Results. The audited consolidated results for the year ended 31st December 1996 were :

The profit attributable to shareholders for the year was HK$494.5 million. This represents an increase of 49.3% over that for 1995, but a decrease of 2.5% after excluding exceptional items from both years. The decline in profitability experienced in 1994 and 1995 has been arrested during 1996, although competitive pressures in the industry remain strong. In technical and non-technical line maintenance, the volume of ramp services activity has continued to grow slightly as the number of aircraft movements at Kai Tak has increased. In the heavy airframe maintenance sector, some improvement has been seen in the second half of the year in the market rates achievable for such work, and the Company’s hangars have been busy. Net finance income for the year was at a similar level to that for 1995. Contributions from associated companies were lower as a result of start-up losses from the operations of Taikoo (Xiamen) Aircraft Engineering Company Limited (TAECO).

In July 1996 the Company completed the formation, with a wholly-owned subsidiary of Rolls-Royce plc, of a 50/50 joint venture company, Hong Kong Aero Engine Services Limited (HAESL) which will offer aero engine overhaul services in the Asia-Pacific region. This company acquired HAECO’s existing engine overhaul operations on 1st January 1997, operating initially at Kai Tak and then at the first phase of a newly-constructed facility at Tseung Kwan O. In recognition of the volume of business and relevant interests brought to the venture by the Company, Rolls-Royce plc has paid the Company HK$155.0 million, which has been recognised as an exceptional profit in the results of the Company for 1996. The Company’s share of HAESL’s profits in 1997 will be accounted for within contributions from associated companies

Despite strong growth prospects for the aviation industry, particularly in the Asia-Pacific region, airlines continue to face revenue yield deterioration and rising costs which will inevitably have an impact on aviation service providers. The requirements of the Company’s major customer, Cathay Pacific Airways, for heavy airframe maintenance in Hong Kong will further reduce with the retirement in late 1996 of the final aircraft in the L1011 TriStar fleet and increased utilisation of the two-bay hangar of the Company’s associate in Xiamen, TAECO.

The number of aircraft movements handled by the Company grew by 6.2% as compared with 1995 which produced marginally higher line maintenance revenues. At the end of 1996 the Company, either directly or through its associate in Xiamen, TAECO, had comprehensive maintenance contracts covering thirty-eight Boeing 747s, four B777s, seven Airbus Industrie A340s and ten A330s for Cathay Pacific Airways, seven A320s and four A330s for Dragonair and three Boeing 747s for Air Hong Kong. Cathay Pacific Airways, the Company’s largest customer, increased its fleet during the year by four B777s, three A340s and three A330s whilst eight L1011 TriStars were phased out. Dragonair increased its fleet by one A330. Air Hong Kong acquired three B747 freighters and disposed of two such aircraft. The expansion of the fleets of Cathay Pacific Airways and Dragonair will continue during 1997 and 1998 with the introduction of further A340, A330, A320 and B777 aircraft.

The volume of heavy airframe maintenance carried out by the Company for Cathay Pacific Airways in 1996 was at a lower level than that of 1995, due principally to the progressive transfer of much of the B747 heavy maintenance to TAECO. However, there was a significant amount of work associated with the lease terminations on the airline’s L1011 TriStar fleet and a substantial amount of heavy maintenance was also performed on the aircraft disposed of and acquired by Air Hong Kong during the year, neither of which will recur.

Heavy maintenance work packages were carried out on two Atlas Air B747s, including conversion of the aircraft from combis to freighters, and on a Continental Airlines B747, on which a full Section 41 rectification and pylon modifications were carried out. Extensive programmes were also performed on aircraft for Air India, Region Air, Transasia Airways, Evergreen International Airlines, American Trans Air, Polar Air Cargo and Xiamen Airlines. Utilisation of the Company’s overhaul facilities during the year was higher than in 1995, with comprehensive engine work packages for South African Airways and China Southern Airlines, as well as a significant amount of work for Cathay Pacific Airways.

The Company concluded an agreement with the Airport Authority whereby the Company will be the sole provider of comprehensive aircraft maintenance at Chek Lap Kok. Construction of a single hangar capable of fully enclosing three widebodied aircraft, together with associated backshops, commenced in October with a planned construction cost of HK$1,400 million.

Construction has also commenced at a one hectare site at Tseung Kwan O of a five-storey building which will house component and avionic overhaul workshops and administration offices following the closure of Kai Tak. The cost of this building is planned at HK$350 million.

During 1996, no purchase, sale or redemption of the shares of the Company has been effected by the Company or its subsidiary company.

Included in the taxation charge for the year is HK$1.8 million taxation on the Company’s share of its associated companies’ profits (1995 : HK$1.6 million). The taxation charge comprises Hong Kong profits tax calculated at 16.5% (1995 : 16.5%) on estimated assessable profits.

The directors will recommend to shareholders at the annual general meeting to be held on 6th May 1997 the payment of a final dividend of HK$0.54 (1995 : HK$0.54) which, together with the interim dividend of HK$0.26 (1995 : HK$0.26) paid on 2nd October 1996 will make a total distribution for 1996 of HK$0.80 (1995 : HK$0.80), unchanged from the total for 1995. The final dividend is expected to be paid on 12th May 1997 to shareholders on the register at the close of business on 6th May 1997; the register will be closed from 28th April 1997 to 6th May 1997 both dates inclusive.

Competitive pressures affecting the Company’s business are unlikely to ease in the short term. The improvement in worldwide rates for heavy airframe maintenance seen in the latter half of 1996 should be regarded with caution, whilst increased competition in line maintenance ahead of the move to Chek Lap Kok will constrain margin growth. In addition, although there has been a degree of moderation in Hong Kong’s rate of inflation, in world terms it is still comparatively high, which remains a matter of some concern.

The Company continues to perform well and is building for the future with confidence but, in all the circumstances, 1997 will be another challenging year.

D M Turnbull
Chairman

Hong Kong, 11th March 1997

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