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o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
China Eastern Airlines Corporation Limited | The People’s Republic of China | |
(Translation of Registrant’s Name Into English) | (Jurisdiction of Incorporation or Organization) |
Hong Qiao International Airport
Shanghai 200335
The People’s Republic of China
(8621) 6268-6268
(Address and Telephone Number of Principal Executive Offices)
Name of Each Exchange | ||
Title of Each Class | on Which Registered | |
American Depositary Shares | The New York Stock Exchange | |
Ordinary H Shares, par value RMB1.00 per share | The New York Stock Exchange* |
Shares are also listed and traded on The Stock Exchange of Hong Kong Limited.
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close
of the period covered by the annual report.
Large Accelerated Filero | Accelerated Filerþ | Non-Accelerated Filero |
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EX-1.1 ARTICLES OF ASSOCIATION | ||||||||
EX-4.12 AIRCRAFT PURCHASE AGREEMENT | ||||||||
EX-4.13 AIRCRAFT PURCHASE AGREEMENT | ||||||||
EX-4.14 AIRCRAFT PURCHASE AGREEMENT | ||||||||
EX-8.1 LIST OF SUBSIDIARY OF CEA | ||||||||
EX-12.1 CEO CERTIFICATION | ||||||||
EX-12.2 CFO CERTIFICATION | ||||||||
EX-13.1 CEO CERTIFICATION | ||||||||
EX-13.2 CFO CERTIFICATION |
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• | our fleet development plans, including, without limitation, related financing, schedule, intended use and planned disposition; | ||
• | the planned expansion of our cargo operations; | ||
• | the impact of changes in the policies of the Civil Aviation Administration of China, or the CAAC, regarding route rights; | ||
• | the impact of the CAAC policies regarding the restructuring of the airline industry in China; | ||
• | our expansion plans, including acquisition of other airlines; | ||
• | our marketing plans, including the establishment of additional sales offices; | ||
• | our plan to add new pilots; and | ||
• | the impact of unusual events on our business and operations. |
• | any changes in regulatory policies of the CAAC; |
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• | the effects of competition on the demand for and price of our services; | ||
• | the availability of qualified flight personnel and airport facilities; | ||
• | any significant depreciation of Renminbi or Hong Kong dollars against U.S. dollars, Japanese yen or Euro, the currencies in which the majority of our borrowings are denominated; | ||
• | the availability and cost of the aviation fuel; | ||
• | changes in political, economic, legal and social conditions in China; | ||
• | the fluctuation of interest rates; | ||
• | our ability to obtain adequate financing, including any required external debt and acceptable bank guarantees; and | ||
• | general economic conditions in markets where our company operates. |
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Capacity measurements | ||
ATK (available tonne kilometers) | the number of tonnes of capacity available for the carriage of revenue load (passengers and cargo) multiplied by the distance flown | |
ASK (available seat kilometers) | the number of seats made available for sale multiplied by the distance flown | |
AFTK (available freight tonne-kilometers) | the number of tonnes of capacity available for the carriage of cargo and mail multiplied by the distance flown | |
Traffic measurements | ||
revenue passenger-kilometers or RPK | the number of passengers carried multiplied by the distance flown | |
revenue freight tonne-kilometers or RFTK | cargo and mail load in tonnes multiplied by the distance flown | |
revenue passenger tonne-kilometers or RPTK | passenger load in tonnes multiplied by the distance flown | |
revenue tonne-kilometers or RTK | load (passenger and cargo) in tonnes multiplied by the distance flown | |
Load factors | ||
overall load factor | tonne-kilometers expressed as a percentage of ATK | |
passenger load factor | passenger-kilometers expressed as a percentage of ASK | |
break-even load factor | the load factor required to equate traffic revenue with our operating costs assuming that our total operating surplus is attributable to scheduled traffic operations | |
Yield and cost measurements | ||
passenger yield (revenue per passenger-kilometer) | revenue from passenger operations divided by passenger-kilometers | |
cargo yield (revenue per cargo tonne-kilometer) | revenue from cargo operations divided by cargo tonne-kilometers | |
average yield (revenue per total tonne-kilometer) | revenue from airline operations divided by tonne-kilometers | |
unit cost | operating expenses divided by ATK | |
tonne | a metric ton, equivalent to 2,204.6 lbs |
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Year Ended December 31, | ||||||||||||||||||||||||
(Restated except for the year ended December 31, 2005) | ||||||||||||||||||||||||
2001 | 2002 | 2003 | 2004 | 2005 | 2005 | |||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$ | |||||||||||||||||||
(in millions, except per share or per ADS data) | ||||||||||||||||||||||||
Income Statement Data: | ||||||||||||||||||||||||
IFRS:(1)(2) | ||||||||||||||||||||||||
Revenues | 12,301 | 13,332 | 14,470 | 21,386 | 27,454 | 3,402 | ||||||||||||||||||
Other operating income | 55 | 63 | 50 | 85 | 245 | 30 | ||||||||||||||||||
Operating expenses | (11,341 | ) | (12,350 | ) | (14,454 | ) | (20,239 | ) | (27,685 | ) | (3,431 | ) | ||||||||||||
Operating profit | 1,015 | 1,045 | 66 | 1,232 | 14 | 2 | ||||||||||||||||||
Finance costs, net | (688 | ) | (777 | ) | (775 | ) | (641 | ) | (578 | ) | (72 | ) | ||||||||||||
Profit (loss) before income tax | 330 | 235 | (741 | ) | 586 | (577 | ) | (72 | ) | |||||||||||||||
Profit (loss) for the year attributable to equity holders of the Company | 557 | 64 | (1,097 | ) | 321 | (467 | ) | (58 | ) | |||||||||||||||
Basic and fully diluted earnings (loss) per share(3) | 0.11 | 0.01 | (0.23 | ) | 0.07 | (0.10 | ) | (0.01 | ) | |||||||||||||||
Basic and fully diluted earnings (loss) per ADS | 11.50 | 1.31 | (22.54 | ) | 6.59 | (9.60 | ) | (1.19 | ) | |||||||||||||||
U.S. GAAP:(4) | ||||||||||||||||||||||||
Profit (loss) attributable to equity holders | — | (365 | ) | (1,391 | ) | 459 | (1,383 | ) | (171 | ) | ||||||||||||||
Basic and fully diluted earnings (loss) per share(3) | — | (0.08 | ) | (0.29 | ) | 0.09 | (0.28 | ) | (0.04 | ) | ||||||||||||||
Basic and fully diluted earnings (loss) per ADS | — | (7.51 | ) | (28.59 | ) | 9.43 | (28.42 | ) | (3.52 | ) |
As of December 31, | ||||||||||||||||||||||||
(Restated except for data as of December 31, 2005) | ||||||||||||||||||||||||
2001 | 2002 | 2003 | 2004 | 2005 | 2005 | |||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$ | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||||||
IFRS:(5) | ||||||||||||||||||||||||
Cash and cash equivalents | 1,331 | 1,945 | 1,583 | 2,114 | 1,864 | 231 | ||||||||||||||||||
Net current liabilities | (3,232 | ) | (7,504 | ) | (9,982 | ) | (12,491 | ) | (25,598 | ) | (3,172 | ) | ||||||||||||
Non-current assets | 25,299 | 28,147 | 33,039 | 36,812 | 53,305 | 6,605 | ||||||||||||||||||
Long term borrowing, including current portion | 5,301 | 6,495 | 11,223 | 10,736 | 12,659 | 1,569 | ||||||||||||||||||
Obligations under finance lease, including current portion | 9,871 | 8,184 | 7,101 | 8,662 | 10,608 | 1,314 | ||||||||||||||||||
Total share capital and reserves | 7,282 | 7,319 | 6,175 | 6,481 | 6,096 | 755 | ||||||||||||||||||
U.S. GAAP:(4) | ||||||||||||||||||||||||
Total assets | — | 45,462 | 50,598 | 53,487 | 59,218 | 7,338 | ||||||||||||||||||
Owner’s equity | — | 5,934 | 4,543 | 5,028 | 6,100 | 750 |
(1) | Certain incomes and expenses for the years ended December 31, 2001, 2002, 2003 and 2004 have been reclassified under the IFRS. Such reclassifications have no effect on the profit (loss) attributable to equity holders for each of those affected years. | |
(2) | Certain expenses for the years ended December 31, 2001, 2002, 2003 and 2004 have been restated as a result of the retrospective application of changes to our accounting policy relating to the costs of overhaul of owned and finance leased aircraft and engines. Such adjustments resulted in a 2.8% increase in the profit attributable to equity holders for the year ended December 31, 2001, a 25.6% decrease in the profit attributable to equity holders for the year ended December 31, 2002, a 15.5% increase in the loss attributable to equity holders for the year ended December 31, 2003 and a 37.5% decrease in the profit attributable to equity holders for the year ended December 31, 2004 . See Note 2(a) to our audited consolidated financial statements included in this annual report. |
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(3) | The calculation of earnings (loss) per share is based on the consolidated profit (loss) attributable to equity holders and 4,866,950,000 shares in issue. | |
(4) | Selected U.S. GAAP financial data for the years ended December 31, 2002, 2003 and 2004 have been restated to reflect our acquisitions of the assets and liabilities relating to the aviation businesses of CEA Northwest and CEA Yunnan in 2005. See Note 44 to our audited consolidated financial statements included in this annual report. | |
(5) | Selected balance sheet data for the years ended December 31, 2001, 2002, 2003 and 2004 have been restated as a result of the retrospective application of changes to our accounting policy relating to the costs of overhaul of owned and finance leased aircraft and engines. See Note 2(a) to our audited consolidated financial statements included in this annual report. |
Average(1) Noon Buying Rate(2)(RMB per US$) | Noon Buying Rate (RMB per US$) | |||||||||||||
Period | Period | High | Low | |||||||||||
2005 | 8.1826 | January 2006 | 8.0596 | 8.0702 | ||||||||||
2004 | 8.2768 | February 2006 | 8.0616 | 8.0415 | ||||||||||
2003 | 8.2771 | March 2006 | 8.0505 | 8.0167 | ||||||||||
2002 | 8.2772 | April 2006 | 8.0248 | 8.0040 | ||||||||||
2001 | 8.2772 | May 2006 | 8.0300 | 8.0005 | ||||||||||
June 2006 | 8.0225 | 7.9943 |
(1) | Determined by averaging the rates on the last business day of each month during the relevant period. | |
(2) | Noon Buying Rate in New York City for cable transfers payable in foreign currencies as certified for customs purpose by the Federal Reserve Bank of New York. |
Year Ended December 31, | ||||||||||||||||||||
2001 | 2002 | 2003 | 2004 | 2005 | ||||||||||||||||
Selected Airline Operating Data: | ||||||||||||||||||||
Capacity: | ||||||||||||||||||||
ATK (millions) | 4,188.2 | 4,366.6 | 4,774.5 | 7,071.2 | 8,751.5 | |||||||||||||||
ASK (millions) | 25,813.5 | 27,962.5 | 29,780.0 | 41,599.1 | 52,427.9 | |||||||||||||||
AFTK (millions) | 1,865.0 | 1,850.0 | 2,094.3 | 3,327.3 | 4,033.0 | |||||||||||||||
Traffic: | ||||||||||||||||||||
Revenue passenger-kilometers (millions) | 15,911.4 | 18,206.4 | 18,002.7 | 27,580.8 | 36,380.6 | |||||||||||||||
Revenue tonne-kilometers (millions) | 2,373.2 | 2,652.2 | 2,907.7 | 4,340.7 | 5,395.2 | |||||||||||||||
Revenue passenger tonne-kilometers (millions) | 1,423.4 | 1,629.2 | 1,611.1 | 2,466.0 | 3,273.7 | |||||||||||||||
Revenue freight tonne-kilometers (millions) | 949.8 | 1,023.0 | 1,296.6 | 1,874.7 | 2,151.5 | |||||||||||||||
Kilometers flown (millions) | 147.2 | 158.8 | 176.5 | 242.8 | 287.7 | |||||||||||||||
Hours flown (thousands) | 220.4 | 234.6 | 259.4 | 360.4 | 467.8 | |||||||||||||||
Number of passengers carried (thousands) | 10,371.4 | 11,533.1 | 12,040.2 | 17,711.0 | 24,290.5 | |||||||||||||||
Weight of cargo carried (millions of kilograms) | 302.0 | 344.7 | 459.8 | 663.6 | 775.5 |
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Year Ended December 31, | ||||||||||||||||||||
2001 | 2002 | 2003 | 2004 | 2005 | ||||||||||||||||
Average distance flown (kilometers per passenger) | 1,534.2 | 1,578.6 | 1,495.2 | 1,557.3 | 1,497.7 | |||||||||||||||
Load Factor: | ||||||||||||||||||||
Overall load factor (%) | 56.7 | 60.7 | 60.9 | 61.4 | 61.7 | |||||||||||||||
Passenger load factor (%) | 61.6 | 65.1 | 60.5 | 66.3 | 69.4 | |||||||||||||||
Break-even load factor (based on ATK) (%) | 54.7 | 59.9 | 63.6 | 62.2 | 66.0 | |||||||||||||||
Yield and Cost Statistics (RMB): | ||||||||||||||||||||
Passenger yield (passenger revenue/passenger-kilometers) | 0.60 | 0.55 | 0.57 | 0.56 | 0.57 | |||||||||||||||
Cargo yield (cargo revenue/cargo tonne-kilometers) | 2.20 | 2.39 | 2.46 | 2.36 | 2.31 | |||||||||||||||
Average yield (passenger and cargo revenue/ tonne-kilometers) | 4.92 | 4.71 | 4.62 | 4.60 | 4.79 | |||||||||||||||
Unit cost (operating expenses/ATK) | 2.69 | 2.87 | 2.94 | 2.86 | 3.16 |
• | route allocation; | ||
• | pricing of domestic airfare; | ||
• | the administration of air traffic control systems and certain airports; and | ||
• | aircraft registration and aircraft airworthiness certification. |
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• | difficulty with integrating the assets and operations of the acquired airline companies or airline-related businesses, including their employees, corporate cultures, managerial systems, processes and procedures and management information systems and services; | ||
• | failure to achieve the anticipated synergies, cost savings or revenue-enhancing opportunities resulting from the acquisition of such airline companies or airline-related businesses; | ||
• | difficulty with exercising control and supervision over the newly acquired operations; and |
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• | increased financial pressure resulting from the assumption of recorded and unrecorded liabilities of the acquired airline companies or airline-related businesses. |
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China Eastern Airlines Corporation Limited 99% 63% 95% 86% 70% |
Shanghai Eastern Airlines Investment Co., Ltd. China Eastern Airlines Jiangsu Co., Ltd. Shanghai Eastern Flight Training Co., Ltd. Eastern Airlines Hotel Co., Ltd. China Cargo Airlines Co., Ltd. Shanghai Eastern Logistics Co., Ltd. |
70% |
China Eastern Airlines Wuhan Limited |
96% |
Shanghai Eastern Maintenance Co., Ltd. China Eastern Fudart Transportation Service Co., Ltd. |
60% 51% |
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2002 | 2003 | 2004 | 2005 | 2006 | ||||||||
Additions (Finance Leases and Purchases) | 4 Boeing 737-700 aircraft | 10 Airbus 320 aircraft 3 Airbus 340-600 aircraft | 2 Airbus 340-600 aircraft 2 Airbus 321 aircraft 5 Airbus 320 aircraft | 2 Airbus 321 aircraft 12 Airbus 320 aircraft 3 Airbus 310-200 aircraft 3 Airbus 300-600 aircraft 3 ERJ145 aircraft 10 Boeing 737-300 aircraft 4 Boeing 737-700 aircraft 3 Boeing 767-300 aircraft 5 CRJ-200 7 BAE146-300 aircraft 3 BAE146-100 | 5 Airbus A330-300 aircraft(1) 2 Airbus A321 aircraft 3 Airbus A319 aircraft 7 Boeing 737-700 aircraft 4 ERJ145 aircraft 1 Boeing 747F aircraft | |||||||
Additions (Operating Leases and Wet Leases) | 2 Airbus 319 aircraft 2 Boeing 737-700 aircraft | 5 Boeing 737-700 aircraft | 1 Airbus 300F aircraft | 16 Airbus A320 aircraft 7 Boeing 737-700 aircraft 3 Boeing 737-800 aircraft 3 Boeing 737-300 aircraft 1 Airbus A300F freighter 2 Boeing 747F freighter | 3 Airbus A330-200 aircraft 2 Airbus A330-300 aircraft | |||||||
Dispositions | 2 Airbus 310 aircraft | 3 Boeing 737-200 aircraft | 0 | 1 BAE 146-100 | 2 Boeing 737-300 |
(1) | It is to be determined if these five Airbus A330-300 aircraft will be acquired by purchase, finance lease or operating lease. |
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2001 | 2002 | 2003 | 2004 | 2005 | 2005 | |||||||||||||||||||
(millions of RMB) | (millions of RMB) | (millions of RMB) | (millions of RMB) | (millions of RMB) | (millions of US$) | |||||||||||||||||||
Traffic Revenues | ||||||||||||||||||||||||
Passengers | 9,586 | 10,038 | 10,375 | 15,534 | 20,853 | 2,584 | ||||||||||||||||||
Cargo and mail | 2,092 | 2,445 | 3,187 | 4,428 | 4,967 | 615 | ||||||||||||||||||
Total Traffic Revenues | 11,678 | 12,483 | 13,562 | 19,962 | 25,820 | 3,199 | ||||||||||||||||||
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2001 | 2002 | 2003 | 2004 | 2005 | ||||||||||||||||
Passenger Traffic (millions of passenger kilometers) | 15,911 | 18,206 | 18,003 | 27,581 | 36,381 | |||||||||||||||
Domestic | 7,512 | 8,516 | 10,302 | 14,500 | 20,276 | |||||||||||||||
Hong Kong | 2,028 | 2,234 | 1,934 | 3,038 | 3,284 | |||||||||||||||
International | 6,371 | 7,457 | 5,767 | 10,043 | 12,819 | |||||||||||||||
ASK (millions) | 25,814 | 27,963 | 29,780 | 41,599 | 52,428 | |||||||||||||||
Domestic | 12,928 | 13,494 | 15,909 | 20,635 | 27,468 | |||||||||||||||
Hong Kong | 3,609 | 3,650 | 3,692 | 4,857 | 5,288 | |||||||||||||||
International | 9,277 | 10,819 | 10,178 | 16,107 | 19,672 | |||||||||||||||
Passenger Yield (passenger revenues/passenger kilometers, in RMB) | 0.60 | 0.55 | 0.57 | 0.56 | 0.57 | |||||||||||||||
Domestic | 0.63 | 0.55 | 0.54 | 0.57 | 0.56 | |||||||||||||||
Hong Kong | 0.95 | 0.86 | 0.84 | 0.74 | 0.76 | |||||||||||||||
International | 0.48 | 0.46 | 0.53 | 0.50 | 0.54 | |||||||||||||||
Passenger Load Factor (%) | 61.64 | 65.11 | 60.45 | 66.30 | 69.39 | |||||||||||||||
Domestic | 58.10 | 63.11 | 64.75 | 70.27 | 73.82 | |||||||||||||||
Hong Kong | 56.20 | 61.21 | 52.37 | 62.55 | 62.10 | |||||||||||||||
International | 68.68 | 68.93 | 56.66 | 62.35 | 65.16 |
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Year Ended December 31, | ||||||||||||||||||||
2001 | 2002 | 2003 | 2004 | 2005 | ||||||||||||||||
Cargo and Mail Tonne-Kilometers (millions) | 950 | 1,023 | 1,297 | 1,875 | 2,152 | |||||||||||||||
Domestic | 176 | 206 | 258 | 328 | 410 | |||||||||||||||
Hong Kong | 48 | 53 | 81 | 124 | 135 | |||||||||||||||
International | 726 | 764 | 958 | 1,423 | 1,607 | |||||||||||||||
Weight of Cargo and Mail Carried (millions of kilograms) | 302 | 345 | 460 | 664 | 776 | |||||||||||||||
Domestic | 146 | 170 | 205 | 262 | 316 | |||||||||||||||
Hong Kong | 33 | 39 | 57 | 85 | 92 | |||||||||||||||
International | 116 | 136 | 198 | 317 | 348 | |||||||||||||||
Cargo and Mail Yield (cargo and mail revenues/cargo and mail tonne-kilometers, in RMB) | 2.20 | 2.39 | 2.46 | 2.36 | 2.31 |
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• | the administration of airports and air traffic control systems; | ||
• | aircraft registration and aircraft airworthiness certification; | ||
• | operational safety standards; and | ||
• | the liabilities of carriers. |
• | whether to apply for any route; | ||
• | the allocation of aircraft among routes; | ||
• | the airfare pricing for the international and Hong Kong passenger routes; | ||
• | the airfare pricing within the limit provided by the CAAC for the domestic passenger routes; | ||
• | the training and supervision of personnel; and | ||
• | many other areas of day-to-day operations. |
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• | availability of appropriate aircraft and flight personnel; | ||
• | safety record; | ||
• | on-time performance; and | ||
• | hub location. |
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Number of | ||||||||||||||||||||||||
Number of | Aircraft under | Number of | Average | |||||||||||||||||||||
Total Number | Aircraft | Operating | Aircraft under | Number of | Average age | |||||||||||||||||||
of Aircraft | Owned | Lease | Finance Lease | Seats | (in years)(1) | |||||||||||||||||||
Jet Passenger Aircraft: | ||||||||||||||||||||||||
Wide-body: | ||||||||||||||||||||||||
A340-600 | 5 | 3 | 2 | — | 322 | 2.4 | ||||||||||||||||||
A340-300 | 5 | 5 | — | — | 289 | 9.6 | ||||||||||||||||||
A330-300 | 2 | — | — | 2 | 300 | 0.3 | ||||||||||||||||||
A330-200 | 3 | — | — | 3 | 264 | 0.3 | ||||||||||||||||||
A310-200 | 3 | — | — | 3 | 220 | 20.7 | ||||||||||||||||||
A300-600 | 13 | 4 | 6 | 3 | 269 | 12.6 | ||||||||||||||||||
B767-300 | 3 | — | — | 3 | 263 | 9.6 | ||||||||||||||||||
Narrow-body: | ||||||||||||||||||||||||
MD-90 | 9 | 2 | 7 | 0 | 157 | 7.9 | ||||||||||||||||||
A321 | 4 | 4 | — | — | 185 | 1.2 | ||||||||||||||||||
A320-200 | 63 | 16 | 24 | 23 | 158 | 4.5 | ||||||||||||||||||
A319 | 12 | — | 2 | 10 | 122 | 4.1 | ||||||||||||||||||
Boeing 737-800 | 7 | — | — | 7 | 158 | 2.3 | ||||||||||||||||||
Boeing 737-700 | 25 | 8 | 2 | 15 | 142 | 3.0 | ||||||||||||||||||
Boeing 737-300 | 23 | 4 | 11 | 8 | 138 | 10.1 | ||||||||||||||||||
ERJ 145 | 4 | 4 | — | — | 50 | 0.5 | ||||||||||||||||||
CRJ-200 | 5 | 5 | — | — | 50 | 4.2 | ||||||||||||||||||
Total Passenger Aircraft: | 186 | 55 | 54 | 77 | — | — | ||||||||||||||||||
Cargo Aircraft: | ||||||||||||||||||||||||
MD-11F | 6 | 6 | — | — | — | 13.5 | ||||||||||||||||||
A300-B4 | 2 | — | 2 | — | — | — | ||||||||||||||||||
B747-300 | 1 | — | 1 | — | — | — | ||||||||||||||||||
Total Fleet | 195 | 61 | 57 | 77 | — | — | ||||||||||||||||||
(1) | The average aircraft age is weighted by the number of available seats. |
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2003 | 2004 | 2005 | ||||||||||
(in hours) | ||||||||||||
Wide-body: | ||||||||||||
A340-600 | 9.9 | 12.6 | 13.8 | |||||||||
A340-300 | 11.9 | 13.8 | 12.8 | |||||||||
A300-600 | 6.3 | 8.8 | 8.9 | |||||||||
A310-200 | — | — | 7.2 | |||||||||
B767-300 | — | — | 9.2 | |||||||||
Narrow-body: | ||||||||||||
MD-90 | 6.9 | 8.5 | 8.0 | |||||||||
MD-82 | 5.4 | 7.8 | 6.2 | |||||||||
A321 | — | 6.4 | 8.3 | |||||||||
A320 | 7.8 | 9.4 | 9.2 | |||||||||
A319 | 8.4 | 9.5 | 9.5 | |||||||||
Boeing 737-800 | — | — | 9.9 | |||||||||
Boeing 737-700 | 9.0 | 9.9 | 9.9 | |||||||||
Boeing 737-300 | 8.6 | 10.0 | 9.0 | |||||||||
ERJ145 | — | — | 7.7 | |||||||||
CRJ-200 | — | — | 5.1 |
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2006 | 2007 | Total | ||||||||||
Aircraft | ||||||||||||
A330-300 | 7 | 5 | 12 | |||||||||
A330-200 | 3 | 1 | 4 | |||||||||
A321 | 2 | 4 | 6 | |||||||||
A320 | 0 | 2 | 2 | |||||||||
A319 | 3 | 2 | 5 | |||||||||
B737NG | 0 | 2 | 2 | |||||||||
B737-700 | 7 | 0 | 7 | |||||||||
ERJ145 | 4 | 3 | 7 | |||||||||
B747F | 1 | 1 | 2 | |||||||||
Total | 27 | 20 | 47 | |||||||||
• | our aircraft requirements and anticipated future deliveries; | ||
• | capital structure and cash flow situation; | ||
• | prevailing interest rates; and | ||
• | other market conditions in effect at the time of any such acquisition or financing. |
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Year Ended December 31, | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
Passenger Revenues (millions of RMB)(1) | ||||||||||||
Domestic | 5,592 | 8,284 | 11,439 | |||||||||
Hong Kong | 1,667 | 2,240 | 2,495 | |||||||||
International | ||||||||||||
Japan | 1,002 | 1,502 | 2,009 | |||||||||
U.S. and Europe | 804 | 1,264 | 1,412 | |||||||||
Other | 1,310 | 2,244 | 3,498 | |||||||||
Total Passenger Revenues | 10,375 | 15,534 | 20,853 | |||||||||
Passenger Traffic (millions of passenger-kilometers) | ||||||||||||
Domestic | 10,302 | 14,500 | 20,278 | |||||||||
Hong Kong | 1,934 | 3,038 | 3,284 | |||||||||
International | 5,767 | 10,043 | 12,819 | |||||||||
Total Passenger Traffic | 18,003 | 27,581 | 36,381 | |||||||||
Passenger Yield (RMB per passenger-kilometer) | ||||||||||||
Domestic | 0.54 | 0.57 | 0.56 | |||||||||
Hong Kong | 0.84 | 0.74 | 0.76 | |||||||||
International | 0.53 | 0.50 | 0.54 | |||||||||
Total Passenger Yield | 0.57 | 0.56 | 0.57 | |||||||||
(1) | Certain revenues for the years ended December 31, 2003 and 2004 have been restated due to reclassification. |
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Payments Due by Period | ||||||||||||||||||||
Contractual | (RMB millions) | |||||||||||||||||||
Obligations | Total | Less Than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | |||||||||||||||
Long-Term Debt | 12,659 | 2,869 | 3,874 | 4,307 | 1,609 | |||||||||||||||
Capital Leases | 12,176 | 2,885 | 4,756 | 1,601 | 2,934 | |||||||||||||||
Operating Leases | 9,452 | 1,702 | 3,102 | 2,629 | 2,019 | |||||||||||||||
Unconditional Purchase Obligations | 47,746 | 9,494 | 26,227 | 12,025 | — | |||||||||||||||
Other Long-term Obligations | 82 | 30 | 52 | — | — | |||||||||||||||
Pension Liabilities | — | — | — | — | — | |||||||||||||||
Post-retirement Benefit Obligations | 1,239 | 36 | 86 | 85 | 1,032 | |||||||||||||||
Deferred Tax Liabilities | 601 | — | 30 | 21 | 550 | |||||||||||||||
Long-term Portions of Other Payables(1) | 155 | — | — | — | — | |||||||||||||||
Short-term Bank Loans | 13,711 | 13,711 | — | — | — | |||||||||||||||
Interest Obligations | 3,538 | 1,303 | 1,190 | 558 | 487 | |||||||||||||||
Under Finance Lease | 1,568 | 457 | 505 | 268 | 338 | |||||||||||||||
Under Bank Loans | 1,970 | 846 | 685 | 290 | 149 | |||||||||||||||
Fixed Rate | 828 | 442 | 298 | 69 | 19 | |||||||||||||||
Variable Rate(2) | 1,142 | 404 | 387 | 221 | 130 | |||||||||||||||
Total | 101,359 | 32,030 | 39,317 | 21,226 | 8,631 | |||||||||||||||
(1) | Figures of payments due by period are not available. | |
(2) | For our variable rate loans, interest rates range from 3 months LIBOR + 0.25% to 6 months LIBOR + 0.6%. Interest obligations relating to variable rate loans are calculated based on the relevant LIBOR rates as of December 31, 2005. A 1% increase or decrease in the interest rate would increase or decrease the interest obligations by RMB278 million in total with RMB97 million in year 1, RMB95 million in years 2 and 3, RMB55 million in years 4 and 5 and RMB31 million for subsequent years. |
Total Amounts | Amount of Commitment Expiration Per Period | |||||||||||||||||||
Other Commercial | Committed | (RMB millions) | ||||||||||||||||||
Commitments | (RMB millions) | Less Than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | |||||||||||||||
Line of Credit | 65,500 | 25,500 | 40,000 | — | — | |||||||||||||||
Standby Letters of Credit | — | — | — | — | — | |||||||||||||||
Guarantees | — | — | — | — | — | |||||||||||||||
Standby Repurchase Obligations | — | — | — | — | — | |||||||||||||||
Other Commercial Commitments | — | — | — | — | — | |||||||||||||||
Total | 65,500 | 25,500 | 40,000 | — | — | |||||||||||||||
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Name | Age | Shares Owned | Position | |||
Li Fenghua | 56 | 5,000 A shares | Chairman of the Board of Directors | |||
Luo Chaogeng(1) | 56 | 5,000 A shares | Director and President | |||
Cao Jianxiong | 47 | 5,800 A shares | Director | |||
Wan Mingwu | 59 | 5,000 A shares | Director and Vice President | |||
Zhong Xiong | 60 | 2,800 A shares | Director | |||
Luo Zhuping | 53 | 5,800 A shares | Director and Company Secretary | |||
Hu Honggao | 52 | 0 | Independent Non-executive Director | |||
Peter Lok | 69 | 0 | Independent Non-executive Director | |||
Wu Baiwang | 63 | 0 | Independent Non-executive Director | |||
Zhou Ruijin | 67 | 0 | Independent Non-executive Director | |||
Xie Rong | 54 | 0 | Independent Non-executive Director | |||
Li Wenxin | 57 | 6,000 A shares | Chairman of the Supervisory Committee | |||
Ba Shengji | 47 | 5,800 A shares | Supervisor | |||
Yang Xingen | 53 | 3,800 A shares | Supervisor | |||
Yang Jie | 36 | 3,000 A shares | Supervisor | |||
Liu Jiashun | 49 | 3,000 A shares | Supervisor | |||
Wu Jiuhong | 54 | 3,000 A shares | Vice President | |||
Zhou Liguo | 57 | 3,000 A shares | Vice President | |||
Zhang Jianzhong | 51 | 5,000 A shares | Vice President | |||
Tong Guozhao | 47 | 5,000 A shares | Vice President | |||
Li Yangmin(2) | 43 | 3,000 A shares | Vice President | |||
Luo Weide | 50 | 3,000 A shares | Chief Financial Officer |
(1) | Mr. Luo served as a director of our company as of June 30, 2005. | |
(2) | Mr. Li served as a vice president of our company as of October 28, 2005. |
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Name | Held Position Since | Expiration of Term | ||
Li Fenghua | June 20, 2003 | June 18, 2007 | ||
Luo Chaogeng | June 30, 2005 | June 18, 2007 | ||
Wan Mingwu | June 30, 2001 | June 18, 2007 | ||
Cao Jianxiong | June 30, 2001 | June 18, 2007 | ||
Zhong Xiong | June 30, 2001 | June 18, 2007 | ||
Luo Zhuping | June 18, 2004 | June 18, 2007 | ||
Hu Honggao | June 30, 2001 | June 18, 2007 | ||
Peter Lok | June 30, 2001 | June 18, 2007 | ||
Wu Baiwang | June 30, 2001 | June 18, 2007 | ||
Zhou Ruijin | June 30, 2001 | June 18, 2007 | ||
Xie Rong | June 20, 2003 | June 18, 2007 | ||
Li Wenxin | June 30, 2001 | June 18, 2007 | ||
Ba Shengji | June 30, 2001 | June 18, 2007 | ||
Yang Xingen | June 18, 2004 | June 18, 2007 | ||
Yang Jie | June 30, 2001 | June 18, 2007 | ||
Liu Jiashun | June 30, 2001 | June 18, 2007 | ||
Wu Jiuhong | April 4, 2002 | June 18, 2007 | ||
Zhou Liguo | April 5, 2004 | June 18, 2007 | ||
Zhang Jianzhong | June 18, 2004 | June 18, 2007 | ||
Tang Guozhao | April 1, 2005 | June 18, 2007 | ||
Li Yangmin | October 28, 2005 | June 18, 2007 | ||
Luo Weide | June 30, 2001 | June 18, 2007 |
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As of December 31, | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
Pilots | 1,516 | 1,699 | 2,154 | |||||||||
Flight attendants | 1,817 | 2,732 | 3,752 | |||||||||
Maintenance personal | 2,696 | 3,283 | 4,480 | |||||||||
Sales and marketing | 2,172 | 2,546 | 3,658 | |||||||||
Other | 8,234 | 10,557 | 15,257 | |||||||||
Total | 16,435 | 20,817 | 29,301 |
Amount | Percent of | Percent of Total | ||||||
Title of Class | Identity of Person or Group | Owned | Class | Shares | ||||
Domestic Shares | CEA Holding | 3,000,000,000 | 90.91% | 61.64% | ||||
H Shares | HKSCC Nominees Limited(1) | 1,487,931,163 | 94.96% | 30.57% |
(1) | As custodian of the Depositary for American Depositary Shares representing H Shares. |
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Price per H Share | Price per ADS | |||||||||||||||
(HK$) | (US$) | |||||||||||||||
High | Low | High | Low | |||||||||||||
2001 | 1.41 | 0.66 | 17.75 | 8.75 | ||||||||||||
2002 | 1.48 | 0.80 | 18.50 | 11.00 | ||||||||||||
2003 | 1.39 | 0.88 | 18.33 | 9.6 | ||||||||||||
First Quarter 2004 | 1.84 | 1.28 | 23.22 | 17.03 | ||||||||||||
Second Quarter 2004 | 1.64 | 1.28 | 21.27 | 16.74 | ||||||||||||
Third Quarter 2004 | 1.65 | 1.49 | 20.90 | 18.81 | ||||||||||||
Fourth Quarter 2004 | 1.79 | 1.40 | 23.30 | 18.20 | ||||||||||||
2004 | 1.85 | 1.28 | 23.70 | 16.60 | ||||||||||||
First Quarter 2005 | 1.70 | 1.34 | 22.48 | 17.23 | ||||||||||||
Second Quarter 2005 | 1.51 | 1.28 | 19.30 | 16.56 | ||||||||||||
Third Quarter 2005 | 1.42 | 1.18 | 18.65 | 15.14 | ||||||||||||
Fourth Quarter 2005 | 1.30 | 0.95 | 16.45 | 12.52 | ||||||||||||
December 2005 | 1.30 | 1.21 | 16.45 | 15.61 | ||||||||||||
January 2006 | 1.33 | 1.19 | 16.96 | 15.50 | ||||||||||||
February 2006 | 1.38 | 1.20 | 17.18 | 15.64 | ||||||||||||
March 2006 | 1.44 | 1.24 | 18.24 | 16.00 | ||||||||||||
April 2006 | 1.29 | 1.12 | 16.88 | 14.80 | ||||||||||||
May 2006 | 1.18 | 1.08 | 15.15 | 13.98 | ||||||||||||
June 2006 | 1.16 | 1.04 | 14.68 | 13.10 |
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• | an aircraft purchase agreement, dated as of October 9, 2004, between our company and Airbus SAS regarding the purchase of 20 Airbus A330-300 aircraft; | ||
• | an amendment to an aircraft purchase agreement, dated as of April 21, 2005, between our company and Airbus SAS regarding the purchase of 15 Airbus A320 series aircraft; | ||
• | an aircraft purchase agreement, dated as of August 8, 2005, between our company and The Boeing Company regarding the purchase of 15 Boeing 787 aircraft (with engines); | ||
• | an aircraft purchase agreement, dated as of December 20, 2005, as amended by a supplemental agreement dated as of April 10, 2006, between our company and The Boeing Company regarding the purchase of 20 Boeing 737 NG series aircraft (with engines); and | ||
• | an amendment to an aircraft purchase agreement, dated as of June 26, 2006, between our company and Airbus SAS regarding the purchase of 30 Airbus A320 aircraft (with engines). |
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• | a dealer in securities; | ||
• | a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings; | ||
• | a tax-exempt organization; | ||
• | a life insurance company; | ||
• | a person liable for alternative minimum tax; | ||
• | a person that actually or constructively owns 10% or more of our voting stock; | ||
• | a person that holds H shares or ADSs as part of a straddle or a hedging or conversion transaction; or | ||
• | a person whose functional currency is not the U.S. dollar. |
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• | a citizen or resident of the United States; | ||
• | a domestic corporation; | ||
• | an estate whose income is subject to United States federal income tax regardless of its source; or | ||
• | a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust. |
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• | at least 75% of our gross income for the taxable year is passive income; or | ||
• | at least 50% of the value, determined on the basis of a quarterly average, of our assets is attributable to assets that produce or are held for the production of passive income. |
• | any gain you realize on the sale or other disposition of your H shares or ADSs; and | ||
• | any excess distribution that we make to you (generally, any distributions to you during a single taxable year that are greater than 125% of the average annual distributions received by you in respect of the H shares or ADSs during the three preceding taxable years or, if shorter, your holding period for the H shares or ADSs). |
• | the gain or excess distribution will be allocated ratably over your holding period for the H shares or ADSs; | ||
• | the amount allocated to the taxable year in which you realized the gain or excess distribution will be taxed as ordinary income; | ||
• | the amount allocated to each prior year, with certain exceptions, will be taxed at the highest tax rate in effect for that year; and |
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• | the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year. |
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RMB’000 | ||||
Carrying amounts | 12,611,920 | |||
Estimated fair value | 12,044,271 | |||
Decrease in the estimated fair value resulting from an increase of the average interest rate by 1% | 295,917 | |||
Increase in the estimated fair value resulting from a decrease of the average interest rate by 1% | 267,635 |
Profit and Loss Account | ||||
Decrease/increase by | ||||
RMB’000 | ||||
US dollar appreciates/ (depreciates) by 1% | 21,552 | |||
Japanese yen appreciates/ (depreciates) by 1% | 6,699 | |||
Euro appreciates/ (depreciates) by 1% | 240 |
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Audit Fees | Audit-Related Fees | Tax Fees | Other Fees | |||||||||||||
(RMB) | (RMB) | (RMB) | (RMB) | |||||||||||||
2004 | 6,093,550 | 1,000,000 | 0 | 0 | ||||||||||||
2005 | 9,684,240 | 5,859,670 | 0 | 0 |
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(a) | See Item 18 for a list of the financial statements filed as part of this annual report. | ||
(b) | Exhibits to this annual report: |
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Exhibits | Description | |
1.1 | Articles of Association as amended on June 30, 2005 (English translation). | |
2.1 | Specimen Certificate for the H Shares.(1) | |
2.2 | Form of Deposit Agreement among the Registrant, The Bank of New York, as depositary, and Owners and Beneficial Owners from time to time of American Depositary Receipts.(2) | |
4.1 | Office Space Lease Agreement between our company and Eastern Air Group Company (together with English translation).(1) | |
4.8 | Employee Housing Lease Agreement between our company and Eastern Air Group Company (together with English translation).(1) | |
4.9 | Aircraft Purchase Agreement, dated as of October 9, 2004, between our company and Airbus SAS. (3) | |
4.10 | Amendment No. 9 to the A320 Purchase Agreement, dated as of April 21, 2005, between our company and Airbus SAS. (3) | |
4.11 | Assets Transfer Agreement, dated as of May 12, 2005, between our company, CEA Holding, CEA Northwest and CEA Yunnan (English translation).(3) | |
4.12 | Aircraft Purchase Agreement, dated as of August 8, 2005, between our company and The Boeing Company. (4) | |
4.13 | Aircraft Purchase Agreement, dated as of December 20, 2005, as amended by a supplemental agreement dated as of April 10, 2006, between our company and The Boeing Company.(4) | |
4.14 | Amendment No. 10 to the A320 Purchase Agreement, dated as of June 26, 2006, between our company and Airbus SAS.(4) | |
8.1 | List of Subsidiaries (as of June 30, 2006). | |
11.1 | Code of Ethics (English translation).(5) | |
12.1 | Certification of President pursuant to Rule 13a-14(a). | |
12.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a). | |
13.1 | Certification of President pursuant to Rule 13a-14(b). | |
13.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(b). |
(1) | Incorporated by reference to our Registration Statement on Form F-1 (File No. 333-6260), filed with the Securities and Exchange Commission on January 9, 1997. | |
(2) | Incorporated by reference to our Registration Statement on Form F-6 (File No. 333-6284), filed with the Securities and Exchange Commission with respect to American Depositary Shares representing our H shares. | |
(3) | Incorporated by reference to our annual report on Form 20-F (File No. 001-14550), filed with the Securities and Exchange Commission on June 24, 2005. |
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(4) | Portions of this document have been omitted pursuant to a confidential treatment request, and the full, unredacted document has been separately submitted to the Securities and Exchange Commission with a confidential treatment request. | |
(5) | Incorporated by reference to our annual report on Form 20-F (File No. 001-14550), filed with the Securities and Exchange Commission on June 28, 2004. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||||||
By: | /s/ Li Fenghua | |||||
Title: Chairman of the Board of Directors |
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Exhibits | Description | |
1.1 | Articles of Association as amended on June 30, 2005 (English translation). | |
2.1 | Specimen Certificate for the H Shares.(1) | |
2.2 | Form of Deposit Agreement among the Registrant, The Bank of New York, as depositary, and Owners and Beneficial Owners from time to time of American Depositary Receipts.(2) | |
4.1 | Office Space Lease Agreement between our company and Eastern Air Group Company (together with English translation).(1) | |
4.8 | Employee Housing Lease Agreement between our company and Eastern Air Group Company (together with English translation).(1) | |
4.9 | Aircraft Purchase Agreement, dated as of October 9, 2004, between our company and Airbus SAS. (3) | |
4.10 | Amendment No. 9 to the A320 Purchase Agreement, dated as of April 21, 2005, between our company and Airbus SAS. (3) | |
4.11 | Assets Transfer Agreement, dated as of May 12, 2005, between our company, CEA Holding, CEA Northwest and CEA Yunnan (English translation).(3) | |
4.12 | Aircraft Purchase Agreement, dated as of August 8, 2005, between our company and The Boeing Company. (4) | |
4.13 | Aircraft Purchase Agreement, dated as of December 20, 2005, as amended by a supplemental agreement dated as of April 10, 2006, between our company and The Boeing Company.(4) | |
4.14 | Amendment No. 10 to the A320 Purchase Agreement, dated as of June 26, 2006, between our company and Airbus SAS.(4) | |
8.1 | List of Subsidiaries (as of June 30, 2006). | |
11.1 | Code of Ethics (English translation).(5) | |
12.1 | Certification of President pursuant to Rule 13a-14(a). | |
12.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a). | |
13.1 | Certification of President pursuant to Rule 13a-14(b). | |
13.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(b). |
(1) | Incorporated by reference to our Registration Statement on Form F-1 (File No. 333-6260), filed with the Securities and Exchange Commission on January 9, 1997. | |
(2) | Incorporated by reference to our Registration Statement on Form F-6 (File No. 333-6284), filed with the Securities and Exchange Commission with respect to American Depositary Shares representing our H shares. | |
(3) | Incorporated by reference to our annual report on Form 20-F (File No. 001-14550), filed with the Securities and Exchange Commission on June 24, 2005. | |
(4) | Portions of this document have been omitted pursuant to a confidential treatment request, and the full, unredacted document has been separately submitted to the Securities and Exchange Commission with a confidential treatment request. | |
(5) | Incorporated by reference to our annual report on Form 20-F (File No. 001-14550), filed with the Securities and Exchange Commission on June 28, 2004. |
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CONSOLIDATED FINANCIAL STATEMENTS OF CHINA EASTERN AIRLINES CORPORATION LIMITED | ||||
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China Eastern Airlines Corporation Limited:
Certified Public Accountants
June 30, 2006
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Year ended December 31, | ||||||||||||||||||||
Restated | Restated | (Note 2a) | ||||||||||||||||||
2003 | 2004 | 2005 | 2005 | |||||||||||||||||
Note | RMB’000 | RMB’000 | RMB’000 | USD’000 | ||||||||||||||||
Revenues | 5 | 14,470,209 | 21,386,553 | 27,454,443 | 3,401,953 | |||||||||||||||
Other operating income | 6 | 50,302 | 85,004 | 245,279 | 30,392 | |||||||||||||||
Operating expenses | ||||||||||||||||||||
Commissions | (465,147 | ) | (772,219 | ) | (969,587 | ) | (120,144 | ) | ||||||||||||
Aircraft fuel | (3,044,956 | ) | (5,429,658 | ) | (8,888,873 | ) | (1,101,444 | ) | ||||||||||||
Take-off and landing charges | (2,254,456 | ) | (3,019,742 | ) | (3,718,846 | ) | (460,812 | ) | ||||||||||||
Ground services and other charges | (64,662 | ) | (99,296 | ) | (115,516 | ) | (14,314 | ) | ||||||||||||
Civil aviation infrastructure levies | — | (251,185 | ) | (466,191 | ) | (57,766 | ) | |||||||||||||
Food and beverages | (541,669 | ) | (758,046 | ) | (976,787 | ) | (121,036 | ) | ||||||||||||
Wages, salaries and benefits | 8 | (1,449,054 | ) | (1,865,879 | ) | (2,359,467 | ) | (292,368 | ) | |||||||||||
Aircraft maintenance | (816,613 | ) | (860,184 | ) | (1,383,989 | ) | (171,494 | ) | ||||||||||||
Aircraft depreciation and operating lease rentals | (3,524,883 | ) | (4,466,523 | ) | (5,254,716 | ) | (651,126 | ) | ||||||||||||
Other depreciation, amortization and operating lease rentals | (495,079 | ) | (495,916 | ) | (679,867 | ) | (84,244 | ) | ||||||||||||
Ticket reservation fee | (161,198 | ) | (209,995 | ) | (292,412 | ) | (36,234 | ) | ||||||||||||
Insurance costs | (163,765 | ) | (152,194 | ) | (148,862 | ) | (18,446 | ) | ||||||||||||
Office, administrative and other expenses | (1,472,956 | ) | (1,858,336 | ) | (2,430,361 | ) | (301,152 | ) | ||||||||||||
Total operating expenses | (14,454,438 | ) | (20,239,173 | ) | (27,685,474 | ) | (3,430,580 | ) | ||||||||||||
Operating profit | 66,073 | 1,232,384 | 14,248 | 1,765 | ||||||||||||||||
Interest income | 147,846 | 129,020 | 128,700 | 15,948 | ||||||||||||||||
Finance costs | 9 | (922,483 | ) | (770,176 | ) | (707,050 | ) | (87,612 | ) | |||||||||||
Share of results in associates | 19 | (32,738 | ) | (50,524 | ) | (9,030 | ) | (1,119 | ) | |||||||||||
Share of results in jointly controlled entities | 20 | — | 45,268 | (4,300 | ) | (533 | ) | |||||||||||||
(Loss)/profit before income tax | (741,302 | ) | 585,972 | (577,432 | ) | (71,551 | ) | |||||||||||||
Taxation | 11 | (a) | (239,373 | ) | (129,601 | ) | 138,704 | 17,187 | ||||||||||||
(Loss)/profit for the year | (980,675 | ) | 456,371 | (438,728 | ) | (54,364 | ) | |||||||||||||
Attributable to: | ||||||||||||||||||||
Equity holders of the Company | (1,097,161 | ) | 320,691 | (467,307 | ) | (57,905 | ) | |||||||||||||
Minority interest | 116,486 | 135,680 | 28,579 | 3,541 | ||||||||||||||||
(980,675 | ) | 456,371 | (438,728 | ) | (54,364 | ) | ||||||||||||||
Dividend payable to equity holders of the Company attributable to the year | 12 | — | 97,339 | — | — | |||||||||||||||
(Loss)/earnings per share for (loss)/profit attributable to the equity holders of the Company during the year | ||||||||||||||||||||
- basic and diluted | 13 | RMB(0.23 | ) | RMB0.07 | RMB(0.10 | ) | US$(0.01 | ) | ||||||||||||
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December 31, | ||||||||||||||||
Restated | (Note 2a) | |||||||||||||||
2004 | 2005 | 2005 | ||||||||||||||
Note | RMB’000 | RMB’000 | USD’000 | |||||||||||||
Non-current assets | ||||||||||||||||
Property, plant and equipment | 14 | 29,743,886 | 38,347,516 | 4,751,743 | ||||||||||||
Construction in progress | 15 | 188,654 | 240,884 | 29,849 | ||||||||||||
Lease prepayments | 16 | 828,808 | 972,771 | 120,539 | ||||||||||||
Advance payments on acquisition of aircraft | 17 | 2,678,603 | 9,072,673 | 1,124,219 | ||||||||||||
Intangible assets | 18 | 36,303 | 688,311 | 85,290 | ||||||||||||
Investments in associates | 19 | 633,212 | 629,746 | 78,034 | ||||||||||||
Investments in jointly controlled entities | 20 | 52,948 | 100,520 | 12,456 | ||||||||||||
Available-for-sale financial assets | 39,546 | 40,802 | 5,055 | |||||||||||||
Other long-term assets | 21 | 2,202,606 | 2,705,558 | 335,252 | ||||||||||||
Deferred tax assets | 11 | 395,465 | 434,839 | 53,882 | ||||||||||||
Derivative assets | 35 | 11,571 | 70,886 | 8,784 | ||||||||||||
36,811,602 | 53,304,506 | 6,605,103 | ||||||||||||||
Current assets | ||||||||||||||||
Flight equipment spare parts | 523,186 | 978,922 | 121,301 | |||||||||||||
Trade receivables | 22 | 1,707,062 | 1,918,409 | 237,715 | ||||||||||||
Amounts due from related companies | 39 | 122,253 | 205,712 | 25,490 | ||||||||||||
Prepayments, deposits and other receivables | 23 | 611,959 | 997,271 | 123,575 | ||||||||||||
Cash and cash equivalents | 24 | 2,114,447 | 1,864,001 | 230,973 | ||||||||||||
Derivative assets | 35 | — | 53,036 | 6,572 | ||||||||||||
5,078,907 | 6,017,351 | 745,626 | ||||||||||||||
Current liabilities | ||||||||||||||||
Sales in advance of carriage | 719,957 | 823,149 | 101,998 | |||||||||||||
Trade payables and notes payables | 25 | 1,457,217 | 3,394,898 | 420,671 | ||||||||||||
Amounts due to related companies | 39 | 138,968 | 295,030 | 36,558 | ||||||||||||
Other payables and accrued expenses | 26 | 4,466,024 | 6,021,481 | 746,137 | ||||||||||||
Provision for aircraft overhaul expenses, current portion | 27 | 52,798 | 15,589 | 1,932 | ||||||||||||
Tax payable | 162,606 | 47,259 | 5,856 | |||||||||||||
Obligations under finance leases, current portion | 28 | 1,189,648 | 2,428,037 | 300,865 | ||||||||||||
Borrowings, current portion | 29 | 9,382,351 | 18,554,630 | 2,299,154 | ||||||||||||
Derivative liabilities | 35 | — | 34,844 | 4,318 | ||||||||||||
17,569,569 | 31,614,917 | 3,917,489 | ||||||||||||||
Net current liabilities | (12,490,662 | ) | (25,597,566 | ) | (3,171,863 | ) | ||||||||||
Total assets less current liabilities | 24,320,940 | 27,706,940 | 3,433,240 | |||||||||||||
F-3
Table of Contents
AS OF DECEMBER 31, 2004 AND 2005
(Amounts in thousands)
December 31, | ||||||||||||||||
Restated | (Note 2a) | |||||||||||||||
2004 | 2005 | 2005 | ||||||||||||||
Note | RMB’000 | RMB’000 | USD’000 | |||||||||||||
Non-current liabilities | ||||||||||||||||
Provision for aircraft overhaul expenses | 27 | 201,211 | 388,410 | 48,128 | ||||||||||||
Obligations under finance leases | 28 | 7,472,638 | 8,180,460 | 1,013,663 | ||||||||||||
Borrowings | 29 | 7,542,828 | 9,790,116 | 1,213,119 | ||||||||||||
Other long-term liabilities | 32 | 100,204 | 155,229 | 19,234 | ||||||||||||
Post-retirement benefit obligations | 33 | (b) | 618,232 | 1,202,877 | 149,052 | |||||||||||
Long-term portion of staff housing allowances | 34 | (b) | 276,248 | 444,196 | 55,042 | |||||||||||
Deferred tax liabilities | 11 | 687,850 | 601,340 | 74,514 | ||||||||||||
Derivative liabilities | 35 | 119,643 | 25,770 | 3,193 | ||||||||||||
17,018,854 | 20,788,398 | 2,575,945 | ||||||||||||||
Net assets | 7,302,086 | 6,918,542 | 857,295 | |||||||||||||
Equity | ||||||||||||||||
Capital and reserves attributable to the Company’s equity holders | ||||||||||||||||
Share capital | 30 | 4,866,950 | 4,866,950 | 603,077 | ||||||||||||
Reserves | 31 | 1,614,301 | 1,229,115 | 152,303 | ||||||||||||
6,481,251 | 6,096,065 | 755,380 | ||||||||||||||
Minority interest | 820,835 | 822,477 | 101,915 | |||||||||||||
Total equity | 7,302,086 | 6,918,542 | 857,295 | |||||||||||||
F-4
Table of Contents
(Amounts in thousands)
Year ended December 31, | ||||||||||||||||||
(Note 2a) | ||||||||||||||||||
2003 | 2004 | 2005 | 2005 | |||||||||||||||
Note | RMB’000 | RMB’000 | RMB’000 | USD’000 | ||||||||||||||
Cash flows from operating activities | ||||||||||||||||||
Cash generated from operations | 36 | 4,086,358 | 4,242,852 | 3,369,783 | 417,559 | |||||||||||||
Interest paid | (860,304 | ) | (872,738 | ) | (1,357,402 | ) | (168,199 | ) | ||||||||||
Income tax paid | (62,977 | ) | (104,009 | ) | (59,932 | ) | (7,426 | ) | ||||||||||
Net cash inflow from operating activities | 3,163,077 | 3,266,105 | 1,952,449 | 241,934 | ||||||||||||||
Cash flows from investing activities | ||||||||||||||||||
Purchase of aircraft, engines, flight equipment, buildings, other property, plant and equipment | (5,776,617 | ) | (1,525,845 | ) | (2,486,830 | ) | (308,150 | ) | ||||||||||
Additions of construction in progress | (249,737 | ) | (178,065 | ) | (189,220 | ) | (23,447 | ) | ||||||||||
Proceeds on disposals of aircraft, engines, flight equipment, buildings, other property, plant and equipment | 91,940 | 667,824 | 32,923 | 4,080 | ||||||||||||||
Acquisition of land use rights | — | — | (31,780 | ) | (3,938 | ) | ||||||||||||
Acquisition of available-for-sale financial assets | — | — | (1,256 | ) | (156 | ) | ||||||||||||
Acquisition of financial assets held for trading | — | (270,350 | ) | — | — | |||||||||||||
Advances payments on acquisitions of aircrafts | (1,295,656 | ) | (2,076,990 | ) | (7,751,197 | ) | (960,471 | ) | ||||||||||
Repayments of advances payments on acquisitions of aircrafts | — | 80,000 | — | — | ||||||||||||||
Decrease/(increase) in long-term bank deposits | (64,255 | ) | (51,108 | ) | 69,000 | 8,550 | ||||||||||||
(Increase)/decrease in short-term bank deposits | (69,246 | ) | 31,424 | (68,730 | ) | (8,517 | ) | |||||||||||
Repayment of other payables (installment payment for acquisition of aviation business) | (30,000 | ) | (30,000 | ) | (30,000 | ) | (3,717 | ) | ||||||||||
Investments in associates | (327,252 | ) | (4,993 | ) | — | — | ||||||||||||
Investments in jointly controlled entities | — | (7,680 | ) | — | — | |||||||||||||
Proceeds from maturity of US Treasury zero coupon bonds | — | 585,736 | — | — | ||||||||||||||
Proceeds from disposals of financial assets held for trading | 311,920 | 275,585 | — | — | ||||||||||||||
Interest received | 104,243 | 71,900 | 128,700 | 15,948 | ||||||||||||||
Business acquisitions, net of cash outflow | 38 | — | — | (40,704 | ) | (5,044 | ) | |||||||||||
Net cash outflow from investing activities | (7,304,660 | ) | (2,432,562 | ) | (10,369,094 | ) | (1,284,862 | ) |
F-5
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005
(Amounts in thousands)
Year ended December 31, | ||||||||||||||||||||
(Note 2a) | ||||||||||||||||||||
2003 | 2004 | 2005 | 2005 | |||||||||||||||||
Note | RMB’000 | RMB’000 | RMB’000 | USD’000 | ||||||||||||||||
Cash flows from financing activities | ||||||||||||||||||||
Proceeds from drawn down of short-term bank loans | 10,920,917 | 8,988,970 | 14,307,315 | (1,772,858 | ) | |||||||||||||||
Repayments of short-term bank loans | (10,815,508 | ) | (7,431,931 | ) | (8,872,754 | ) | (1,099,447 | ) | ||||||||||||
Proceeds from drawn down of long-term bank loans | 5,606,107 | 2,155,310 | 5,135,286 | 636,327 | ||||||||||||||||
Repayments of long-term bank loans | (898,022 | ) | (2,647,930 | ) | (3,843,483 | ) | (476,256 | ) | ||||||||||||
Principal repayments of finance lease obligations | (1,400,749 | ) | (1,617,001 | ) | (1,157,334 | ) | (143,408 | ) | ||||||||||||
Proceeds from issuance of notes payables | 1,254,030 | 1,347,786 | 4,228,783 | 524,000 | ||||||||||||||||
Repayments of notes payables | (908,790 | ) | (1,265,939 | ) | (3,376,072 | ) | (418,338 | ) | ||||||||||||
Capital injection from minority shareholders of subsidiaries | 5,765 | 218,387 | — | — | ||||||||||||||||
Proceeds from issuance of debentures | — | — | 1,951,600 | 241,828 | ||||||||||||||||
Dividends paid | — | — | (97,339 | ) | (12,062 | ) | ||||||||||||||
Dividends paid to minority shareholders of subsidiaries | — | (60,000 | ) | (90,000 | ) | (11,152 | ) | |||||||||||||
Net cash inflow/(outflow) from financing activities | 3,763,750 | (312,348 | ) | 8,186,002 | 1,014,350 | |||||||||||||||
Net (decrease)/increase in cash and cash equivalents | (377,833 | ) | 521,195 | (230,643 | ) | (28,578 | ) | |||||||||||||
Cash and cash equivalents at January 1 | 1,944,525 | 1,582,780 | 2,114,447 | 262,007 | ||||||||||||||||
Exchange adjustment | 16,088 | 10,472 | (19,803 | ) | (2,456 | ) | ||||||||||||||
Cash and cash equivalents at December 31 | 1,582,780 | 2,114,447 | 1,864,001 | 230,973 | ||||||||||||||||
F-6
Table of Contents
(Amounts in thousands)
Attributable to equity | ||||||||||||||||||||
holders of the Company | ||||||||||||||||||||
Share | Minority | Total | ||||||||||||||||||
capital | Reserves | Total | interest | equity | ||||||||||||||||
RMB’000 | RMB’000 | RMB’000 | RMB’000 | RMB’000 | ||||||||||||||||
Balance at January 1, 2003 as previously presented | 4,866,950 | 2,512,153 | 7,379,103 | — | 7,379,103 | |||||||||||||||
As previously separately reported as minority interest (Note 2(a)) | — | — | — | 404,517 | 404,517 | |||||||||||||||
Effect of changes in accounting policy on the adoption of IAS16 (Note 2(a)) | — | (207,609 | ) | (207,609 | ) | — | (207,609 | ) | ||||||||||||
Balance at January 1, 2003, as restated | 4,866,950 | 2,304,544 | 7,171,494 | 404,517 | 7,576,011 | |||||||||||||||
Cash flow hedges, net of tax | — | (47,136 | ) | (47,136 | ) | — | (47,136 | ) | ||||||||||||
Contributions from minority interest of subsidiaries | — | — | — | 5,764 | 5,764 | |||||||||||||||
Loss for the year | — | (949,816 | ) | (949,816 | ) | 116,487 | (833,329 | ) | ||||||||||||
Balance at December 31, 2003 | 4,866,950 | 1,307,592 | 6,174,542 | 526,768 | 6,701,310 | |||||||||||||||
Balance at January 1, 2004 as previously presented | 4,866,950 | 1,515,201 | 6,382,151 | — | 6,382,151 | |||||||||||||||
As previously separately reported as minority interest (Note 2(a)) | — | — | — | 522,713 | 522,713 | |||||||||||||||
Effect of changes in accounting policy on the adoption of IAS16 (Note 2(a)) | — | (207,609 | ) | (207,609 | ) | 4,055 | (203,554 | ) | ||||||||||||
Balance at January 1, 2004, as restated | 4,866,950 | 1,307,592 | 6,174,542 | 526,768 | 6,701,310 | |||||||||||||||
Cash flow hedges, net of tax | — | (13,982 | ) | (13,982 | ) | — | (13,982 | ) | ||||||||||||
Contributions from minority interest of subsidiaries | — | — | — | 218,387 | 218,387 | |||||||||||||||
Dividends paid to minority interest of subsidiaries | — | — | — | (60,000 | ) | (60,000 | ) | |||||||||||||
Profit for the year | — | 320,691 | 320,691 | 135,680 | 456,371 | |||||||||||||||
Balance at December 31, 2004 | 4,866,950 | 1,614,301 | 6,481,251 | 820,835 | 7,302,086 | |||||||||||||||
Balance at January 1, 2005 as previously presented | 4,866,950 | 2,015,294 | 6,882,244 | — | 6,882,244 | |||||||||||||||
As previously separately reported as minority interest (Note 2(a)) | — | — | — | 831,208 | 831,208 | |||||||||||||||
Effect of changes in accounting policy on the adoption of IAS16 (Note 2(a)) | — | (400,993 | ) | (400,993 | ) | (10,373 | ) | (411,366 | ) | |||||||||||
Balance at January 1, 2005, as restated before opening adjustment | 4,866,950 | 1,614,301 | 6,481,251 | 820,835 | 7,302,086 | |||||||||||||||
Opening adjustment on derecognition of negative goodwill on the adoption of IFRS 3 (Note 2(a)) | — | 42,873 | 42,873 | — | 42,873 | |||||||||||||||
Balance at January 1, 2005, as restated | 4,866,950 | 1,657,174 | 6,524,124 | 820,835 | 7,344,959 | |||||||||||||||
Cash flow hedges, net of tax | — | 136,587 | 136,587 | — | 136,587 | |||||||||||||||
Dividend relating to 2004 | — | (97,339 | ) | (97,339 | ) | — | (97,339 | ) | ||||||||||||
Dividend paid to minority interest of subsidiaries | — | — | — | (90,000 | ) | (90,000 | ) | |||||||||||||
Contribution from minority interest of subsidiaries | — | — | — | 63,063 | 63,063 | |||||||||||||||
Loss for the year | — | (467,307 | ) | (467,307 | ) | 28,579 | (438,728 | ) | ||||||||||||
Balance at December 31, 2005 | 4,866,950 | 1,229,115 | 6,096,065 | 822,477 | 6,918,542 | |||||||||||||||
F-7
Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
1 | CORPORATE INFORMATION | |
China Eastern Airlines Corporation Limited (the “Company”), a joint stock company limited by shares was incorporated in the People’s Republic of China (“PRC”) on April 14, 1995. The address of its registered office is 66 Airport Street, Pudong International Airport, Shanghai, PRC. The Company and its subsidiaries (the “Group”) are principally engaged in the operation of civil aviation, including the provision of passenger, cargo, and mail delivery and other extended transportation services. | ||
The Company is majority owned by China Eastern Air Holding Company (“CEA Holding”), a state-owned enterprise incorporated in the PRC. | ||
During the year ended December 31, 2005, the Company acquired certain assets and liabilities relating to the aviation businesses of China Eastern Air Northwest Company (“CEA Northwest”) and China Eastern Air Yunnan Company (“CEA Yunnan”). Further details of the acquisitions are set out in Note 38. | ||
2 | PRINCIPAL ACCOUNTING POLICIES | |
The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been constantly applied to all the years presented, unless otherwise stated. | ||
(a) | Basis of Preparation | |
The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and the disclosure requirements of the Hong Kong Companies Ordinance. This basis of accounting differs in certain material respects from that used in the preparation of the Group’s statutory accounts in the PRC. The statutory accounts of the Group have been prepared in accordance with the accounting principles and the relevant regulations applicable to PRC joint stock limited companies (“PRC Accounting Regulations”). In preparing these financial statements in accordance with IFRS, appropriate adjustments have been made to the Group’s statutory accounts to conform with IFRS. | ||
This basis of accounting under IFRS differs from generally accepted accounting principles in the United States of America (“U.S. GAAP”). Differences between IFRS and U.S. GAAP and their effect on profit attributable to equity holders for each of the three years ended December 31, 2005, and on owners’ equity at December 31, 2004 and 2005, are set out in note 43. The consolidated financial statements incorporate additional disclosures customary in filings with the Securities and Exchange Commission of the United States of America (the “SEC”). | ||
The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of property, plant and equipment and financial assets. |
F-8
Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
2 | PRINCIPAL ACCOUNTING POLICIES (CONTINUED) | |
(a) | Basis of Preparation (Continued) | |
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in Note 4. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Although these estimates are based on management’s best knowledge of current event and actions, actual results ultimately may differ from those estimates. | ||
Standards, interpretations & amendments to published standards effective in 2005 | ||
In 2005, the Group adopted the new and revised IFRS as described below, which are relevant to its operations. The 2004 comparatives have been adjusted as required, in accordance with the relevant requirements of the new/revised IFRS. |
— | IAS 1 and 27 (both revised in 2003) have affected the presentation of minority interest. IAS 1 (revised in 2003) also has affected the presentation of share of profit of associates and other disclosures. | ||
— | IAS 2, 8, 10, 17, 21, 28, 32, 33 (all revised in 2003), 39 (revised in 2004) and IFRS 2 had no material effect on the Group’s policies. | ||
— | IAS 16 (amended 2004) replaces IAS 16 (revised 1998). The Group has adopted the revised IAS 16 and has amended the accounting policy applied to the costs of overhaul of owned and finance leased aircraft and engines. Under the Group’s revised policy, these costs are capitalized as a component of property, plant and equipment, and are depreciated over the appropriate maintenance cycles. When each overhaul is performed, its cost is recognized in the carrying amount of the item of property, plant and equipment and is depreciated over the estimated period between overhauls on a straight-line basis. Upon completion of an overhaul, any remaining carrying amount of the cost of the previous overhaul is derecognized and charged to the income statement. In prior years, the costs of overhauls were expensed in the income statement as incurred. The adoption of the revised treatment of IAS 16 (amended 2004) has been accounted for retrospectively. |
F-9
Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
2 | PRINCIPAL ACCOUNTING POLICIES (CONTINUED) | |
(a) | Basis of Preparation (Continued) |
2003 | 2004 | 2005 | ||||||||||
Increase/(decrease) | RMB’000 | RMB’000 | RMB’000 | |||||||||
Decrease in aircraft maintenance expenses | (526,592 | ) | (536,099 | ) | (710,824 | ) | ||||||
Increase in aircraft depreciation | 673,836 | 794,390 | 820,555 | |||||||||
Decrease in taxation | (3,954 | ) | (50,479 | ) | (19,658 | ) | ||||||
Increase/(decrease) in profit for the year attributable to minority interest | 4,055 | (14,428 | ) | 30,271 | ||||||||
Decrease in the profit attributable to equity holders of the Company | (147,345 | ) | (193,384 | ) | (120,344 | ) | ||||||
Decrease in aircraft, engines and flight equipment | (218,142 | ) | (476,433 | ) | (586,163 | ) | ||||||
Decrease in deferred tax liabilities | (14,588 | ) | (65,067 | ) | (84,725 | ) | ||||||
Increase/(decrease) in minority interest | 4,055 | (10,373 | ) | 19,898 | ||||||||
Decrease in beginning retained profits | (60,264 | ) | (207,609 | ) | (400,993 | ) | ||||||
Decrease in basic and diluted earnings per share | RMB(0.03) | RMB(0.04) | RMB(0.02) | |||||||||
— | IAS 24 (revised in 2003) has extended the identification and disclosure of related parties to include state-owned enterprises. Related parties include CEA Holding and its subsidiaries, Civil Aviation Administration of China (“CAAC”, a regulatory authority of the civil aviation industry in the PRC) and its affiliates, and other state-controlled enterprises and their subsidiaries, directly or indirectly controlled by the PRC government, corporations in which the Company is able to control or exercise significant influence, and key management personnel of the Company, CEA Holding, CAAC and other state-controlled enterprises, and their close family members. | ||
— | IFRS 3, IAS 36 (revised in 2004) and IAS 38 (revised in 2004) have resulted in a change in the accounting policy relating to the accounting for goodwill and negative goodwill. The Group ceased amortization of goodwill and negative goodwill from January 1, 2005. Accumulated amortization as at December 31, 2004 has been eliminated with a corresponding decrease in the costs of goodwill and negative goodwill. From January 1, 2005 onwards, positive goodwill arising from all acquisitions is no longer subject to amortization but is tested annually for impairment, as well as when there are indications of impairment. The balance of negative goodwill as at January 1, 2005 is derecognized with a corresponding adjustment to the opening balance of retained profits. Negative goodwill amounted RMB42,873,000 has been derecognized to the opening balance of retained profits as at January 1, 2005. From January 1, 2005 onwards, IFRS 3 requires, the Group to recognize immediately in the income statement the excess of the net fair value of those items acquired over the cost of the acquisition. |
F-10
Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
2 | PRINCIPAL ACCOUNTING POLICIES (CONTINUED) | |
(a) | Basis of Preparation (Continued) |
2005 | ||||
RMB’000 | ||||
Increase in intangible assets | 42,873 | |||
Increase in retained profits | 42,873 | |||
— | IAS 32 (revised in 2003) has added the requirements to disclose information about the use of valuation techniques, including the sensitivities of fair value estimates, to significant valuation assumptions. | ||
— | IFRS 5 has resulted in a change in the accounting policy relating to the recognition of assets held for sale or discontinued operations, which did not have any material impact on the results and financial positions of the Group as the Group did not hold material assets in this category during the periods presented. |
— | IAS 19 (Amendment) introduces the option of an alternative recognition approach for actuarial gains and losses. It may impose additional recognition requirements for multi-employer plans where insufficient information is available to apply defined benefit accounting. It also adds new disclosure requirements. As the Group does not intend to change the accounting policy adopted for recognition of actuarial gains and losses and does not participate in any multi-employer plans, adoption of this amendment will only impact the format and extent of disclosures presented in the financial statements. The Group will apply this amendment from January 1, 2006. | ||
— | IAS 39 (Amendment) changes the definition of financial instruments classified at fair value through profit or loss and restricts the ability to designate financial instruments as part of this category. The Group believes that this amendment should not have a significant impact on the classification of financial instruments, as the Group should be able to comply with the amended criteria for the designation of financial instruments at fair value through profit and loss. The Group will apply this amendment from January 1, 2006. |
F-11
Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
2 | PRINCIPAL ACCOUNTING POLICIES (CONTINUED) | |
(a) | Basis of Preparation (Continued) |
— | IFRS 7 introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, including sensitivity analysis to market risk. It replaces IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and disclosure requirements in IAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report under IFRS. The amendment to IAS 1 introduces disclosures about the level of an entity’s capital and how it manages capital. The Group assessed the impact of IFRS 7 and the amendment to IAS 1 and concluded that the main additional disclosures will be the sensitivity analysis to market risk and the capital disclosures required by the amendment of IAS 1. The Group will apply IFRS 7 and the amendment to IAS 1 from January 1, 2007. | ||
— | IFRIC 4 requires the determination of whether an arrangement is or contains a lease to be based on the substance of the arrangement. It requires an assessment of whether: (a) fulfillment of the arrangement is dependent on the use of a specific asset or assets (the asset); and (b) the arrangement conveys a right to use the asset. Management is currently assessing the impact of IFRIC 4 on the Group’s operations. |
The financial information has been prepared in Renminbi (“RMB”), the national currency of the PRC. Solely for the convenience of the reader, the December 31, 2005 financial statements have been translated into United States dollars (“US$”) at the rate of US$1.00 = RMB8.0702, being the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2005. No representation is made that the RMB amounts could have been, or could be, converted into United States dollars at that rate or at any other certain rate on December 31, 2005 or at any other certain date. | ||
(b) | Group accounting | |
The consolidated financial statements include the financial statements of the Company and its subsidiaries made up to December 31. |
(i) | Subsidiaries | ||
Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. | |||
Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. |
F-12
Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
2 | PRINCIPAL ACCOUNTING POLICIES (CONTINUED) | |
(b) | Group accounting (CONTINUED) |
(i) | Subsidiaries (Continued) | ||
The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement (see Note 2(k)). | |||
Inter-company transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. | |||
Minority interest represents the interests of outside members in the operating results and net assets of subsidiaries. The Group applies a policy of treating transactions with minority interest as transactions with parties external to the Group. Disposals to minority interest result in gains and losses for the Group that are recorded in the income statement. Purchases from minority interest result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
2 | PRINCIPAL ACCOUNTING POLICIES (CONTINUED) | |
(b) | Group accounting (CONTINUED) |
(i) | Subsidiaries (Continued) | ||
Particulars of the principal subsidiaries, all of which are limited companies established and operating in the PRC, as of December 31, 2005 are as follows: |
Place and | Attributable | |||||||||||||||||||
date of | Paid-up | equity | Principal | |||||||||||||||||
Company | establishment | capital | interest | Activities | ||||||||||||||||
2004 | 2005 | 2004 | 2005 | |||||||||||||||||
RMB’000 | RMB’000 | |||||||||||||||||||
China Cargo Airlines Co., Ltd. | PRC July 22, 1998 | 500,000 | 500,000 | 70 | % | 70 | % | Provision of cargo carriage services | ||||||||||||
Shanghai Eastern Airlines Logistics Co., Ltd. | PRC August 23, 2004 | 200,000 | 200,000 | 70 | % | 70 | % | Provision of cargo logistics services | ||||||||||||
China Eastern Airlines Jiangsu Co., Ltd. | PRC May 3, 1993 | 803,666 | 880,000 | 63 | % | 63 | % | Provision of airline services | ||||||||||||
Eastern Airlines Hotel Co., Ltd. | PRC March 18, 1998 | 70,000 | 70,000 | 86 | % | 86 | % | Provision of hotel services primarily to crew Members | ||||||||||||
Shanghai Eastern Airlines Investment Co., Ltd. | PRC May 8, 2002 | 412,500 | 412,500 | 99 | % | 99 | % | Investment Holding | ||||||||||||
Shanghai Eastern Flight Training Co., Ltd. | PRC December 18, 1995 | 473,000 | 473,000 | 95 | % | 95 | % | Provision of flight training services | ||||||||||||
Shanghai Eastern Maintenance Co., Ltd. | PRC November 27, 2002 | 25,658 | 25,658 | 60 | % | 60 | % | Provision of aircraft repairment and maintenance | ||||||||||||
China Eastern Fudart Transportation Service Co., Ltd. | PRC April 1, 1993 | 5,714 | 5,714 | 51 | % | 51 | % | Provision of agency services for transportation of import and export cargo by air or sea | ||||||||||||
c |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
2 | PRINCIPAL ACCOUNTING POLICIES (CONTINUED) | |
(b) | Group accounting (CONTINUED) |
(ii) | Associates | ||
Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognized at cost. The Group’s investments in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition (see Note 2(k)). | |||
The Group’s share of its associates’ post-acquisition profits or losses is recognized in the income statement, and its share of post-acquisition movements in reserves is recognized in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate. | |||
Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. | |||
(iii) | Jointly Controlled Entities | ||
A jointly controlled entity is an entity in which the Group has joint control over its economic activity established under a contractual arrangement. The Group’s investments in jointly controlled entities includes goodwill (net of any accumulated impairment loss) identified on acquisition (see note 2(k)). | |||
The Group’s interests in jointly controlled entities are accounted for by the equity method of accounting based on the audited financial statements or management accounts of the jointly controlled entities. The Group’s share of its jointly controlled entities’ post-acquisition profits or losses is recognized in the income statement, and its share of post-acquisition movements is adjusted against the carrying amount of the investment. When the Group’s share of losses in a jointly controlled entities’ equals or exceeds its interest in the jointly controlled entities, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the jointly controlled entities. | |||
Unrealized gains on transactions between the Group and its jointly controlled entities are eliminated to the extent of the Group’s interest in the jointly controlled entities. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of jointly controlled entities have been changed where necessary to ensure consistency with the policies adopted by the Group. | |||
(iv) | Common Control Transactions | ||
The Group adopts acquisition accounting for common control transactions. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
2 | PRINCIPAL ACCOUNTING POLICIES (CONTINUED) | |
(c) | Foreign currency translation | |
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The financial statements are presented in Chinese Renminbi (“RMB”), which is the Company’s functional and presentation currency. | ||
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, except when deferred in equity as qualifying cash flow hedges. | ||
Translation differences on non-monetary financial assets and liabilities are reported as part of the fair value gain or loss. When a gain or loss on a non-monetary item is recognized directly in equity, any exchange component of that gain or losses is recognized directly in equity. Conversely, when a gain or loss on a non-monetary item is recognized in the income statement, any exchange component of that gain or loss is recognized in the income statement. | ||
(d) | Revenue recognition and sales in advance of carriage | |
Passenger, cargo and mail revenues are recognized as traffic revenues when the transportation services are provided. The value of sold but unused tickets is included in current liabilities as sales in advance of carriage. | ||
Commission income represents amounts earned from other carriers in respect of sales made by the Group’s agents on their behalf, and is recognized in the income statement upon ticket sales. Commission expense represents amounts payable to other carriers in respect of sales made by the other carriers for the Group, and is recognized in the income statement when the related revenue is recognized. | ||
Revenues from other operating businesses, including income derived from the provision of ground services and cargo handling services, are recognized when the services are rendered. | ||
Rental income from subleases of aircraft is recognized on a straight-line basis over the terms of the respective leases. Rental income from leasing office premises and cargo warehouses is recognized on a straight-line basis over the lease term. | ||
Interest income is recognized on a time-proportionate basis using the effective interest method. | ||
Revenues are presented net of business tax. | ||
(e) | Segment reporting | |
A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that is subject to risks and returns that are different from those of segments operating in other economic environments. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
2 | PRINCIPAL ACCOUNTING POLICIES (CONTINUED) | |
(e) | Segment reporting (Continued) | |
In accordance with the Group’s internal financial reporting, the Group has determined that business segments be presented as the primary reporting format and geographical as the secondary reporting format. | ||
In respect of the geographical segment, the analysis of turnover and operating profit by geographical segment is based on the following criteria: |
(i) | Traffic revenue from services within the PRC (excluding Hong Kong Special Administrative Region (“Hong Kong”)) is classified as domestic operation. Traffic revenue from inbound and outbound services between the PRC and Hong Kong or overseas markets is classified under Hong Kong or the relevant overseas locations. | ||
(ii) | Revenues from ticket handling services, airport ground services and other miscellaneous services are classified on the basis of where the services are performed. |
(f) | Retirement benefits | |
The Group participates in defined contribution retirement schemes regarding pension and medical benefits for employees organized by the municipal governments of the relevant provinces. The contributions to the schemes are charged to the income statement as and when incurred. | ||
In addition, the Group provides retirees with post-retirement benefits including retirement subsidies, transportation subsidies, social function activity subsidies as well as other welfare. The liability recognized in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of government bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the greater of 10% of the value of plan assets or 10% of the defined benefit obligation are charged or credited to income over the employees’ expected average remaining working lives. | ||
Past-service costs are recognized immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortized on a straight-line basis over the vesting period. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
2 | PRINCIPAL ACCOUNTING POLICIES (CONTINUED) | |
(g) | Maintenance and overhaul costs | |
In respect of aircraft and engines under operating leases, the Group has the responsibility to fulfill certain return conditions under relevant leases. In order to fulfill these return conditions, major overhauls are required to be conducted on a regular basis. Accordingly, the present value of estimated costs of major overhauls for aircraft and engines under operating leases are provided at each balance sheet date. The provision in each period is estimated using historical major overhaul costs incurred during each overhaul and the estimated period between overhauls using the ratios of actual flying hours/cycles and estimated flying hours/cycles between overhauls. The costs of major overhauls comprise mainly labor and materials. Differences between the estimated cost and the actual cost of the overhaul are included in the income statement in the period of overhaul. | ||
In respect of aircraft and engines owned by the Group or held under finance leases, costs of overhaul are capitalized as a component of property, plant and equipment and are depreciated over the appropriate maintenance cycles. When each overhaul is performed, its cost is recognized in the carrying amount of the item of property, plant and equipment and is depreciated over the estimated period between overhauls, on a straight-line basis. Upon completion of an overhaul, any remaining carrying amount of the cost of the previous overhaul is derecognized and charged to the income statement. | ||
All other routine repairs and maintenance costs incurred in restoring such assets to their normal working condition are charged to the income statement as and when incurred. | ||
Improvements are capitalized and depreciated over their expected useful lives to the Group. | ||
(h) | Government grant | |
Grants from the government are recognized at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. | ||
Government grants relating to costs are deducted from the related cost in the income statement as a reduction of the related cost. | ||
Government grants relating to the property, plant and equipment are recognized as a reduction of carrying amount of the asset. The grant is recognized as income over the life of a depreciable asset by way of a reduced depreciation charge. | ||
(i) | Taxation | |
The Group provides for income tax based on the results for the year as adjusted for items which are not assessable or deductible for income tax purposes. Taxation of the Group is determined in accordance with the relevant tax rules and regulations applicable in the jurisdictions where the group companies operate. | ||
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination. Deferred tax is measured using tax rates enacted, or substantively enacted at the balance sheet date. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
2 | PRINCIPAL ACCOUNTING POLICIES (CONTINUED) | |
(i) | Taxation (Continued) | |
Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. | ||
Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates and jointly controlled entities, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. | ||
(j) | Property, plant and equipment | |
Property, plant and equipment are recognized initially at cost which comprises purchase price, costs transferred from construction in progress and advance payments on acquisition, and any directly attributable costs of bringing the assets to the condition for their intended use. | ||
Subsequent to the initial recognition, property, plant and equipment are stated at revalued amount less accumulated depreciation and accumulated impairment losses, if any. Independent valuations are performed at least once every five years, or sooner if considered necessary by the directors. In the intervening years, the directors review the carrying values of the property, plant and equipment and adjustment is made where they are materially different from fair value. Increases in the carrying amount arising on revaluation are credited to the revaluation reserve. Decreases in valuation of property, plant and equipment are first offset against increases from earlier valuations of the same asset and are thereafter charged to the income statement. All other decreases in valuation are charged to the income statement. Any subsequent increases are credited to the income statement up to the amount previously charged. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset, and the net amount is restated to the revalued amount of the asset. | ||
Costs of overhaul for aircraft and engines owned by the Group or held under finance leases are capitalized as a component of property, plant and equipment when incurred (see Note 2(g)). | ||
Depreciation of property, plant and equipment is calculated on a straight-line basis to write off the cost or revalued amount of each asset to their residual value over their estimated useful lives. The estimated useful lives used for the calculation of annual depreciation charges are as follows: |
Aircraft, engines and flight equipment | ||||
- Components related to overhaul costs | — | 2 to 8 years | ||
- Others | — | 20 years | ||
Buildings | — | 15 to 35 years | ||
Other property, plant and equipment | — | 5 to 20 years |
The residual values and useful lives of each property, plant and equipment are reviewed, and adjusted if appropriate at each balance sheet date. | ||
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated revalued amount (Note 2(l)). |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
2 | PRINCIPAL ACCOUNTING POLICIES (CONTINUED) | |
(j) | Property, plant and equipment (Continued) | |
Gains and losses on disposals are determined by comparing proceeds with carrying amounts and are included in operating profit. When revalued assets are sold, the relevant amounts included in the revaluation reserve are transferred from revaluation reserve to retained profits. | ||
(k) | Intangible assets | |
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary, associate, jointly controlled entity or business at the date of acquisition. Goodwill on acquisition of subsidiaries and businesses is included in ‘intangible assets’. Goodwill on acquisition of associates and jointly controlled entities is included in ‘investments in associates’ and ‘investments in jointly controlled entities’. Recognized goodwill is tested annually for impairment and carried at cost less accumulated impairment losses, if any. Impairment losses on goodwill are not reversed. Gains and losses on the disposals of an entity include the carrying amount of goodwill relating to the entity sold. | ||
Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. | ||
(l) | Impairment of non-financial assets | |
Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). | ||
Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. | ||
(m) | Construction in progress | |
Construction in progress represents buildings under construction and plant and equipment pending installation. This includes the costs of construction and acquisition and interest capitalized (Note 2(p)). No depreciation is provided on construction in progress until the asset is completed and ready to use. | ||
(n) | Lease prepayments | |
Lease prepayments represent acquisition costs of land use rights less accumulated amortization. Amortization is provided over the lease period of land use rights on a straight-line basis. | ||
(o) | Advanced payments on acquisition of aircraft | |
Advanced payments on acquisition of aircraft represents payments to aircraft manufacturers to secure deliveries of aircraft in future years and the related interest capitalized (Note 2(p)). The balance is transferred to property, plant and equipment upon delivery of the aircraft. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
2 | PRINCIPAL ACCOUNTING POLICIES (CONTINUED) | |
(p) | Borrowing costs | |
Interest attributable to loans for advance payments used to finance the acquisition of aircraft and other qualifying assets is capitalized as an additional cost of the related asset. Interest is capitalized at the Group’s weighted average interest rate on borrowings or, where applicable, the interest rate related to specific borrowings during the period of time that is required to complete and prepare the asset for its intended use. | ||
All other borrowing costs are charged to the income statement in the period in which they are incurred. | ||
(q) | Long-term bank deposits | |
Long-term bank deposits placed to secure future lease obligations are classified as held-to-maturity financial assets. Held-to-maturity financial assets are initially recognized in the balance sheet at fair value plus transaction costs. Subsequently, they are stated in the balance sheet at amortized cost less impairment losses. | ||
(r) | Flight equipment spare parts | |
Flight equipment spare parts are stated at the lower of cost and net realizable value. Cost is determined using the weighted average method. The cost of flight equipment spare parts comprises the purchase price (net of discounts), freight charges, duty and value added tax and other miscellaneous charges. The net realizable value is the estimated replacement cost of the flight equipment spare parts. | ||
(s) | Trade receivables | |
Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognized in the income statement. | ||
(t) | Cash and cash equivalents | |
Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less. | ||
(u) | Borrowings | |
Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any differences between the proceeds (net of transaction costs) and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest method. | ||
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
2 | PRINCIPAL ACCOUNTING POLICIES (CONTINUED) | |
(v) | Provisions | |
Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. | ||
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. | ||
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense. | ||
(w) | Leases |
(i) | A Group company is the lessee | ||
Leases of assets where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the inception of the lease at the lower of the fair value of the leased asset or the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Leased assets are depreciated using a straight-line basis over their expected useful lives to residual values. | |||
Leases of assets under which a significant portion of the lease risks and rewards of ownership are retained by the lessor are classified as operating leases. Lease payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease. | |||
(ii) | A Group company is the lessor | ||
When assets are leased out under a finance lease, the present value of the lease payments is recognized as a receivable. The difference between the gross receivable and the present value of the receivable is recognized as unearned finance income. Lease income is recognized over the term of the lease using the net investment method, which reflects a constant periodic rate of return. | |||
Assets leased out under operating leases are included in property, plant and equipment in the balance sheet. They are depreciated over their expected useful lives on a basis consistent with similar property, plant and equipment. Rental income is recognized on a straight-line basis over the lease term. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
2 | PRINCIPAL ACCOUNTING POLICIES (CONTINUED) | |
(x) | Derivative financial instruments | |
Derivative financial instruments are initially recognized in the balance sheet at fair value and are subsequently remeasured at their fair value. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. | ||
The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. | ||
Derivative financial instrument that does not qualify for hedge accounting are accounted for as trading instruments and any unrealized gains or losses, being changes in fair value of the derivative, are recognized in the income statement immediately. | ||
Changes in the fair value of derivatives that are designated and qualify as fair value hedges and that are highly effective, are recorded in the income statement, along with any changes in the fair value of the hedged assets or liabilities that are attributable to the hedged risk. | ||
Derivative financial instrument that qualifies for hedge accounting and is designated as a specific hedge of the variability in cashflows of a highly probable forecast transaction, is accounted for as follows: |
(i) | the effective portions of any change in fair value on the derivative financial instrument is recognized directly in equity. Where the forecasted transaction or firm commitment results in the recognition of an asset or a liability, the gains and losses previously deferred in equity are included in the initial measurement of the cost of the asset or liability. Otherwise, the cumulative gain or loss on the derivative financial instrument is removed from equity and recognized in the income statement in the same period during which the hedged forecast transaction affects net profit or loss. | ||
(ii) | the ineffective portions of any change in fair value is recognized in the income statement immediately. |
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized in the income statement when the committed or forecasted transaction ultimately occurs. When a committed or forecasted transaction is no longer expected to occur, the cumulative gain or loss that was recorded in equity is immediately transferred to the income statement. | ||
(y) | Dividend | |
Dividend distribution to the Company’s shareholders is recognized as a liability in the financial statements in the period in which the dividends are approved by the Company’s equity holders. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
2 | PRINCIPAL ACCOUNTING POLICIES (CONTINUED) | |
(z) | Available-for-sale financial assets | |
Investments in securities other than subsidiaries, associates and jointly controlled entities, being held for non-trading purposes, are classified as available-for-sale financial assets and are initially recognized at fair value plus transaction costs. At each balance sheet date, the fair value is remeasured, with any resulting gain or loss being recognized directly in equity in the fair value reserve, except for impairment losses. When these investments are derecognized, the cumulative gain or loss previously recognized directly in equity is recognized in the income statement. | ||
The Group assesses at each balance sheet date whether there is objective evidence that a financial asset is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the securities below its cost is considered an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss, measured as the difference between the acquisition cost and the current fair value less any impairment loss on that financial asset previously recognized in the income statement, is removed from equity and recognized in the income statement. Impairment losses recognized in the income statement on equity instruments are not reversed through the income statement. | ||
(aa) | Comparatives | |
Where necessary, prior year amounts have been reclassified to conform with changes in presentation in the current year. The major reclassifications for the 2004 comparative figures include reclassification of certain items from “other payables and accrued expenses” to “trade and notes payables”, and certain items from “prepayments, deposits and other receivables” to “trade receivables”. | ||
3. | FINANCIAL RISK MANAGEMENT | |
(a) | Financial risk factors | |
Financial assets of the Group mainly includes bank deposits and balances, amounts due from related companies, trade receivables, long-term receivables, short-term investments and derivative assets. Financial liabilities of the Group include bank and other loans, obligations under finance leases, amounts due to related companies, trade payables, notes payables, derivative liabilities and other payables. |
(i) | Business risk | ||
The operations of the air transportation industry are substantially influenced by global political and economic development. Accidents, wars, natural disasters, etc. may have material impact on the Group’s operations or the industry as a whole. In addition, the Group conducts its principal operations in the PRC and accordingly is subject to special considerations and significant risks not typically associated with companies in ‘Western’ countries. These include risks associated with, among others, the political, economic and legal environment, competition and the influence of CAAC in the PRC civil aviation industry. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
3. | FINANCIAL RISK MANAGEMENT (CONTINUED) | |
(a) | Financial risk factors (Continued) |
(ii) | Price risk | ||
The Group’s results of operations may be significantly affected by the fluctuation in fuel prices which is a significant expense for the Group. While the international fuel prices are determined by worldwide market demand and supply, domestic fuel prices are regulated by CAAC. The Group has entered into certain financial derivatives to hedge against the fuel prices risk (Note 35(c)). | |||
(iii) | Interest rate risk | ||
The Group has significant bank borrowings at floating variable rates and is exposed to risk arising from changes in market interest rates. To hedge against the variability in the cashflow arising from a change in market interest rates, the Group has entered into certain interest rate swaps to swap variable rates into fixed rates. The interest rates and terms of repayment of borrowings made to the Group are disclosed in Note 29. Details of interest rate swaps are disclosed in Note 35(a). | |||
(iv) | Credit risk | ||
The Group has no significant concentrations of credit risk. The Group has policies in place to ensure that blank tickets are made to sales agents with an appropriate credit history. A major portion of sales are conducted through sales agents and the majority of these agents are connected to various settlement plans and/or clearing systems which have tight requirements on the credit standing of these agents. | |||
Transactions in relation to derivative financial instruments are only carried out with financial institutions of high reputation. The Group has policies that limit the amount of credit exposure to any one financial institution. | |||
(v) | Liquidity risk | ||
The Group’s primary cash requirements have been for additions of and upgrades to aircraft, engines and flight equipment and payments on related borrowings/debts. The Group finances its working capital requirements through a combination of funds generated from operations and short-term bank loans. The Group generally acquires aircraft through long-term finance leases and long-term loans. | |||
The Group operates with a working capital deficit. As at December 31, 2005, the Group’s net current liabilities amounted to RMB25,598 million (2004: RMB12,491 million). For the year ended December 31, 2005, the Group recorded a net cash inflow from operating activities of RMB1,952 million (2004: RMB3,266 million), a net cash outflow from investing activities and financing activities of RMB2,183 million (2004: RMB2,745 million), and an decrease in cash and cash equivalents of RMB231 million (2004: increase of RMB521 million). | |||
The directors of Company believe that cash from operations and short-term bank borrowings will be sufficient to meet the Group’s operating cashflow. Due to the dynamic nature of the underlying businesses, the Group’s treasury policy aims at maintaining flexibility in funding by keeping credit lines available. The directors of the Company believe that the Group has obtained sufficient general credit facilities from PRC banks for financing future capital commitments and for working capital purposes. |
F-25
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
3. | FINANCIAL RISK MANAGEMENT (CONTINUED) | |
(a) | Financial risk factors (Continued) |
(vi) | Foreign currency risk | ||
The Group’s finance lease obligation as well as certain bank and other loans are denominated in US dollars, Japanese Yen and Euro, and certain expenses of the Group are denominated in currencies other than RMB. The Group generates foreign currency revenues from ticket sales made in overseas offices and would normally generate sufficient foreign currencies after payment of foreign currency expenses, to meet its foreign currency liabilities repayable within one year. The Group also enters into certain foreign currency forward contracts to hedge against foreign currency risk (Note 35(b)). |
(b) | Fair value estimation | |
The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available-for-sale securities) is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price; the appropriate quoted market price for financial liabilities is the current ask price. | ||
The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. The fair value of interest-rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward foreign exchange contracts is determined using forward exchange market rates at the balance sheet date. The fair value of fuel option contracts is determined using quoted market values. | ||
The nominal value less impairment provision of trade receivables and payables are assumed to approximate their fair values. The fair values of other long-term receivables are based on cash flow discounted using a rate based on the borrowing rate. The fair value of financial liabilities for disclosure purpose is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. |
F-26
Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
4. | CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS | |
Estimates and judgements used in preparing the financial statements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. | ||
(a) | Estimated impairment of goodwill | |
The Group tests annually whether goodwill has been impaired in accordance with the accounting policy stated in Note 2(l). The recoverable amounts of cash generating units have been determined based on value-in-use calculations. These calculations require the use of estimates (see Note 18). In 2005, after reviewing the business environment as well as the Group’s objectives and past performance, management concluded that there was no material impairment loss for goodwill. | ||
(b) | Estimated impairment of property, plant and equipment | |
The Group has made substantial investments in tangible long-lived assets. The Group conducts impairment reviews of these assets whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. | ||
Determining whether an asset is impaired requires significant judgment, including the Group’s estimates of the future cash flows attributable to the asset and the appropriate discount rate. If different judgments or estimates had been utilized, material differences could have resulted in the amount and timing of the impairment charge, if any. | ||
(c) | Property, plant and equipment | |
The Group had approximately RMB38,000 million of property, plant and equipment as at December 31, 2005, including aircraft, engines and flight equipment with a value of approximately RMB34,740 million. As discussed in Note 2(j), property, plant and equipment are initially recognized at cost and are subsequently stated at revalued amount less accumulated depreciation. Their recorded value is impacted by management judgment, including valuations performed by the management and/or independent professional valuers, estimates of useful lives, residual value and impairment charges. If different judgements or estimates had been utilized, material differences could have resulted in the amount of revaluation and related depreciation charges. | ||
Management reviewed the carrying value of the Group’s property, plant and equipment as at December 31, 2005 and are of the opinion that the carrying amount of the property, plant and equipment is not materially different from the estimated fair value and no impairment or changes in estimates of useful lives are necessary. | ||
(d) | Fair value estimation | |
The carrying amounts of the Group’s current financial assets, including cash and cash equivalents, trade receivables, prepayments, other receivables, amounts due from related companies and current financial liabilities including trade payables and note payables, other payables and accrued expenses and amounts due to related companies, approximate their fair values due to their short maturities. |
F-27
Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
4. | CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (CONTINUED) | |
(e) | Revenue recognition | |
As discussed in Note 2(d), passenger, cargo and mail revenues are recognized as traffic revenues when the transportation services are provided. The value of unused passenger tickets is included in current liabilities as sales in advance of carriage. Unused tickets are recognized in traffic revenues based on current estimates. Management periodically evaluate the balance in sales in advance of carriage and record any adjustments, which can be material, in the period the evaluation is completed. These adjustments result from differences between the estimates of certain revenue transactions, the timing of recognizing revenue for any unused air tickets and the related sales price, and are impacted by various factors, including a complex pricing structure and interline agreements throughout the industry, which affect the timing of revenue recognition. | ||
(f) | Overhaul costs | |
The amount of overhaul costs charged/amortized to operating profits is impacted by management’s estimates of the expected flying hours/cycles and overhaul costs, which are largely based on past experience of overhauls of the same or similar models of aircraft and engines. Different judgements or estimates could significantly affect the estimated overhaul provision and materially impact the results of operations. | ||
(g) | Retirement benefits | |
The Group operates and maintains defined retirement benefit plans which provides retirees with benefits including transportation subsidies, social activity subsidies as well as other welfare. As discussed in Note 2(f), the cost of providing the aforementioned benefits in the defined retirement benefit plan is actuarially determined and recognized over the employees’ service period by utilizing various actuarial assumptions and using the projected unit credit method. These assumptions include, without limitation, the selection of discount rate, annual rate of increase of per capita benefit payment and employees’ turnover rate. The discount rate is based on management’s review of local high quality corporate bonds. The annual rate of increase of benefit payments is based on the general local economic conditions. The employees’ turnover rate is based on historical trends of the Group. Additional information regarding the retirement benefit plans is discussed in Note 33. | ||
(h) | Deferred taxation | |
While deferred tax liabilities are provided in full on all taxable temporary differences, deferred tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. In assessing the amount of deferred tax assets that need to be recognized, the Group considers future taxable income and ongoing prudent and feasible tax planning strategies. In the event that the Group’s estimates of projected future taxable income and benefits from available tax strategies are changed, or changes in current tax regulations are enacted that would impact the timing or extent of the Group’s ability to utilize the tax benefits of net operating loss carry forwards in the future, adjustments to the recorded amount of net deferred tax assets and taxation expense would be made. | ||
(i) | Current tax | |
The Group makes provision for current tax based on the estimated income tax liabilities. The estimated income tax liabilities are primarily computed based on the tax filings as prepared by the Group and based on management’s interpretation of relevant tax rulings. From time to time, there may be disagreements with the tax authorities on the tax treatments of certain items included in the tax computations. |
F-28
Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
5 | REVENUES | |
The Group is principally engaged in the operation of civil aviation, including the provision of passenger, cargo, mail delivery and other extended transportation services. |
Year ended December 31, | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
RMB’000 | RMB’000 | RMB’000 | ||||||||||
Revenues | ||||||||||||
Traffic revenues (a) | ||||||||||||
— Passenger | 10,389,701 | 15,925,933 | 21,367,747 | |||||||||
— Cargo and mail | 3,226,949 | 4,540,463 | 5,087,244 | |||||||||
Commission income | 157,784 | 292,991 | 185,827 | |||||||||
Ground service income | 471,338 | 695,433 | 806,755 | |||||||||
Cargo handling income | 163,450 | 227,806 | 292,488 | |||||||||
Rental income from operating subleases of aircraft | 31,209 | 121,480 | 183,260 | |||||||||
Others | 198,417 | 110,615 | 198,175 | |||||||||
14,638,848 | 21,914,721 | 28,121,496 | ||||||||||
Less: Business tax (b) | (168,639 | ) | (528,168 | ) | (667,053 | ) | ||||||
14,470,209 | 21,386,553 | 27,454,443 | ||||||||||
(a) | Since the terrorist attacks on the World Trade Centre in New York in September 2001, many airlines introduced insurance and security surcharges on passenger air tickets (collectively the “Surcharges”). Such Surcharges are generally recognized as revenue, together with the other components of the ticket price, when the transportation services are provided. | |
For tickets that are issued by the Group but where the transportation services are provided by another carrier, there was (i) industry guidance which permitted the billing of such Surcharges on a negotiated basis and (ii) diversity in practice among the carriers on the billing of the Surcharges. Accordingly, the Company deferred recognition of the Surcharges as revenue. Management believes such Surcharges will no longer be payable based on general industry acceptance of non billing and industry guidance issued by the Accounting Centre of China Aviation, the sole agent for interline billing of PRC airlines, in December 2005. Accordingly, the Surcharges related to tickets uplifted between 2002 and 2004 in the amount of RMB131,023,000 were released from other payables and recognized as revenue in 2005. | ||
From January 1, 2005, the above insurance and security surcharges together with other surcharges are recognized as revenue once the transportation services are provided, or once the ticket price has been billed through interline billing in the case where transportation services are provided by another carrier. | ||
(b) | Except for traffic revenues derived from inbound international and regional flights, which are not subject to PRC business tax, the Group’s traffic revenues, commission income, ground service income, cargo handling income and other revenues are subject to PRC business tax levied at rates ranging from 3% to 5%, pursuant to PRC business tax rules and regulations. |
F-29
Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
6 | OTHER OPERATING INCOME |
Year ended December 31, | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
RMB’000 | RMB’000 | RMB’000 | ||||||||||
Government subsidies (a) | 58,448 | 73,506 | 193,069 | |||||||||
Net fair value gains on financial instruments | ||||||||||||
— forward foreign exchange contract | (8,146 | ) | 11,498 | 25,002 | ||||||||
— fuel hedging income | — | — | 27,208 | |||||||||
50,302 | 85,004 | 245,279 | ||||||||||
(a) | The government subsidies represent: |
(i) | subsidies granted by the local government to the Company from 2002 to 2005 in consideration of the relocation of the Company’s international flights and related facilities from Shanghai Hongqiao Airport to Pudong International Airport; and | ||
(ii) | subsidies granted by various local municipalities to encourage the Group to operate certain routes to the places where these municipalities are located. |
7 | SEGMENT INFORMATION | |
(a) | Primary reporting format by business segment | |
The Group principally operates in one business segment, which is the operation of civil aviation, including the provision of passenger, cargo, mail delivery and other extended transportation services. | ||
(b) | Secondary reporting format by geographical segment | |
The Group’s revenues (net of business tax) and results by geographical segment are analyzed as follows: |
Other | ||||||||||||||||||||
Domestic# | Hong Kong | Japan | countries* | Total | ||||||||||||||||
RMB’000 | RMB’000 | RMB’000 | RMB’000 | RMB’000 | ||||||||||||||||
2005 | ||||||||||||||||||||
Traffic revenues | ||||||||||||||||||||
— Passenger | 11,438,773 | 2,494,669 | 2,009,137 | 4,910,693 | 20,853,272 | |||||||||||||||
— Cargo and mail | 346,428 | 641,686 | 623,678 | 3,354,998 | 4,966,790 | |||||||||||||||
11,785,201 | 3,136,355 | 2,632,815 | 8,265,691 | 25,820,062 | ||||||||||||||||
Commission income | 124,037 | 13,768 | 11,557 | 36,285 | 185,647 | |||||||||||||||
Ground service income | 794,814 | — | — | — | 794,814 | |||||||||||||||
Cargo handling income | 281,901 | — | — | — | 281,901 | |||||||||||||||
Rental income from operating sublease of aircraft | 183,260 | — | — | — | 183,260 | |||||||||||||||
Other operating revenues | 188,759 | — | — | — | 188,759 | |||||||||||||||
13,357,972 | 3,150,123 | 2,644,372 | 8,301,976 | 27,454,443 | ||||||||||||||||
Other operating income | 214,277 | 6,000 | 25,002 | — | 245,279 | |||||||||||||||
Segment results (operating profit) | (658,153 | ) | 184,578 | (451,742 | ) | 939,565 | 14,248 | |||||||||||||
F-30
Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
7 | SEGMENT INFORMATION (CONTINUED) |
Other | ||||||||||||||||||||
Domestic# | Hong Kong | Japan | countries* | Total | ||||||||||||||||
RMB’000 | RMB’000 | RMB’000 | RMB’000 | RMB’000 | ||||||||||||||||
2004 | ||||||||||||||||||||
Traffic revenues | ||||||||||||||||||||
— Passenger | 8,283,700 | 2,239,968 | 1,502,326 | 3,508,105 | 15,534,099 | |||||||||||||||
— Cargo and mail | 298,846 | 592,008 | 647,181 | 2,890,325 | 4,428,360 | |||||||||||||||
8,582,546 | 2,831,976 | 2,149,507 | 6,398,430 | 19,962,459 | ||||||||||||||||
Commission income | 201,146 | 22,297 | 16,924 | 50,376 | 290,743 | |||||||||||||||
Ground service income | 692,178 | — | — | — | 692,178 | |||||||||||||||
Cargo handling income | 224,356 | — | — | — | 224,356 | |||||||||||||||
Rental income from operating sublease of aircraft | 121,480 | — | — | — | 121,480 | |||||||||||||||
Other operating revenues | 95,337 | — | — | — | 95,337 | |||||||||||||||
9,917,043 | 2,854,273 | 2,166,431 | 6,448,806 | 21,386,553 | ||||||||||||||||
Other operating income | 83,004 | 2,000 | — | — | 85,004 | |||||||||||||||
Segment results (operating profit) | 188,645 | 354,754 | 243,979 | 445,006 | 1,232,384 | |||||||||||||||
Other | ||||||||||||||||||||
Domestic# | Hong Kong | Japan | countries* | Total | ||||||||||||||||
RMB’000 | RMB’000 | RMB’000 | RMB’000 | RMB’000 | ||||||||||||||||
2003 | ||||||||||||||||||||
Traffic revenues | ||||||||||||||||||||
— Passenger | 5,591,640 | 1,667,123 | 1,001,544 | 2,114,933 | 10,375,240 | |||||||||||||||
— Cargo and mail | 279,003 | 390,088 | 588,361 | 1,929,532 | 3,186,984 | |||||||||||||||
5,870,643 | 2,057,211 | 1,589,905 | 4,044,465 | 13,562,224 | ||||||||||||||||
Commission income | 117,448 | 10,788 | 8,338 | 21,210 | 157,784 | |||||||||||||||
Ground service income | 471,338 | — | — | — | 471,338 | |||||||||||||||
Cargo handling income | 163,450 | — | — | — | 163,450 | |||||||||||||||
Rental income from operating sublease of aircraft | 31,209 | — | — | — | 31,209 | |||||||||||||||
Other operating revenues | 84,204 | — | — | — | 84,204 | |||||||||||||||
6,738,292 | 2,067,999 | 1,598,243 | 4,065,675 | 14,470,209 | ||||||||||||||||
Other operating income | 50,302 | — | — | — | 50,302 | |||||||||||||||
Segment results (operating profit) | (524,488 | ) | 198,406 | 166,545 | 225,610 | 66,073 | ||||||||||||||
#: | The People’s Republic of China, excluding the Hong Kong Special Administrative Region. | |
*: | include the United States of America, Europe and Asian countries other than Japan. |
F-31
Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
8 | WAGES, SALARIES AND BENEFITS |
Year ended December 31, | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
RMB’000 | RMB’000 | RMB’000 | ||||||||||
Wages, salaries, bonus and allowances | 892,012 | 1,549,339 | 1,774,292 | |||||||||
Employee welfare and benefits | 135,080 | 41,383 | 166,267 | |||||||||
Staff housing allowance (Note 34(b)) | 260,463 | 29,253 | 36,231 | |||||||||
Defined contribution retirement schemes (Note 33(a)) | 121,200 | 194,200 | 280,218 | |||||||||
Post-retirement benefits (Note 33(b)) | 40,299 | 51,704 | 102,459 | |||||||||
1,449,054 | 1,865,879 | 2,359,467 | ||||||||||
9 | FINANCE COSTS |
Year ended December 31, | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
RMB’000 | RMB’000 | RMB’000 | ||||||||||
Interest relating to obligations under finance leases | ||||||||||||
— wholly repayable within five years | 324,184 | 265,949 | 195,764 | |||||||||
— not wholly repayable within five years | 166,272 | 73,327 | 128,869 | |||||||||
490,456 | 339,276 | 324,633 | ||||||||||
Interest on loans from bank and financial institutions | ||||||||||||
— wholly repayable within five years | 265,955 | 410,998 | 729,698 | |||||||||
— not wholly repayable within five years | 180,291 | 144,693 | 243,433 | |||||||||
446,246 | 555,691 | 973,131 | ||||||||||
Interest relating to note payables | 6,396 | 22,148 | 52,639 | |||||||||
Amortization of the discount on zero coupon debentures | — | — | 22,944 | |||||||||
Interest relating to a long-term payable (Note 29) | 9,610 | 8,344 | 6,999 | |||||||||
952,708 | 925,459 | 1,380,346 | ||||||||||
Less: amounts capitalized into advance payments on acquisition of aircraft (Note 17) | (97,414 | ) | (57,120 | ) | (279,989 | ) | ||||||
855,294 | 868,339 | 1,100,357 | ||||||||||
Net foreign exchange (gains)/losses (a) | 62,179 | 32,207 | (414,640 | ) | ||||||||
Waiver of amounts due to related companies | — | (133,029 | ) | — | ||||||||
Fair value losses on financial instruments — transfer from equity in respect of interests rate swap qualified as cash flow hedges | 5,010 | 2,659 | 21,333 | |||||||||
922,483 | 770,176 | 707,050 | ||||||||||
(a) | The exchange gain for the year ended December 31, 2005 primarily relates to revaluation of the Group’s foreign currency denominated borrowings and obligations under finance leases. |
F-32
Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
10 | (LOSS)/PROFIT BEFORE INCOME TAX | |
(Loss)/profit before income tax is stated after: |
Year ended December 31, | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
RMB’000 | RMB’000 | RMB’000 | ||||||||||
Charging: | ||||||||||||
Depreciation of property, plant and equipment | 2,956,031 | 3,076,585 | 3,911,722 | |||||||||
Operating lease rentals | ||||||||||||
— aircraft | 1,238,012 | 1,720,736 | 1,785,615 | |||||||||
— land and buildings | 116,279 | 146,704 | 212,027 | |||||||||
Amortization of lease prepayments | 20,049 | 18,414 | 25,219 | |||||||||
Amortization of goodwill | 5,654 | 5,654 | — | |||||||||
Loss on disposals of property, plant and equipment | 33,578 | — | — | |||||||||
Consumption of flight equipment spare parts | 86,009 | 139,711 | 239,134 | |||||||||
Allowances for obsolescence of flight equipment spare parts | 53,336 | 73,406 | — | |||||||||
Provision for impairment of trade and other receivables | 19,229 | 24,250 | 25,325 | |||||||||
Auditors’ remuneration | 7,380 | 7,380 | 10,000 | |||||||||
and crediting: | ||||||||||||
Amortization of negative goodwill | 3,452 | 3,452 | — | |||||||||
Reversal of allowances for obsolescence of flight equipment spare parts | — | — | 13,930 | |||||||||
Gain on disposals of property, plant and equipment | — | 47,819 | 8,073 | |||||||||
Gain on disposals of financial asset held for trading | 21,920 | 5,235 | — | |||||||||
F-33
Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
11 | TAXATION | |
(a) | Taxation (credited)/charged to the consolidated statements of operations is as follows: |
Year ended December 31, | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
RMB’000 | RMB’000 | RMB’000 | ||||||||||
Provision for PRC income tax, net of reversal | 124,530 | 160,502 | (81,734 | ) | ||||||||
Deferred taxation | �� | 114,843 | (30,901 | ) | (56,970 | ) | ||||||
239,373 | 129,601 | (138,704 | ) | |||||||||
Year ended December 31, | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
RMB’000 | RMB’000 | RMB’000 | ||||||||||
(Loss)/profit before taxation | (741,302 | ) | 585,972 | (577,432 | ) | |||||||
Adjusted: | ||||||||||||
Share of result of associates and jointly controlled entities | 32,738 | 5,256 | 13,330 | |||||||||
(708,564 | ) | 591,228 | (564,102 | ) | ||||||||
Tax calculated at enacted tax rate of 15% | 106,285 | (88,684 | ) | 84,615 | ||||||||
Effect attributable to subsidiaries charged at tax rate of 33% | (10,539 | ) | (17,578 | ) | 18,334 | |||||||
Effect attributable to subsidiaries with income tax exemption | — | — | 33,852 | |||||||||
Income not subject to taxation | — | — | 4,462 | |||||||||
Expenses not deductible for tax purposes | (74,273 | ) | (27,673 | ) | (5,642 | ) | ||||||
Reversal of income tax provision made in prior years as a result of tax clearance with local tax bureau | — | — | 81,807 | |||||||||
Unrecognized tax losses | (258,515 | ) | — | (86,074 | ) | |||||||
Utilization of previously unrecognized tax losses | — | 6,395 | — | |||||||||
Others | (2,331 | ) | (2,061 | ) | 7,350 | |||||||
Tax (charge)/benefit | (239,373 | ) | (129,601 | ) | 138,704 | |||||||
F-34
Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
11 | TAXATION (CONTINUED) | |
(b) | The Group operates international flights to overseas destinations. There was no material overseas taxation for the years ended December 31, 2005 and 2004, as there are double tax treaties between the PRC and the corresponding jurisdictions (including Hong Kong) relating to aviation business. | |
(c) | Deferred income tax assets and liabilities are offset when there is a legally enforceable right of offset and when the deferred income taxes relate to the same authority. The following amounts, determined after appropriate offsetting, are shown in the balance sheets: |
December 31, | ||||||||
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Deferred tax assets | ||||||||
— Deferred tax asset to be utilized after 12 months | 286,780 | 286,764 | ||||||
— Deferred tax asset to be utilized within 12 months | 108,685 | 148,075 | ||||||
395,465 | 434,839 | |||||||
Deferred tax liabilities | ||||||||
— Deferred tax liability to be realized after 12 months | (687,850 | ) | (601,340 | ) | ||||
— Deferred tax liability to be realized within 12 months | — | — | ||||||
(687,850 | ) | (601,340 | ) | |||||
Deferred tax liabilities, net | (292,385 | ) | (166,501 | ) | ||||
December 31, | ||||||||
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
At January 1, as restated | 325,753 | 292,385 | ||||||
Additions through business acquisitions (Note 38) | — | (93,017 | ) | |||||
Credited to income statement (Note 11(a)) | (30,901 | ) | (56,970 | ) | ||||
Charged/(credited) to equity: | ||||||||
— gain/(losses) on cashflow hedges (Note 31) | (2,467 | ) | 24,103 | |||||
At December 31 | 292,385 | 166,501 | ||||||
F-35
Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
11 | TAXATION (CONTINUED) | |
The deferred tax assets and liabilities (prior to offsetting of balances within the same tax jurisdiction) were made up of taxation effects of the followings: |
December 31, | ||||||||
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Deferred tax assets: | ||||||||
Tax losses carried forward | 349,562 | 451,659 | ||||||
Provision for obsolete flight equipment spare parts | 54,014 | 33,192 | ||||||
Repair cost on flight equipment | 119,039 | 64,454 | ||||||
Provision for post-retirement benefits | 95,252 | 185,102 | ||||||
Other accrued expenses and derivative financial instruments | 120,704 | 139,949 | ||||||
738,571 | 874,356 | |||||||
Less: unrecognized assets | (252,120 | ) | (338,194 | ) | ||||
486,451 | 536,162 | |||||||
Deferred tax liabilities: | ||||||||
Provision for aircraft overhauls | (106,128 | ) | (143,517 | ) | ||||
Depreciation and amortization | (672,708 | ) | (559,146 | ) | ||||
(778,836 | ) | (702,663 | ) | |||||
Net deferred tax liabilities | (292,385 | ) | (166,501 | ) | ||||
At | (Charged)/ | At | ||||||||||||||
December | credited | (Charged)/ | December | |||||||||||||
31, | to income | credited | 31, | |||||||||||||
2003 | statement | to equity | 2004 | |||||||||||||
RMB’000 | RMB’000 | RMB’000 | RMB’000 | |||||||||||||
Tax losses carried forward | 54,401 | 43,041 | — | 97,442 | ||||||||||||
Provision for obsolete flight equipment spare parts | 41,960 | 12,054 | — | 54,014 | ||||||||||||
Repair cost on flight equipment | 160,541 | (41,502 | ) | — | 119,039 | |||||||||||
Provision for post-retirement benefits | 89,733 | 5,519 | — | 95,252 | ||||||||||||
Other accrued expenses and derivative financial instruments | 122,262 | (4,025 | ) | 2,467 | 120,704 | |||||||||||
468,897 | 15,087 | 2,467 | 486,451 | |||||||||||||
Provision for aircraft overhauls | (103,853 | ) | (2,275 | ) | — | (106,128 | ) | |||||||||
Depreciation and amortization | (690,797 | ) | 18,089 | — | (672,708 | ) | ||||||||||
(794,650 | ) | 15,814 | — | (778,836 | ) | |||||||||||
Movement of deferred tax liabilities | (325,753 | ) | 30,901 | 2,467 | (292,385 | ) | ||||||||||
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
11 | TAXATION (CONTINUED) | |
Movements of net deferred tax liabilities of the Group for the year ended December 31, 2005: |
Additions | ||||||||||||||||||||
At | (Charged)/ | through | At | |||||||||||||||||
December | credited | (Charged)/ | business | December | ||||||||||||||||
31, | to income | credited | acquisitions | 31, | ||||||||||||||||
2004 | statement | to equity | (Note 38) | 2005 | ||||||||||||||||
RMB’000 | RMB’000 | RMB’000 | RMB’000 | RMB’000 | ||||||||||||||||
Tax losses carried forward | 97,442 | 16,023 | — | — | 113,465 | |||||||||||||||
Provision for obsolete flight equipment spare parts | 54,014 | (20,628 | ) | — | (194 | ) | 33,192 | |||||||||||||
Repair cost on flight equipment | 119,039 | (54,585 | ) | — | — | 64,454 | ||||||||||||||
Provision for post-retirement benefits | 95,252 | 12,066 | — | 77,784 | 185,102 | |||||||||||||||
Other accrued expenses and derivative financial instruments | 120,704 | 35,081 | (24,103 | ) | 8,267 | 139,949 | ||||||||||||||
486,451 | (12,043 | ) | (24,103 | ) | 85,857 | 536,162 | ||||||||||||||
Provision for aircraft overhauls | (106,128 | ) | 5,185 | — | (42,574 | ) | (143,517 | ) | ||||||||||||
Depreciation and amortization | (672,708 | ) | 63,828 | — | 49,734 | (559,146 | ) | |||||||||||||
(778,836 | ) | 69,013 | — | 7,160 | (702,663 | ) | ||||||||||||||
Net deferred tax liabilities | (292,385 | ) | 56,970 | (24,103 | ) | 93,017 | (166,501 | ) | ||||||||||||
In accordance with the PRC tax law, tax losses can be carried forward to off set against future taxable income for a period of five years. As of December 31, 2004 and 2005, the Group had tax losses carried forward of approximately RMB2,330,000,000 and RMB3,011,000,000 respectively which will expire between 2006 and 2010, available to off set against the Group’s future taxable income. As of December 31, 2004 and 2005, the Group did not recognize RMB252,120,000 and RMB338,194,000 of deferred tax assets arising from the tax losses available as management did not consider it probable that such tax losses would be realized before they expire. | ||
12 | DIVIDENDS | |
Dividend of RMB97,339,000 (RMB0.02 per share) in respect of the year ended December 31, 2004 were paid in 2005. | ||
The Board of Directors of the Company has recommended not to pay any dividend in respect of the year ended December 31, 2005. | ||
13 | (LOSS)/EARNINGS PER SHARE | |
The calculation of basic (loss)/earnings per share is based on the loss attributable to equity holders of RMB1,097,161,000, profit of RMB 320,691,000 and loss of RMB467,307,000 for the year ended December 31, 2003, 2004 and 2005, respectively and 4,866,950,000 weighted average number of shares in issue during the years ended December 31, 2003, 2004 and 2005. The Company has no potential dilutive ordinary shares. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
14 | PROPERTY, PLANT AND EQUIPMENT |
Aircraft, engines and | ||||||||||||||||||||
flight equipment | ||||||||||||||||||||
Held | Other | |||||||||||||||||||
under | property, | |||||||||||||||||||
finance | plant and | |||||||||||||||||||
Owned | leases | Buildings | equipment | Total | ||||||||||||||||
RMB’000 | RMB’000 | RMB’000 | RMB’000 | RMB’000 | ||||||||||||||||
Valuation | ||||||||||||||||||||
At January 1, 2005 | 26,142,685 | 13,452,651 | 2,254,015 | 2,321,357 | 44,170,708 | |||||||||||||||
Transfers from construction in progress (Note 15) | — | — | 33,582 | 116,985 | 150,567 | |||||||||||||||
Transfers from advance payments on acquisition of aircraft (Note 17) | 445,949 | 1,191,167 | — | — | 1,637,116 | |||||||||||||||
Additions through business acquisitions (Note 38) | 4,781,327 | 2,155,855 | 72,222 | 293,429 | 7,302,833 | |||||||||||||||
Other additions | 1,952,356 | 991,640 | 71,451 | 463,023 | 3,478,470 | |||||||||||||||
Disposals | (67,354 | ) | — | (6,281 | ) | (125,299 | ) | (198,934 | ) | |||||||||||
At December 31, 2005 | 33,254,963 | 17,791,313 | 2,424,989 | 3,069,495 | 56,540,760 | |||||||||||||||
Accumulated depreciation | ||||||||||||||||||||
At January 1, 2005 | 9,638,471 | 3,264,609 | 392,209 | 1,131,533 | 14,426,822 | |||||||||||||||
Charge for the year | 2,307,706 | 1,161,395 | 87,284 | 355,337 | 3,911,722 | |||||||||||||||
Disposals | (66,030 | ) | — | (159 | ) | (79,111 | ) | (145,300 | ) | |||||||||||
At December 31, 2005 | 11,880,147 | 4,426,004 | 479,334 | 1,407,759 | 18,193,244 | |||||||||||||||
Net book amount | ||||||||||||||||||||
At December 31, 2005 | 21,374,816 | 13,365,309 | 1,945,655 | 1,661,736 | 38,347,516 | |||||||||||||||
At January 1, 2005 | 16,504,214 | 10,188,042 | 1,861,806 | 1,189,824 | 29,743,886 | |||||||||||||||
(a) | In January 2004, the Company exercised its right to terminate a finance lease arrangement and purchased an aircraft at a consideration equal to the present value of the remaining minimum lease payments on the date of the purchase. In this connection, the Company was entitled to a rebate of RMB98,921,000, as it had met certain conditions as defined in the original lease arrangement. Such a rebate was recognized as a reduction is the cost of the aircraft. | |
(b) | The Group’s property, plant and equipment is stated at fair value. The latest independent valuation was performed on June 30, 2001. | |
Had the property, plant and equipment of the Group and the Company been stated at cost less accumulated depreciation and impairment losses, the carrying amounts of property, plant and equipment would have been as follows: |
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
At December 31, | 29,262,326 | 37,943,085 | ||||||
(c) | As at December 31, 2005, aircraft owned by the Group with an aggregate net book amount of approximately RMB9,843,773,000 (2004: RMB9,737,032,000) were pledged as collateral under certain loan arrangements (see Note 29). |
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Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
15 | CONSTRUCTION IN PROGRESS |
December 31, | ||||||||
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
At January 1, | 219,788 | 188,654 | ||||||
Additions through business acquisitions (Note 38) | — | 13,577 | ||||||
Other additions | 178,065 | 189,220 | ||||||
Transfer to property, plant and equipment (Note 14) | (209,199 | ) | (150,567 | ) | ||||
At December 31, | 188,654 | 240,884 | ||||||
Representing: | ||||||||
Buildings | 81,599 | 103,418 | ||||||
Other property, plant and equipment | 107,055 | 137,466 | ||||||
188,654 | 240,884 | |||||||
16 | LEASE PREPAYMENTS |
December 31, | ||||||||
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Cost | ||||||||
At January 1, | 965,462 | 965,462 | ||||||
Additions through business acquisitions (Note 38) | — | 74,339 | ||||||
Other additions | — | 94,843 | ||||||
At December 31, | 965,462 | 1,134,644 | ||||||
Accumulated amortization | ||||||||
At January 1, | 118,240 | 136,654 | ||||||
Amortization charge | 18,414 | 25,219 | ||||||
At December 31, | 136,654 | 161,873 | ||||||
Net book amount | ||||||||
At December 31, | 828,808 | 972,771 | ||||||
Lease prepayments represent unamortized prepayments for land use rights. | ||
The Group’s land use rights are located in the PRC and the majority of these land use rights have terms of 50 years from the date of grant. As at December 31, 2005, the majority of these land use rights had remaining terms ranging from 41 to 49 years (2004: from 42 to 48 years). | ||
Certificates of certain land use rights owned by the Group, with nil carrying value, are currently registered under the name of CEA Holding and held by CEA Holding on behalf of the Group. The Group is entitled to lawfully and validly occupy and use these lands for its daily operations. The procedures to change the registration of the land use rights certificates with the relevant municipal land bureaus are currently being addressed by CEA Holding. Until the completion of these transfer procedures, the Group is unable to assign or pledge these land use rights. The Company’s directors do not believe the lack of certificates of certain land use rights has any material impact on the financial position of the Group. | ||
The directors do not believe the lack of certificates of certain land use rights has any material impact on the financial position of the Group |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
17 | ADVANCE PAYMENTS ON ACQUISITION OF AIRCRAFT |
December 31, | ||||||||
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
At January 1, | 2,239,893 | 2,678,603 | ||||||
Additions | 1,996,990 | 7,751,197 | ||||||
Interest capitalized (Note 9) | 57,120 | 279,989 | ||||||
Transfers to property, plant and equipment (Note 14) | (1,615,400 | ) | (1,637,116 | ) | ||||
At December 31, | 2,678,603 | 9,072,673 | ||||||
Included in balance at December 31, 2004 and 2005 is accumulated interest capitalized of RMB 160,016,000 and RMB409,530,000, at an average interest rate of 4.0% and 4.0% respectively. | ||
18 | INTANGIBLE ASSETS |
December 31, | ||||||||||||
Negative | Net | |||||||||||
Goodwill | goodwill | Balance | ||||||||||
RMB’000 | RMB’000 | RMB’000 | ||||||||||
Year ended December 31, 2004 | ||||||||||||
Net book amount, at beginning of year | 84,830 | (46,325 | ) | 38,505 | ||||||||
Amortization (charge)/credit | (5,654 | ) | 3,452 | (2,202 | ) | |||||||
Net book amount, at end of year | 79,176 | (42,873 | ) | 36,303 | ||||||||
At December 31, 2004 | ||||||||||||
Cost | 113,105 | (55,245 | ) | 57,860 | ||||||||
Accumulated amortization and impairment | (33,929 | ) | 12,372 | (21,557 | ) | |||||||
Net book amount, at end of year | 79,176 | (42,873 | ) | 36,303 | ||||||||
Year ended December 31, 2005 | ||||||||||||
Net book amount, at beginning of year as previously presented | 79,176 | (42,873 | ) | 36,303 | ||||||||
Opening adjustment on derecognition of negative goodwill | — | 42,873 | 42,873 | |||||||||
79,176 | — | 79,176 | ||||||||||
Additions through business acquisitions (Note 38) | 609,135 | — | 609,135 | |||||||||
Net book amount, at end of year | 688,311 | — | 688,311 | |||||||||
The amortization of goodwill of RMB5,654,000 and negative goodwill of RMB3,452,000 for the year ended December 31, 2004 is included in “other depreciation, amortization and operating lease” in the consolidated statements of operations. |
F-40
Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
18 | INTANGIBLE ASSETS (CONTINUED) | |
Impairment tests for goodwill | ||
The Company operates in one cash-generating unit (“CGU”) which is the carriage of passenger, cargo and mail over various routes. | ||
The recoverable amount of a CGU is determined based on value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by management covering a five-year period. Cash flows beyond the five-year period are extrapolated using the estimated growth rates stated below. The growth rate does not exceed the long-term average growth rate for the aviation business in which the CGU operates. | ||
Key assumptions used for value-in-use calculations are: |
— Gross margin | 20 | % | ||
— Growth rate | 10 | % | ||
— Discount rate | 5 | % |
Management determined budgeted gross margin based on past performance and its expectations for market development. The weighted average growth rate used is consistent with the forecasts included in industry reports. The discount rate used is pre-tax and reflects specific risks relating to the Company’s business. |
F-41
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
19 | INVESTMENTS IN ASSOCIATES |
December 31, | ||||||||
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Unlisted investments, at cost | 757,676 | 763,240 | ||||||
Goodwill | 47,060 | 47,060 | ||||||
Share of post acquisition results/(reserves) | (171,524 | ) | (180,554 | ) | ||||
633,212 | 629,746 | |||||||
Movement of investments in associates is as follows: |
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
At January 1, | 656,054 | 633,212 | ||||||
Cost of additional investment | 27,682 | 5,564 | ||||||
Share of results | (44,318 | ) | (9,030 | ) | ||||
Amortization of goodwill | (6,206 | ) | — | |||||
At December 31, | 633,212 | 629,746 | ||||||
Particulars of the principal associates, all of which are limited liability companies established and operating in the PRC, are as follows: |
Place and | Attributable | |||||||||||
date of | Paid-up | equity | Principal | |||||||||
Company | establishment | capital | interest | activities | ||||||||
RMB’000 | 2004 | 2005 | ||||||||||
China Eastern Airlines | PRC | 600,000 | 40% | 40% | Provision of air | |||||||
Wuhan Co., Ltd. (a) | August 16, 2002 | transportation services | ||||||||||
(“CEA Wuhan”) | ||||||||||||
Eastern Air Group | PRC | 400,000 | 25% | 25% | Provision of financial | |||||||
Finance Co., Ltd. | December 6, 1995 | services to group | ||||||||||
(“EAGF”) | companies of CEA | |||||||||||
Holding | ||||||||||||
Eastern Aviation | PRC | 10,000 | 45% | 45% | Provision of aviation | |||||||
Advertising Services | March 4, 1986 | advertising agency | ||||||||||
Co., Ltd. | services | |||||||||||
China Eastern Air | PRC | 350,000 | 45% | 45% | Provision of air | |||||||
Catering Investment Co., Ltd. | November 17, 2003 | catering services | ||||||||||
Eastern Aviation Import | PRC | 80,000 | 45% | 45% | Provision of aviation | |||||||
& Export Co., Ltd. | June 9, 1993 | equipment, spare | ||||||||||
(“EAIEC”) | parts and tools | |||||||||||
trading | ||||||||||||
Shanghai Dongmei | PRC | 31,000 | 45% | 45% | Provision of travelling | |||||||
Aviation Travel Co., | October 17, 2004 | and accommodation | ||||||||||
Ltd. (“SDATC”) | agency services |
F-42
Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
19 | INVESTMENTS IN ASSOCIATES (CONTINUED) |
Place and | Attributable | |||||||||||
date of | Paid-up | equity | Principal | |||||||||
Company | establishment | capital | interest | activities | ||||||||
RMB’000 | 2004 | 2005 | ||||||||||
Qingdao Liuting | PRC | 450,000 | 25% | 25% | Provision of airport | |||||||
International | December 1, 2000 | operation services | ||||||||||
Airport Co., Ltd. | ||||||||||||
Collins Aviation | PRC | 57,980 | 35% | 35% | Provision of airline | |||||||
Maintenance Service | September 27, 2002 | electronics products | ||||||||||
Shanghai Ltd. | maintenance services | |||||||||||
Shanghai Hongpu | PRC | 25,000 | 30% | 30% | Provision of cable and | |||||||
Civil Airport | October 18, 2002 | wireless | ||||||||||
Communication | communication | |||||||||||
Co., Ltd. | services | |||||||||||
China Eastern Airlines | PRC | 10,162 | 40% | 40% | Provision of ticket | |||||||
Development (HK) | May 20, 1995 | sales and goods | ||||||||||
Co., Ltd. | logistics | |||||||||||
Jiangsu Huayu General | PRC | 110,000 | 27% | 27% | Provision of aviation | |||||||
Aviation Co., Ltd. | December 1, 2004 | supporting services |
Notes: | ||
(a) | Subsequent to December 31, 2005, the Company completed acquisitions amounting in aggregate to an additional 56% interest in China Eastern Airlines Wuhan Co., Ltd. (Note 42). | |
(b) | The Group’s aggregated share of the revenues, results, assets and liabilities of its associates are as follows: |
Assets | Liabilities | Revenues | Loss | |||||||||||||
RMB’000 | RMB’000 | RMB’000 | RMB’000 | |||||||||||||
2004 | 2,098,974 | 1,465,762 | 915,174 | (44,318 | ) | |||||||||||
2005 | 1,807,387 | 1,177,641 | 887,928 | (9,030 | ) | |||||||||||
F-43
Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
20 | INVESTMENTS IN JOINTLY CONTROLLED ENTITIES |
December 31, | ||||||||
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Unlisted investments, at cost | 7,680 | 59,552 | ||||||
Share of post-acquisition results/(reserves) | 45,268 | 40,968 | ||||||
52,948 | 100,520 | |||||||
The Group’s aggregated share of the revenues, results, assets and liabilities of its jointly controlled entities is as follows: |
(Loss) | ||||||||||||||||
Assets | Liabilities | Revenues | /profit | |||||||||||||
RMB’000 | RMB’000 | RMB’000 | RMB’000 | |||||||||||||
2004 | 65,813 | 12,865 | 102,587 | 45,268 | ||||||||||||
2005 | 142,667 | 42,147 | 133,570 | (4,300 | ) | |||||||||||
Movement of investments in jointly controlled entities is as follows: |
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
At January 1, | — | 52,948 | ||||||
Cost of additional investment | 7,680 | 51,872 | ||||||
Share of results | 45,268 | (4,300 | ) | |||||
At December 31, | 52,948 | 100,520 | ||||||
Particulars of the principal jointly controlled entities, all of which are limited liability companies established and operating in the PRC are as follows: |
Place and | Attributable | |||||||||||
date of | Paid-up | equity | Principal | |||||||||
Company | establishment | capital | interest | activities | ||||||||
RMB’000 | 2004 | 2005 | ||||||||||
Shanghai Technologies | PRC | 113,843 | — | 51% | Provision of | |||||||
Aerospace Co., Ltd. | September 28, 2004 | repair and | ||||||||||
(“STA”) (a) | maintenance | |||||||||||
Shanghai Eastern | PRC | 17,484 | 40% | 40% | Provision of spare parts | |||||||
Union Aviation | December 28, 1995 | repair and | ||||||||||
Wheels & Brakes | maintenance | |||||||||||
Overhual Engineering Co., Ltd (“Wheels & Brakes”) | ||||||||||||
Eastern China Kaiya | PRC | 10,000 | 41% | 41% | Provision of computer | |||||||
System Integration | May 21, 1999 | systems development | ||||||||||
Co., Ltd. |
Notes | ||
(a) | Under a Joint Venture Agreement dated March 10, 2003, the Company has agreed to share control over the economic activities of STA. Any strategic financial and operating decisions relating to the activities of STA require the unanimous consent of the Company and the other joint venture partner. |
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Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
21 | OTHER LONG-TERM ASSETS |
December 31, | ||||||||
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Long-term bank deposits (a) | 1,908,398 | 2,026,220 | ||||||
Deposits relating to aircraft under operating leases (b) | 133,159 | 446,323 | ||||||
Prepaid customs duty and value added tax | 21,083 | 4,756 | ||||||
Rental and renovation deposits | 18,558 | 34,777 | ||||||
Prepaid staff benefits (c) | 28,439 | 62,096 | ||||||
Other long-term receivables | 92,969 | 131,386 | ||||||
2,202,606 | 2,705,558 | |||||||
(a) | The long-term bank deposits are pledged as collateral under certain finance lease arrangements (see Note 28). As at December 31, 2004 and 2005, the effective interest rate on the long-term bank deposits was 5.0% and 3.6% per annum respectively. The deposits have average maturities of 4.4 years. The fair value of long-term bank deposit of the Group is RMB1,991 million and RMB2,114 million as at December 31, 2004 and 2005 respectively, which are determined using the expected future payments discounted at market interest rates prevailing at the year end of 2.5% to 6.5% (2004: 2.5% to 7.0%). | |
(b) | The fair value of deposits relating to aircraft under operating leases of the Group is RMB133 million and RMB446 million as at December 31,2004 and 2005 respectively, which are determined using the expected future payments discounted at market interest rates prevailing at the year end of 4.4% (2004: 2.4%). | |
(c) | This represents subsidies to certain employees as an encouragement to purchase motor vehicles. The employees are required to serve the Group for six years from the date of receipt of the subsidies in order not to be required to repay the Group for the subsidy. If the employee leaves before the end of the six-year period, a refund by the employee is required calculated on a pro-rata basis. These subsidies are amortized over six years on the straight-line basis. |
F-45
Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
22 | TRADE RECEIVABLES | |
The credit terms given to trade customers are determined on an individual basis, with the credit periods generally ranging from half a month to three months. | ||
The aging analysis of trade receivables is as follows: |
December 31, | ||||||||
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Less than 31 days | 1,223,059 | 1,580,082 | ||||||
31 to 60 days | 259,086 | 134,095 | ||||||
61 to 90 days | 116,048 | 122,377 | ||||||
91 to 180 days | 93,587 | 34,097 | ||||||
181 to 365 days | 4,047 | 13,302 | ||||||
Over 365 days | 89,208 | 127,466 | ||||||
1,785,035 | 2,011,419 | |||||||
Less: provision for impairment of receivables | (77,973 | ) | (93,010 | ) | ||||
Trade receivables, net | 1,707,062 | 1,918,409 | ||||||
23 | PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES |
December 31, | ||||||||
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Prepaid aircraft operating lease rentals | 19,373 | 21,279 | ||||||
Prepayment for acquisition of flight equipments and other assets | 126,645 | 179,206 | ||||||
Deposits with banks and a financial institution with original maturity over three months but less than a year (a) | 77,446 | 175,332 | ||||||
Custom duties and value added tax recoverable (b) | — | 114,781 | ||||||
Rebate receivable on aircraft acquisitions | 31,136 | 102,582 | ||||||
Rental deposits | 43,674 | 49,303 | ||||||
Others | 313,685 | 354,788 | ||||||
611,959 | 997,271 | |||||||
(a) | As at December 31, 2004 and 2005, the effective interest rate on deposits with banks and a financial institution is 0.7 and 0.7% respectively. | |
(b) | Pursuant to the Caiguanshui [2004] No. 63 issued by the Ministry of Finance on December 29, 2004, PRC airlines (including the Company, China Cargo Airlines Co., Ltd. and China Eastern Airlines Jiangsu Co., Ltd.) are subject to reduced custom duties and value added tax on imported flight equipment and overseas repair costs in relation to those aircraft flying on international and regional routes with effect from January 1, 2005. During the year ended December 31, 2005, the Group paid the related custom duties and value added tax at the standard rates and hence is entitled to a refund of over payment. As at December 31, 2005, the Group has aggregated recoverable balances of RMB114,781,000. |
F-46
Table of Contents
CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
24 | CASH AND CASH EQUIVALENTS | |
The carrying amounts of the cash and cash equivalents are denominated in the following currencies: |
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Renminbi | 1,821,638 | 1,281,206 | ||||||
US Dollars | 105,448 | 333,099 | ||||||
Japanese Yen | 55,203 | 76,591 | ||||||
Euro | 27,760 | 37,420 | ||||||
Pound Sterling | 17,534 | 22,979 | ||||||
Australian Dollars | 13,601 | 18,969 | ||||||
Singapore Dollars | 15,063 | 15,943 | ||||||
Canadian Dollars | 4,977 | 14,187 | ||||||
Others | 53,223 | 63,607 | ||||||
2,114,447 | 1,864,001 | |||||||
25 | TRADE PAYABLES AND NOTES PAYABLES | |
The aging analysis of trade payables and notes payables is as follows: |
December 31, | ||||||||
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Less than 31 days | 923,041 | 1,697,293 | ||||||
31 to 60 days | 69,163 | 397,187 | ||||||
61 to 90 days | 74,533 | 195,869 | ||||||
91 to 180 days | 369,478 | 846,775 | ||||||
181 to 365 days | — | 212,025 | ||||||
Over 365 days | 21,002 | 45,749 | ||||||
1,457,217 | 3,394,898 | |||||||
As at December 31, 2005, all notes payables totaling RMB 1,775,048,000 were unsecured. Discount rates ranged from 2.9% to 3.2% (2004: 3.8% to 4.1%) and all notes are repayable within six months. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
26 | OTHER PAYABLES AND ACCRUED EXPENSES |
December 31, | ||||||||
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Accrued fuel cost | 1,239,930 | 1,415,797 | ||||||
Accrued take-off and landing charges | 724,164 | 810,226 | ||||||
Accrued aircraft overhaul expenses | 461,200 | 745,627 | ||||||
Accrued salaries, wages and benefits | 242,195 | 271,963 | ||||||
Other accrued operating expenses | 492,109 | 739,415 | ||||||
Duties and levies payable | 431,922 | 755,373 | ||||||
Current portion of provision for staff housing allowances (Note 34 (b)) | 93,427 | 13,270 | ||||||
Current portion of other long-term liabilities (Note 32) | 30,000 | 66,029 | ||||||
Current portion of post-retirement benefit obligations (Note 33(b)) | 27,500 | 35,825 | ||||||
Staff housing fund payable (Note 34(a)) | 75,364 | 136,510 | ||||||
Deposit received from ticketing agents | 215,335 | 353,805 | ||||||
Current portion of operating lease payable | — | 52,268 | ||||||
Staff welfare payable | 25,666 | 39,433 | ||||||
Others | 407,212 | 585,940 | ||||||
4,466,024 | 6,021,481 | |||||||
27 | PROVISION FOR AIRCRAFT OVERHAUL EXPENSES |
December 31, | ||||||||
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
At January 1, | 266,093 | 254,009 | ||||||
Additions through business acquisitions (Note 38) | — | 196,122 | ||||||
Additional provisions | 75,897 | 64,700 | ||||||
Reversal resulting from change in estimate (a) | (20,814 | ) | (58,577 | ) | ||||
Utilization | (67,167 | ) | (52,255 | ) | ||||
At December 31, | 254,009 | 403,999 | ||||||
Less: current portion | (52,798 | ) | (15,589 | ) | ||||
Long-term portion | 201,211 | 388,410 | ||||||
Provision of aircraft overhaul expenses represents the present value of estimated costs of major overhauls for aircraft and engines under operating leases as the Group has the responsibility to fulfill certain return conditions under relevant leases. | ||
(a) | Prior to 2005, the overhauls for Company’s certain aircraft models under operating leases were performed by overseas service providers. In 2005, the Company identified domestic facilities to carry out overhauls for certain aircraft models. The cost of the overhauls carried out domestically was lower than that in overseas. Accordingly, the Company changed its estimate for provision for aircraft overhauls as related those aircraft models. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
28 | OBLIGATIONS UNDER FINANCE LEASES | |
At December 31, 2004 and 2005, Group had 22 and 26 aircraft, respectively under finance leases. Under the terms of the leases, Group has the option to purchase, at or near the end of the lease terms, certain aircraft at fair market value and others at either fair market value or a percentage of the respective lessors’ defined costs of the aircraft. The obligations under finance leases are principally denominated in US Dollars. | ||
The future minimum lease payments (including interests), and the present value of the minimum lease payments under finance leases are as follows: |
December 31, 2004 | December 31, 2005 | |||||||||||||||||||||||
Present | Present | |||||||||||||||||||||||
value of | value of | |||||||||||||||||||||||
Minimum | Minimum | Minimum | minimum | |||||||||||||||||||||
lease | Lease | lease | lease | |||||||||||||||||||||
payments | Interest | Payments | payments | Interest | payments | |||||||||||||||||||
RMB’000 | RMB’000 | RMB’000 | RMB’000 | RMB’000 | RMB’000 | |||||||||||||||||||
Within one year | 1,526,981 | 337,333 | 1,189,648 | 2,885,047 | 457,010 | 2,428,037 | ||||||||||||||||||
In the second year | 1,962,208 | 262,372 | 1,699,836 | 2,870,162 | 300,106 | 2,570,056 | ||||||||||||||||||
In the third to fifth year | 3,924,600 | 168,346 | 3,756,254 | 3,487,110 | 472,914 | 3,014,196 | ||||||||||||||||||
After the fifth year | 2,401,578 | 385,030 | 2,016,548 | 2,934,000 | 337,792 | 2,596,208 | ||||||||||||||||||
Total | 9,815,367 | 1,153,081 | 8,662,286 | 12,176,319 | 1,567,822 | 10,608,497 | ||||||||||||||||||
Less: amount repayable within one year | (1,526,981 | ) | (337,333 | ) | (1,189,648 | ) | (2,885,047 | ) | (457,010 | ) | (2,428,037 | ) | ||||||||||||
Long-term portion | 8,288,386 | 815,748 | 7,472,638 | 9,291,272 | 1,110,812 | 8,180,460 | ||||||||||||||||||
The fair value of obligations under finance leases is RMB8,382 and RMB10,432 million as at December 31,2004 and 2005 respectively, which is determined using the expected future payments discounted at market interest rates prevailing at the year end of 2.5% to 7.0% (2004: 2.5% to 7.0%). | ||
At December 31, 2004 and 2005, the Group had long-term bank deposits totaling RMB 1,908,398,000 and RMB2,026,220,000 respectively pledged as collateral under certain finance lease arrangements (Note 21). In addition, the finance lease obligations are secured by the related aircraft, assignments of all benefits of the relevant insurance policies relating to the aircraft together with guarantees provided by certain banks in the PRC. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
29 | BORROWINGS |
December 31, | ||||||||
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Non-current | ||||||||
Long-term bank borrowings | ||||||||
— secured | 2,987,920 | 5,809,678 | ||||||
— unsecured | 4,554,908 | 3,980,438 | ||||||
7,542,828 | 9,790,116 | |||||||
Current | ||||||||
Long-term bank borrowings | ||||||||
— secured | 2,925,038 | 1,555,313 | ||||||
— unsecured | 268,394 | 1,313,917 | ||||||
Short-term bank borrowings | ||||||||
— secured | — | 33,000 | ||||||
— unsecured | 6,188,919 | 13,677,856 | ||||||
Debentures | — | 1,974,544 | ||||||
9,382,351 | 18,554,630 | |||||||
Total borrowings | 16,925,179 | 28,344,746 | ||||||
The borrowings are repayable as follows: | ||||||||
Within one year | 9,382,351 | 18,554,630 | ||||||
In the second year | 2,386,862 | 2,663,434 | ||||||
In the third to fifth year | 3,216,181 | 5,517,473 | ||||||
After the fifth year | 1,939,785 | 1,609,209 | ||||||
16,925,179 | 28,344,746 | |||||||
2004 | 2005 | ||||||||
Interest rate and final maturities | RMB’000 | RMB’000 | |||||||
RMB denominated bank loans: | |||||||||
Loans for working capital | Fixed interest rates ranging from 4.94% to 5.76% per annum as at December 31, 2005; 3-year loans with final maturity through to 2008. | 1,710,100 | 3,253,500 | ||||||
Loans for the purchases of aircraft | Fixed interest rates of 5.18% per annum as at December 31, 2005; 2 to 8-year loans with final maturity through to 2012 | 880,000 | 1,455,000 | ||||||
Loans for construction projects | Fixed interest rates of 5.76% per annum as at December 31, 2005; 7 to 10-year loans with final maturities through to 2007 | 412,500 | 200,000 |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
29 | BORROWINGS (CONTINUED) |
2004 | 2005 | ||||||||
Interest rate and final maturities | RMB’000 | RMB’000 | |||||||
U.S. dollar denominated bank loans: | |||||||||
Loans for the purchases of aircraft | Fixed interest rates ranging from 4.01% to 6.86% per annum 2 to 10-year loans with final maturities through to 2013 | — | 296,120 | ||||||
Loans for the purchases of aircraft | Floating interest rates ranging from 3 months LIBOR+0.25% to 6 months LIBOR+0.75% as at December 31, 2005; 2 to 10-year loans with final maturities through to 2015 | 7,703,037 | 7,295,480 | ||||||
Loan for the purchase of an aircraft simulator | Floating interest rates of 6 months LIBOR +0.6% as at December 31, 2005; 3-year loans with final maturity in 2007 | 30,623 | 111,820 | ||||||
Loan for finance* leases of aircraft | Fixed interest rates ranging from 6.46% to 8.62% per annum, repayable by instalments up to 2008 | — | 47,426 | ||||||
Total long-term bank loans | 10,736,260 | 12,659,346 | |||||||
* | These loans are secured by the related aircraft. |
2005 | ||||
RMB’000 | ||||
Nominal value | 2,000,000 | |||
Less: Unamortized discount | (25,456 | ) | ||
1,974,544 | ||||
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
29 | BORROWINGS (CONTINUED) | |
The carrying amounts of the borrowings are denominated in the following currencies: |
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Renminbi | 7,295,601 | 13,112,485 | ||||||
US Dollars | 9,430,325 | 15,232,261 | ||||||
Japanese Yen | 199,253 | — | ||||||
16,925,179 | 28,344,746 | |||||||
As at December 31, 2004 and 2005, the secured bank borrowings of the Group for the purchases of aircraft was secured by the related aircraft with an aggregate net book amount of RMB9,737,032,000 and RMB9,843,773,000 respectively (Note 14). Certain secured bank borrowings with aggregate amount of RMB1,162,186,000 and RMB2,899,386,000 were also guaranteed by Export-Import Bank of the United States, China Industrial and Commercial Bank and China Construction Bank as at December 31,2004 and 2005 respectively. | ||
Certain unsecured bank borrowings of the Group totalling of RMB2,122,600,000 and RMB2,122,600,000 were guaranteed by CEA Holding as at December 31,2004 and 2005 respectively (Note 39) | ||
30 | SHARE CAPITAL |
December 31, | ||||||||
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Registered, issued and fully paid of RMB1.00 each Unlisted shares held by CEA Holding and employees | 3,000,000 | 3,000,000 | ||||||
A shares listed on The Shanghai Stock Exchange | 300,000 | 300,000 | ||||||
H shares listed on The Stock Exchange of Hong Kong Limited | 1,566,950 | 1,566,950 | ||||||
4,866,950 | 4,866,950 | |||||||
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
31 | RESERVES | |
(Amounts in thousands) |
Statutory | ||||||||||||||||||||||||||||
and | ||||||||||||||||||||||||||||
discretionary | Capital | Hedging | ||||||||||||||||||||||||||
Share | reserves | Revaluation | reserve | reserve | Retained | |||||||||||||||||||||||
premium | (Note (a)) | reserve | (Note (b)) | (Note 35) | profits | Total | ||||||||||||||||||||||
RMB’000 | RMB’000 | RMB’000 | RMB’000 | RMB’000 | RMB’000 | RMB’000 | ||||||||||||||||||||||
At January 1, 2004, as previously presented | 1,006,455 | 314,035 | 490,688 | (720,057 | ) | (77,879 | ) | 501,959 | 1,515,201 | |||||||||||||||||||
Effect of changes in accounting policy on the adoption of IAS16 | — | — | — | — | — | (207,609 | ) | (207,609 | ) | |||||||||||||||||||
At January 1, 2004, restated | 1,006,455 | 314,035 | 490,688 | (720,057 | ) | (77,879 | ) | 294,350 | 1,307,592 | |||||||||||||||||||
Unrealized losses on cashflow hedges (Note 35) | ||||||||||||||||||||||||||||
— gross | — | — | — | — | (7,610 | ) | — | (7,610 | ) | |||||||||||||||||||
— tax | — | — | — | — | 1,141 | — | 1,141 | |||||||||||||||||||||
Realized gains on cashflow hedges (Note 35) | ||||||||||||||||||||||||||||
— gross | — | — | — | — | (8,839 | ) | — | (8,839 | ) | |||||||||||||||||||
— tax | — | — | — | — | 1,326 | — | 1,326 | |||||||||||||||||||||
Profit attributable to equity holders of the Company | — | — | — | — | — | 320,691 | 320,691 | |||||||||||||||||||||
Transfer from retained profits to reserves (a) | — | 67,136 | — | — | — | (67,136 | ) | — | ||||||||||||||||||||
At December 31, 2004 | 1,006,455 | 381,171 | 490,688 | (720,057 | ) | (91,861 | ) | 547,905 | 1,614,301 | |||||||||||||||||||
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
31 | RESERVES (CONTINUED) | |
(Amounts in thousands) |
Statutory | ||||||||||||||||||||||||||||
and | ||||||||||||||||||||||||||||
discretionary | Capital | Hedging | ||||||||||||||||||||||||||
Share | reserves | Revaluation | reserve | reserve | Retained | |||||||||||||||||||||||
premium | (Note (a)) | reserve | (Note (b)) | (Note 35) | profits | Total | ||||||||||||||||||||||
RMB’000 | RMB’000 | RMB’000 | RMB’000 | RMB’000 | RMB’000 | RMB’000 | ||||||||||||||||||||||
At January 1, 2005, as previously presented | 1,006,455 | 381,171 | 490,688 | (720,057 | ) | (91,861 | ) | 948,898 | 2,015,294 | |||||||||||||||||||
Effect of changes in accounting policy on the adoption of IAS 16 | — | — | — | — | — | (400,993 | ) | (400,993 | ) | |||||||||||||||||||
At January 1, 2005, restated | 1,006,455 | 381,171 | 490,688 | (720,057 | ) | (91,861 | ) | 547,905 | 1,614,301 | |||||||||||||||||||
Recognition of negative goodwill in retained profits on the adoption of IFRS 3 | — | — | — | — | — | 42,873 | 42,873 | |||||||||||||||||||||
1,006,455 | 381,171 | 490,688 | (720,057 | ) | (91,861 | ) | 590,778 | 1,657,174 | ||||||||||||||||||||
Unrealized gains on cashflow hedges (Note 35) | ||||||||||||||||||||||||||||
— gross | — | — | — | — | 181,449 | — | 181,449 | |||||||||||||||||||||
— tax | — | — | — | — | (27,217 | ) | — | (27,217 | ) | |||||||||||||||||||
Realized gains on cashflow hedges (Note 35) | ||||||||||||||||||||||||||||
— gross | — | — | — | — | (20,759 | ) | — | (20,759 | ) | |||||||||||||||||||
— tax | — | — | — | — | 3,114 | — | 3,114 | |||||||||||||||||||||
Dividend relating to 2004 | — | — | �� | — | — | — | (97,339 | ) | (97,339 | ) | ||||||||||||||||||
Loss attributable to equity holders of the company | — | — | — | — | — | (467,307 | ) | (467,307 | ) | |||||||||||||||||||
Transfer from retained profits to reserves (a) | — | 26,671 | — | — | — | (26,671 | ) | — | ||||||||||||||||||||
At December 31, 2005 | 1,006,455 | 407,842 | 490,688 | (720,057 | ) | 44,726 | (539 | ) | 1,229,115 | |||||||||||||||||||
(a) | Statutory and Discretionary Reserves |
December 31, | ||||||||
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Statutory common reserve fund | 178,797 | 196,746 | ||||||
Statutory common welfare fund | 174,385 | 183,107 | ||||||
Discretionary common reserve fund | 27,989 | 27,989 | ||||||
381,171 | 407,842 | |||||||
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
31 | RESERVES (CONTINUED) | |
Pursuant to the PRC regulations and the Group companies’ Articles of Association, each of the companies is required to transfer 5% to 10% of its profit for the year, as determined under the PRC Accounting Regulations, to the statutory common welfare fund. This fund can only be used to provide staff welfare facilities and other collective benefits to the Group companies employees. This fund is non-distributable other than in liquidation. | ||
Each of the Group company is allowed to transfer 5% of its profit for the year as determined under the PRC Accounting Regulations, to a discretionary common reserve fund. The transfer to this reserve is subject to approval at shareholders’ meetings. | ||
For the year ended December 31, 2005, under the PRC Accounting Regulations, the Company recorded a loss for the year. Accordingly, no profit appropriation of the Company to reserves has been made for the year ended December 31, 2005 (2004: nil). The transfer from retained profits to reserves for the year represents the profit appropriation to reserves of certain subsidiaries of the Company. |
(b) | Capital reserve |
Capital reserve represents the difference between the fair value of the net assets injected and the nominal amount of the Company’s share capital issued in respect of a group restructuring in June 1996. | ||
32 | OTHER LONG-TERM LIABILITIES |
December 31, | ||||||||
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Deferred credit on aircraft operating lease rental (a) | — | 43,645 | ||||||
Deferred credit on government grants (b) | — | 70,410 | ||||||
Other long-term payable (c) | 130,204 | 107,203 | ||||||
130,204 | 221,258 | |||||||
Less: Current portion (Note 26) | (30,000 | ) | (66,029 | ) | ||||
Long-term portion | 100,204 | 155,229 | ||||||
(a) | Deferred credit on aircraft operating lease rental represents the unamortized portion of lease incentives from lessors. | |
(b) | Deferred credit on government grants represents government grants received for construction and acquisition of safety and security facilities. As at December 31, 2005, the related facilities have not been constructed or purchased. | |
(c) | The balance is unsecured, bearing interest at an effective rate of 6.21% per annum and is repayable by annual instalments of RMB30,000,000 (before taking into account of time value) up to year 2009. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
33 | RETIREMENT BENEFIT PLANS AND POST-RETIREMENT BENEFITS |
(a) | Defined contribution retirement schemes | ||
(i) | Pension | ||
The Group companies participate in defined contribution retirement schemes organized by municipal governments of the various provinces in which the Group companies operate, and substantially all of the Group’s PRC employees are eligible to participate in the Group companies’ retirement schemes. The Group companies are required to make annual contributions to the schemes at rates ranging from 20% to 22% on the employees’ prior year salary and allowances. Employees are required to contribute to the schemes at rates ranging from 7% to 8% of their basic salaries. The Group has no other material obligation for the payment of retirement benefits beyond the annual contributions under these schemes. For the year ended December 31, 2003 ,2004 and 2005, the Group’s pension cost charged to the consolidated income statements amounted to RMB 121,200,000, RMB146,500,000 and RMB228,264,000 respectively. | |||
(ii) | Medical insurance | ||
The majority of the Group’s PRC employees participate in the medical insurance schemes organized by the municipal governments, under which the Group and its employees are required to contribute to the scheme approximately 12% and 2%, respectively, of the employee’s basic salaries. For those employees who participate in these schemes, the Group has no other obligation for the payment of medical expense beyond the annual contributions. For the year ended December 31, 2003, 2004 and 2005, the Group’s medical insurance contribution charged to the statements of operations amounted to RMB36,424,000, RMB47,700,000 and RMB51,954,000 respectively. | |||
(b) | Post-retirement benefits | ||
In addition to the above retirement schemes, the Group provides retirees with other post-retirement benefits including transportation subsidies, social function activities subsidies and others. The expected cost of providing these post-retirement benefits is actuarially determined and recognized by using the projected unit credit method, which involves a number of assumptions and estimates, including inflation rate, discount rate and employees’ turnover ratio. | |||
The post-retirement benefit obligations recognized in the balance sheets are as follows: |
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Present value of unfunded post-retirement benefit obligations | 731,077 | 1,970,292 | ||||||
Unrecognized actuarial gain | (85,345 | ) | (731,590 | ) | ||||
Post-retirement benefit obligations | 645,732 | 1,238,702 | ||||||
Less: current portion (Note 26) | (27,500 | ) | (35,825 | ) | ||||
Long-term portion | 618,232 | 1,202,877 | ||||||
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
33 | RETIREMENT BENEFIT PLANS AND POST-RETIREMENT BENEFITS (CONTINUED) | |
The costs of post-retirement benefits are recognized under wages, salaries and benefits in the statements of operations as follows: |
2003 | 2004 | 2005 | ||||||||||
RMB’000 | RMB’000 | RMB’000 | ||||||||||
Current service cost | 13,064 | 20,849 | 56,436 | |||||||||
Interest cost | 27,235 | 29,857 | 45,200 | |||||||||
Actuarial losses recognized | — | 998 | 823 | |||||||||
Total (Note 8) | 40,299 | 51,704 | 102,459 | |||||||||
2003 | 2004 | 2005 | ||||||||||
Discount rate | 5.0 | % | 5.0 | % | 3.5 | % | ||||||
Annual rate of increase of per capita benefit payment | 1.5 | % | 1.5 | % | 1.5 | % | ||||||
Employees turnover rate | 3.0 | % | 3.0 | % | 3.0 | % | ||||||
34 | STAFF HOUSING BENEFITS | |
(a) | Staff housing fund | |
In accordance with the PRC housing reform regulations, the Group is required to contribute to the State-sponsored housing fund at rates ranging from 1% to 15% (2004: 1% to 15%) of the specified salary amount of its PRC employees. At the same time, the employees are required to contribute an amount equal to the Group’s contribution. The employees are entitled to claim the entire sum of the fund contributed under certain specified withdrawal circumstances. For the year ended December 31, 2003, 2004 and 2005, the Group’s contributions to the housing funds amounted to RMB 65,300,000, RMB94,200,000 and RMB102,472,000 respectively which has been charged to the statements of operations. The staff housing fund payable as at December 31, 2004 and 2005 amounted to RMB75,364,000 and RMB136,510,000 respectively (Note 26). The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. | ||
(b) | Staff housing allowances | |
The Group also provides staff housing allowances to eligible employees who joined in the Group prior to 1998 according to the Group’s staff housing allowance policy introduced in October 2003 (the “Staff Housing Allowance Policy”). |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
34 | STAFF HOUSING BENEFITS (CONTINUED) | |
(b) | Staff housing allowances (CONTINUED) | |
Under the Staff Housing Allowance Policy, employees who have not been allocated with any housing quarters or who have not been allocated with a quarter above the minimum area as set out in the Staff Housing Allowance Policy, are entitled to a cash allowance based on the area of quarter entitled and the unit price as set out in the Staff Housing Allowance Policy. The total entitlement is principally vested over a period of 20 years. Upon an employee’s resignation, his or her entitlement will cease and any unpaid entitlement related to past service up to the date of resignation will be paid. Upon the establishment of the Staff Housing Allowance Policy, employees are entitled to a portion of the total entitlement already accrued based on his or her past service period. Such entitlement would be paid over a period of 4 to 5 years. As at December 31, 2005, the present obligation of the provision for the employee’s staff housing entitlement is RMB457,466,000 (2004: RMB369,675,000), of which RMB13,270,000 (2004: RMB93,427,000) is classified as current portion in ‘other payables and accrued expenses’. | ||
For the year ended December 31, 2004 and 2005, the staff housing benefit provided under the Staff Housing Allowance Policy amounted to RMB29,253,000 and RMB36,231,000 respectively which has been charged to the statements of operations. | ||
35 | DERIVATIVE FINANCIAL INSTRUMENTS |
Assets | Liabilities | |||||||||||||||
2004 | 2005 | 2004 | 2005 | |||||||||||||
RMB’000 | RMB’000 | RMB’000 | RMB’000 | |||||||||||||
At December 31, | ||||||||||||||||
Interest rate swaps (a) | 11,571 | 71,260 | 19,447 | 19,821 | ||||||||||||
Forward foreign exchange contracts (b) | — | 2,469 | 100,196 | 17,808 | ||||||||||||
Fuel option contracts (c) | — | 50,193 | — | 22,985 | ||||||||||||
Total | 11,571 | 123,922 | 119,643 | 60,614 | ||||||||||||
Less: non-current portion | ||||||||||||||||
Interest rate swaps | (11,571 | ) | (70,292 | ) | (19,447 | ) | (2,731 | ) | ||||||||
Forward foreign exchange contracts | — | (594 | ) | (100,196 | ) | (10,380 | ) | |||||||||
Fuel option contracts | — | — | — | (12,659 | ) | |||||||||||
(11,571 | ) | (70,886 | ) | (119,643 | ) | (25,770 | ) | |||||||||
Current portion | — | 53,036 | — | 34,844 | ||||||||||||
(a) | Interest rate swaps | |
The Group uses interest rate swaps to reduce the risk of changes in market interest rates (Note 3(a)(iii)). The interest rate swaps entered into by the Group are generally for swapping variable rates, usually reference to LIBOR, into fixed rates. The Group’s interest rate swaps qualify for hedge accounting and are accounted for as cashflow hedge. As at December 31, 2004 and 2005, the notional amount of the outstanding interest rate swap agreements was approximately US$437 million and US$661 million respectively: These agreements will expire between 2006 and 2016. For the year ended December 31, 2004 and 2005, a net gain of RMB29,700,000 and RMB78,546,000 respectively arising from changes in the fair value of the interest rate swaps subsequent to initial recognition was recognized directly in the hedging reserve (Note 31). |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 35 DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) | ||
(b) | Forward foreign exchange contracts | |
The Group uses currency forward contracts to reduce risk of changes in currency exchange rates in respect of ticket sales and expenses denominated in foreign currencies (Note 3(a)(vi)). These contracts are generally for selling of Japanese Yen and purchasing of U.S. dollars at fixed exchange rates. On July 21, 2005, the People’s Bank of China revalued the RMB with reference to an undisclosed basket of currencies. Prior to the revaluation, the Group’s currency forward contracts qualified for hedge accounting and were accounted for as cashflow hedge of firm commitments. After the revaluation, the Group discontinued the hedge relationship and did not apply hedge accounting on forward foreign exchange contracts from July 1, 2005. As at December 31, 2004 and 2005, the notional amount of the outstanding currency forward contracts was approximately US$226 million and US$92 million respectively, which will expire between 2006 and 2010. For the years ended December 31, 2003, 2004 and 2005, a net loss of 58,102,000, a net loss of RMB 46,149,000 and a net gain of RMB82,144,000 respectively arising from changes in the fair value of these foreign currency forwards between the initial recognition up to June 30, 2005 was recognized directly in the hedging reserve (Note 31). The change in the fair value between July 1, 2005 and December 31, 2005 of RMB13,299,000 was recognized in the statements of operations. | ||
(c) | Fuel option contracts | |
The Group uses fuel option contracts to reduce the risk of changes in market oil/petroleum prices in connection with aircraft fuel costs. As at December 31, 2005, the Group had outstanding fuel option contracts to buy approximately 2,600,000 barrels of crude oil at prices which ranging from US$ 41 to US$ 70 per barrel and sell approximately 6,840,000 barrels of crude oil at prices which ranging from US$ 33.5 to US$ 87.25 per barrel, all of which will expire between 2006 and 2007. Management did not designate these fuel option contracts for hedge accounting and changes in fair values have been recognized directly in the statements of operations. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
36 | NOTES TO CONSOLIDATED CASH FLOW STATEMENT | |
(a) | Cash generated from operations |
Year ended December 31, | ||||||||||||||||
(Note 2a) | ||||||||||||||||
2003 | 2004 | 2005 | 2005 | |||||||||||||
RMB’000 | RMB’000 | RMB’000 | USD’000 | |||||||||||||
(Loss)/Profit before income tax | (741,302 | ) | 585,972 | (577,432 | ) | (71,551 | ) | |||||||||
Adjustments for: | ||||||||||||||||
Depreciation of property, plant and equipment | 2,956,031 | 3,076,585 | 3,911,722 | 484,712 | ||||||||||||
Gains on disposals of property, plant and equipment | 33,578 | (47,819 | ) | (8,073 | ) | (1,000 | ) | |||||||||
Share of results in associates | 32,738 | 50,524 | 9,030 | 1,119 | ||||||||||||
Share of results in jointly controlled entities | — | (45,268 | ) | 4,300 | 533 | |||||||||||
Amortization of lease prepayments | 20,049 | 18,414 | 25,219 | 3,125 | ||||||||||||
Amortization of goodwill and negative goodwill | 2,202 | 2,202 | — | — | ||||||||||||
Net foreign exchange (gains)/loss | 77,850 | 32,207 | (414,640 | ) | (51,379 | ) | ||||||||||
Gains on disposals of financial assets held for trading | (21,920 | ) | (5,235 | ) | — | — | ||||||||||
Fair value gains on financial assets at fair value through profit or loss | — | (8,839 | ) | (30,877 | ) | (3,826 | ) | |||||||||
Consumption of flight equipment spare parts | 86,009 | 139,711 | 239,134 | 29,632 | ||||||||||||
Allowance for obsolescence of flight equipment spare parts | 53,336 | 73,406 | (13,930 | ) | (1,726 | ) | ||||||||||
Provision for impairment of trade and other receivables | 19,229 | 24,250 | 25,325 | 3,138 | ||||||||||||
Provision for post-retirement benefits | 40,299 | 51,704 | 102,459 | 12,696 | ||||||||||||
Provision for staff housing allowance | 260,463 | 29,253 | 36,231 | 4,489 | ||||||||||||
Provision for aircraft overhaul expenses | 63,757 | 75,897 | 64,700 | 8,017 | ||||||||||||
Interest income | (147,846 | ) | (129,020 | ) | (128,700 | ) | (15,948 | ) | ||||||||
Interest expense | 860,304 | 868,339 | 1,100,357 | 136,348 | ||||||||||||
Operating profit before working capital changes | 3,594,777 | 4,792,283 | 4,344,825 | 538,379 | ||||||||||||
Changes in working capital | ||||||||||||||||
Flight equipment spare parts | (128,713 | ) | (110,725 | ) | (294,969 | ) | (36,550 | ) | ||||||||
Trade receivables | (360,451 | ) | (136,995 | ) | (112,027 | ) | (13,882 | ) | ||||||||
Amount due from related companies | 770 | (122,253 | ) | (83,459 | ) | (10,342 | ) | |||||||||
Prepayments, deposits and other receivables | 197,006 | (361,345 | ) | (306,283 | ) | (37,952 | ) | |||||||||
Sales in advance of carriage | 225,739 | (206,496 | ) | 101,490 | 12,576 | |||||||||||
Trade payables and notes payables | 348,959 | 509,638 | 821,222 | 101,760 | ||||||||||||
Amount due to related companies | 432,510 | 138,968 | 156,062 | 19,338 | ||||||||||||
Other payables and accrued expenses | (202,937 | ) | (120,900 | ) | (1,030,806 | ) | (127,730 | ) | ||||||||
Other long-term liabilities | 9,610 | 8,344 | (67,764 | ) | (8,397 | ) | ||||||||||
Provision for aircraft overhaul expenses | (11,457 | ) | (91,321 | ) | (110,832 | ) | (13,733 | ) | ||||||||
Post-retirement benefit obligations | (19,455 | ) | (27,093 | ) | (29,370 | ) | (3,639 | ) | ||||||||
Staff housing allowances | — | (29,253 | ) | (18,306 | ) | (2,269 | ) | |||||||||
491,581 | (549,431 | ) | (975,042 | ) | (120,820 | ) | ||||||||||
Cash generated from operations | 4,086,358 | 4,242,852 | 3,369,783 | 417,559 | ||||||||||||
(b) Non-cash transaction | ||||||||||||||||
Investing activities not affecting cash | ||||||||||||||||
Injection of land use right from minority shareholder of a subsidiary | — | — | 63,063 | 7,814 | ||||||||||||
Capital contribution to a jointly controlled entity in form of property, plant and equipment | — | — | 51,872 | 6,428 | ||||||||||||
Utilization of rebates from aircraft acquisition for purchases of flight equipment spare parts | — | 98,921 | — | — | ||||||||||||
Financing activities not affecting cash | ||||||||||||||||
Finance lease obligations incurred for acquisition of aircraft | 1,163,979 | 3,525,570 | 991,640 | 122,877 | ||||||||||||
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
37 | COMMITMENTS | |
(a) | Capital commitments | |
The Group has the following capital commitments: |
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Authorized and contracted for: | ||||||||
— Aircraft, engines and flight equipment | 8,791,472 | 47,259,446 | ||||||
— Other property, plant and equipment | 129,440 | 96,827 | ||||||
— Acquisition of a subsidiary (Note 42) | 308,134 | 390,000 | ||||||
9,229,046 | 47,746,273 | |||||||
Authorized but not contracted for: | ||||||||
— Aircraft, engines and flight equipment | 3,533,000 | 723,000 | ||||||
— Others property, plant and equipment | 2,381,710 | 13,424,055 | ||||||
5,914,710 | 14,147,055 | |||||||
Total | 15,143,756 | 61,893,328 | ||||||
Contracted expenditures for the above aircraft and flight equipment, including deposits prior to delivery, subject to future inflation increases built in the contracts and any discounts available upon delivery of the aircraft, if any, are expected to be paid as follows: |
2005 | ||||
RMB’000 | ||||
2006 | 9,006,906 | |||
2007 | 12,703,578 | |||
2008 | 13,523,589 | |||
2009 | 6,256,592 | |||
2010 | 5,768,781 | |||
Total | 47,259,446 | |||
(b) | Operating lease commitments | |
The Group has commitments under operating leases to pay future minimum lease rentals as follows: |
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Aircraft, engines and flight equipment | ||||||||
Within one year | 1,024,857 | 1,633,301 | ||||||
In the second year | 1,095,792 | 1,550,209 | ||||||
In the third to fifth year | 3,094,495 | 4,075,691 | ||||||
After the fifth year | 550,310 | 2,015,670 | ||||||
5,765,454 | 9,274,871 | |||||||
Land and buildings | ||||||||
Within one year | 19,287 | 68,739 | ||||||
In the second year | 14,874 | 60,330 | ||||||
In the third to fifth year inclusive | 25,401 | 44,951 | ||||||
After the fifth year | 22,139 | 2,846 | ||||||
81,701 | 176,866 | |||||||
Total | 5,847,155 | 9,451,737 | ||||||
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
38 | BUSINESS ACQUISITIONS | |
On June 30, 2005, pursuant to an acquisition agreement entered into between the Company, CEA Holding, China Eastern Air Northwest Company (“CEA Northwest”; a wholly owned subsidiary of CEA Holding) and China Eastern Air Yunnan Company (“CEA Yunnan”; a wholly owned subsidiary of CEA Holding), and upon approval by the Company’s shareholders in a General Meeting, the Company acquired certain assets and liabilities relating to the aviation businesses of CEA Northwest and CEA Yunnan. The aggregate acquisition price paid and payable by the Company is RMB639,749,000. | ||
The goodwill is attributable to an increase in the Company’s competitiveness as a result of its increased size and the extension of the business scope geographically to the north-western and southern-western regions of the PRC. | ||
The acquired businesses contributed revenues of RMB4,269,745,000 and profit after taxation of RMB23,552,000 to the Group for the period from July 1, 2005 to December 31, 2005. If the acquisition had occurred on January 1, 2005, the acquired businesses would have contributed revenues of RMB7,740,744,000, and net loss of RMB510,870,000 to the Group for the year ended December 31, 2005. | ||
Details of net assets acquired and related goodwill are as follows: |
RMB’000 | ||||
Purchase consideration: | ||||
— Cash | 639,749 | |||
— Direct costs relating to the acquisition | 29,968 | |||
Total purchase consideration | 669,717 | |||
Fair value of net assets acquired — shown as below | (60,582 | ) | ||
Goodwill (Note 18) | 609,135 | |||
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
38 | BUSINESS ACQUISITIONS (CONTINUED) | |
The assets and liabilities arising from the acquisition are as follows: |
Fair value of net assets acquired | ||||
RMB’000 | ||||
Property, plant and equipment | 7,302,833 | |||
Construction in progress | 13,577 | |||
Lease prepayments | 74,339 | |||
Investments in associates | 5,564 | |||
Other long-term assets | 777,644 | |||
Deferred tax assets | 93,017 | |||
Flight equipment spare parts | 385,971 | |||
Trade receivables | 124,645 | |||
Prepayment, deposits and other receivables | 74,993 | |||
Cash and cash equivalents | 629,013 | |||
Trade payables and notes payables | (263,748 | ) | ||
Sales in advance of carriage | (1,702 | ) | ||
Other payables and accrued expenses | (2,600,738 | ) | ||
Borrowings, current portion | (2,163,898 | ) | ||
Borrowings, long-term portion | (814,220 | ) | ||
Taxation | (26,319 | ) | ||
Derivative Liabilities | (16,151 | ) | ||
Obligations under finance leases | (2,515,423 | ) | ||
Provision for aircraft overhaul expenses | (196,122 | ) | ||
Post retirement benefit obligations | (519,881 | ) | ||
Staff housing allowance | (150,023 | ) | ||
Other long-term liabilities | (152,789 | ) | ||
Net assets acquired | 60,582 | |||
Purchase consideration settled in cash | 669,717 | |||
Cash and cash equivalents in businesses acquired | (629,013 | ) | ||
Cash outflow on business acquisition | 40,704 | |||
See Note 42 for details regarding a business acquisition completed after the balance sheet but before the approval of these consolidated financial statements. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
39 | RELATED PARTY TRANSACTIONS | |
The Group is controlled by CEA Holding, which owns approximately 61.64% of the Company’s shares as at December 31, 2005. The aviation industry in the PRC is administrated by the CAAC. CEA Holding and the Group is ultimately controlled by the PRC government, which also controls a significant portion of the productive assets and entities in the PRC (collectively referred as “the state-controlled enterprises”). | ||
(a) Related party transactions The Group sells air tickets through sales agents and is therefore likely to have extensive transactions with other state-controlled enterprises, and the employees of state-controlled enterprises while such employees are on corporate business as well as their close family members. These transactions are carried out on normal commercial terms that are consistently applied to all of the Group’s customers. Due to the large volume and the pervasiveness of these transactions, the management is unable to determine the aggregate amount of the transactions for disclosure. Therefore, retail transactions with these related parties are not disclosed herein. Management believes that meaningful related party disclosures on these retail transactions have been adequately made. | ||
The other related party transactions are: |
Income/ | ||||||||||||||||
(expenses or payments) | ||||||||||||||||
2003 | 2004 | 2005 | ||||||||||||||
Nature of transaction | Related party | RMB’000 | RMB’000 | RMB’000 | ||||||||||||
With CEA Holding or companies directly or indirectly held by CEA Holding: | ||||||||||||||||
Interest income on deposits at an average rate of 0.72% per annum in 2003, 2004 and 2005 | EAGF** | 4,096 | 4,897 | 5,341 | ||||||||||||
Interest expense on loans at rates of 4.54% per annum in 2003, 4.5% per annum in 2004 and 4.50% per annum in 2005 | EAGF** | (6,396 | ) | (1,150 | ) | (14,855 | ) | |||||||||
Commission income on carriage | CEA Northwest* | 51,667 | 93,062 | 39,247 | ||||||||||||
service provided by other airlines | CEA Yunnan* | 50,442 | 81,517 | 38,817 | ||||||||||||
with air tickets sold by the Group, at rates ranging from 3% to 9% of the value of tickets sold | CEA Wuhan *** | 28,964 | 32,396 | 46,412 | ||||||||||||
Commission expense on air tickets | CEA Northwest* | (17,776 | ) | (14,181 | ) | (2,374 | ) | |||||||||
sold on behalf of the Group, at | CEA Yunnan* | (10,743 | ) | (22,494 | ) | (6,238 | ) | |||||||||
rates ranging from 3% to 9% of | CEA Wuhan*** | (8,547 | ) | (32,396 | ) | (9,550 | ) | |||||||||
the value of tickets sold | SDATC** | (24,940 | ) | (8,228 | ) | (7,402 | ) | |||||||||
China Eastern Air | — | — | (34,225 | ) | ||||||||||||
Development (HK) Co., Ltd | ||||||||||||||||
Shanghai Tourism | (6,046 | ) | (13,201 | ) | (21,815 | ) | ||||||||||
(HK) Co., Ltd |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
39 | RELATED PARTY TRANSACTIONS (CONTINUED) |
Income/ | ||||||||||||||||
(expenses or payments) | ||||||||||||||||
2003 | 2004 | 2005 | ||||||||||||||
Nature of transaction | Related party | RMB’000 | RMB’000 | RMB’000 | ||||||||||||
With CEA Holding or companies directly or indirectly held by CEA Holding: | ||||||||||||||||
Handling charges of 0.1% to 2% for purchase of aircraft, flight equipment, flight equipment spare parts, other property, plant and equipment | EAIEC** | (21,393 | ) | (34,270 | ) | (40,590 | ) | |||||||||
Ticket reservation service charges for utilization of computer reservation system | Travel Sky Technology Limited | (71,884 | ) | (86,311 | ) | (124,677 | ) | |||||||||
Repairs and maintenance expense for ground service facilities | CEA Northwest * | — | (9,535 | ) | — | |||||||||||
Repairs and maintenance expense for aircraft and engines | Wheels & Brakes | (25,361 | ) | (25,445 | ) | (63,972 | ) | |||||||||
STA | — | (104,853 | ) | |||||||||||||
EAIEC** | — | (6,969 | ) | |||||||||||||
Lease rental income from operating lease of aircraft | CEA Wuhan Airlines*** | 31,209 | 38,239 | 41,327 | ||||||||||||
Lease rental charges for operating lease of aircraft | CEA Northwest* | (92,466 | ) | (199,188 | ) | — | ||||||||||
CEA Yunnan* | (27,726 | ) | (86,341 | ) | — | |||||||||||
Supply of food and beverages | Eastern Air (Shantou) | |||||||||||||||
Economic Development Co., Ltd. | (36,413 | ) | (57,623 | ) | (61,701 | ) | ||||||||||
CEACI | — | (188,406 | ) | (231,759 | ) | |||||||||||
Shanghai Eastern Air Catering Co., Ltd | (96,984 | ) | (165,643 | ) | (184,306 | ) | ||||||||||
Qingdao Eastern Air | ||||||||||||||||
Catering Investment Co., Ltd. | — | (14,291 | ) | (15,055 | ) | |||||||||||
Xian Eastern Air | ||||||||||||||||
Catering Investment Co., Ltd. | — | (50 | ) | (15,079 | ) | |||||||||||
Yunnan Eastern Air | ||||||||||||||||
Catering Investment Co., Ltd. | — | (244 | ) | (17,451 | ) | |||||||||||
Advertising expense | Eastern Aviation Advertising Service Co., Ltd. (“EAASC”) | (2,676 | ) | (5,629 | ) | (8,611 | ) | |||||||||
Purchase of aviation equipment | Shanghai Eastern Aviation Equipment Manufacturing Corporation | (3,149 | ) | (14,850 | ) | (8,987 | ) | |||||||||
Rental expenses | Shanghai Eastern Aviation Equipment Manufacturing Corporation | (5,945 | ) | (5,582 | ) | (4,909 | ) | |||||||||
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
39 | RELATED PARTY TRANSACTIONS (CONTINUED) |
* | The Group acquired the aviation business of CEA Northwest and CEA Yunnan with effect from June 30, 2005. Transactions with CEA Northwest and CEA Yunnan up to June 30, 2005 are regarded as related party transactions. | ||
** | EAGF is also a 25% owned associate of the Group; SDATC and EAIEC are both a 45% owned associates of the Group. | ||
*** | CEA Wuhan was a 40% owned associate of the Group for the year ended December 31, 2005. On December 8, 2005, the Company entered into agreement to acquire an additional 56% equity interest in CEA Wuhan and the acquisitions were completed after December 31, 2005. |
Income/ | |||||||||||||||
(expenses or payments) | |||||||||||||||
2003 | 2004 | 2005 | |||||||||||||
Nature of transaction | Related party | RMB’000 | RMB’000 | RMB’000 | |||||||||||
With CAAC and its affiliates: | |||||||||||||||
Civil aviation infrastructure levies paid to CAAC | CAAC | (129,646 | ) | (251,185 | ) | (466,191 | ) | ||||||||
Aircraft insurance premium paid through CAAC who entered into the insurance policy on behalf of the Group | CAAC | (157,278 | ) | (154,086 | ) | (201,653 | ) | ||||||||
With other state-controlled enterprises: | |||||||||||||||
Take-off and landing fees charges | State-controlled airports | (1,372,896 | ) | (1,579,115 | ) | (2,461,858 | ) | ||||||||
Purchase of aircraft fuel | State-controlled fuel suppliers | (2,128,628 | ) | (3,447,336 | ) | (4,571,155 | ) | ||||||||
Interest income on deposits at an average rates of 0.72% per annum (2004: 0.72% per annum) | State-controlled banks | 38,012 | 15,025 | 30,948 | |||||||||||
Interest expense on loans at an average rate of 4.54% per annum (2004: 4.54% per annum) | State-controlled banks | (976,760 | ) | (588,842 | ) | (790,478 | ) | ||||||||
Commission expense on air tickets sold on behalf of the Group at rates ranging from 3% to 9% of the value of tickets sold | Other PRC airlines | (41,284 | ) | (78,232 | ) | (153,528 | ) | ||||||||
Supply of food and beverages | Other state-control enterprises | (146,141 | ) | (236,102 | ) | (368,120 | ) |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
39 | RELATED PARTY TRANSACTIONS (CONTINUED) | |
(b) | Balances with related companies | |
(i) Amounts due from related companies |
2004 | 2005 | |||||||
Company | RMB’000 | RMB’000 | ||||||
China Eastern Air Development (HK) Co., Ltd | — | 66,457 | ||||||
CEA Holding | 23,835 | 57,773 | ||||||
SDATC** | 39,485 | 43,223 | ||||||
Shanghai Tourism (HK) Co., Ltd | — | 23,177 | ||||||
CEA Wuhan *** | — | 3,541 | ||||||
EAIEC** | — | 4,956 | ||||||
STA | — | 4,927 | ||||||
CEA Yunnan* | 52,161 | — | ||||||
Other related companies | 6,772 | 1,658 | ||||||
Total | 122,253 | 205,712 | ||||||
* | The Group acquired the aviation business of CEA Northwest and CEA Yunnan with effect from June 30, 2005. Transactions with CEA Northwest and CEA Yunnan up to June 30, 2005 are regarded as related party transactions. | |
** | EAGF is a 25% owned associate of the Group; SDATC is a 45% owned associate of the Group; EAIEC is a 45% owned associate of the Group. | |
*** | CEA Wuhan was a 40% owned associate of the Group for the year ended December 31, 2005. On December 8, 2005, the Company entered into agreement to acquire an additional 56% equity interest in CEA Wuhan and the acquisitions were completed after December 31, 2005. |
Except for amount due from CEA Holding, which is reimbursement in nature, all other amounts due from related companies are trade in nature, interest free and payable within normal credit terms given to trade customers. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
39 | RELATED PARTY TRANSACTIONS (CONTINUED) | |
(ii) Amounts due to related companies |
2004 | 2005 | |||||||
Company | RMB’000 | RMB’000 | ||||||
EAIEC** | (47,093 | ) | (90,123 | ) | ||||
EAGF** | — | (4,328 | ) | |||||
CEA Wuhan *** | (19,063 | ) | (80,407 | ) | ||||
STA | — | (8,491 | ) | |||||
CEA Holding | — | (94,216 | ) | |||||
CEA Northwest* | (69,380 | ) | — | |||||
Other related companies | (3,432 | ) | (17,465 | ) | ||||
Total | (138,968 | ) | (295,030 | ) | ||||
* | The Group acquired the aviation business of CEA Northwest and CEA Yunnan with effect from June 30, 2005. Transactions with CEA Northwest and CEA Yunnan up to June 30, 2005 are regarded as related party transactions. | |
** | EAGF is a 25% owned associate of the Group; SDATC is a 45% owned associate of the Group; EAIEC is a 45% owned associate of the Group. | |
*** | CEA Wuhan was a 40% owned associate of the Group for the year ended December 31, 2005. On December 8, 2005, the Company entered into agreement to acquire an additional 56% equity interest in CEA Wuhan and the acquisitions were completed after December 31, 2005 |
Except for amounts due to EAGF and CEA Holding, which is reimbursement in nature, all other amounts due to related companies are trade in nature, interest free and payable within normal credit terms given by trade creditors. |
(iii) Short-term deposits and short-term loans with an associate |
Average interest rate | ||||||||||||||||
2004 | 2005 | 2004 | 2005 | |||||||||||||
RMB’000 | RMB’000 | |||||||||||||||
Short-term deposits (included in Prepayments, Deposits and other Receivables) | ||||||||||||||||
“EAGF” | 0.7 | % | 0.7 | % | 413,870 | 475,078 | ||||||||||
Short-term loans (included in Borrowings) | ||||||||||||||||
“EAGF”* | 4.5 | % | 4.5 | % | 140,765 | 213,702 | ||||||||||
* | EAGF is a 25% owned associate of the Group. |
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Table of Contents
39 | RELATED PARTY TRANSACTIONS (CONTINUED) |
Average interest rate | ||||||||||||||||
2004 | 2005 | 2004 | 2005 | |||||||||||||
RMB’000 | RMB’000 | |||||||||||||||
Bank deposits | ||||||||||||||||
(included in cash and cash equivalents) | 0.7 | % | 0.7 | % | 1,814,207 | 1,196,963 | ||||||||||
Long-term bank borrowings | 3.2 | % | 4.6 | % | 10,736,260 | 10,438,483 |
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Salaries, bonus, allowances and benefits | 1,813 | 1,825 |
40 | ULTIMATE HOLDING COMPANY |
41 | CONTINGENT LIABILITIES |
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42 | POST BALANCE SHEET EVENT |
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43 | SIGNIFICANT DIFFERENCES BETWEEN IFRS AND U.S. GAAP |
2003 | 2004 | 2005 | ||||||||||||
Note | RMB’000 | RMB’000 | RMB’000 | |||||||||||
Consolidated profit (loss) attributable to the Company’s equity holders | ||||||||||||||
As stated under IFRS | (980,675 | ) | 456,371 | (438,728 | ) | |||||||||
Less: Minority interests | (g) | (116,486 | ) | (135,680 | ) | (28,579 | ) | |||||||
(1,097,161 | ) | 320,691 | (467,307 | ) | ||||||||||
U.S. GAAP adjustments: | ||||||||||||||
Net income (loss) attributable to airline operations of CEA Northwest and CEA Yunnan before June 30, 2005 | (a) | (493,075 | ) | 24,424 | (575,326 | ) | ||||||||
Reversal of difference in depreciation charges and profit (loss) on disposals of fixed assets arising from revaluation of fixed assets | (b) | 53,812 | 64,667 | 74,664 | ||||||||||
Rescission of related party lease arrangements | (c) | — | (133,029 | ) | — | |||||||||
Reversal of the retroactive effect of the new overhaul accounting policy adopted in 2005 | (d) | 173,347 | 227,510 | (471,756 | ) | |||||||||
Change in accounting policy on the recognition of negative goodwill under IFRS 3 | (e) | — | — | 3,452 | ||||||||||
Others | (f) | 6,860 | (1,518 | ) | (7,172 | ) | ||||||||
Deferred tax effect on the U.S. GAAP adjustments | (h) | (35,103 | ) | (43,598 | ) | 60,122 | ||||||||
As stated under U.S. GAAP | (1,391,320 | ) | 459,147 | (1,383,323 | ) | |||||||||
Basic and fully diluted earnings (loss) per share under U.S. GAAP | (RMB 0.286 | ) | RMB 0.094 | (RMB 0.284 | ) | |||||||||
Basic and fully diluted earnings (loss) per American Depository Share (“ADS”) under U.S. GAAP | (RMB 28.59 | ) | RMB 9.43 | (RMB 28.42 | ) | |||||||||
2003 | 2004 | 2005 | ||||||||||||
Note | RMB’000 | RMB’000 | RMB’000 | |||||||||||
Consolidated net assets | ||||||||||||||
As stated under IFRS | 6,701,310 | 7,302,086 | 6,918,542 | |||||||||||
Less: Minority interests | (g) | (526,768 | ) | (820,835 | ) | (822,477 | ) | |||||||
6,174,542 | 6,481,251 | 6,096,065 | ||||||||||||
U.S. GAAP adjustments: | ||||||||||||||
Shareholders’ equity attributable to airline operations of CEA Northwest and CEA Yunnan | (a) | (1,357,699 | ) | (1,426,741 | ) | 413,841 | ||||||||
Reversal of net revaluation surplus and difference in depreciation charges, the related accumulated depreciation and profit (loss) on disposals arising from the revaluation of fixed assets | (b) | (544,677 | ) | (480,010 | ) | (405,346 | ) | |||||||
Reversal of the retroactive effect of the new overhaul accounting policy adopted in 2005 | (d) | 244,246 | 471,756 | — | ||||||||||
Change in accounting policy on the recognition of negative goodwill under IFRS 3 | (e) | — | — | (39,421 | ) | |||||||||
Others | (f) | 35,971 | 34,453 | 27,281 | ||||||||||
Deferred tax effect on the U.S. GAAP adjustments | (h) | (9,395 | ) | (52,993 | ) | 7,129 | ||||||||
As stated under U.S. GAAP | 4,542,988 | 5,027,716 | 6,099,549 | |||||||||||
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
43 | SIGNIFICANT DIFFERENCES BETWEEN IFRS AND U.S. GAAP (CONTINUED) |
(a) | CEA Northwest and CEA Yunnan Acquisitions | |
As disclosed in Note 38, the Group acquired certain assets and liabilities of the aviation businesses of CEA Northwest and CEA Yunnan effective June 30, 2005. Under IFRS, acquisition accounting was applied to these business combinations such that the businesses are consolidated by the Group from June 30, 2005. | ||
Under U.S. GAAP, these transactions are considered to be combinations of businesses under common control which are accounted for in a manner similar to “pooling-of-interests”. Consequently, the acquired assets and liabilities of CEA Northwest and CEA Yunnan and their results of operations and cash flows have been included in the condensed consolidated financial statements of the Group at their U.S. GAAP carrying values for all years presented. | ||
Our condensed consolidated financial statements prepared and presented in accordance with U.S. GAAP to reflect the effect of the acquisitions of CEA Northwest’s and CEA Yunnan’s aviation businesses under common control for the relevant periods are set forth in Note 44 to our audited consolidated financial statements included in this annual report. | ||
(b) | Revaluation of fixed assets | |
Under IFRS, the Group’s fixed assets are initially recorded at cost and are subsequently restated at revalued amounts less accumulated depreciation. The excess depreciation charge arising from the revaluation surplus was approximately RMB63,895,000, RMB57,568,000 and RMB73,803,000 for the year ended December 31, 2003, 2004 and 2005, respectively. The additional gain (loss) arising from the revaluation surplus on disposals of revalued fixed assets was approximately loss of RMB10,083,000, gain of RMB7,099,000 and RMB861,000 for the years ended December 31, 2003, 2004 and 2005, respectively. | ||
Under U.S. GAAP, fixed assets are stated at cost less accumulated depreciation. Accordingly, the revaluation surplus, the related differences in depreciation charges and gain (loss) on disposals are reversed. | ||
(c) | Rescission of related party lease arrangements | |
The Company entered into certain lease arrangements with CEA Northwest and its subsidiary to lease three A310 aircraft and three Bae146 aircraft in 2004 that were subsequently terminated and retroactively rescinded. The impact of the retroactive rescission of the lease arrangements with CEA Northwest was an aggregate settlement by CEA Northwest in the amount of RMB133 million (the “Settlement Amount”), which represented the operating losses incurred on the operation of the CEA Northwest leased aircraft during 2004, to the Group through the reduction of the Group’s inter-company payable accounts with CEA Northwest. | ||
Under IFRS, the Settlement Amount was recognised as non-operating income for the year ended December 31, 2004 and was in effect an extinguishment of a financial liability through a reduction of the Group’s inter-company payable accounts with CEA Northwest. | ||
Under U.S. GAAP, the Settlement Amount, through reduction of the Group’s intercompany payable account of CEA Holding’s wholly owned subsidiary, was deemed as the principal shareholder incurring costs on behalf of the Company and was recognised as a capital contribution in accordance with Staff Accounting Bulletin Topic 5-T (“SAB Topic 5-T”). Any cost incurred by the principal shareholder on behalf of its subsidiary are required to be reflected in the subsidiary’s financial statements as an expense and a corresponding capital contribution unless the principal shareholders actions are completely unrelated to its position as a shareholder under SAB Topic 5-T. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
43 | SIGNIFICANT DIFFERENCES BETWEEN IFRS AND U.S. GAAP (CONTINUED) | |
(d) | Retroactive application of the new overhaul accounting policy adopted in 2005 | |
Prior to the adoption of the revised IAS 16 (Note 2), the Group expensed overhaul costs on owned and finance leased aircraft as incurred. Upon the adoption of the revised IAS 16 effective January 1, 2005, the Group capitalized overhaul costs as a separate component of the fixed assets carrying value to be depreciated over the estimated period between overhauls on a straight line basis. Upon the completion of an overhaul, any remaining balance of the previous overhaul will be derecognised and charged to the consolidated statements of operations. The adoption of the revised IAS 16 has been applied retrospectively to all years presented. | ||
Under U.S. GAAP, the capitalization of overhaul costs incurred as a separate component of fixed assets is an acceptable alternative. Therefore, the Group also changed its accounting policy on overhaul costs for owned and financed lease aircrafts in the U.S. GAAP condensed consolidated financial statements as such policy was considered to be preferable. Under U.S. GAAP, the effect of a change in accounting policy is recognized in the period of the change by including the cumulative effect of the change to the new accounting policy. | ||
(e) | Recognition of negative goodwill | |
Under U.S. GAAP, in a business combination in which the fair value of the identifiable net assets acquired exceeds the cost of the acquired business, the excess over cost should reduce, on a pro rata basis, amounts assigned to all of the acquired assets, including purchased research and development assets required to be written off, with the exception of financial assets (other than investments accounted for by the equity method), assets to be disposed of by sale, deferred tax assets, prepaid assets related to pension or other post-retirement benefit plans, and any other current assets. Any remaining negative goodwill is recognised as an extraordinary gain. | ||
As the result of the adoption of IFRS 3, the Group’s negative goodwill balance of RMB42,873,000 at January 1, 2005 is derecognized with a corresponding adjustment to the opening balance of retained earnings. From January 1, 2005 onwards, IFRS 3 requires the Group to recognize immediately in the statements of operations the excess of the net fair value of those items acquired over the cost of the acquisition. | ||
(f) | Other U.S. GAAP adjustments | |
The application of U.S. GAAP differs in certain other respects from IFRS. Under U.S. GAAP: i) recognition of gain on sale and leaseback transactions is deferred and amortized, ii) transitional obligations for post retirement benefits are amortized over the average remaining service period of active plan participants, and iii) amortization of goodwill ceased on December 31, 2003. | ||
(g) | Minority interest | |
Under IFRS, minority interest is classified in the equity section of the consolidated balance sheets and included in the consolidated statements of changes in owners’ equity. Profit (loss) attributable to the minority interest is presented as a component of the Group’s total profit (loss) for the year. U.S. GAAP does not classify minority interest in the equity section of the consolidated balance sheets, and consequently does not include minority interest in the consolidated statement of changes in owners’ equity. Under U.S. GAAP, profit (loss) attributable to minority interest is presented as a separate item before net income (loss). |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
43 | SIGNIFICANT DIFFERENCES BETWEEN IFRS AND U.S. GAAP (CONTINUED) | |
(h) | Deferred tax effect | |
These represent the corresponding deferred tax effect as a result of the adjustments stated in (b) to (f) above. | ||
Under IFRS, deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. | ||
Under U.S. GAAP, a valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or, all of, the deferred tax assets will not be realised. “More likely than not” is defined as a likelihood of more than 50%. In determining whether a valuation allowance is necessary, a company may not generally consider future anticipated income in measuring the valuation allowance if that company has a history of losses. However, as confirmed by the IASB as part of the convergence project with FAS 109, the Group believes that “more likely than not” under U.S. GAAP and “probable” under IFRS have the same meaning for the application of IAS 12 and SFAS 109. Therefore this difference in the wording of U.S. GAAP and IFRS does not have any impact on the Group’s net assets or net income (loss), and the Group has therefore not included a reconciling item for this difference. | ||
(i) | Consolidation based on variable interest model | |
IFRS focuses on the concept of control to determine whether an entity should be consolidated. Under U.S. GAAP, a dual consolidation decision model exists. Under this model, consolidation decisions are evaluated first based on the variable interest model then the traditional consolidation model. Therefore, under U.S. GAAP, an entity will consolidate a variable interest entity (“VIE”) which it does not control but absorbs the majority of the VIE’s expected losses or returns. FIN 46, “Consolidation of Variable Interest Entities” requires certain VIEs to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The primary beneficiary has a variable interest in the entity that will cause it to absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s expected residual returns, or both. | ||
The Group completed its FIN 46 assessment, including the review of arrangements with associates as part of the preparation of its consolidated financial statements and concluded that there were no variable interest entities for which the Group absorbs the majority of losses or returns that would have any material impact on its financial position or results of operations. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
43 | SIGNIFICANT DIFFERENCES BETWEEN IFRS AND U.S. GAAP (CONTINUED) | |
(j) | CEA Yunnan air crash | |
In November 2004, an aircraft of CEA Yunnan crashed in Baotau, Neimonggol, China. As the result of this air crash, CEA Yunnan was subject to exposures including the loss of aircraft, claims filed by the families of the deceased passengers and crew, other third party liabilities including damage to park facilities, injuries and auxiliary costs. When the Company acquired CEA Yunnan in May 2005, the air crash related exposures were not transferred with other assets and liabilities of the aviation businesses. Rather, such exposures were transferred to CEA Holding. | ||
Under IFRS, insurance recovery is not recognized until virtually certain and the air crash has no impact on the Group’s consolidated financial statements as acquisition accounting was applied (Note 38). However, under U.S. GAAP, outstanding claims are accrued net of insurance recovery that are equally probable and determinable. In addition, any costs to be incurred by CEA Holding for claims in excess of insurance recovery will be deemed as the principal shareholder incurring costs on behalf of the Company and will be recognized as expenses and a capital contribution in accordance with SAB Topic 5-T. There are no such capital contribution recorded to date. | ||
(k) | New accounting pronouncements | |
In December 2004, the FASB revised Statement No. 123 (FAS 123 R). FAS 123 R, “Share-Based Payment”, requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Pro forma disclosure is no longer an alternative to financial statement recognition. FAS 123 R is effective for fiscal periods beginning after June 15, 2005. The Group is evaluating the transition provisions allowed by FAS 123 R. The Group does not expect the adoption of FAS 123 R to have a material impact on the Group’s financial position or operational results. | ||
On November 24, 2004, the FASB issued Statement No. 151, “Inventory Costs”, an amendment of ARB No. 43, Chapter 4 (FAS 151). FAS 151 requires that abnormal amounts of idle capacity and spoilage costs be excluded from the cost of inventory and expensed when incurred. The provisions of FAS 151 are applicable to inventory costs incurred during fiscal years beginning after June 15, 2005. The Group does not expect the adoption of FAS 151 to have a material impact on the Group’s financial position or results of operation. | ||
On December 15, 2004, the FASB issued Statement No. 153, “Exchanges of Nonmonetary Assets”, an amendment of APB Opinion No. 29 (FAS 153). FAS 153 requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (2) the transactions lack commercial substance. FAS 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Group does not expect the adoption of FAS 153 to have a material impact on the Group’s financial position or results of operation. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
43 | SIGNIFICANT DIFFERENCES BETWEEN IFRS AND U.S. GAAP (CONTINUED) | |
(k) | New accounting pronouncements (Continued) | |
On March 29, 2005, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107, “Share-Based Payment” (SAB 107). This bulletin provides guidance related to share-based payment transactions with non-employees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of FAS 123 R in an interim period, capitalization of compensation cost related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of FAS 123 R, the modification of employee share options prior to adoption of FAS 123 R and disclosures in Management’s Discussion and Analysis subsequent to adoption of FAS 123 R. SAB 107 will be effective when a registrant adopts FAS 123 R. The Group does not expect the adoption of SAB 107 to have a material impact on the Group’s financial position or operation results. | ||
In May 2005, the FASB issued Statement No.154, “Accounting Changes and Error Corrections” (FAS 154), which replaces APB Opinions No. 20 “Accounting Changes”, and FASB Statement No. 3, “Reporting Accounting changes in Interim Financial Statements”, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. The reporting of a correction of an error by restating previously issued financial statements is also addressed by this Statement. FAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Group does not expect the adoption of FAS 154 to have a material impact on the Group’s financial position or operational results. |
F-76
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
44 | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE U.S. GAAP |
2003 | 2004 | 2005 | ||||||||||
Note | RMB’000 | RMB’000 | RMB’000 | |||||||||
Revenues | (a) | 19,553,557 | 28,208,342 | 30,894,678 | ||||||||
Other operating income | (b) | 50,302 | 275,185 | 245,279 | ||||||||
19,603,859 | 28,483,527 | 31,139,957 | ||||||||||
Operating expenses | ||||||||||||
Commissions | (526,429 | ) | (809,972 | ) | (990,745 | ) | ||||||
Aircraft fuel | (4,222,762 | ) | (7,079,632 | ) | (9,934,425 | ) | ||||||
Take-off and landing charges | (3,066,210 | ) | (3,964,703 | ) | (4,201,851 | ) | ||||||
Ground service and other charges | (64,662 | ) | (99,296 | ) | (115,516 | ) | ||||||
Civil aviation and infrastructure levies | — | (358,667 | ) | (538,320 | ) | |||||||
Food and beverages | (711,159 | ) | (934,795 | ) | (1,081,023 | ) | ||||||
Wages, salaries and benefits | (2,066,749 | ) | (2,750,242 | ) | (2,833,663 | ) | ||||||
Aircraft maintenance | (2,024,768 | ) | (2,413,910 | ) | (1,236,093 | ) | ||||||
Aircraft depreciation and operating leases | (3,687,806 | ) | (4,296,767 | ) | (7,249,590 | ) | ||||||
Other depreciation, amortisation and operating leases | (608,242 | ) | (618,807 | ) | (688,139 | ) | ||||||
Ticket reservation fee | (235,735 | ) | (290,994 | ) | (325,924 | ) | ||||||
Insurance | (249,631 | ) | (216,850 | ) | (172,554 | ) | ||||||
Office, administrative and other expenses | (1,986,317 | ) | (2,709,201 | ) | (2,755,350 | ) | ||||||
Total operating expenses | (19,450,470 | ) | (26,543,836 | ) | (32,123,193 | ) | ||||||
Operating profit (loss) | 153,389 | 1,939,691 | (983,236 | ) | ||||||||
Interest income | 181,936 | 166,340 | 114,441 | |||||||||
Finance costs, net | (1,414,969 | ) | (1,279,106 | ) | (808,554 | ) | ||||||
Share of results of associates | (31,759 | ) | (49,007 | ) | (9,030 | ) | ||||||
Share of results of jointly controlled entities | — | 45,268 | (4,300 | ) | ||||||||
(Loss) profit before income taxes and minority interest | (1,111,403 | ) | 823,186 | (1,690,679 | ) | |||||||
Income tax (expense) benefit | (c) | (166,283 | ) | (205,965 | ) | 344,220 | ||||||
(Loss) profit after taxation before minority interest | (1,277,686 | ) | 617,221 | (1,346,459 | ) | |||||||
Minority interests | (113,634 | ) | (158,074 | ) | (36,864 | ) | ||||||
(Loss) profit attributable to shareholders | (1,391,320 | ) | 459,147 | (1,383,323 | ) | |||||||
Dividend payable to equity holders of the Company attributable to the year | — | 97,339 | — | |||||||||
Earning (loss) per share | ||||||||||||
— basic and diluted | (0.29 | ) | 0.09 | (0.28 | ) | |||||||
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
44 | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE U.S. GAAP (CONTINUED) |
2004 | 2005 | |||||||
Note | RMB | RMB | ||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | 3,038,938 | 1,864,001 | ||||||
Trade receivables | 1,827,464 | 1,918,409 | ||||||
Amounts due from related companies | (e) | 422,503 | 205,712 | |||||
Flight equipment spare parts | 698,242 | 1,034,641 | ||||||
Prepayments, deposits and other receivables | 776,216 | 997,271 | ||||||
Derivative assets | — | 53,036 | ||||||
Total current assets | 6,763,363 | 6,073,070 | ||||||
Non-current assets | ||||||||
Property, plant and equipment | (d) | 38,869,590 | 38,811,836 | |||||
Construction in progress | 236,585 | 240,884 | ||||||
Lease prepayments | 828,808 | 972,771 | ||||||
Investments in associates | 639,015 | 629,746 | ||||||
Investments in jointly controlled entities | 52,948 | 100,520 | ||||||
Available-for-sale financial assets | 39,546 | 40,802 | ||||||
Advance payments on acquisition of aircraft | 2,728,262 | 9,072,673 | ||||||
Other long-term assets | 2,965,003 | 2,705,558 | ||||||
Deferred tax assets | 395,465 | 499,544 | ||||||
Intangible assets | (42,873 | ) | — | |||||
Derivative assets | 11,571 | 70,886 | ||||||
Total assets | 53,487,283 | 59,218,290 | ||||||
LIABILITIES AND OWNERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Trade payables and notes payables | 1,997,318 | 3,394,898 | ||||||
Sales in advance of carriage | 734,389 | 823,149 | ||||||
Amounts due to related companies | (e) | 4,098,242 | 295,030 | |||||
Provision for aircraft overhaul expenses, current portion | 82,643 | 15,589 | ||||||
Other payables and accrued expenses | 6,437,048 | 5,986,578 | ||||||
Tax payable | 241,710 | 47,259 | ||||||
Obligations under finance leases, current portion | 1,603,429 | 2,428,037 | ||||||
Borrowings, current portion | 11,424,246 | 18,554,630 | ||||||
Derivative liabilities | — | 34,844 | ||||||
Total current liabilities | 26,619,025 | 31,580,014 | ||||||
Non-current liabilities | ||||||||
Obligation under finance leases | 9,793,187 | 8,180,460 | ||||||
Provision for aircraft overhaul expenses | 334,298 | 388,410 | ||||||
Post-retirement benefit obligations | 999,481 | 1,103,492 | ||||||
Borrowings | 8,318,918 | 9,790,116 | ||||||
Other long term liabilities | 704,397 | 599,425 | ||||||
Deferred tax liabilities | 738,669 | 618,204 | ||||||
Derivative liabilities | 120,384 | 25,770 | ||||||
Total liabilities | 47,628,359 | 52,285,891 | ||||||
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
44 | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE U.S. GAAP (CONTINUED) |
2004 | 2005 | |||||||
RMB | RMB | |||||||
Commitment and contingencies | ||||||||
Minority interests | 831,208 | 832,850 | ||||||
Share capital | 4,866,950 | 4,866,950 | ||||||
Reserves | 160,766 | 1,232,599 | ||||||
Owners’ equity | 5,027,716 | 6,099,549 | ||||||
Total liabilities and owners’ equity | 53,487,283 | 59,218,290 | ||||||
2003 | 2004 | 2005 | ||||||||||
RMB’000 | RMB’000 | RMB’000 | ||||||||||
Net cash inflow (outflow) from | ||||||||||||
Operating activities | 3,052,326 | 5,371,326 | 1,008,155 | |||||||||
Investing activities | (7,435,568 | ) | (2,659,099 | ) | (10,369,094 | ) | ||||||
Financing activities | 4,282,197 | (2,216,175 | ) | 8,186,002 | ||||||||
Increase (decrease) in cash and cash equivalents | (101,045 | ) | 496,052 | (1,174,937 | ) | |||||||
Cash and cash equivalents at beginning of year | 2,643,931 | 2,542,886 | 3,038,938 | |||||||||
Cash and cash equivalents at end of year | 2,542,886 | 3,038,938 | 1,864,001 | |||||||||
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44 | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE U.S. GAAP (CONTINUED) |
Total | ||||
RMB’000 | ||||
Balance at January 1, 2003 | 5,993,667 | |||
Cash flow hedges, net of tax | (49,654 | ) | ||
Distribution to owner | (9,705 | ) | ||
Loss for the year | (1,391,320 | ) | ||
Balance at December 31, 2003 | 4,542,988 | |||
Balance at January 1, 2004 | 4,542,988 | |||
Cash flow hedges, net of tax | (13,982 | ) | ||
Rescission of related party lease arrangement | 133,029 | |||
Contribution from owner | (93,466 | ) | ||
Profit for the year | 459,147 | |||
Balance at December 31, 2004 | 5,027,716 | |||
Balance at January 1, 2005 | 5,027,716 | |||
Net liabilities assumed by CEA Holding (note i) | 2,379,048 | |||
Recognition of deferred tax asset (note ii) | 36,860 | |||
Cash flow hedges, net of tax | 136,587 | |||
Dividend relating to 2004 | (97,339 | ) | ||
Loss for the year | (1,383,323 | ) | ||
Balance at December 31, 2005 | 6,099,549 | |||
Notes: | ||
(i) | In connection with the aforementioned CEA Northwest and the CEA Yunnan Acquisitions as described in Note 43(a), certain assets and liabilities of CEA Northwest and CEA Yunnan not acquired by the Group were transferred to CEA Holding. Also, as a result of the CEA Northwest and the CEA Yunnan Acquisitions, the tax losses attributable to the aviation operations of CEA Northwest and CEA Yunnan are no longer available for utilization against future taxable income of such operations. Accordingly, the net assets not acquired and the deferred tax assets arising from such tax losses and related valuation allowance was eliminated as a reduction against equity. | |
(ii) | In connection with the CEA Northwest and the CEA Yunnan Acquisitions, the property, plant and equipment of CEA Northwest and CEA Yunnan were revalued as of December 31, 2004 according to the relevant PRC rules and regulations. The revalued amount serves as the tax base for future years. Such revaluations are not recorded under U.S. GAAP. However, a deferred tax asset is recognized for the tax deductibility of the resulting net revaluation surplus with a corresponding credit to equity under U.S. GAAP. |
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44 | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE U.S. GAAP (CONTINUED) |
(a) | Revenues |
Year ended December 31, | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
RMB’000 | RMB’000 | RMB’000 | ||||||||||
Revenues | ||||||||||||
Traffic revenues | ||||||||||||
— Passenger | 15,342,490 | 22,692,368 | 24,780,599 | |||||||||
— Cargo and mail | 3,558,610 | 4,879,136 | 5,246,779 | |||||||||
Total traffic revenues | 18,901,100 | 27,571,504 | 30,027,378 | |||||||||
Commission income | 68,095 | 123,281 | 126,194 | |||||||||
Ground service income | 504,670 | 717,573 | 831,143 | |||||||||
Cargo handling income | 164,850 | 227,806 | 298,488 | |||||||||
Rental income from operating subleases of aircraft | 31,209 | 204,721 | 183,260 | |||||||||
Others | 185,693 | 111,837 | 201,345 | |||||||||
19,855,617 | 28,956,722 | 31,667,808 | ||||||||||
Less: Business tax | (302,060 | ) | (748,380 | ) | (773,130 | ) | ||||||
19,553,557 | 28,208,342 | 30,894,678 | ||||||||||
(b) | Other operating income |
Year ended December 31, | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
RMB’000 | RMB’000 | RMB’000 | ||||||||||
Other operating income | ||||||||||||
Government subsidies | 58,448 | 73,506 | 193,069 | |||||||||
Insurance compensation on crash of aircraft | — | 190,181 | — | |||||||||
Net fair value (losses) gains on financial instruments | (8,146 | ) | 11,498 | 52,210 | ||||||||
50,302 | 275,185 | 245,279 | ||||||||||
(c) | Income tax |
Income tax benefit (expense) consisted of: |
Year ended December 31, | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
RMB’000 | RMB’000 | RMB’000 | ||||||||||
PRC income tax: | ||||||||||||
Company and subsidiaries | (131,207 | ) | (244,406 | ) | 81,734 | |||||||
Deferred tax | ||||||||||||
— Current year | (35,076 | ) | 38,441 | 137,529 | ||||||||
— Adjustment for change in applicable tax rate for airline operations of CEA Northwest and CEA Yunnan | — | — | 124,957 | |||||||||
(166,283 | ) | (205,965 | ) | 344,220 | ||||||||
Additional income taxes were allocated as follows: | ||||||||||||
Owners’ equity, for deferred tax asset recognized in connection with the tax deductibility resulting from net revaluation surplus | — | — | 36,860 | |||||||||
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44 | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE U.S. GAAP (CONTINUED) | |
(c) | Income tax (Continued) |
Year ended December 31, | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
RMB’000 | RMB’000 | RMB’000 | ||||||||||
Profit (loss) before taxation | (1,111,403 | ) | 790,015 | (1,690,679 | ) | |||||||
Adjusted: | ||||||||||||
Share of results of associates and jointly controlled entities | 31,759 | 3,739 | 13,330 | |||||||||
(1,079,644 | ) | 793,754 | (1,677,349 | ) | ||||||||
Tax calculated at enacted tax rate of 15% | 161,947 | (119,063 | ) | 251,602 | ||||||||
Effect attributable to airline operations of CEA Northwest and CEA Yunnan | 7,327 | (32,012 | ) | 17,259 | ||||||||
Effect of change in the income tax rate applicable to the aviation operations of CEA Northwest and CEA Yunnan | — | — | 124,957 | |||||||||
Effect attributable to subsidiaries charged at tax rate of 33% | (4,117 | ) | (17,578 | ) | 18,334 | |||||||
Effect attributable to subsidiaries with income tax exemption | — | — | 33,852 | |||||||||
Income not subject to taxation | 243 | 245 | 4,462 | |||||||||
Expenses not deductible for tax purposes | (77,013 | ) | (41,891 | ) | (109,329 | ) | ||||||
Reversal of income tax provision made in prior years as a result of tax clearance with local tax bureau | — | — | 81,807 | |||||||||
Unrecognised tax losses of the Company | (258,515 | ) | — | (86,074 | ) | |||||||
Utilisation of previously unrecognised tax losses | — | 6,395 | — | |||||||||
Others | 3,845 | (2,061 | ) | 7,350 | ||||||||
Tax benefit (charge) | (166,283 | ) | (205,965 | ) | 344,220 | |||||||
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44 | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE U.S. GAAP (CONTINUED) | |
(c) | Income tax (Continued) |
December 31, | ||||||||
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Deferred tax assets: | ||||||||
Tax losses carried forward | 349,562 | 451,659 | ||||||
Provision for obsolete flight equipment spare parts | 54,014 | 33,192 | ||||||
Repair cost on flight equipment | 119,039 | 64,454 | ||||||
Provision for post-retirement benefits | 95,252 | 185,102 | ||||||
Other accrued expenses and derivative financial instruments | 120,704 | 139,949 | ||||||
738,571 | 874,356 | |||||||
Less: Valuation allowance | (252,120 | ) | (338,194 | ) | ||||
Total deferred tax assets | 486,451 | 536,162 | ||||||
Deferred tax liabilities: | ||||||||
Provision for aircraft overhauls | (106,128 | ) | (143,517 | ) | ||||
Depreciation and amortization | (723,527 | ) | (511,305 | ) | ||||
Total deferred tax liabilities | (829,655 | ) | (654,822 | ) | ||||
Net deferred tax liabilities | (343,204 | ) | (118,660 | ) | ||||
Representing: | ||||||||
Net deferred tax assets — current portion | — | — | ||||||
Net deferred tax assets — non-current portion | 395,465 | 499,544 | ||||||
Net deferred tax liabilities — current portion | — | — | ||||||
Net deferred tax liabilities — non-current portion | (738,669 | ) | (618,204 | ) | ||||
(343,204 | ) | (118,660 | ) | |||||
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44 | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE U.S. GAAP (CONTINUED) | |
(d) | Property, plant and equipment |
December 31, | ||||||||
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Aircraft and flight equipment | ||||||||
— owned | 33,307,896 | 42,748,323 | ||||||
— held under finance leases | 18,475,692 | 22,884,972 | ||||||
Buildings | 2,718,911 | 2,445,683 | ||||||
Other property, plant and equipment | 2,894,401 | 3,454,344 | ||||||
57,396,900 | 71,533,322 | |||||||
Less: Accumulated depreciation and amortization | (18,527,310 | ) | (32,721,486 | ) | ||||
38,869,590 | 38,811,836 | |||||||
December 31, | ||||||||
2004 | 2005 | |||||||
RMB’000 | RMB’000 | |||||||
Cost | 18,475,692 | 22,884,972 | ||||||
Less: Accumulated depreciation and amortization | (5,404,935 | ) | (9,524,421 | ) | ||||
13,070,757 | 13,360,551 | |||||||
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44 | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE U.S. GAAP (CONTINUED) | |
(e) | Related party transactions |
(i) | Related party transactions | ||
As a result of the aforementioned CEA Northwest and CEA Yunnan acquisitions, transactions with CEA Northwest and CEA Yunnan are excluded from the following list, and the related party transactions of CEA Northwest and CEA Yunnan are included in the following list for all of the periods presented. |
Income/ | ||||||||||||||
(expenses or payments) | ||||||||||||||
2003 | 2004 | 2005 | ||||||||||||
Nature of transaction | Related party | RMB’000 | RMB’000 | RMB’000 | ||||||||||
With CEA Holding or companies directly or indirectly held by CEA Holding: | ||||||||||||||
Interest income on deposits at an average rate of 0.72% per annum (2004 & 2003: 0.72% per annum) | EAGF* | 10,507 | 6,233 | 5,341 | ||||||||||
Interest expense on loans at rate of 4.50% per annum (2004 & 2003: 4.54% per annum) | EAGF* | (14,692 | ) | (15,744 | ) | (14,855 | ) | |||||||
Commission income on carriage service provided by other airlines with air tickets sold by the Group, at rates ranging from 3% to 9% of the value of tickets sold | CEA Wuhan ** | 28,964 | 32,396 | 46,412 | ||||||||||
Commission expense on air tickets sold on behalf | CEA Wuhan** | (8,547 | ) | (32,396 | ) | (9,550 | ) | |||||||
of the Group, at rates ranging from 3% to 9% of | SDATC* | (24,940 | ) | (8,228 | ) | (7,402 | ) | |||||||
the value of tickets sold | China Eastern Air | — | — | (34,225 | ) | |||||||||
Development (HK) Co., Ltd | ||||||||||||||
Shanghai Tourism (HK) Co., Ltd | (6,046 | ) | (13,201 | ) | (21,815 | ) | ||||||||
Handling charges of 0.1% to 2% for purchase of aircraft, flight equipment, flight equipment spare parts, other property, plant and equipment | EAIEC* | (21,393 | ) | (34,270 | ) | (40,590 | ) | |||||||
Ticket reservation service charges for utilisation of computer reservation system | Travel Sky Technology Limited | (71,884 | ) | (86,311 | ) | (124,677 | ) |
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44 | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE U.S. GAAP (CONTINUED) | |
(e) | Related party transactions (Continued) |
Income/ | ||||||||||||||
(expenses or payments) | ||||||||||||||
2003 | 2004 | 2005 | ||||||||||||
Nature of transaction | Related party | RMB’000 | RMB’000 | RMB’000 | ||||||||||
Repairs and maintenance expense for aircraft and | Wheels & Brakes | (25,361 | ) | (25,445 | ) | (63,972 | ) | |||||||
engines | STA | — | — | (104,853 | ) | |||||||||
EAIEC* | — | — | (6,969 | ) | ||||||||||
Lease rental income from operating lease of aircraft | CEA Wuhan Airlines** | 31,209 | 38,239 | 41,327 | ||||||||||
Supply of food and beverages | Eastern Air (Shantou) Economic Development Co., Ltd. | (36,413 | ) | (57,623 | ) | (61,701 | ) | |||||||
CEACI | — | (188,406 | ) | (231,759 | ) | |||||||||
Shanghai Eastern Air Catering Co., Ltd. | (112,104 | ) | (185,575 | ) | (184,306 | ) | ||||||||
Qingdao Eastern Air Catering Investment Co., Ltd. | (2,518 | ) | (14,291 | ) | (15,055 | ) | ||||||||
Xian Eastern Air Catering Investment Co., Ltd. | (7,416 | ) | (15,947 | ) | (15,079 | ) | ||||||||
Yunnan Eastern Air Catering Investment Co., Ltd. | (32,062 | ) | (36,552 | ) | (17,451 | ) | ||||||||
Advertising expense | CAASC | (2,676 | ) | (5,629 | ) | (8,611 | ) | |||||||
Purchase of aviation equipment | Shanghai Eastern Aviation Equipment Manufacturing Corporation | (5,309 | ) | (19,276 | ) | (8,987 | ) | |||||||
Rental expenses | Shanghai Eastern Aviation Equipment Manufacturing Corporation | (5,945 | ) | (5,582 | ) | (4,909 | ) |
* | EAGF is also a 25% owned associate of the Group; SDATC and EAIEC are both a 45% owned associates of the Group. | |
** | CEA Wuhan was a 40% owned associate of the Group for the year ended December 31, 2005. On December 8, 2005, the Company entered into agreement to acquire an additional 56% equity interest in CEA Wuhan and the acquisitions were completed after December 31, 2005. |
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44 | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE U.S. GAAP (CONTINUED) | |
(e) | Related party transactions (Continued) |
Income/ | ||||||||||||||
(expenses or payments) | ||||||||||||||
2003 | 2004 | 2005 | ||||||||||||
Nature of transaction | Related party | RMB’000 | RMB’000 | RMB’000 | ||||||||||
With CAAC and its affiliates: | ||||||||||||||
Civil aviation infrastructure levies paid to CAAC | CAAC | (210,651 | ) | (358,667 | ) | (466,191 | ) | |||||||
Aircraft insurance premium paid through CAAC who entered into the insurance policy on behalf of the Group | CAAC | (217,653 | ) | (208,098 | ) | (201,653 | ) | |||||||
With other state-controlled enterprises: | ||||||||||||||
Take-off and landing fees charges | State-controlled airports | (2,017,543 | ) | (2,365,872 | ) | (2,461,858 | ) | |||||||
Purchase of aircraft fuel | State-controlled fuel suppliers | (3,188,283 | ) | (4,240,133 | ) | (4,571,155 | ) | |||||||
Interest income on deposits at an average rates of 0.72% per annum (2004 & 2003: 0.72% per annum) | State-controlled banks | 49,123 | 19,371 | 30,948 | ||||||||||
Interest expense on loans at an average rate of 4.54% per annum (2004 & 2003: 4.54% per annum) | State-controlled banks | (1,383,274 | ) | (833,910 | ) | (790,478 | ) | |||||||
Commission expense on air tickets sold on behalf of the Group at rates ranging from 3% to 9% of the value of tickets sold | Other PRC airlines | (66,443 | ) | (124,565 | ) | (153,528 | ) | |||||||
Supply of food and beverages | Other state-control enterprises | (280,522 | ) | (322,726 | ) | (368,120 | ) |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
44 | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE U.S. GAAP (CONTINUED) | |
(e) | Related party transactions (Continued) |
(ii) | Balances with related companies |
(a) | Amounts due from related companies |
2004 | 2005 | |||||||
Company | RMB’000 | RMB’000 | ||||||
China Eastern Air Development (HK) Co., Ltd | 4,928 | 66,457 | ||||||
CEA Holding | 23,835 | 57,773 | ||||||
SDATC* | 39,485 | 43,223 | ||||||
Shanghai Tourism (HK) Co., Ltd | — | 23,177 | ||||||
CEA Wuhan ** | — | 3,541 | ||||||
EAIEC* | — | 4,956 | ||||||
STA | — | 4,927 | ||||||
Other related companies | 354,255 | 1,658 | ||||||
Total | 422,503 | 205,712 | ||||||
* | EAGF is a 25% owned associate of the Group; SDATC is a 45% owned associate of the Group; EAIEC is a 45% owned associate of the Group. | |
** | CEA Wuhan was a 40% owned associate of the Group for the year ended December 31, 2005. On December 8, 2005, the Company entered into agreement to acquire an additional 56% equity interest in CEA Wuhan and the acquisitions were completed after December 31, 2005. |
Except for amount due from CEA Holding, which is reimbursement in nature, all other amounts due from related companies are trade in nature, interest free and payable within normal credit terms given to trade customers. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
44 | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE U.S. GAAP (CONTINUED) | |
(e) | Related party transactions (Continued) |
(ii) | Balances with related companies (Continued) |
(b) | Amounts due to related companies |
2004 | 2005 | |||||||
Company | RMB’000 | RMB’000 | ||||||
EAIEC* | (57,148 | ) | (90,123 | ) | ||||
EAGF* | (175,500 | ) | (4,328 | ) | ||||
CEA Wuhan ** | (19,063 | ) | (80,407 | ) | ||||
STA | — | (8,491 | ) | |||||
CEA Holding | (3,705,929 | ) | (94,216 | ) | ||||
Other related companies | (140,602 | ) | (17,465 | ) | ||||
Total | (4,098,242 | ) | (295,030 | ) | ||||
* | EAGF is a 25% owned associate of the Group; SDATC is a 45% owned associate of the Group; EAIEC is a 45% owned associate of the Group. | |
** | CEA Wuhan was a 40% owned associate of the Group for the year ended December 31, 2005. On December 8, 2005, the Company entered into agreement to acquire an additional 56% equity interest in CEA Wuhan and the acquisitions were completed after December 31, 2005. |
Except for amounts due to EAGF and CEA Holding, which is reimbursement in nature, all other amounts due to related companies are trade in nature, interest free and payable within normal credit terms given by trade creditors. |
(c) | Short-term deposits and short-term loans with an associate |
Average interest rate | ||||||||||||||||
2004 | 2005 | 2004 | 2005 | |||||||||||||
RMB’000 | RMB’000 | |||||||||||||||
Short-term deposits (included in Prepayments, deposits and other receivables) | ||||||||||||||||
“EAGF” | 0.7 | % | 0.7 | % | 503,884 | 475,078 | ||||||||||
Short-term loans (included in Borrowings) | ||||||||||||||||
“EAGF”* | 4.5 | % | 4.5 | % | 315,265 | 213,702 | ||||||||||
* | EAGF is a 25% owned associate of the Group. |
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CHINA EASTERN AIRLINES CORPORATION LIMITED | ||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ||
44 | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE U.S. GAAP (CONTINUED) | |
(e) | Related party transactions (Continued) |
(ii) | Balances with related companies (Continued) |
(d) | State-controlled banks and other financial institutions |
Average interest rate | ||||||||||||||||
2004 | 2005 | 2004 | 2005 | |||||||||||||
RMB’000 | RMB’000 | |||||||||||||||
Bank deposits (included in cash and cash equivalents) | 0.7 | % | 0.7 | % | 2,407,866 | 1,196,963 | ||||||||||
Long-term bank borrowings | 3.2 | % | 4.6 | % | 11,774,396 | 10,438,483 |
(iii) | Guarantees by holding company |
The long-term bank loans of the Group guaranteed by CEA Holding are RMB2,122,600,000 as at December 31, 2004 and 2005. |
F-90