During the Period, total operating expenses for the Group were RMB42.4 billion, up 22.5% from 2005 due to increases in the price and consumption of jet fuel, although fuel prices dropped in the second half of the year. The total cost of jet fuel for the Group in the Period was RMB15.7 billion. This was 37.0% of total operating expenses, up 3 percentage points over 2005.
“2006 was a critical year for the Company”, commented Mr. Li Jiaxiang, Chairman of Air China. “We had several highlights this year, including our A-share listing in Shanghai and the restructuring of our cross shareholding with Cathay Pacific Airways. The share listing helped stabilize our capital structure and provide us the resources to continue our fleet expansion while the share restructuring strengthens our relationship with Cathay and provides us with valuable know-how in flight services. From an operating standpoint, we saw a break in the high global oil prices in the second half of the year, which helped bring some relief to the most significant cost pressure we have been facing. As a result, we were able to post a substantial increase in earnings and reward our shareholders with a year-end dividend.”
Robust growth in passengers
During the Period, the total number of passengers carried by the Company increased 14.2% to 33.97 million. Passenger traffic measured by revenue passenger kilometer (“RPK”) was 63.36 billion, an increase of 15.5% over 2005. RPK on international routes, domestic routes, and Hong Kong and Macau routes was 25.37 billion, 32.9 billion and 1.98 billion respectively, representing YoY increases of 16.5%, 14.2% and 13.1%.
Passenger capacity (“ASK”) of Air China increased 12.4% to 79.4 billion during the Period. Passenger load factor increased 1.9 percentage points to 75.9%. Average passenger yield per RPK was RMB0.59, an increase of 1.8% compared to 2005.
Expansion of hub and route networks
As of December 31, 2006, the total number of aircraft assigned to the Company’s Beijing hub was 123, giving the Company a market share of 44% at the nation’s largest domestic and international airport. Meanwhile, Chengdu’s position as a secondary hub in the Southwestern region of the country was further strengthened. The Chengdu-based fleet consisted of 38 aircraft. The Company continued to add new capacity in Shanghai, which serves as an international gateway. The Shanghai-based fleet has 30 aircraft. Air China also accelerated the build-up of its operational base in Southern China.
During the Period, the Company introduced 35 new routes and began new services to four additional countries. As of December 31, 2006, Air China and Air China Cargo operated a total of 285 routes, which includes 196 domestic routes, 81 international routes and 8 regional routes. The Company continued to refine its route network to increase operating efficiency. Internationally, the Company started new services from Beijing to Ho Chi Ming city, Delhi, Madrid and Sao Palo; from Tian Jin to Seoul; from Dalian to Seoul; and from Hangzhou to Pusan. A dozen new domestic routes, which mainly originate from the Company’s hubs were also added.
Fleet expansion and upgrade
During the Period, Air China introduced 31 new aircraft. As of December 31, 2006, the Company (including Air China Cargo) operated a fleet of 207 aircraft. The average aircraft age was 7.1 years.
In order to promote service on international routes, the Company upgraded the business and first class cabins of 9 Boeing 747 and 4 Airbus A340 aircraft. The upgrades were finished on schedule by December 31, 2006, and a new program of upgrading the cabin facilities of other A340 aircraft has begun.
Increased marketing efforts and expanded partnership
In 2006, the sale of electronic tickets was RMB10.65 billion, an increase of 202.9%. Air China inaugurated a call center, a North American sales website and a European call center, which have helped strengthen its sales network. The Company is also promoting its frequent flyer program. During the Period, a total of 1.1 million new members joined the program, bringing the total membership of the program to 4.1 million as of December 31, 2006.
On 22 May 2006, the Company signed a Memorandum of Understanding with the Star Alliance, demonstrating its intention to join Star. While further strengthening cooperation with long time business partners such as Lufthansa and United, the Company also introduced code sharing arrangements with new partners, including Varig, Virgin Atlantic, Qantas and Air New Zealand. Additionally, a comprehensive code sharing arrangement was implemented with Shangdong Airlines on China-Korea routes.
Cargo operation
Cargo traffic experienced growth of 19% to 3.29 billion RTK in the Period. Cargo capacity (“AFTK”) increased 20.8% to 6.1 billion. The cargo load factor was 53.7%, a decrease of 0.8 percentage points.
Outlook
Looking forward, Chairman Li Jiaxiang said, “Although the high price of jet fuel creates significant cost a pressure, the PRC economy has maintained its fast pace of growth and has been the driving force behind our rapid growth. The coming Olympic Games in 2008 will present business opportunities as the Company leverages its status as the sole passenger airline partner of the Games. Furthermore, our strategic relationship with Cathay Pacific Airways and our prospective membership in the Star Alliance will further add to the momentum.”
