for the for the year year year for the for the for the for the year year year ended ended ended year year period year ended ended ended ended 31 Dec 31 Dec 31 Dec ended ended from 31 Dec 31 Dec 31 Dec 2004 2005 2006 31 Dec 31 Dec 1 Jan to 31 Dec 2006 2007 2008 2009 2004 2005 30 Jun 2006 Rent paid by RMB47.6 RMB50 RMB52.5 RMB16.99 RMB29.89 RMB26.55 RMB48.73 RMB55 RMB60 RMB70us to CNAHC million million million million million million million million million millionunder thePropertiesLeasingAgreement Basis for such caps: In arriving at the above caps, the Directors have considered the historicalfigures for the property leasing and taken into account the possibility that themarket price for rents of relevant properties will be increasing at an annualrate of 5%, and the potential increase in the floor area of properties leased bythe Company from CNAHC. As of to date, the properties leased by the Company from CNAHC and itssubsidiaries cover a floor area of 59,318 sq.m., representing an increase offloor area of approximately 6,200 sq.m. compared to the period from 2004 to2005. In 2006, three newly leased properties, i.e. Zhejiang Jiaoyun Building,Sanliting aircrew boarding house in Hangzhou and a ticketing office at Chengdu,were added to the properties leased by the Company. Considering the risingrental rate of properties in the PRC, and the coming 2008 Beijing Olympic Gamesand other factors, the Directors expect that the rental payment will continue torise in the next three years. Additionally, the construction of the Xi'nanAir China Building, which is owned by CNAHC, is almost finished. After that, thegross floor area of properties leased from CNAHC will increase. 4.3 Tourism Co-operation Services The Company entered into a tourism services cooperation agreement (the "Tourism Cooperation Agreement") and a supplemental agreement thereto withCNATC on 1 November 2004 and on 10 November 2006, respectively. Description of transaction: Pursuant to the Tourism Cooperation Agreement andthe supplemental agreement thereto, the Company has agreed to provide thefollowing services to CNATC: • Commercial charter flight services: the Company will provide charter (including charter flight route) services to customers procured by CNATC at market rates. • Package tours co-operation services: the Company and CNATC will sell package tours combining (i) the Company's airline tickets with (ii) accommodation at hotels owned and operated by CNATC. For the airline tickets in such packages sold by CNATC, CNATC will pay the Company in accordance with the pricing principle under the "Sales Agency Framework Agreement" while the Company will pay CNATC for the hotel fee portion of the packages. • Reciprocal frequent-flyer programme ("FFP") co-operation services: CNATC will join the Company's FFP under which our Companion card members are encouraged to stay at CNATC's hotels by receiving mileage credits for such stay. As consideration, CNATC will pay us the equivalent value represented by those mileage credits. Pursuant to the Tourism Cooperation Agreement, CNATC agreed to provide thefollowing services to the Company: • FFP co-operation services: under the FFP, if our Companion card members redeem their mileage credits for free, discounted or upgraded stay at CNATC's hotels, the Company will reimburse CNATC for such redemption at a price similar to our arrangements with other FFP partners. • Hotel accommodation services: CNATC will provide hotel accommodation services to the Company's employees on duty and passengers affected by our flight delays or cancellations, for which services the Company will pay relevant fees to CNATC at group rates. • Aviation tourist services with special features including but not limited to a newly launched service of ground transportation for passengers of two classes. The Tourism Co-operation Agreement will expire on 31 December 2006 and asprovided in its supplemental agreement, among others, its term has been extendedto 31 December 2009. Reasons for the transaction: In the ordinary course of business, the Company hasentered into similar transactions with various parties including both connectedpersons and independent third parties. CNATC is a resourceful and well-knowntourism corporation with outstanding competency in air tourism. Tourismcooperation with CNATC enables both CNATC and the Company to fully leverage ontheir advantages to achieve better operating performance. Historical Amounts, Revised Cap and Proposed Caps: The annual aggregated amount paid by CNATC to the Company for each of the twoyears ended 31 December 2004 and 31 December 2005 and the first six months of2006 were approximately RMB6.74 million, RMB16.16 million and RMB25.81 million,respectively. The Directors have been monitoring the Company's continuing connectedtransactions. Due to the launch of charter flight route business and based oninternal estimate of the annual transaction amount of 2006, the Directors notethat the existing cap for 2006 for tourism cooperation with CNATC will not besufficient for the Company's current requirement and therefore propose thatthe existing cap, i.e. RMB40.4 million, be revised to be RMB51 million. It is proposed that the aggregate amount to be paid by CNATC to the Company fortourism cooperation for each of the three years ended 31 December 2007, 2008 and2009 will not exceed the annual limit of RMB59.20 million, RMB69.04 million, andRMB80.84 million, respectively. The maximum aggregate annual amount to be paid by the Company to CNATC fortourism cooperation for each of the three years ended 31 December 2007, 2008 and2009 are expected to fall below the de minimis threshold as stipulated underRule 14A.33(3) of the Hong Kong Listing Rules, therefore such transaction willbe exempt from the announcement and independent shareholders' approvalrequirement for connected transactions. Transaction Historical Caps Historical Figures Future Caps Annual Annual Annual Actual Actual Unaudited Estimated Revised Annual Annual Annual cap cap cap annual annual historical annual annual cap cap cap for the for the for the amount amount amount amount cap for the for the for the year year year for the for the for the for the for the year year year ended ended ended year year period year year ended ended ended 31 Dec 31 Dec 31 Dec ended ended from ended ended 31 Dec 31 Dec 31 Dec 2004 2005 2006 31 Dec 31 Dec 1 Jan to 31 Dec 31 Dec 2007 2008 2009 2004 2005 30 Jun 2006 2006 2006 Amount to be RMB30.8 RMB35.6 RMB40.4 RMB6.74 RMB16.16 RMB25.81 RMB51 RMB51 RMB59.2 RMB69.04 RMB80.84paid by million million million million million million million million million million millionCNATC tous under the TourismCo-operationServicesAgreement Basis for such caps: In arriving at the above caps, the Directors have considered the historicalfigures for the same transactions and have taken into account the positiveprospects of such transactions. Since early 2006, the Company cooperated with CNATC to offer commercial charterflight route services to CNATC for the less popular routes, i.e. the routebetween Beijing and Xilin Haote as well as that between Beijing and Mianyang.Under such cooperation, the two flight routes are chartered to CNATC. In otherwords, all the flights on the two flight routes are chartered to CNATC. Suchcooperation model has substantially increased the amount paid by CNATC to us. From January 2006 to September 2006, CNATC paid us approximately RMB28million for charter flight route service. Such revenue is expected to reach upto approximately RMB41 million in total for 2006. Accordingly, the revenuegenerated from FFP cooperation services as well as the package toursco-operation services also have a substantial growth. Such revenue generated in2006 is estimated to be not more than RMB10 million. Accordingly the estimatedannual transaction amount for 2006 will be approximately RMB51 million. The Company and CNATC intend to further strengthen their cooperation in respectof the charter flights available for the less popular routes. The Companyexpects to enjoy a revenue growth in the next three years for furtherimprovement of the operation of the said two charter flight routes and thepotential cooperation opportunities emerging from the addition of extra lesspopular routes. Based on the projection that the revenue generated from charterflight cooperation during 2007 and 2009 is expected to achieve an annual growthof 20%, the number of frequent flyers will also be further increased.Accordingly, the revenue generated from its FFP cooperation services as well asthe package tours co-operation services is also expected to have a continuousgrowth. 4.4 Comprehensive Services The Company entered into a comprehensive services agreement (the "Comprehensive Services Agreement") and a supplemental agreement thereto withCNAHC on 1 November 2004 and on 10 November 2006 respectively. Description of transaction: pursuant to the Comprehensive Services Agreement andthe supplemental agreement thereto: • CNAHC will provide the Company with various ancillary services, including but not limited to: (i) catering service; (ii) supply of various items for in-flight services; (iii) manufacturing and repair of airline-related ground equipment and vehicles; (iv) cabin decoration and equipment; (v) passenger cabin and cargo cabin ancillary parts (including seats); (vi) warehousing services; (vii) in-flight articles cleaning services; and (viii) printing of air tickets and other documents. • The Company will provide certain welfare-logistics services to the retired employees of CNAHC and its subsidiaries. The charges payable by the Company to CNAHC for the comprehensive services aboveshall be based on prevailing market rate or, if no prevailing market rate isavailable, fair and reasonable price determined after arm's lengthnegotiation. The management charges payable by CNAHC to the Company for thewelfare-logistics services provided to its retired employees shall be settled ata rate of 4%. Such charges relating to retired employees shall be appropriatedto the Company before the quarter for making such payment. The Comprehensive Services Agreement will expire on 31 December 2006 and asprovided in its supplemental agreement, among others, its term has been extendedto 31 December 2009. Reasons for the transaction: For the services to be provided by CNAHC, theDirectors believe that CNAHC has special strengths that independent parties donot possess, including (1) knowledge of the aviation industry; (2) a proventrack record of quality and timely service; and (3) the site where services areprovided by CNAHC are generally near to the site of the Company and thereforethe ability to offer efficient services. In light of these factors, theDirectors believe that it is in the best interest of the Company to enter intoabove transactions with CNAHC. Historical Amounts and Proposed Caps: The annual aggregated amount paid by the Company to CNAHC for each of the twoyears ended 31 December 2004 and 31 December 2005 and the first six months of2006 were approximately RMB92.80 million, RMB91.20 million and RMB39 million,respectively. It is proposed that the total amount to be paid by the Company to CNAHC underthe Comprehensive Services Agreement for each of the three years ended 31December 2007, 2008 and 2009 will not exceed the annual limit of RMB80 million,RMB90 million and RMB100 million, respectively. For each of the three years ended 31 December 2007, 2008 and 2009, the totalannual amount to be paid by CNAHC to the Company for the provision ofwelfare-logistics services to the retired employees is expected to fall belowthe de minimis threshold as stipulated under Rule 14A.33(3) of the Hong KongListing Rules, therefore such transaction will be exempt from the announcementand independent shareholder approval requirement for connected transactions. Transaction Historical Caps Historical Figures Future Caps Annual Annual Annual Actual Actual Unaudited Estimated Annual Annual Annual cap cap cap annual annual historical annual cap cap cap for the for the for the amount amount amount amount for the for the for the year year year for the for the for the for the year year year ended ended ended year year period year ended ended ended 31 Dec 31 Dec 31 Dec ended ended from ended 31 Dec 31 Dec 31 Dec 2004 2005 2006 31 Dec 31 Dec 1 Jan to 31 Dec 2007 2008 2009 2004 2005 30 Jun 2006 2006 Amount to be RMB100 RMB115 RMB132 RMB92.80 RMB91.20 RMB39 RMB75 RMB80 RMB90 RMB100paid by us to million million million million million million million million million millionCNAHC undertheComprehensiveServicesAgreement Basis for such caps: In arriving at the above caps, the Directors have considered the historicalfigures for the same transaction and have taken into account the expected growthof the Company's air passenger services in the next few years. On the one hand, there were decreasing transaction amounts recorded in the pastthree years, which were mainly due to the restructuring and streamlining ofenterprises that provided services to the Company and the disposal of interestsin such enterprises by CNAHC Assets Management Company (the Assets ManagementCompany). As at the end of 2006, the number of affiliates of Assets ManagementCompany has been reduced by four. On the other hand, in 2005, the transaction amount relating to the in-flightcatering services accounted for approximately 60% of those of the comprehensiveservices. As the number of flights is growing, it is expected that the cateringbusiness of the affiliated enterprise of the Assets Management Company, i.e.Zhejiang Zhongyu, will also be increased in the future. Accordingly, theprojected transaction amounts will increase from 2007 to 2009. 4.5 Line Maintenance and Other Ground Services The Company entered into a standard ground handling agreement (the "StandardGround Handling Agreement") with CASL on 17 April 2004, which has a term of oneyear and is subject to renewal and the latest renewal was done in January 2006and the renewed term is still one year. Description of transaction: CASL provides line maintenance and other groundservices at Hong Kong International Airport to the Company. The services arecharged at market rates. Reasons for the transaction: CASL had been providing such services to theCompany prior to the restructuring for the Company's initial public offeringin 2004 and the Company will continue to require such services. Historical Amounts and Proposed Caps: The aggregated amount paid by the Company to CASL for each of the two yearsended 31 December 2004 and 31 December 2005 and the first six months of 2006were approximately RMB23.7 million, RMB29.15 million and RMB14.32 million,respectively. It is proposed that the maximum annual aggregate amount payable by the Companyto CASL for the line maintenance and other ground services for each of the threeyears ended 31 December 2007, 2008 and 2009 will not exceed the annual limit ofRMB45 million, RMB50 million and RMB55 million, respectively. Transaction Historical Caps Historical Figures Future Caps Annual Annual Annual Actual Actual Unaudited Estimated Annual Annual Annual cap cap cap annual annual historical annual cap cap cap for the for the for the amount amount amount amount for the for the for the year year year year year year ended ended ended for the for the for the for the ended ended ended 31 Dec 31 Dec 31 Dec year year period year ended 31 Dec 31 Dec 31 Dec 2004 2005 2006 ended ended from 31 Dec 2007 2008 2009 31 Dec 31 Dec 1 Jan to 2006 2004 2005 30 Jun 2006 Amount to be RMB40 RMB45 RMB50 RMB23.7 RMB29.15 RMB14.32 RMB33 RMB45 RMB50 RMB55paid by million million million million million million million million million millionus to CASLunder theStandardGroundHandlingAgreement Basis for such caps: In arriving at the above caps, the Directors have considered the historicalfigures for the same transaction and the high speed of growth of transactionamounts in recently years, and have also taken into account the possibleincrease in the Company's demand for the line maintenance and other groundservices including some new services at the Hong Kong International Airportalong with the increasing demand for the Company's passenger services in thenext few years. In addition, due to the rapid business growth of the Company, our fleet size hasbeen growing very fast. The number of aircraft operated by the Company at theend of 2004, 2005 and the first six months of 2006 amounted to 151, 176 and 192,respectively. In 2006, purchase agreements in respect of the purchase of 49aircrafts in total were executed. There will be more flights to Hong Kong thatwill increase relevant ground service charges. Besides, there is a possibility that 3% Goods and Service Tax will be charged bythe Government of Hong Kong Special Administrative Region, which may or may notbe approved in the future. Locally, Hong Kong has continued to sufferinflationary pressure with Consumer Pricing Index rising to 2.3% for the monthof July 2006. All these factors will probably lead to the increase of theservice charges to be paid by the Company to CASL. 4.6 Sales Agency Services for Airline Tickets and Cargo Space The Company entered into a sales agency framework agreement (the "SalesAgency Services Framework Agreement") and a supplemental agreement thereto withCNAHC on 1 November 2004 and on 10 November 2006, respectively. Description of transaction: Pursuant to the Sales Agency Services FrameworkAgreement and the supplemental agreement thereto, certain associates of CNAHCacting as the Company's sales agents will: • purchase air tickets and cargo spaces from the Company at wholesale prices and resell such air tickets and cargo spaces to end-purchasers; or • procure purchasers for the Company's air tickets and cargo spaces on a commission basis. The Company will pay the relevant agency commission based on relevant PRCregulations or, where the regulations do not provide a specific commission,based on market rates. Currently, the commissions prescribed for sales of airtickets are as follows: • for domestic routes, 3% of the ticket price; • for Hong Kong and Macau routes, 7% of the ticket price; and • for international routes, 9% of the ticket price. In accordance with industry practice, and subject to applicable regulations, theCompany may also offer incentives to sales agents for reaching certain ticketsale targets. The Sales Agency Services Framework Agreement will expire on 31 December 2006and as provided in its supplemental agreement, among others, its term has beenextended to 31 December 2009. Reasons for the transaction: The Company has entered into similar transactionswith various parties including both connected persons and independent thirdparties in its ordinary course of business. The agency companies of CNAHC haverich experience and sizable customer base in air transportation agency business. Historical Amounts and Proposed Caps: The annual aggregate sales agency commission and amount of incentive paid by theCompany to CNAHC Group for each of the two years ended 31 December 2004 and 31December 2005 and the first six months of 2006 were approximately RMB25.91million, RMB34.74 million and RMB19.18 million, respectively. The annualaggregate sales of airline tickets and cargo space to CNAHC Group for on-sale toend-users for each of the two years ended 31 December 2004 and 31 December 2005and the first six months of 2006 were approximately RMB218.4 million, RMB232.83million and RMB103.71 million, respectively. It is proposed that the maximum annual aggregate amount of sales agencycommission and amount of incentive to be paid by the Company to CNAHC Group foreach of the three years ended 31 December 2007, 2008 and 2009 will not exceedthe annual limit of RMB63 million, RMB75.60 million, and RMB90.72 million,respectively; and that the annual aggregate sales of airline tickets and cargospace to CNAHC Group for on-sale to end-users for each of the three years ended31 December 2007, 2008 and 2009 will not exceed the annual limit of RMB357million, RMB408 million, and RMB459 million, respectively. Transaction Historical Caps Historical Figures Future Caps Annual Annual Annual Actual Actual Unaudited Estimated Annual Annual Annual cap cap cap annual annual historical annual cap cap cap for the for the for the amount amount amount amount for the for the for the year year year for the for the for the for the year year year ended ended ended year year period year ended ended ended ended 31 Dec 31 Dec 31 Dec ended ended from 31 Dec 2006 31 Dec 31 Dec 31 Dec 2004 2005 2006 31 Dec 31 Dec 1 Jan to 2007 2008 2009 2004 2005 30 Jun 2006 Agency RMB29 RMB35 RMB42 RMB25.91 RMB34.74 RMB19.18 RMB41 RMB63 RMB75.6 RMB90.72commissions million million million million million million million million million millionand incentivespaid by us toCNAHC)Sales of airline RMB420 RMB470 RMB533 RMB218.4 RMB232.83 RMB103.71 RMB260 RMB357 RMB408 RMB459tickets million million million million million million million million million millionand cargospace toCNAHC Group Basis for such caps: In arriving at the above caps, the Directors have considered the historicalfigures for the past three years and the potential growth of such transactions. The actual amount of the agency commission and amount of incentives paid inrespect of ticket sales for each of the two years ended 31 December 2004 and 31December 2005 and the first six months of 2006 were RMB25.91 million, RMB34.74million and RMB19.18 million, respectively. The annual growth rate of 2005 over2004 was 35%. Due to the rapid business growth of the Company, its fleet size has been growingvery fast. Through implementation of the first and business class renovationworks as well as by leveraging on the potential business growth arising from the2008 Beijing Olympic Games, the Directors expect that the the agency commissionand amount of incentives paid in respect of ticket sales will considerablyincrease accordingly. The Directors expect the transaction amount will have anannual increase of approximately 20% over the future three years. As for the sale of air tickets and cargo space, the actual revenues generatedfrom the ticket and cargo space sales in the first six months of 2006 wereRMB103.71 million. The revenue generated from the ticket and cargo space salesis expected to be up to RMB260.10 million in 2006. The Company's cargo fleetnow has 8 aircraft, compared to 4 aircraft in 2004. The future expansion of theCompany's fleet size and the restructuring of Air China Cargo plus the 2008Beijing Olympic Games will lead to sustainable growth of the ticket and cargospace sales. 5. NON-EXEMPT CONTINUING CONNECTED TRANSACTIONS 5.1 Financial Services The Company entered into a financial services agreement (the "FinancialServices Agreement") and a supplemental agreement thereto with CNAF on 1November 2004 and on 10 November 2006, respectively. Description of transaction: Pursuant to the Financial Services Agreement and thesupplemental agreement thereto, CNAF has agreed to provide the Group with arange of financial services including the following: • deposit services; • loan and finance leasing services; • negotiable instrument and letter of credit services; • trust loan and trust investment services; • underwriting services for debt issuances; • intermediary and consulting services; • guarantee services; • settlement services; • internet banking services; and • any other services provided by CNAF under the approval of the China Banking Regulatory Commission ("CBRC"). The fees and charges payable by the Group to CNAF under the Financial ServicesAgreement are determined with reference to the applicable fees and chargesspecified by the People's Bank of China (the "PBOC") and the CBRC for therelevant services from time to time, and if neither the PBOC nor the CBRC hasspecified a fee or charge for a particular service, then the service will beprovided by CNAF on terms no less favourable than terms available fromcommercial banks in China and the terms offered by CNAF to other members ofCNAHC Group. The Financial Services Agreement will expire on 31 December 2006 and as providedin its supplemental agreement, among others, its term has been extended to 31December 2009. Reasons for the transaction: The Directors believe that it is in the interest ofthe Company to enter into above transaction with CNAF having taken into accountthe following factors: • in respect of transactions between the Group and members of CNAHC group, CNAF is able to provide more efficient settlement service compared with independent third party banks; and • since CNAF is 19.31% owned by the Company, the Company can ultimately benefit from the business development of CNAF. Historical Amounts and Proposed Caps: The annual aggregated amount of certain transactions between the Group and CNAFfor each of the two years ended 31 December 2004 and 31 December 2005 and thefirst six months of 2006 are as follows: • Maximum daily outstanding balance of deposits (including accrued interest) placed by the Group with CNAF were RMB1,196 million, RMB1,047 million and RMB 784 million, respectively; • Maximum daily outstanding balance of loans (including accrued interest) granted by CNAF to the Group were RMB523.9 million, RMB597.47 million and RMB690 million, respectively; and • Fees and charges paid by the Group to CNAF for other financial Services were nil, approximately RMB14.40 million and RMB7.91million, respectively. It is proposed that the maximum aggregate annual amount of certain transactionsbetween the Group and CNAF for each of the next three years ended 31 December2007, 2008 and 2009 will not exceed the annual limit as follows: • Maximum daily outstanding balance of deposits (including accrued interest) placed by the Group with CNAF will be RMB2.5 billion; and • Maximum daily outstanding balance of loans (including accrued interest) granted by CNAF to the Group will be RMB2.5 billion. The maximum aggregate annual amount to be paid by the Group to CNAF for otherfinancing services for each of the three years ended 31 December 2007, 2008 and2009 are expected to fall below the de minimis threshold as stipulated underRule 14A.33(3) of the Hong Kong Listing Rules, therefore such transactions willbe exempt from the announcement and independent shareholders' approvalrequirement for connected transactions. Transaction Historical Caps Historical Figures Future Caps Annual Annual Annual Actual Actual Unaudited Estimated Annual Annual Annual cap cap cap annual annual historical annual cap cap cap for the for the for the amount amount amount amount for the for the for the year year year for the for the for the for the year year year ended ended ended year year period year ended ended ended ended 31 Dec 31 Dec 31 Dec ended ended from 31 Dec 2006 31 Dec 31 Dec 31 Dec 2004 2005 2006 31 Dec 31 Dec 1 Jan to 2007 2008 2009 2004 2005 30 Jun 2006 Financial RMB5 RMB5 RMB5 RMB1,196 RMB1,047 RMB784 RMB1 RMB2.5 RMB2.5 RMB2.5Services billion billion billion million million million billion billion billion billion(deposit)Financial RMB3 RMB3 RMB3 RMB523.9 RMB597.47 RMB690 RMB750 RMB2.5 RMB2.5 RMB2.5Services (loan) billion billion billion million million million million billion billion billion Basis for such caps: In arriving at the caps for financial services to be provided by CNAF, theDirectors have considered the historical figures and have taken into account (i)the historical and estimated figures as set out in the table above; (ii) thelevel of financial flexibility required by the Company; and (iii) the increasein capital expenditures needs as the business scale expands. The Company has entered into a new stage of swift growth after its restructuringand successful listing and has more room for development. Its demands forfinancial services will be increased accordingly. Since the fuel price hasbecome relatively stable, the Company's performance will be improved steadilyand the cash flow will increase gradually, which will result in a substantialdemand for deposits. Meanwhile, the expansion of the Company's fleet size andthe air routes network will also lead to a higher demand for loans. Inparticular, huge amount of loans are needed to finance the purchase of newaircraft each year for the coming three years. 5.2 Subcontracting of Charter Flight Services The Company entered into a charter flight service framework agreement (the "Charter Flight Service Framework Agreement") and a supplemental agreementthereto with CNAHC on 1 November 2004 and on 10 November 2006, respectively. Description of transaction: Pursuant to the Charter Flight Service FrameworkAgreement and the supplemental agreement thereto, CNAHC will subcontract to theCompany its obligation of government charter flight that it undertakes from thePRC government. The Company's hourly rate of the charter flight service feewill be calculated on the basis of the following formula that includes totalcost and reasonable margins: Hourly rate = Total cost per flight hour x (1 + 6.5%) Total cost includes all direct costs and indirect costs. The Charter Flight Service Framework Agreement will expire on 31 December 2006and as provided in its supplemental agreement thereto, among others, its termhas been extended to 31 December 2009. Reasons for the transaction: As the national flag carrier of China, the Companyhas historically provided charter flights for government related travel servicesto national leaders, government delegations, national sports teams and culturalenvoys. The Company has gained significant brand recognition by being thedesignated government charter flight carrier. Based upon the hourly rate formulaunder the Charter Flight Service Framework Agreement and its supplementalagreement, it is expected that the Company will generate considerable revenuefrom such transaction. Historical Amounts and Proposed Caps: The aggregate annual amount paid by CNAHC to the Company for each of the twoyears ended 31 December 2004 and 31 December 2005 and the first six months of2006 were nil, approximately RMB407.05 million and RMB221.83 million,respectively. It is proposed that the maximum annual aggregate amount of revenue derived fromthe Charter Flight Service Framework Agreement for each of the three years ended31 December 2007, 2008 and 2009 will not exceed the annual limit of RMB700million, RMB812 million and RMB917 million, respectively. Transaction Historical Caps Historical Figures Future Caps Annual Annual Annual Actual Actual Unaudited Estimated Annual Annual Annual cap cap cap annual annual historical annual cap cap cap for the for the for the amount amount amount amount for the for the for the year year year for the for the for the for the year year year ended ended ended year year period year ended ended ended ended 31 Dec 31 Dec 31 Dec ended ended from 31 Dec 2006 31 Dec 31 Dec 31 Dec 2004 2005 2006 31 Dec 31 Dec 1 Jan to 2007 2008 2009 2004 2005 30 Jun 2006 Amount of RMB600 RMB650 RMB700 Nil RMB407.05 RMB221.83 RMB500 RMB700 RMB812 RMB917revenue million million million million million million million million millionderived fromthe Charter Flight ServiceFrameworkAgreement Basis for such caps: In arriving at the above caps, the Directors considered the historical andestimated figures as set out in the table above of the same transaction and thefollowing factors: • considering the development of China's foreign relationship as well as its booming foreign economic cooperation, the Directors expect that governmental delegates, national sports teams and cultural envoys will have more frequent visits to foreign countries, especially before 2008 Beijing Olympics Games. The Directors expect substantial increase in flight hours is respect of such charter flight in 2007 and 2008; • the level of flexibility as suggested by relevant government bodies; and • the potential future surge in the fuel and other flight-related costs. 5.3 Continuing Connected Transactions between the Group and the Lufthansa Group Description of transaction: The Company has entered into various transactionsunder separate agreements with different periods, some of which are more thanthree years, with Lufthansa Group in the ordinary course of its business,including, among others: • MRO Services provided by the Company to the Lufthansa Group; • mutual provision of catering services; • mutual provision of ground handling services in China and Germany; • mutual provision of ticket sales agency services; • airline codeshare arrangement under which the actual carrier's flights can be marketed under the airline designator code of the partner carrier and revenues earned from these arrangements are allocated between the parties based on negotiated terms according to airline industry standards; • special prorate arrangement under which a carrier agrees to accept passengers from another carrier and receive payment directly from that carrier; and • other airline co-operation arrangements between the Lufthansa Group and the Company. The above transactions have been entered into on normal commercial terms basedon arm's length negotiations. Reasons for the transaction: The Company has entered into various transactionswith Lufthansa Group in the ordinary course of the Company's business.Lufthansa is one of the leading airlines worldwide and is one of the foundingmembers of the Star Alliance, which is the largest and most awarded airlinealliance in the world. Lufthansa is a premium brand which has a high level ofrecognition and a first class reputation. Through the co-operation withLufthansa Group, the Group could further enhance the quality and attractivenessof its products and services. Historical Amounts and Proposed Caps: For each of the two years ended 31 December 2004 and 31 December 2005 and thefirst six months of 2006, (i) the aggregate annual amount paid by the Company toLufthansa Group, for its ground handling and catering services and pursuant tosales agency arrangement, code-sharing, special prorate and other airlinecooperation arrangements, were approximately RMB435.05 million, RMB634.34million and RMB234.28 million, respectively; and (ii) the aggregate annualamount paid by Lufthansa Group to us, for our ground handling service and MROServices and pursuant to sales agency arrangement, code-sharing, special prorateand other airline cooperation arrangements, were approximately RMB409.30million, RMB466.27 million and RMB209.28 million, respectively. It is expected that for each of the three years ended 31 December 2007, 2008 and2009, (i) the maximum amount payable by the Company to Lufthansa Group, for itsground handling and catering services and pursuant to sales agency arrangement,code-sharing, special prorate and other airline cooperation arrangements, willnot exceed the annual limit of RMB775.20 million, RMB900 million and RMB1,017million, respectively; and (ii) the maximum amount payable by Lufthansa Group tous, for our ground handling service and MRO services and pursuant to salesagency arrangement, code-sharing, special prorate and other airline cooperationarrangements, will not exceed the annual limit of RMB592.80 million, RMB687.70million and RMB777 million, respectively. Transaction Historical Caps Historical Figures Future Caps Annual Annual Annual Actual Actual Unaudited Estimated Annual Annual Annual cap cap cap annual annual historical annual cap cap cap for the for the for the amount amount amount amount for the for the for the year year year for the for the for the for the year year year ended ended ended year year period year ended ended ended ended 31 Dec 31 Dec 31 Dec ended ended from 31 Dec 31 Dec 31 Dec 31 Dec 2004 2005 2006 31 Dec 31 Dec 1 Jan to 2006 2007 2008 2009 2004 2005 30 Jun 2006 Amount to be RMB630 RMB660 RMB750 RMB435.05 RMB634.34 RMB234.28* RMB680 RMB775.20 RMB900 RMB1,017paid by million million million million million million million million million millionthe Companyto LufthansaGroupAmount to be RMB500 RMB530 RMB600 RMB409.30 RMB466.27 RMB209.28* RMB520 RMB592.8 RMB687.7 RMB777paid by million million million million million million million million million millionthe LufthansaGroupto Company * Due to accounting policy reason and that the high season for travelling is July, August and September, the transaction amount in the second half year will be much higher than that of the first half year. Basis for such caps: In arriving at the above caps, the Directors have considered (i) the historicaland estimated figures as set out in the table above; and (ii) the discussionwith Lufthansa Group about its planned flight schedules between Germany andChina; and (iii) the Company's business plan about increased flight routes toGermany. It is expected that compared to 2005, the rate of growth for the actualtransaction amount of 2006 will be about 7.2% for amounts paid by the Company toLufthansa Group, and about 11.5% for amounts to be paid by Lufthansa Group tothe Company. This is mainly due to the increase in code sharing services, whichresulted from the rapid business growth of the Company and the growth of itsfleet size. Considering the expansion of the Company's fleet, plus that the expectedincrease in the business of the Company and Lufthansa Group brought by the 2008Beijing Olympic Games and the stronger trading relationships between China andGermany along with the economic development of China and Germany, transactionamount for the future three years are expected to considerably increase. Inaddition, after the Company becomes a member of the Star Alliance, the Companywill have more opportunities of commercial cooperation with Lufthansa Group. Based on the above reasons, the Directors consider that the annual growth ratefor the caps is expected to be less than 14%, 16% and 13%, respectively, for thethree years ended 31 December 2009 are fair and reasonable. The growth rates of2007 and 2008 will be higher than that of 2009 due to the impact of 2008 BeijingOlympic Games, with 2008 being the highest amongst the three years due to thefact that the 2008 Beijing Olympic Games will take place in 2008. 5.4 Continuing Connected Transactions between the Group and the Beijing Capital Airports Group Description of transaction: The Company had entered into various transactionswith Beijing Capital Airports Group in the ordinary course of its business undervarious agreements. On 10 November 2006, the Company and Beijing CapitalAirports Group entered into a service framework agreement ("Service FrameworkAgreement"), under which the services include, among others: • provision of taking-off/landing/parking services of the Company's aircraft at airports owned by the Beijing Capital Airports Group; • provision of passengers' waiting lounge, check-in counters and office buildings to the Company by airports owned by the Beijing Capital Airports Group; • provision of utilities (including water, gas and electricity) to the Company at Beijing Capital International Airport by the Beijing Capital Airports Group; and • provision of ground handling services to the Company by the Beijing Capital Airports Group. Most of the services provided by the Beijing Capital Airports Group to theCompany are charged on the pricing terms which are prescribed, approved orrecommended by PRC governmental authorities. The Service Framework Agreement has a term of three years from 1 January 2007 to31 December 2009, subject to renewal. Reasons for the transaction: The Company has entered into various transactionswith Beijing Capital Airports Group in the ordinary course of the Company'sbusiness. Historical Amounts and Proposed Caps: The actual transaction amounts paid by the Company to the Beijing CapitalAirports Group for each of the two years ended 31 December 2004 and 31 December2005 and the first six months of 2006 were approximately RMB653.40 million,RMB709.82 million and RMB381.82 million, respectively. It is proposed that for each of the three years ended 31 December 2007, 2008 and2009, the maximum amount payable by the Company to Beijing Capital AirportsGroup under the Service Framework Agreement will not exceed the annual limit ofRMB1,026 million, RMB1,190 million and RMB1,350 million, respectively. Transaction Historical Caps Historical Figures Future Caps Annual Annual Annual Actual Actual Unaudited Estimated Annual Annual Annual cap cap cap annual annual historical annual cap cap cap for the for the for the amount amount amount amount for the for the for the year year year for the for the for the for the year year year ended ended ended year year period year ended ended ended ended 31 Dec 31 Dec 31 Dec ended ended from 31 Dec 31 Dec 31 Dec 2004 2005 2006 31 Dec 31 Dec 1 Jan to 31 Dec 2006 2007 2008 2009 2004 2005 30 Jun 2006 Amount paid by us RMB730 RMB900 RMB1,200 RMB653.40 RMB709.82 RMB381.82 RMB900 RMB1,026 RMB1,190 RMB1,350to million million million million million million million million million millionthe BeijingCapitalAirports Group Basis for such caps: In arriving at the above caps, the Directors have taken into account (i) thehistorical and estimated figures as set out in the table above, and (ii) theincrease in the number of flights based on the Company's projections, as wellas: • that the Company will continue to position Beijing as the hub for its development strategy. Considering that the fast growing fleet size of the Company and the 2008 Beijing Olympic Games, the number of aircrafts of the Company taken off/landed at Beijing Capital Airport will increase accordingly and as a result, the landing fee and other services fee charged by the Beijing Capital Airports is expected to be increased; and • in addition, the costs incurred in connection with public facilities and ground operations etc. of the Beijing Capital Airports will also be increased due to the rise in the energy costs in recent years, the expansion of the infrastructural facilities in the Beijing Capital Airports and the completion of the T3 Terminal. 6. LISTING RULES IMPLICATIONS 6.1 The continuing connected transactions under the Financial Services Agreement and its supplemental agreement between the Company and CNAF, theCharter Flight Service Framework Agreement and its supplemental agreementbetween the Company and CNAHC, and the Service Framework Agreement between theCompany and the Beijing Capital Airports Group, and the continuing connectedtransactions between the Company and Lufthansa Group fall under Rule 14A.35 ofthe Hong Kong Listing Rules. These transactions are subject to reporting andannouncement requirements set out under Rules 14A.45 to 14A.47 of the Hong KongListing Rules and are required to be approved by the Independent Shareholders inaccordance with the requirements set out under Rules 14A.48 at the Company'sEGM. 6.2 Except the Non-exempt Continuing Connected Transactions, as each of thePercentage Ratios (other than the profits ratio) of the other continuingconnected transactions (excluding the de minimis continuing connectedtransactions) set out in this announcement above, on an annual basis, higherthan 0.1% and less than 2.5%, they therefore fall under Rule 14A.34 of the HongKong Listing Rules. Accordingly, these continuing connected transactions aresubject to the reporting and announcement requirements set out under Rules14A.45 to 14A.47 of the Hong Kong Listing Rules, but are exempt from therequirements of independent shareholders' approval under Chapter 14A of theHong Kong Listing Rules. 6.3 The Board (including the independent non-executive directors of theCompany) considers that the abovementioned continuing connected transactionshave been conducted on normal commercial terms or on terms no less favourablethan those available to independent third parties and were entered into on acontinuing and regular basis and in the ordinary and usual course of business ofthe Company, are fair and reasonable and in the interests of the Company and theShareholders as a whole, and that the revised annual cap of 2006 for certaincontinuing connected transaction and the annual cap for each of the future threeyears ended 31 December 2007, 2008 and 2009 for the abovementioned continuingconnected transactions are fair and reasonable. 6.4 A circular containing, among other things, (i) details of the Non-exemptContinuing Connected Transactions; (ii) a letter from an independent financialadviser to the Independent Board Committee and the Independent Shareholderscontaining its advice on the Non-exempt Continuing Connected Transactions; and(iii) the recommendation of the Independent Board Committee in respect of theNon-exempt Continuing Connected Transactions, will be despatched to shareholdersin accordance with the Hong Kong Listing Rules as soon as practicable. 7. PRC LAW IMPLICATIONS 7.1 Pursuant to the Listing Rules of the Shanghai Stock Exchange, thesupplemental agreements mentioned above to the following agreements shall beapproved or ratified by the Shareholders at the EGM: (a) Financial Services Agreement; (b) Charter Flight Service Framework Agreement; (c) Sales Agency Services Framework Agreement; and (d) Standard Ground Handling Agreement. DEFINITIONS In this announcement, unless the context otherwise requires, the following termsshall have the following meanings: "Air China Cargo" Air China Cargo Co., Ltd, a company with limited liability incorporated under the laws of People's Republic of China and with 51% of its registered capital owned by the Company as at the date of this announcement "Board" The board of Directors of the Company "Company" Air China Limited, a company incorporated in the People's Republic of China, whose H shares are listed on the Hong Kong Stock Exchange as its primary listing venue and on the Official List of the UK Listing Authority as its secondary listing venue, and whose A shares are listed on the Shanghai Stock Exchange "Directors" The directors of the Company "EGM" The Company's extraordinary general meeting to be held on 28 December 2006 "Group" The Company, its subsidiaries and joint ventures "Hong Kong Listing Rules" The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited "Hong Kong Stock Exchange" The Stock Exchange of Hong Kong Limited "Independent Board Committee" A board committee comprising Mr. Wu Zhipan, Mr. Zhang Ke and Mr. Jia Kang, all being the independent non-executive directors of the Company "Independent Shareholders" The independent shareholders of the Company "MRO Services" Aircraft maintenance, repair and overhaul services "Non-exempt Continuing The transactions under the Financial Services Connected Transaction" Agreement and its supplemental agreement between the Company and CNAF, the Charter Flight Service Framework Agreement and its supplemental agreement between the Company and CNAHC, the Service Framework Agreement between the Company and the Beijing Capital Airports Group and the continuing connected transactions between the Company and Lufthansa Group "Percentage Ratios" The percentage ratios set out in Rule 14.07 of the Hong Kong Listing Rules, i.e. "assets ratio", "profits ratio", "revenue ratio", "consideration ratio" and "equity capital ratio" "PRC" The People's Republic of China, excluding, for the purpose of this announcement only, Hong Kong, Macau and Taiwan "Prospectus" The Company's prospectus dated 3 December 2004 "RMB" Renminbi, the lawful currency of the PRC "Shareholders" Shareholders of the Company By order of the Board Air China Limited Zheng Baoan Li Man Kit Joint Company Secretaries Beijing, 13 November 2006 As at the date of this announcement, the Directors of the Company are Messrs LiJiaxiang, Kong Dong, Wang Shixiang, Yao Weiting, Christopher Dale Pratt, MaXulun, Cai Jianjiang, Fan Cheng, Hu Hung Lick, Henry*, Wu Zhipan*, Zhang Ke* andJia Kang*. * Independent non-executive Director of the Company This information is provided by RNS The company news service from the London Stock Exchange