Air China Regulatory News (AIRC)

30 May 2006 07:03

Air China Ld30 May 2006 40. DISTRIBUTABLE RESERVES As at 31 December 2005, in accordance with the PRC Company Law, an amount ofapproximately RMB8,505 million (2004: RMB7,704 million) standing to the creditof the Company's capital reserve account, and an amount of approximately RMB305million (2004: RMB52 million) standing to the credit of the Company's reservefunds, as determined in accordance with PRC GAAP, were available fordistribution by way of future capitalisation issue. In addition, the Company hadretained earnings of approximately RMB1,641 million (2004: RMB208 million), asdetermined in accordance with PRC GAAP and being the lesser amount of theretained earnings determined in accordance with PRC GAAP and IFRSs, availablefor distribution as dividend. 41. CONTINGENT LIABILITIES Pursuant to the Restructuring, the following legal matters set out in items (a)and (b) below were transferred to or assumed by the Company upon itsincorporation. As at 31 December 2005, the Group had the following contingentliabilities: (a) Pursuant to the Restructuring of CNAHC, in preparation for the listing ofthe Company's H shares on Hong Kong Stock Exchange and the London StockExchange, the Company entered into a restructuring agreement with CNAHC andCNACG on 20 November 2004 ("Restructuring Agreement"), except for liabilitiesconstituting or arising out of or relating to business undertaken by the Companyafter the Restructuring, no other liabilities were assumed by the Company andthe Company is not liable, whether severally, or jointly and severally, fordebts and obligations incurred prior to the Restructuring by CNAHC and CNACG.The Company has also undertaken to indemnify CNAHC and CNACG in respect of anydamage suffered or incurred by CNAHC and CNACG as a result of any breach by theCompany of any provision of the Restructuring Agreement. (b) On 15 April 2002, Flight CA129 crashed on approach to Gimhae InternationalAirport, South Korea. There were 129 fatalities including 121 passengers and 8 crew members aboard thecrashed aircraft. An investigation was conducted by the Chinese and the Koreancivil aviation authorities, but the cause of the accident has yet to be releasedat the date of these financial statements. Certain injured passengers andfamilies of the deceased passengers have commenced proceedings in Korean courtsseeking damages against Air China International Corporation, the predecessor ofthe Company. The Group cannot predict the timing of the courts' judgements orthe possible outcome of the lawsuits nor any possible appeal actions. Up to 31December 2005, the Company, Air China International Corporation and theCompany's insurer had paid an aggregate amount of approximately RMB197 millionin respect of passenger liability and other auxiliary costs. Included in theRMB197 million is an amount of approximately RMB179 million borne by theCompany's insurer. As part of the Restructuring, CNAHC has agreed to indemnifythe Group for any liabilities relating to the crash of Flight CA129, excludingthe compensation already paid up to 30 September 2004 (being the date ofincorporation of the Company). The Directors of the Company believe that therewill not be any material adverse impact on the Group's financial position. (c) The Group and the Company have issued guarantees to banks in respect of thebank loans granted to the following parties: Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Joint ventures 91,000 - - - Associates 149,109 214,002 128,303 198,102 240,109 214,002 128,303 198,102 42. COMMITMENTS (a) Capital commitments The Group and the Company have the following amounts of contractual commitmentsfor the acquisition and construction of plant, property and equipment: Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Contracted, but not provided for: Aircraft and flight 31,696,796 8,750,195 31,403,107 7,272,969 equipment Buildings 835,902 544,855 664,614 211,607 Others 22,339 8,426 22,339 8,426 32,555,037 9,303,476 32,090,060 7,493,002 Authorised, but not contracted for: Aircraft and flight 3,973,095 - 3,564,126 - equipment Buildings 1,920,079 2,528,544 1,920,079 2,528,544 Others 65,608 - - - Total capital commitments 38,513,819 11,832,020 37,574,265 10,021,546 (b) Investment commitments As at 31 December 2005, the Company is committed to make capital contributionsof RMB358 million (equivalent to approximately US$45 million) (2004: RMB422million) and RMB103 million (2004: Nil) to a joint venture and an associate,respectively. (c) Operating lease commitments The Group and the Company lease certain of its office premises, aircraft andrelated equipment under operating lease arrangements. Leases for these assetsare negotiated for terms ranging from 1 to 20 years. At the balance sheet date, the Group and the Company have the following futureminimum lease payments under non-cancellable operating leases: Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Within one year 1,507,057 1,140,228 760,230 748,202 In the second to fifth years, inclusive 2,862,349 3,215,879 1,657,353 2,111,282 Over five years 1,066,083 1,000,319 644,741 566,585 5,435,489 5,356,426 3,062,324 3,426,069 43. FINANCIAL INSTRUMENTS (a) Fair value Financial assets of the Group and the Company mainly include cash and cashequivalents, pledged deposits, trade receivables, available-for-saleinvestments, deposits and other receivables. Financial liabilities of the Groupand the Company mainly include bank and other loans, obligations under financeleases, trade payables, other payables, bills payable and air trafficliabilities. The carrying amounts of the Group's and the Company's financial instrumentsapproximated their fair value as at the balance sheet date. Fair value estimatesare made at a specific point in time and based on relevant market informationabout the financial instruments. These estimates are subjective in nature andinvolve uncertainties and matters of significant judgement and therefore cannotbe determined with precision. Changes in assumptions could significantly affectthe estimates. (b) Interest rate risk The following table sets out the carrying amount, by maturity, of the Group'sfinancial instruments that are exposed to interest rate risk: For the year ended 31 December 2005 Fixed rate In the third to fifth Within one In the years, Over five year second year inclusive years Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Obligations under finance leases 1,625,907 1,949,802 6,071,492 57,377 9,704,578 Bank and other loans 4,877,843 1,502,072 2,856,723 812,434 10,049,072 4.5% corporate bonds - - - 3,000,000 3,000,000 Bills payable 327,937 - - - 327,937 Cash assets 2,522,336 - - - 2,522,336 Floating rate In the third to fifth Within one In the years, Over five year second year inclusive years Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Obligations under finance leases 328,966 - - - 328,966 Bank and other loans 5,523,327 1,245,086 1,842,931 1,563,633 10,174,977 For the year ended 31 December 2004 Fixed rate In the third to fifth Within one In the years, Over five year second year inclusive years Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Obligations under finance leases 1,629,551 1,606,254 6,722,448 1,910,163 11,868,416 Bank and other loans 3,197,913 1,195,648 3,694,366 1,596,253 9,684,180 Bills payable 362,033 - - - 362,033 Cash assets 9,851,305 - - - 9,851,305 Floating rate In the third to fifth Within one In the years, Over five year second year inclusive years Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Obligations under finance leases 75,595 337,376 - - 412,971 Bank and other loans 5,608,138 1,868,251 2,520,893 2,021,211 12,018,493 Interest on financial instruments classified as floating rate is repriced atintervals of less than one year. Interest on financial instruments classified asfixed rate is fixed until the maturity of the instrument. The other financialinstruments of the Group that are not included in the above tables arenon-interest-bearing and are therefore not subject to interest rate risk. 44. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Group's principal financial instruments, other than derivatives, comprisebank and other loans, obligations under finance leases, cash and cashequivalents and pledged deposits. The main purpose of these financialinstruments is to raise finance for the Group's operations. The Group hasvarious other financial assets and liabilities such as trade receivables andtrade payables, which arise directly from its operations. The Group also enters into derivative transactions, including principally swapsand collars contracts. The purpose is to manage the jet fuel price risk arisingfrom the Group's operations. It is, and has been throughout the year under review, the Group's policy that notrading in financial instruments shall be undertaken. The Group operates globally and generates revenue in various currencies. TheGroup's airline operations are exposed to business risk, liquidity risk, jetfuel price risk, foreign currency risk, interest rate risk and credit risk. TheGroup's overall risk management approach is to moderate the effects of suchvolatility on its financial performance. Financial risk management policies are periodically reviewed and approved by theBoard of Directors and they are summarised below. (a) Business risk The operations of the air transportation industry are substantially influencedby global political and economic development. Factors such as accidents and warsmay have a material impact on the Group's operations or the industry as a whole.In addition, the Group primarily conducts its principal operations in MainlandChina and accordingly is subject to special consideration and significant risksnot typically associated with companies in the United States of America andWestern Europe. These include risks associated with, among other things, thepolitical, economic and legal environment, competition and influence of the CAACin the Chinese civil aviation industry. (b) Liquidity risk The Group's net current liabilities amounted to approximately RMB16,006 millionat 31 December 2005 (2004: RMB9,053 million). The Group recorded a net cashinflow from operating activities of approximately RMB6,048 million for the yearended 31 December 2005 (2004: RMB6,151 million). For the same period, the Grouphad a net cash outflow from investing activities of approximately RMB12,500million (2004: RMB4,979 million). The Group also recorded a net cash outflowfrom financing activities of approximately RMB766 million and an inflow fromfinancing activities of approximately RMB5,620 million for the years ended 31December 2005 and 2004, respectively. The Group has recorded a decrease in cashand cash equivalents of approximately RMB7,165 million and an increase in cashand cash equivalents of approximately RMB6,824 million for the years ended 31December 2005 and 2004, respectively. With regards to 2006 and thereafter, the liquidity of the Group is primarilydependent on its ability to maintain adequate cash inflow from operations tomeet its debt obligations as they fall due, and on its ability to obtainexternal financing to meet its committed future capital expenditure. Withregards to its future capital commitments and other financing requirements, theCompany has already obtained several banking facilities with several PRC banksof up to an amount of RMB78,570 million as at 31 December 2005, of which anamount of approximately RMB33,476 million was utilised. The Directors of the Company have carried out a detailed review of the cash flowforecast of the Group for the year ending 31 December 2006. Based on suchforecast, the Directors have determined that adequate liquidity exists tofinance the working capital and capital expenditure requirements of the Groupduring 2006. In preparing the cash flow forecast, the Directors have consideredhistorical cash requirements of the Group as well as other key factors,including the availability of the above-mentioned loans financing which mayimpact the operations of the Group prior to the end of 2006. The Directors areof the opinion that the assumptions and sensitivities which are included in thecash flow forecast are reasonable. However, as with all assumptions in regard tofuture events, these are subject to inherent limitations and uncertainties andsome or all of these assumptions may not be realised. (c) Jet fuel price risk The Group's strategy for managing the risk on jet fuel price aims to provide theGroup with protection against sudden and significant increases in prices. Inmeeting these objectives, the Group allows for the judicious use of approvedderivative instruments such as swaps and collars with approved counter-partiesand within approved limits. Moreover, counter-party credit risk is generally restricted to any gains onchanges in fair value at any time, and not the principal amount of theinstrument. Therefore, the possibility of material loss arising in the event ofnon-performance by a counter-party is considered to be unlikely. The fair values of derivative instruments of the Group and the Company at the balance sheet date are as follows: Group Group 2005 2005 2004 2004 Assets Liabilities Assets Liabilities RMB'000 RMB'000 RMB'000 RMB'000 Swaps and collars expiring: Within 6 months - - - - Over 6 months to 21 months 127,659 (1,791) - - 127,659 (1,791) - - Company Company 2005 2005 2004 2004 Assets Liabilities Assets Liabilities RMB'000 RMB'000 RMB'000 RMB'000 Swaps and collars expiring: Within 6 months - - - - Over 6 months to 21 months 115,220 (1,791) - - 115,220 (1,791) - - Fair values of derivative instruments, denominated in United States dollars, areobtained from quoted market prices, dealer price quotations, discounted cashflow models and option pricing models, which consider current market andcontractual prices for the underlying instruments, as well as time value ofmoney, yield curve and volatility of the underlying instruments. (d) Foreign currency risk The Group's finance lease obligations as well as certain bank and other loansare denominated in United States dollars and Japanese yen, and certain expensesof the Group are denominated in currencies other than RMB. The Group generatesforeign currency revenue from ticket sales made in overseas offices and wouldnormally generate sufficient foreign currencies after payment of foreigncurrency expenses, to meet its foreign currency liabilities repayable within oneyear. RMB against United States dollars and Hong Kong dollars have beencomparatively stable in the past. However, RMB against Japanese yen hadexperienced a significant level of fluctuation during the year which is themajor reason for the significant exchange difference recognised by the Group forthe year. (e) Interest rate risk The Group's earnings are also affected by changes in interest rates due to theimpact of such changes on interest income and expense from short-term depositsand other interest-bearing financial assets and liabilities. A significantportion of the Group's interest-bearing financial liabilities with maturitiesover one year have predominately fixed rates of interest and are denominated inUnited States dollars and Japanese yen. The Group's short-term deposits and other interest-bearing financial assets andliabilities are predominately denominated in RMB, United States dollars and HongKong dollars. (f) Credit risk The Group's cash and cash equivalents are deposited with banks in MainlandChina, overseas banks and an associate. The Group has policies in place to limitthe exposure to any one financial institution. A significant portion of the Group's air tickets are sold by agentsparticipating in the Billing and Settlements Plan ("BSP"), a clearing systembetween airlines and sales agents organised by the International AirTransportation Association. The balance due from BSP agents amounted toapproximately RMB529 million as at 31 December 2005 (2004: RMB531 million). Except for the above, the Group has no significant concentration of credit risk,with exposure spread over a number of counter-parties. 45. CONSOLIDATED CASH FLOW STATEMENT (a) Establishment of a joint venture For the year ended 31 December 2004, the establishment of a joint venture hasbeen shown in the consolidated cash flow statement as a single item. The cashflow effect can be analysed as follows: 2004 RMB'000 Cash and bank balances 561,509 Trade receivables 16,844 Other receivables 2,778 Property, plant and equipment (note 15) 565,840 Inventories 352 Trade payables (40,018) Other payables and accruals (357,517) Air traffic liabilities (2,010) Net assets attributable to the joint venture 747,778 partners Dilution gain on an investment (note 9) 330,222 Cash contribution from the joint venture partners 1,078,000 Less: Cash attributable to the joint venture (561,509) partners Cash flow on establishment of a joint venture, net of cash attributable to the joint venture 516,491 partners (b) Major non-cash transactions Major non-cash transactions in 2004 were as follows: (i) In 2004, the Group received an aircraft injected by the PRC governmentamounting to RMB304,787,000 (note 36). This amount has been recorded inproperty, plant and equipment. (ii) Upon incorporation of the Company on 30 September 2004, CNAHC effected thetransfer of certain land use rights in an aggregate amount of approximatelyRMB885,626,000 to the Company. 46. RELATED PARTY TRANSACTIONS The Group is part of a larger group of companies under CNAHC and has extensivetransactions and relationships with members of CNAHC. As such, it is possiblethat the terms of these transactions are not the same as those that would resultfrom transactions among wholly-unrelated parties. Related parties refer tocorporations in which CNAHC is a shareholder and is able to exercise control orjoint control. The transactions were made at prices and terms mutually agreedbetween the parties. The Directors of the Company are of the opinion that thetransactions with related parties (see below) were conducted in the usual courseof business. The Group had the following significant transactions between the Group and (i)CNAHC, its subsidiaries (other than the Group) and joint ventures (collectivelyknown as the "CNAHC Group"); (ii) its joint ventures; and (iii) its associates: Group 2005 2004 RMB'000 RMB'000 A. Included in air traffic revenue Sale of air tickets CNAHC Group 9,836 17,227 Associates 1,463 2,154 11,299 19,381 Sale of cargo space CNAHC Group 200,273 213,836 Government charted flights CNAHC 407,048 - B. Included in other operating revenue Aircraft and related equipment lease income CNAHC Group - 1,912 Aircraft engineering income Associates 11,563 9,876 Ground services income CNAHC Group 1,061 - Joint ventures 23,417 942 Associates 34,401 19,849 58,879 20,791 Bellyhold income Joint venture 1,496,302 1,384,457 Others CNAHC Group 22,432 5,734 Joint ventures 33,406 14,424 Associates 35,568 11,484 91,406 31,642 Group 2005 2004 RMB'000 RMB'000 C. Included in finance revenue and finance costs Interest income Associate 2,363 3,409 Interest expense Associate 14,532 21,843 D. Included in operating expenses Airport ground services, take-off, landing and depot expenses CNAHC Group 92,836 97,183 Associates 248,128 210,103 340,964 307,286 Air catering charges CNAHC Group 49,695 43,241 Joint ventures 115,116 85,874 Associates 7,496 5,123 172,307 134,238 Repair and maintenance costs Joint ventures 363,181 472,378 Associates 125,717 107,508 488,898 579,886 Sale commission expenses CNAHC Group 7,571 25,913 Associates 6,119 - 13,690 25,913 Management fees CNAHC Group 10,096 44,080 Aircraft leasing fees Associate 201,388 - Others CNAHC Group 79,197 71,729 Associates 7,517 9,050 86,714 80,779 Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 E. Deposits, loans and bills payable Deposits placed with an 470,863 566,985 415,366 519,655 associate Loans from an associate 203,016 481,132 190,910 364,400 Bills payable to an 103,426 - 103,426 - associate F. Outstanding balance with related parties Due from CNAHC (long 531,813 631,813 531,813 631,813 term) Due from other CNAHC group companies 38,039 44,916 12,993 8,801 Due from associates 62,948 90,842 15,419 17,305 Due to associates (95,905) (81,591) (129,410) (82,109) Due from a joint venture 451,965 412,539 922,378 841,916 Due to CNAHC and CNACG (133,680) (2,256,117) (118,680) (2,240,213) Due to other CNAHC group companies (40,471) (49,617) (22,413) (12,163) Due to a joint venture (115,435) (179,934) (288,588) (449,835) Due from CNAHC 474,216 - 474,216 - Due from subsidiaries - - 11,519 22,513 Due to subsidiaries - - (588,623) (559,703) The long term amount due from CNAHC is unsecured, interest-free and is notrepayable within one year from the balance sheet date. Except for the long termamount due from CNAHC, the outstanding balances with related parties areunsecured, interest-free and repayable within one year. Group 2005 2004 RMB'000 RMB'000 G. Compensation of key management personnel of the Group Short term 5,501 5,002 employee benefits Post-employment 142 93 benefits Total 5,643 5,095 compensation paid to key management personnel Further details of directors' emoluments are included in note 10 to the financial statements. Group 2005 2004 RMB'000 RMB'000 H. Disposal of a 20,737 - long term investment to CNAHC Group On 30 September 2005, Beijing Catering Co. Ltd., a 60% joint venture of theGroup, sold its shares in CNAF to CNAHC for a total consideration ofapproximately RMB34 million. (a) In addition to the above, on 18 October 1997, CNAC entered into a licenceagreement with China National Aviation Corporation ("CNAC (PRC)") pursuant towhich CNAC (PRC) had agreed to grant a licence to CNAC, free of royalty, for theright to use certain trademarks in Hong Kong, the Taiwan region and Macau solong as CNAC is a subsidiary of CNACG. On 25 August 2004, CNAC (PRC) entered into two assignment agreements with CNACGpursuant to which CNAC (PRC) has agreed to assign, free of royalty, theabove-mentioned trademarks to CNACG for use in Hong Kong and Macau,respectively. On 25 August 2004, CNACG entered into two licence agreements withCNAC pursuant to which CNACG has agreed to grant licences to CNAC, free ofroyalty, for the rights to use those trademarks in Hong Kong and Macau,respectively, so long as CNAC is a direct or indirect subsidiary of CNAHC. Theselicence agreements supersede the licence agreement entered into between CNAC(PRC) and CNAC on 18 October 1997. No royalty charge was levied in respect for the use of these trademarks duringeach of the two years ended 31 December 2005. (b) Pursuant to certain of the Company's aircraft leasing arrangements and bankloans arrangements, the overseas lessors and lenders require guarantees to begiven by some major PRC state-owned banks. In giving such guarantees, the PRCstate-owned banks in turn require CNAHC and CNAF to provide counter-guaranteesin favour of the banks. As at the balance sheet date, the amounts of suchcounter-guarantees provided by CNAHC and CNAF are as follows: Group 2005 2004 RMB'000 RMB'000 CNAHC: Finance leases (note 32) - 921,000 Bank loans (note 33) - 1,455,000 - 2,376,000 CNAF: Finance leases (note 32) - 3,976,000 Bank loans (note 33) - 761,000 - 4,737,000 - 7,113,000 (c) The Company entered into several agreements with CNAHC which govern the useof trademarks granted by the Company to CNAHC; the provision of financialservices by CNAF; the provision of construction project management services byChina National Aviation Construction and Development Company; the subcontractingof charter-flight services to CNAHC; the leasing of properties from and toCNAHC; the provision of air ticketing and cargo services; media and advertisingservices arrangement to China National Aviation Media and Advertising Co., Ltd.;the tourism services co-operation agreement with CNAHC; the comprehensiveservices agreement with CNAHC; and the provision of maintenance and other groundservices by China Aircraft Services Limited. (d) There were no pension payments relating to the Supplementary PensionBenefits of the Group for the year ended 31 December 2005. All pension paymentsrelating to the Supplementary Pension Benefits of RMB39 million for the yearended 31 December 2004 were borne by CNAHC (note 11). (e) On 19 August 2004, Fly Top Limited, a wholly-owned subsidiary of CNAC,entered into the following acquisition agreements: (a) a sale and purchase agreement with CNACG in relation to the acquisition ofapproximately 16% of the issued share capital of LSGHK, a company incorporatedin Hong Kong with limited liability (the "CNACG Agreement"); and (b) a sale and purchase agreement with Hong Kong International Air CateringLimited ("HKIAC"), a company incorporated in Hong Kong with limited liabilityand in which Air China International Corporation has a 25% equity interest, inrelation to the acquisition of approximately 4.2% of the issued share capital ofLSGHK (the "HKIAC Agreement"). The total consideration of the above acquisitions is approximately RMB122million. Immediately after the completion of the CNACG Agreement and the HKIACAgreement, the Group's effective shareholding interests in LSGHK isapproximately 14%. The Group operates in an economic environment predominated by enterprisesdirectly or indirectly owned or controlled by the PRC government through itsnumerous authorities, affiliates or other organisations (collectively"State-owned Enterprises"). During the year, the Group had transactions withState-owned Enterprises including, but not limited to, the provision of airpassenger and air cargo services and purchases of services. The Directorsconsider that transactions with other State-owned Enterprises are activities inthe ordinary course of the Group's business and that the dealings of the Grouphave not been significantly or unduly affected by the fact that the Group andthe other State-owned Enterprises are ultimately controlled or owned by the PRCgovernment. The Group has also established pricing policies for products andservices, and such pricing policies do not depend on whether or not thecustomers are State-owned Enterprises. Having due regard to the substance of therelationships, the Directors are of the opinion that none of these transactionsare material related party transactions that require separate disclosure. 47. NET PROFIT ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT The net profit attributable to equity holders of the parent for the year ended31 December 2005 and for the period from 1 October 2004 to 31 December 2004dealt with in the financial statements of the Company was approximately RMB2,113million and RMB1,230 million (note 38), respectively. 48. COMPARATIVE FIGURES The following comparative figures have been reclassified to conform to thecurrent year's presentation: (a) Reclassification of profit and loss items: 2004 2005 Group Nature of item Classification Classification RMB'000 Share of tax attributable Tax Share of profits 96,974 to associates less losses from associates Finance revenue (which Finance costs Finance revenue 79,361 includes interest income, net gains on fuel derivatives, net and dividend income from available-for-sale investments) (b) Reclassification of balance sheet items: 2004 2005 Group Company Nature of item Classification Classification RMB'000 RMB'000 Non-pledged deposits Cash and cash Non-pledged 320,850 313,768 with equivalents deposits with maturity of more than maturity of three more months when acquired than three months when acquired Advance payments for Prepayments, Advance 2,193,458 1,958,515 aircraft payments and related equipment deposits and for aircraft and other related receivables equipment The Directors are of the view that the above changes would result in a moreappropriate presentation of the Group's financial statements and better reflectthe Group's financial performance and financial position. 49. EVENTS AFTER THE BALANCE SHEET DATE (a) On 17 January 2006, the Company and AIE, a wholly-owned subsidiary of theCompany, entered into an aircraft purchase agreement with Boeing Company("Boeing") pursuant to which the Company has agreed to purchase 10 Boeing737-800 aircraft (the "Boeing Aircraft") from Boeing for an aggregateconsideration of US$655.2 million (equivalent to approximately RMB5,288million). The aggregate consideration for the acquisition of the Boeing Aircraftis payable in cash by installments and the Boeing Aircraft are scheduled to bedelivered in stages from 2007 to 2008. (b) On 24 January 2006, the Group, through a subsidiary and an associate ofCNAC, entered into several agreements with Shun Tak Air Transport Limited andits subsidiaries (the "Macau Asia Express Agreements") to establish Macau AsiaExpress Limited ("Macau Asia Express") to engage in the business of operatinglow cost model air transport services based in Macau. Pursuant to the Macau AsiaExpress Agreements, the Group will hold an indirect effective interest of 30% inMacau Asia Express. The aggregate initial investment to Macau Asia Express is up to approximatelyHK$234 million (equivalent to approximately RMB243 million) and in which theshare of investment cost attributable to the Group, in an aggregate amount ofapproximately HK$161 million (equivalent to approximately RMB167 million), willbe funded by internal resources. The completion of the establishment of MacauAsia Express is subject to certain conditions to be fulfilled. Macau Asia Express is a subsidiary of CNAC, as defined by the laws of Macau, butCNAC does not have unilateral control over the entity. Accordingly, it will beaccounted for as a jointly controlled entity in the Group's financial statementsaccordance with IAS 31 Interests in Joint Ventures. 50. APPROVAL OF THE FINANCIAL STATEMENTS The financial statements were approved and authorised for issue by the Board ofDirectors on 18 April 2006. III. INDEBTEDNESS Borrowings The table below sets forth our total outstanding indebtedness as at 31 March2006. As at 31 March 2006 Repayable Repayable Within After One Year One Year Total RMB RMB RMB Notes (in (in (in millions) millions) millions) Bank loans, other loans and corporate bonds (1) 12,411 12,739 25,150 Finance lease obligations (2) 2,017 6,979 8,996 Bills payable 756 - 756 Total 15,184 19,718 34,902 As at 31 March 2006 Total Indebtedness RMB (in millions) Indebtedness denominated in U.S. dollars (US$2,410 million) 19,321 Indebtedness denominated in Japanese (Japanese yen46,383 yen million) 3,166 Indebtedness denominated in HK dollars (HK$15 15 million) Indebtedness denominated in Renminbi 12,400 Total 34,902 Notes: (1) The Group's bank loans, other loans and corporate bonds of approximatelyRMB14,473 million were secured by mortgages over certain of the Group's assets(consisting of aircraft and bank deposits) in the amount of approximatelyRMB16,603 million as at 31 March 2006. Certain commercial banks have providedguarantees in the amount of approximately RMB9,461 million to which certainmajor PRC state-owned banks have provided counter-guarantees in the amount ofapproximately RMB4,707 million. (2) The Group's finance lease obligations of approximately RMB8,996 million weresecured by certain of the Group's aircraft in the amount of approximatelyRMB9,205 million as at 31 March 2006. Certain commercial banks have providedguarantees in the amount of approximately RMB10,660 million to which certainmajor PRC state-owned banks have provided counter-guarantees of approximatelyRMB2,265 million. In addition to the above, as at 31 March 2006, certain of the Group's bankdeposits in the amount of approximately RMB102 million were pledged against theGroup's aircraft operating leases and financial derivatives. Contingent liabilities Pursuant to the restructuring of China National Aviation Holding Company("CNAHC") for the listing of the Company's H shares on the Hong Kong StockExchange and the London Stock Exchange (the "Restructuring"), the legal mattersand litigation set out in items (i) and (ii) below were transferred to orassumed by the Company upon its incorporation. As at 31 March 2006, the Grouphad the following contingent liabilities: (i) Pursuant to the agreement for the Restructuring (the "RestructuringAgreement") entered into by the Company with CNAHC and China National AviationCorporation (Group) Limited ("CNACG"), except for liabilities constituting orarising out of or relating to businesses undertaken by the Company after theRestructuring, no other liabilities were assumed by the Company and the Companyis not liable, whether severally, or jointly and severally, for debts andobligations incurred prior to the Restructuring by CNAHC and CNACG. The Companyhas also undertaken to indemnify CNAHC and CNACG in respect of any damagesuffered or incurred by CNAHC and CNACG as a result of any breach by the Companyof any provision of the Restructuring Agreement. (ii) On April 15, 2002, Flight CA129 crashed on approach to Gimhae InternationalAirport, South Korea. There were 129 fatalities including 121 passengers and 8crew members aboard the crashed aircraft. An investigation was conducted by theChinese and the Korean civil aviation authorities, but the cause of the accidenthas yet to be officially released at the date of this letter. Certain injuredpassengers and families of the deceased passengers have commenced proceedings inKorean courts seeking damages against Air China International Corporation (thepredecessor of the Company). The Group can neither predict the timing of thecourts' judgements nor the possible outcome of the lawsuits nor any possibleappeal actions. Up to 31 March 2006, the Company, Air China InternationalCorporation and the Company's insurer had paid an aggregate amount ofapproximately RMB200 million in respect of passenger liability and otherauxiliary costs. Included in the RMB200 million is an amount of approximatelyRMB182 million borne by the Company's insurer. As part of the Restructuring,CNAHC has agreed to indemnify the Group for any liabilities relating to thecrashed aircraft, excluding the compensation already paid up to 30 September2004 (being the date of incorporation of the Company). The directors of theCompany believe that there will not be any material adverse impact on theGroup's financial position. (iii) The Group has issued guarantees to banks in respect of the bank loanfacilities granted to the following parties: As at 31 March 2006 RMB (in millions) Joint venture 11 Associates 149 Total 160 Except as disclosed above, as at 31 March 2006, the Group did not have anyoutstanding mortgages, charges, pledges, debentures, loan capital, bank loansand overdrafts, debt securities or other similar indebtedness, finance leases orhire purchase commitments, acceptance liabilities or acceptance credits, anyguarantees or other material contingent liabilities. Save as disclosed above, the directors have confirmed that there has been nomaterial change in the indebtedness of the Group since 31 March 2006. APPENDIX II GENERAL INFORMATION 1. RESPONSIBILITY STATEMENT This circular includes particulars given in compliance with the Listing Rulesfor the purpose of giving information with regard to the Group. The Directorscollectively and individually accept full responsibility for the accuracy of theinformation contained in this circular and confirm, having made all reasonableenquiries, that to the best of their knowledge and belief there are no otherfacts the omission of which would make any statement herein misleading. 2. DISCLOSURE OF INTERESTS OF DIRECTORS AND SUPERVISORS As at the Latest Practicable Date, Mr. Zhang Xianlin, a Supervisor of theCompany, had interests in 33,126,000 shares, which represents approximately 1%of the share capital of CNAC. Save as disclosed above, as at the Latest Practicable Date, none of theDirectors, Supervisors or chief executive of the Company has interests or shortpositions in the shares, underlying shares and/or debentures (as the case maybe) of the Company or its associated corporations (within the meaning of Part XVof the SFO) which were notified to the Company and the Stock Exchange pursuantto SFO (including interests or short positions which he is taken or deemed tohave under such provisions of the SFO), or recorded in the register maintainedby the Company pursuant to Section 352 of the SFO, or which were notified to theCompany and the Stock Exchange pursuant to the Model Code for SecuritiesTransactions by Directors of the Listed Companies. None of the Directors or Supervisors of the Company has any direct or indirectinterest in any assets which have been, since 31 December 2005 (the date towhich the latest published audited financial statements of the Group were madeup), acquired or disposed of by or leased to any member of the Group or areproposed to be acquired or disposed of by or leased to, to any member of theGroup. None of the Directors or Supervisors of the Company is materially interested inany contract or arrangement subsisting at the date of this circular and which issignificant in relation to the business of the Group. None of the Directors or Supervisors of the Company and their respectiveassociates (as defined in the Listing Rules) has any competing interests whichwould be required to be disclosed under Rule 8.10 of the Listing Rules if eachof them were a controlling shareholder of the Company. 3. SUBSTANTIAL SHAREHOLDERS As at the Latest Practicable Date, to the knowledge of the Directors,Supervisors and chief executive of the Company, the interests and shortpositions of the following persons (other than a Director, Supervisor or chiefexecutive of the Company) who have an interest or short position in the sharesand underlying shares of the Company which would fall to be disclosed to theCompany pursuant to the SFO, or who are, directly or indirectly, interested in10% or more of the nominal value of any class of share capital carrying rightsto vote in all circumstances at general meetings of any members of the Group areas follows: (a) Substantial interests in the Company Percentage Percentage of the Percentage of the total Percentage Type and of the total issued of the number total issued non-H total of shares issued domestic foreign issued H of the shares shares shares shares Type of Company of the of the of the of the Short Name interests concerned Company Company Company Company position CNAHC Beneficial 4,826,195,989 51.16% 100% - - - owner domestic shares CNAHC(1) Attributable 1,380,482,920 14.64% - 100% - - interests non-H foreign shares China National Beneficial 1,380,482,920 14.64% - 100% - - Aviation Corporation owner non-H foreign (Group) Limited shares Cathay Pacific Beneficial 943,321,091 10.00% - - 29.24% - owner H shares Swire Pacific Attributable 943,321,091 10.00% - - 29.24% - Limited(2) interests H shares John Swire & Sons Attributable 943,321,091 10.00% - - 29.24% - Limited(2) interests H shares John Swire & Sons Attributable 943,321,091 10.00% - - 29.24% - (H.K.) Limited(2) interests H shares Temasek Holdings Attributable 400,450,000 4.25% - - 12.41% - (Private) Limited interests H shares (3) HSBC Halbis Investment 163,840,000 1.74% - - 5.08% - Partners (Hong Kong) manager H shares Limtied Wellington Investment 201,314,500 2.13% - - 6.24% - Management Company, LLP manager H shares JPMorgan Chase & Investment 388,759,500 4.12% - - 12.05% - Co.(4) manager H shares 67,246,000 0.71% - - 2.08% - H shares (lending pool) Morgan Stanley(5) Investment 218,219,073 2.31% - - 6.76% - Manager 38,921,371 0.41% - - 1.21% - (short position) Note: Based on the information available to the Directors, chief executive andSupervisors of the Company (including such information as was available on thewebsite of the Stock Exchange) and so far as the Directors, chief executive andSupervisors are aware, as at the Latest Practicable Date: 1. By virtue of CNAHC's 100% interest in China National Aviation Corporation(Group) Limited, CNAHC is deemed to be interested in the 1,380,482,920 non-Hforeign shares of the Company directly held by China National AviationCorporation (Group) Limited. 2. By virtue of John Swire & Sons Limited's 100% interest in John Swire & Sons(H.K.) Limited and their approximately 30% equity interest and 53% voting rightsin Swire Pacific Limited, and Swire Pacific Limited's approximately 46% interestin Cathay Pacific, John Swire & Sons Limited, John Swire & Sons (H.K.) Limitedand Swire Pacific Limited are deemed to be interested in the 943,321,091 Hshares of the Company directly held by Cathay Pacific. 3. Temasek Holdings (Private) Limited, through its controlled entities, had anattributable interest in 400,450,000 H shares of the Company, out of which theinterest in 292,500,000 H shares (representing approximately 9.07% of the totalissued H shares) was held directly by Aranda Investment (Mauritius) Pte Ltd. andthe interest in the remaining 107,950,000 H shares was held directly by DahliaInvestments Ptd Ltd, FPL Alpha Investment Pte Ltd and Fullerton (Private)Limited. 4. JPMorgan Chase & Co, through its controlled entities, had an attributableinterest in 388,759,500 H shares of the Company and 67,246,000 H shares of theCompany as lending pool, out of which the interest in 67,246,000 H shares washeld directly by JPMorgan Chase Bank, N.A., 278,248,000 H shares was helddirectly by JF Asset Management Limited, 9,644,000 H shares was held directly byJF International Management Inc., 347,500 H shares was held directly by J.P.Morgan Whitefriars Inc., 6,000,000 H shares was held directly by J.P. MorganSecurities Ltd., 26,266,000 H shares was held directly by JPMorgan AssetManagement (Japan) Limted and 1,008,000 H shares was held directly by JF AssetManagement (Singapore) Limited. 5. Morgan Stanley, through its controlled entities, had an attributable interestin 218,219,073 H shares of the Company and maintained a short position of38,921,371 H shares of the Company, out of which Morgan Stanley InvestmentManagement Company directly held 173,642,000 H shares, Morgan Stanley & CoInternational Limited directly held 5,132,831 H shares and maintained a shortposition of 3,074,833 H shares, Morgan Stanley Dean Witter Hong Kong SecuritiesLimited directly held 16,092 H shares and maintained a short position of 78,000H shares, Morgan Stanley Asset & Investment Trust Management Co., Limiteddirectly held 3,352,000 H shares, Morgan Stanley Capital (Cayman Islands)Limited maintained a short position of 1,890,000 H shares, Morgan StanleyCapital Services Inc. directly held 119,155 H shares, Morgan Stanley Capital(Luxembourg) S.A. directly held 2,058,000 H shares, Morgan Stanley Hedging Co.Ltd. directly held 34,200 H shares and Morgan Stanley & Co. Inc. directly held33,864,795 H shares and maintained a short position of 33,878,538 H shares. (b) Substantial interests in CNAC Percentage of the No. of issued share Capacity shares capital CNAHC(1) Attributable 2,264,628,000 68.36 interest The Company(2) Beneficial owner 2,264,628,000 68.36 Best Strikes Limited Beneficial owner 187,656,000 5.66 On Ling Investments Attributable 322,856,000 9.75 interest Limited(3) Novel Investments Attributable 322,856,000 9.75 interest Holdings Limited(3) Novel Enterprises Attributable 322,856,000 9.75 interest Limited(3) Novel Enterprises (BVI) Attributable 322,856,000 9.75 interest Limited(3) Novel Credit Limited(3) Attributable 322,856,000 9.75 interest Novel Holdings (BVI) Attributable 322,856,000 9.75 interest Limited(3) Westleigh Limited(3) Attributable 322,856,000 9.75 interest Notes: 1. CNAHC owns approximately 51.16 per cent of the total issued share capital ofthe Company and the entire issued share capital of CNACG, a company incorporatedin Hong Kong, which in turn owns approximately 14.64 per cent of the totalissued share capital of the Company. Accordingly its interests in CNAC duplicatewith those interest of the Company. 2. CNACG, the CNAC's former immediate controlling shareholder, transferred itsapproximately 69 per cent shareholding interest in CNAC to the Company inSeptember 2004 by way of a capital contribution in return for the Company'snon-H foreign shares, as such the Company becomes the immediate controllingshareholder of CNAC. Its interest in CNAC duplicates with those interests ofCNAHC. 3. 5.6% of the interest held by each of these companies in CNAC duplicates withBest Strikes Limited's interest in CNAC. The interests of these companies inCNAC also duplicate each other. (c) Substantial interests in other members of the Group Approximate Member of % of share the Group Name capital Air Macau CNAC 51% Air Macau Sociedale de Turismo e Diversaes de 14% Macau Air Macau Servico, Administracao e 20% Participacoes, Lda. Ameco Deutsche Lufthansa AG 40% Air China Cargo Capital Airport Holding Company 24% Air China Cargo CITIC Pacific Limited 25% Save as disclosed above, as at the Latest Practicable Date, to the knowledge ofthe Directors, chief executive and Supervisors of the Company, no other person(other than a Director, Supervisor or chief executive of the Company) had aninterest or short position in the shares and underlying shares of the Companywhich would fall to be disclosed to the Company pursuant to the SFO, orotherwise was, directly or indirectly, interested in 10% or more of the nominalvalue of any class of share capital carrying rights to vote in all circumstancesat general meetings of any members of the Group. 4. MATERIAL CONTRACTS The Group has entered into the following material contracts within the two yearsimmediately preceding the date of this circular (Capitalised terms used in thissection has the same meaning as those defined in the Company's prospectus dated3 December 2004): (a) the Restructuring Agreement dated 20 November 2004 entered into between theCompany, CNAHC and CNACG regarding the Restructuring referred to in the sectionheaded "Business - Connected Transactions" of the Company's prospectus dated 3December 2004; (b) the Non-competition Agreement dated 20 November 2004 entered into betweenthe Company and CNAHC regarding the arrangement of non-competition as referredto in the section headed "Business - Connected Transactions" of the Company'sprospectus dated 3 December 2004; (c) the Trademark Licence Agreement dated 1 November 2004 entered into betweenthe Company and CNAHC regarding the licensing of the trademark bearing "AirChina" logo and other trademarks referred to in the section headed "Business -Connected Transactions" of the Company's prospectus dated 3 December 2004; (d) the Comprehensive Services Agreement dated 1 November 2004 entered intobetween the Company and CNAHC regarding the general principle for the mutualprovision of certain ancillary services to each other referred to in the sectionheaded "Business - Connected Transactions" of the Company's prospectus dated 3December 2004; (e) the Financial Services Agreement dated 1 November 2004 entered into betweenthe Company and CNAF regarding the general principle for the provision of arange of financial services to the Company by CNAF referred to in the sectionheaded "Business - Connected Transactions" of the Company's prospectus dated 3December 2004. As at 30 September 2004, there were 3 loans denominated in RMB inthe total outstanding principal amount of RMB210,000,000 and 2 loans denominatedin USD in the total outstanding principal amount of USD19,550,000 which havebeen granted by CNAF to the Company and which are outstanding, details of whichare set out below: Outstanding principal amount Annual interest rate Term RMB100,000,000 4.536% 30 August 2004 to 28 February 2005 RMB60,000,000 4.536% 30 August 2004 to 28 February 2005 RMB50,000,000 4.536% 17 August 2004 to 16 February 2005 US$10,600,000 LIBOR+0.75% 12 July 2004 to 7 January 2005 US$8,950,000 6 month LIBOR+0.4% 15 May 2002 to 14 May 2009 Outstanding principal amount Annual interest rate Term RMB100,000,000 4.536% 30 August 2004 to 28 February 2005 RMB60,000,000 4.536% 30 August 2004 to 28 February 2005 RMB50,000,000 4.536% 17 August 2004 to 16 February 2005 US$10,600,000 LIBOR+0.75% 12 July 2004 to 7 January 2005 US$8,950,000 6 month LIBOR+0.4% 15 May 2002 to 14 May 2009 (g) the Sale and Purchase Agreement dated 19 August 2004 between Fly Top Limitedand Hong Kong International Air Catering Limited, a company incorporated in HongKong, regarding CNAC's acquisition through Fly Top Limited of approximately 4.2%of the issued share capital of LSGLS; the consideration for the acquisition isHK$24.5 million. Fly Top Limited shall not be obliged to complete this agreementunless the sale and purchase of the equity interest in each of (i) Beijing AirCatering Co., Ltd., (ii) SWACL and (iii) LSGLS as referred to in paragraph (f)above have completed or are completed simultaneously. Upon completion of theagreement, Fly Top Limited would execute the Deed of Adherence and Supplementreferred to in paragraph (f) above. The agreement is governed by Hong Kong law; (h) the 2004 Amendment to the Joint Venture Contract for Ameco between theCompany and Lufthansa dated 19 July 2004, which provides, among other things,that (1) the term of Ameco shall be extended for further 25 years since the dateof the issuance of the new business license; (2) the registered capital shall beincreased by US$100 million (the instalment subscription schedule is set out inparagraph 2B of this Appendix; (3) the Company undertakes, upon Ameco's actualneed of financing, to arrange total loan facility of approximately RMB282.7million and Lufthansa undertakes, upon Ameco's actual need of financing, toarrange total loan facility of approximately US$69.3 million and; (4)restrictions shall apply on transfer of registered capital and profit allocation(set out in paragraph 2A of "Appendix IX -Statutory and General Information" ofthe Company's prospectus); (i) the Assignment Agreement between us and CNAHC on 8 October 2004 regardingthe equity interests in Shandong Aviation Group and Shandong Airlines referredto in the section headed "Business - Connected Transactions" of the Company'sprospectus dated 3 December 2004. Pursuant to this agreement: (i) CNAHC agreed to transfer all of its rights and obligations under twotransfer agreements according to which CNAHC agreed to acquire a 48.0% equityinterest in Shandong Aviation Group and a 22.8% equity interest in ShandongAirlines; (ii) Since CNAHC has already paid part of the equity transfer amount andrelevant fees under the two transfer agreements, we have agreed to pay the sameamount to CNAHC. The Company also agreed to pay the outstanding amount under thetwo transfer agreements to Shandong Aviation Group and Shandong Airlines; (iii) the Company agreed to reimburse CNAHC for all the amounts and expensesthat have been incurred and paid by CNAHC under the above two transferagreements within seven (7) days of the effectiveness of the AssignmentAgreement; (iv) CNAHC has given certain representations and warranties including that ithas all the rights, power and authorisation to make such transfer and that suchtransfer will not result in the breach of any other agreements or documents thathave been entered into by CNAHC; (v) CNAHC and the Company agreed to indemnify each other against all the damageand expenses arising from any breach of representations and warranties given byCNAHC or the Company, as the case may be; and (vi) the Assignment Agreement shall be effective after it is signed by bothparties and approved by the relevant government authorities; (j) the Hong Kong Underwriting Agreement dated 2 December 2004 entered intoamong the Company, CNAHC, the Joint Global Coordinators, the Joint Sponsors, theHong Kong Underwriters and HSBC Nominees (Hong Kong) Limited pursuant to whichit is agreed, inter alia: (i) the Company agreed, subject to certain conditions, to issue and allot, atthe Offer Price, the Offer Shares to be issued in connection with the Hong KongPublic Offering; (ii) the Hong Kong Underwriters agreed, subject to certain conditions, toprocure subscribers (or subscribe themselves) for the Offer Shares; (iii) the Hong Kong Underwriters will be paid on admission to listing on theHong Kong Stock Exchange a commission of 2.5% of the Offer Price multiplied bythe number of Offer Shares allotted pursuant to the Hong Kong Public Offering; (iv) the obligations of the Hong Kong Underwriters to procure subscribers for,or failing which, themselves to subscribe for, Offer Shares are subject tocertain conditions. These conditions include, amongst others, delivery ofcertain condition precedent documents and registering various documents withRegistrar of Companies. In addition, the Hong Kong Underwriters have the rightto terminate the Hong Kong Underwriting Agreement in certain circumstances priorto admission; (v) the Company agreed to pay certain costs, charges, fees and expenses of theHong Kong Public Offering; (vi) each of the Company and CNAHC gave certain representations, warranties andother undertakings, subject to certain limits, to each of the Joint GlobalCoordinators, the Joint Sponsors and the Hong Kong Underwriters; (vii) the Company gave certain indemnities, subject to certain limits, to eachof the Joint Global Coordinators, the Joint Sponsors and the Hong KongUnderwriters; (k) a Sponsor's Agreement dated 3 December 2004 between the Company and theLondon Sponsor pursuant to which the Company appoints the London Sponsor as thesponsor in connection with the London Listing in consideration for the Companyagreeing to pay to Merrill Lynch Far East Limited as a Hong Kong Underwriter acommission under the Hong Kong Underwriting Agreement (See Paragraph (j) above)and all costs and expenses incurred in connection with the London Listing,provided that the London Sponsor will not commit or purport to commit theCompany to pay any such amounts, save as agreed beforehand between the Companyand the London Sponsor. The Company undertakes, among other things, to (i)procure that certain documents in connection with the London Listing arepublished, (ii) deliver the Prospectus to the UK Registrar of Companies and(iii) not make announcements regarding the London Listing without notifying theLondon Sponsor. The Sponsor's Agreement provides that the London Sponsor mayterminate the Sponsor's Agreement if, among other things, (i) it comes to theattention of the London Sponsor that any statement in the Prospectus is untrueand (ii) the Company has not complied with the Sponsor's Agreement in anyrespect which is material in the context of the London Listing; (l) a Paying Agency Appointment Letter dated 3 December 2004 between the Companyand Computershare Investor Services Plc ("Computershare") pursuant to which theCompany appoints Computershare as paying agent in connection with the LondonListing and in consideration for the Company agreeing to pay an initial fee of4,000 and a minimum annual fee of 5,000, Computershare shall, among otherthings, (i) calculate the amount of any dividend payable to each UK shareholderand (ii) dispatch all payments, as instructed by the Company. The Paying AgencyAgreement also provides that the Company shall, in certain circumstances,indemnify Computershare against, among other things, all actions, proceedings,liability and claims in to acting in accordance with the Company's instructions; (m) the strategic placing agreement dated 20 November 2004 between the StrategicInvestor, the Joint Global Coordinators and our Company, pursuant to which theStrategic Investor has agreed to, among other things, subscribe at the OfferPrice for such number of Offer Shares that would constitute, in aggregate, 10.0%of our total issued share capital immediately following the completion of theGlobal Offering referred to in the section headed "Strategic Investor" of theCompany's prospectus dated 3 December 2004; (n) the Short-term Commercial Paper Underwriting Agreement dated 26 April 2005entered between the Company and Bank of China Limited, pursuant to which Bank ofChina Limited has agreed to be to form an underwriting syndicate and be the leadunderwriter for the RMB2 billion short term commercial paper issued by theCompany for a lump sum consulting fee of RMB3 million and a lead underwritingfee of 0.12% of the value of the commercial paper issued by the Company; (o) the A330-200 Purchase Agreement dated 26 January 2005 entered into betweenthe Company. AIE and Airbus S.A.S. in relation to the purchase of 20 A330-200aircraft, the details of the agreement are set out in Company's circular dated 4March 2005; (p) the Boeing Aircraft Purchase Agreement dated 8 August 2005 entered intobetween the Company, AIE and Boeing Company in relation to the purchase of 15Boeing 787 aircraft, the details of the agreement are set out in the Company'scircular dated 30 August 2005; (q) the Boeing Aircraft Purchase Agreement dated 17 January 2006 entered intobetween the Company and AIE and Boeing Company in relation to the purchase of 10 Boeing 737 aircraft, the details of the agreement are set out in theCompany's circular dated 29 March 2006; and (r) the Boeing Aircraft Purchase Agreement dated 19 April 2006 entered intobetween the Company and AIE and Boeing Company in relation to the purchase of 15Boeing 737 aircraft, the details of the agreement are set out in the sectionheaded "Letter from the Board - The Boeing Aircraft Purchase Agreement" of thiscircular. Except as disclosed above, no other material contract has been entered into bythe Group within the two years immediately preceding the date of this circular. 5. LITIGATION The litigation or claims of material importance pending or threatened against amember of the Group are as disclosed in the section headed "Contingentliabilities" in "Appendix I -Financial Information of the Group - III.Indebtedness Statement" to this circular. Except as disclosed above, as at the Latest Practical Date, there was nolitigation or claims of material importance pending or threatened against anymember of the Group. 6. SERVICE CONTRACTS Each of the Directors has entered into a service contract with the Company for aterm of three years from 30 September 2004 other than Mr. Fan Cheng, whoseservice contract has a term of three years from 18 October 2005 and the servicecontract is thereafter subject to termination by either party giving writtennotice to the other party. None of the Directors has any existing or proposed service contract with anymember of the Group which is not expiring or terminable by the Group within oneyear without payment of compensation (other than statutory compensation). 7. NO MATERIAL ADVERSE CHANGE The Directors confirm that there has been no material adverse change in theGroup's financial or trading position since 31 December 2005, being the date towhich the latest published audited accounts of the Group have been made up. 8. PROCEDURE FOR DEMANDING A POLL BY SHAREHOLDERS Pursuant to Article 72 of the Articles of Association of the Company, at anygeneral meeting of shareholders of the Company a resolution shall be decided ona show of hands unless a poll is (before or after any vote by show of hands)demanded: • by the chairman of the meeting; • by at least two shareholders entitled to vote present in person or by proxy;or • by one or more shareholders present in person or by proxy and representing 10%or more of all shares carrying the right to vote at the meeting. The demand for a poll may be withdrawn by the person who makes such demand.Further details of the procedure for demanding a poll were set out in AppendixVIII "Summary of Articles of Association" to the Company's prospectus dated 3December 2004. 9. MISCELLANEOUS (a) The joint company secretaries of the Company are Zheng Baoan and Li Man Kit.Mr. Li is an associate member of the Institute of Chartered Secretaries andAdministrators, UK and the Hong Kong Institute of Company Secretaries. (b) The qualified accountant of the Company is David Tze-kin Ng. Mr. Ng is amember of the Hong Kong Institute of Certified Public Accountants. (c) The registered address of the Company is at 9th Floor, Blue Sky Mansion, 28Tianzhu Road, Zone A, Tianzhu Airport Industrial Zone, Shunyi District, Beijing,China. The head office of the Company is at South Terminal, Beijing CapitalInternational Airport, Chaoyang District, Beijing, China. (d) The Hong Kong branch share registrar and transfer office of the Company isComputershare Hong Kong Investor Services Limited, Rooms 1712-1716, 17th Floor,Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong. 10. DOCUMENTS AVAILABLE FOR INSPECTION Copies of the following documents are available for inspection during normalbusiness hours at the principal place of business of the Company in Hong Kong at5th Floor, CNAC House 12 Tung Fai Road, Hong Kong International Airport, HongKong up to and including 13 June 2006: (a) the articles of association of the Company; (b) the 2005 audited financial statements of the Group, the text of which is setout in Appendix I to this circular; (c) major transaction circular dated 4 March 2005 issued by the Company inrespect of the purchase of 20 A330-200 aircraft; (d) major transaction circular dated 30 August 2005 issued by the Company inrespect of the purchase of 15 Boeing 787 aircraft; (e) discloseable transaction circular dated 29 March 2006 issued by the Companyin respect of the purchase of 10 Boeing 737 aircraft; and (f) material contracts referred in the section headed "Material Contracts" ofthis circular. 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