Scheduled destination. Half the world s population lives within 5-hour flying time from Hong Kong

Transcription

1 THE AIRPORT AUTHORITY HONG KONG ( the Authority ) is a statutory corporation wholly owned by the Government of the Hong Kong Special Administrative Region. The Authority is charged with the operation and development of Hong Kong International Airport ( HKIA ). Scheduled destination Half the world s population lives within 5-hour flying time from Hong Kong As the gateway to China and much of Asia, HKIA is one of the busiest international airports in the world. Last year, over 34 million passengers and more than 2.5 million tonnes of cargo passed through the airport. More than 70 airlines operate some 4,000 flights a week from HKIA to more than 130 destinations worldwide. With 50% of the world s population within five-hour flying time, HKIA is a multi-modal international aviation centre and superhub of the region.

2 We are an integrated multi-modal transportation hub for flow of people, goods, services and information. Contents 3 Event Highlights 4 Chairman s Statement 8 Chief Executive Officer s Overview 12 The Board and Executive Directors 14 Financial and Operational Highlights 15 Business Review 18 Safety, Security, Quality and Efficiency 24 Customers and Retail 30 Planning and Growth 36 Corporate and Community 40 Financial Review 47 Report of the Members of the Board 52 Auditors Report 53 Financial Statements 80 5-Year Financial and Operational Summary

3 2 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

4 Event Highlights April 02 >> The Authority unveiled details of its proposed multi-purpose SkyPlaza development with facilities for passengers, transport and business. May 02 >> HKIA was voted Airport of the Year for the second year in a row by Skytrax Research, a UK-based aviation research company. June 02 >> HKIA received an Eagle Award from IATA recognising the value for money that it provides to airlines. July 02 >> Expressions of Interest were invited from around the world for development of the International Exhibition Centre in the northeast corner of the airport. September 02 >> Hong Kong hosted the largest ever Air Cargo Forum with 4,000 delegates and 250 exhibitors from 69 nations. Airport Ambassador programme launched to promote customer service at the airport and vocational training for young people. (Senior Ambassadors joined the scheme in December 2002.) Launch ceremony held for the comprehensive transformation of the Arrivals Hall with new retail and catering and miniature gardens. October 02 >> A 15-year franchise for development, construction and operation of an Express Cargo Terminal at HKIA was awarded to DHL International (Hong Kong) Ltd. HKIA was voted Best Airport by readers of Travel Trade Gazette Asia and was Best Large Airport in the J D Power & Associates 2002 Global Airport Satisfaction Study. November 02 >> A Letter of Intent on flight diversions and emergency support was signed by the five Pearl River Delta airports at a semi-annual A5 Forum meeting. December 02 >> A 15 percent discount on aircraft landing and parking charges was extended until December Airport Customer Service Champion Awards presented to frontline service staff to recognise outstanding performance during the year. January 03 >> The Authority announced new records for cargo, passengers and flight movements, making 2002 the best year ever for aviation in Hong Kong. A new Arrivals Duty Free pavilion opened offering a wide choice of duty free and general merchandise for last minute purchases by arriving passengers. February 03 >> A total of 25 luxury brand licences and 23 catering licences announced for the East Hall shopping area which is undergoing a major renovation and expansion. A community gardening project was launched on the airport island, using composted kitchen waste from airport restaurants. Opening took place of the Airport- Mainland Coach Station, featuring a waiting lounge and sheltered bays for 10 coaches. March 03 >> The Authority launched its second bond issue for retail investors. The issue was 8 times over subscribed. The SARS outbreak started to have a very severe adverse effect on business at HKIA. April 03 >> A relief package of reductions on various charges was offered to airport business partners suffering from the impact of SARS. The title of Cargo Airport of the Year 2003 was awarded (for a second consecutive year) to HKIA by industry magazine Air Cargo News. May 03 >> A major revitalisation package was introduced to stimulate traffic and bring travellers back to Hong Kong immediately after the lifting of the travel warning against Hong Kong and Guangdong by the World Health Organisation. ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 3

5 Chairman s Statement A record year The financial year ending 31 March 2003 was a successful one for the Airport Authority. Hong Kong International Airport saw record throughputs of both passengers and cargo. This resulted in a respectable net profit of HK$502 million which represents an increase of 113% on the last financial year. Starting from late March 2003, the Severe Acute Respiratory Syndrome (SARS) has, however, inflicted considerable damage on the local economy and on tourism and air travel generally. Both SARS and the war in Iraq will have a substantial negative impact on our business for the coming financial year. We also need to plan for the impact of direct services between the Chinese Mainland and Taiwan, whenever these may be resumed. We continue to adjust our planning and our services to these uncertain circumstances. Dr Victor Fung Kwok-king Chairman HKIA has a key role to play in the recovery of Hong Kong. Looking to the long term, there are many positive factors for the airport, most particularly the continued dynamic economic growth of China. HKIA is developing a series of strategies to ensure that it remains a principal hub of air transport infrastructure supporting this growth, especially in the Pearl River Delta region. The airport, as an important engine for economic development in Hong Kong, has a key role to play in the recovery of Hong Kong from the challenges the territory presently faces. Our regional context A part of that role has been made possible by the new powers of the Authority to extend its activities outside of the airport island. These powers are now available to us following the passage of the Airport Authority (Permitted Airport-related Activities) Order by the Legislative Council in October The context for the Order is a very competitive environment for aviation in China. With the rapid growth of the economy, airports within the Mainland of China are developing fast and airports in the region and around the world are ever increasing their direct services into the Chinese Mainland bypassing Hong Kong. No longer can we rely on our traditional role as the only international gateway to China. 4 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

6 CHAIRMAN S STATEMENT There is now, however, tremendous potential for HKIA to assist in building international links for the Pearl River Delta, a region which has become the manufacturing centre of the world. Our major platform for the development of links with the Delta is the A5 Forum of Pearl River Delta airports, which was formed in Through co-operation rather than head-to-head competition, we intend to expand the customer base for southern China so that all five airports can benefit and use their resources in the fullest and most appropriate fashion. We achieved considerable progress in the Forum last year and the five airports signed a Letter of Intent on flight diversions and emergency support procedures in November Creating new flows Taken together, the Order and the A5 Forum are a firm foundation for extending our facilities and activities to access new flows of people and cargo from within the Chinese Mainland. These new flows are essential for our long-term growth and for us to maintain our position as one of the strategically important international airports of the world. To access and serve our new flows we are already developing HKIA as much more than an airport. This means the delivery of many initiatives within a strategy to provide properly for all parts of the markets that we serve. One sign of this strategy in action during the year was the award of the contract to build and operate an Express Cargo Terminal. When this opens in 2004, the terminal will cater for the fastest growing sector of the overall cargo market. Cargo traffic will also be boosted by the establishment of cargo consolidation centres within the Delta itself by 2006/07. These centres will bring us geographically closer to our customers in the Delta region so that we can understand and respond quickly to their changing requirements. HKIA has tremendous potential to lead the development of international aviation links for the Pearl River Delta. Passengers, on the other hand, are being attracted through the development of multimodal transport links, with HKIA acting as the consolidation point for flows from many modes and directions. A new coach station for Mainland passengers coming to HKIA was opened during the year and a cross-boundary ferry terminal is due to open in summer Our ability to serve parts of our departing passenger market is also to be increased with a new facility called SkyPlaza, whose construction is due to start within This major new development will feature a variety of services for passengers and other airport users, but with a special emphasis on tour groups and passengers travelling to or from the Mainland of China. ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 5

7 CHAIRMAN S STATEMENT Additional flows of passengers for the airport will also be created through the International Exhibition Centre, the first phase of which is due to open in late We will develop specialised services and facilities for delegates to exhibitions and conferences so that the particular needs of this market segment are effectively served. The International Exhibition Centre will act as a magnet for future development within the SkyCity commercial complex (which also includes SkyPlaza). With access by air, land and sea, SkyCity will bring a new dimension of business to HKIA. The dedication and enthusiasm of our staff is the solid guarantee of the safety, security and health of our airport. The airport experience New cargo and passenger facilities and transport services are one aspect of the overall strategy in building our future business. They are vital in creating the flows that stimulate the development of new destinations and flight frequencies. The quality of the airport experience, built around the resources brought in by new flows, is also essential to attracting passengers. This means close attention to such factors as security and safety, customer service and shops and restaurants. Excellence in all of these factors will be vital to our development, in the face of keen competition, as the international hub for the Chinese Mainland as a whole. In the wake of the SARS outbreak, a comprehensive regime of health measures has been introduced to ensure that passengers and the airport community are adequately protected. These health measures, together with the high standards of security and safety achieved at HKIA, are vital elements in our effort to attract passengers. We have refined many aspects of our security measures in close co-operation with the police and other Government departments. We also made good progress in ensuring the safety of all persons at the airport, working towards our ultimate target of zero injuries. Customer service has been a central theme of our work within the passenger terminal throughout the year. During the year, we have made many changes within the terminal to improve the quality of the customer experience. New restaurants have been opened in the Arrivals Hall and we have expanded duty free and other shopping for arriving passengers. Once the new retail starts to open in the expanded East Hall in late 2003, we will boast more top brand name shops than any other airport. Our people and our partners During the year, we made considerable progress in managing our human resources. In response to the Hay Report on the Review of Remuneration of Senior Executives in Statutory and Other Bodies, we achieved a closer alignment of our pay structure with the private sector by successfully implementing a variable compensation scheme for senior management. 6 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

8 CHAIRMAN S STATEMENT The 970 staff of the Airport Authority have achieved a great deal during the year in growing our business and in meeting the needs of customers and business partners. I am most grateful to them all for their dedication and enthusiasm. They have worked tirelessly to make HKIA a safe, secure and healthy airport. The additional health measures now in place will give world travellers confidence and peace of mind when travelling through HKIA. I am also delighted to acknowledge the contribution of all members of the airport community of some 45,000 individuals working with our many partner organisations at HKIA. To assist our business partners in coping with the financial impact on their business of SARS, in April 2003 the Authority offered a relief package which includes reductions in charges and interest-free deferred payments. In addition, in May we announced another multi-million dollar revitalisation package under the name of Operation SkyFit to stimulate traffic and bring travellers back to Hong Kong. We sense huge opportunities for growth and are determined to seize and exploit those opportunities. We have benefited a great deal from the assistance provided to us by Government departments, both in terms of current airport operation and in terms of support for our ambitious plans for the future. We are particularly grateful for Legislative Council and Government support in passing the Order permitting us to extend our activities outside the airport island. An uncertain outlook Immediately, we have to address the rebuilding of passenger throughput, which in its worst week averaged below 20,000 a day. Our aim is to reach at least eighty percent of our normal traffic by December To achieve this target, we have launched an intensive marketing campaign to reassure the travelling public that HKIA is fit and healthy and to welcome passengers back. Looking beyond this phase, as numbers grow for both passengers and cargo, we will be clearly focused on expansion of capacity just in time to meet demand. As our facilities and services develop, we will fulfil our mission to create one of the leading international airports of the world, a key driver for the economy of Hong Kong. Faced with intense competition and uncertainties in the world s economic and political situation, plus the impact of SARS on regional aviation, I nonetheless remain very confident in our continued ability to prosper and grow. We manage an airport infrastructure amongst the finest in the world. In the short space of five years since airport opening, we have been recognised as a world leader for service to passengers and businesses alike. The growth potential of our markets in China and beyond is enormous. I know that we have the capability to make the very best use of that potential and to go on to set new global standards for airport management. Dr Victor Fung Kwok-king Chairman Hong Kong, 30 May 2003 ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 7

9 Chief Executive Officer s Overview More than an airport Dozens of airports throughout the world can boast of their hundreds of flights a day and of their millions of passengers a year. All of us do our best to offer convenient connections and transshipments for passengers and cargo. However, HKIA is much more than just an airport. Instead, we are becoming a centre for the integration and management of multi-modal flows of people, goods, services and information. Such flows are the basis for the growth and success of HKIA, and our development and enhancement of these flows brings economic value to Hong Kong and the Pearl River Delta region. Dr David J Pang Chief Executive Officer Results for the year In a challenging environment for aviation worldwide, while taking bold steps to position HKIA for future growth, we have also accomplished all the corporate goals set at the beginning of the year. We achieved another record year for HKIA. Passenger numbers were up by 3.3% at 34.2 million and cargo throughput was up by 20% at 2.55 million tonnes. Net profit for the year was up 113% at HK$502 million. The increase in profit can be attributed to both traffic growth and productivity improvements and is a very satisfactory result when set against general economic difficulties in Hong Kong. In fact, HKIA has been able to reduce operating expenditure every year for the past three years in spite of volume increases. HKIA integrates and manages multi-modal flows of people, goods, services and information. By and large, our record results reflect the international aviation links that we provide to serve the fast economic growth of the Chinese Mainland. Our ability to link our growing catchment market with the rest of the world, and to serve that market effectively in the face of keen competition, remains the key to our future success. We will achieve that success by continuing to think and act well outside the box of a traditional airport operator. I am, however, very conscious that, even with such a rate of increase, our third consecutive year of profit increase still represents a low return on our net assets. We have much work ahead of us to improve this return by realising more fully the potential of HKIA as one of the greatest international airports in the world. We maintained our excellent credit rating and this was reflected in the success of our second retail bond issue, launched in March 2003, which also showed a good acceptance by the public of the HKIA as an investment. 8 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

10 CHIEF EXECUTIVE OFFICER S OVERVIEW We achieved further international recognition for our service quality. This recognition included our leadership by a wide margin as Best Large Airport in the 2002 Global Airport Satisfaction Study conducted by J D Power and Associates, and the title Best Airport from Travel Trade Gazette Asia. HKIA received an Eagle Award from the International Air Transport Association (IATA) highlighting the value for money that we offer to airlines. Other accolades included recognition as Airport of the Year 2002 by Skytrax Research of the UK, and (for a second consecutive year) as Cargo Airport of the Year 2003 by Air Cargo News. A Diamond Award in the Public Sector/Not-for-Profit Organization Category of the 2002 Best Corporate Governance Disclosure Awards of the Hong Kong Society of Accountants was also the second such award in a row. We will achieve success by thinking and acting outside the airport operator box. Our health We accomplished so much in the past year while living by our core values in safety, security, quality and ethics. These values remain the trusted guides and uncompromising standards for how we conduct our business at HKIA. As a result of our disciplined processes for safety at work, our total staff recordable injuries were again reduced by half, for a second consecutive year, meaning that we are right on track to achieve our goal of zero injuries. Safety in all parts of the airport remained a top priority for the HKIA through the year. I am proud that tightening of security procedures through the year was achieved with minimum inconvenience to our passengers. We will never compromise on the standards we set for security of the airport and will maintain our vigilance in the face of new threats. Our success in increasing passenger and cargo throughput in challenging times certainly owes much to the quality of service offered to customers by ourselves and our many business partners in the airport community. The results of passenger satisfaction surveys conducted over the past year provide ample evidence that our many initiatives to improve customer service are indeed bearing fruit. I am delighted that the Customer Service Excellence Programme that we launched in early 2002 has brought such solid results in a relatively short space of time. Much progress was made in transforming the airport into a service business offering a unique airport experience. Many changes and new facilities - for example, in terms of shops, restaurants, transport and information - are our direct response to surveys of customer needs. A warmer environment is also being created with miniature gardens, landscaping and cultural performances. Such initiatives are part of our drive to attract passengers by offering much more than just the basic infrastructure of an airport. This was a year of excellent health for HKIA, and our fundamentals are solid and reliable. ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 9

11 CHIEF EXECUTIVE OFFICER S OVERVIEW Our core values in safety, security, quality and ethics guide our conduct of business at HKIA. Our growth For sustainable growth, HKIA s strategy is to maximise the push and pull through of passenger and cargo flows and we have been making intensive efforts to increase the flows into the airport. This means improving connections with our target markets, particularly in the Pearl River Delta, and removing barriers between them and us. We have opened a fine new coach station for Mainland passengers coming to HKIA and a cross-boundary ferry terminal is due to open in summer All such initiatives are again a reflection of our intention to build our business by developing as much more than an airport pure and simple. The Pearl River Delta is vital to our cargo business as 70% of air cargo handled at HKIA has its origin in the Delta region. Barriers to access to HKIA for cargo are being dismantled through facilities such as our Marine Cargo Terminal and the direct sealed truck services between HKIA and Mainland cities offered by both Hong Kong Air Cargo Terminals Limited and Asia Airfreight Terminals Limited. For our customers, we are integrating multi-modal transport flows to provide the fastest, most reliable and most economic air transport solutions. We have also made progress during the year in integrating with the four other airports in the Pearl River Delta. This has involved both multilateral links being established through the A5 Forum and bilateral links. By developing co-operation among the five airports, we will improve regional and international access to the whole of China, which is now the fastest growing aviation market in the world. In the new financial year, the outbreak of SARS is having a substantial impact on our business. At the end of May 2003, immediately after the lifting of the travel advisory against Hong Kong and Guangdong by the World Health Organization, we announced an aggressive revitalisation package to stimulate traffic and bring travellers back to Hong Kong. In the longer term, I believe that our plans and projections for growth will remain valid and appropriate to our potential and prospects. Crises come and go, but the flows of people and goods will continue. Temporary setbacks must not make us lose sight of our long-term vision. In summary, we have made excellent progress with development of our platform for growth. In particular, we are well on schedule in implementation of all of the ten key growth projects laid out in the Master Plan 2020 that we published in late Indeed, four of these projects will either be complete or sufficiently operational to contribute to our business within at most a year from now. Our passenger and cargo markets have been developing very much in line with the targets set in the Master Plan and we will continue to bring our ten key projects forward just in time to meet that demand. Our people and our organisation We could not have accomplished what we have achieved in terms of both excellent health and sustainable growth without the creativity and dedication of our people. 10 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

12 CHIEF EXECUTIVE OFFICER S OVERVIEW The integration of diversities in our organisation is ever further advanced. Combined together, the many and varying talents of our people are a great source of energy and innovation. As HKIA reaches maturity with implementation of Business Units and Service Units, lines of accountability have become clearer. We are increasingly outward oriented towards our markets and our customers and able to act with speed and determination in tackling and solving their problems. As part of the continuous effort to build an organisation of continuous learning, sharing and caring, early in 2003 we established an Airport Management Academy with a vision to pass on some of the management expertise we have developed at HKIA. The Academy as it develops will synchronise our corporate culture of learning and sharing. It will assist us in our mission of setting and sharing new global standards for airport operation and management. Partnerships for the journey ahead As integrator of the airport, we depend very much on the quality of service provided by our many business partners. Our progress and achievements during the year are the fruit of the excellent partnerships that we have formed with so many other organisations. Their enthusiastic participation in many joint initiatives during the year has been crucial to the achievement of our common goals of service excellence and business growth. HKIA has come a long way in its first five years. From the base of a superb piece of hardware, we have built a successful service and experience business. Our challenge going forward is to integrate ourselves with the huge markets that we serve in the Mainland of China. Remember that HKIA is not just an airport, it is a centre of multi-modal flows of people and goods. Together with our business partners, we will contribute to the economic growth of Hong Kong and the Pearl River Delta region. We have much to learn and also much to offer. I am very sure that our organisation and its staff have the capabilities and commitment to achieve the great task ahead. Our challenge is to integrate with the other four airports in the Pearl River Delta to maximise the value of our available resources and assets. I would like to take this opportunity to thank all my colleagues in HKIA, all our business partners and the Government for their parts in achieving another record year. The good counsel and vision of our Board Members have also been invaluable in developing our strategies for the future and in overcoming present challenges. I look forward to continuing support from staff, business partners, the Government, the Board and our many other stakeholders as we overcome the challenges posed by the SARS outbreak and other economic uncertainties; and then go on together to achieve an even greater future in the years to come. Dr David J Pang Chief Executive Officer Hong Kong, 30 May 2003 ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 11

13 The Board and Executive Directors >> 1 >> 2 >> 3 >> 4 >> 76 >> 87 >> 98 >> 910 The Board Dr Victor Fung Kwok-king >> 1 Chairman Aged 57. First appointed to the Board in June 1999 and was re-appointed in June Chairman of Li & Fung Group. Chairman of the Hong Kong University Council. Hong Kong Representative on the APEC Business Advisory Council. Member of the Tenth National Committee of Chinese People s Political Consultative Conference. Dr David J Pang >> 2 Chief Executive Officer* Aged 59. Appointed as Chief Executive Officer in January Former Corporate Vice President of E.I. DuPont and Chairman, DuPont Greater China. The Honourable Mrs Selina Chow Liang Shuk-yee GBS JP >> 3 Aged 58. First appointed to the Board in June 1999 and was re-appointed in June Member of the Legislative Council. Chairman of the Hong Kong Tourism Board. Mr Daniel R Fung QC SC >> 4 Aged 49. First appointed to the Board in June 1999 and was re-appointed in June Chairman, Des Voeux Chambers. Chairman of the Broadcasting Authority. Chairman, East-West Strategic Development Commission Limited. Member of the Tenth National Committee of Chinese People s Political Consultative Conference. Former Solicitor General of the Hong Kong SAR Government. Mr Stephen lp Shu-kwan GBS JP >> 5 Secretary for Economic Development and Labour* Aged 51. Became a Board Member in July 2002 upon his appointment as Secretary for Economic Development and Labour. Mr Albert Lam Kwong-yu JP >> 6 Director-General of Civil Aviation* Aged 59. Became a Board Member in October 1998 upon his appointment as Director-General of Civil Aviation and was re-appointed in June 1999 and June Mr Frederick Si-hang Ma JP >> 7 Secretary for Financial Services and the Treasury* Aged 51. Became a Board Member in July 2002 upon his appointment as Secretary for Financial Services and the Treasury. Mr John Strickland GBS JP >> 8 Aged 63. First appointed to the Board in June 1999 and was re-appointed in June Director of Hong Kong Exchanges and Clearing Limited. Director of Esquel Holdings Inc. Director of Wheelock and Company Limited. Member of the Hong Kong University Council. Member of the Antiquities Advisory Board. Member of the ICAC Operations Review Committee. Former Chairman of the Hongkong and Shanghai Banking Corporation Limited. 12 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

14 THE BOARD AND EXECUTIVE DIRECTORS From left to right: Mr Alex Derbie, Mr Hans Bakker, Mr Raymond W C Lai, Mr Howard Eng Kiu-chor, Mr Willie W Chan >> 5 >> Miss Maria Tam Wai-chu GBS JP >> 9 Aged 57. First appointed to the Board in December 1995 and was re-appointed in June 1999 and June A Barrister. Hong Kong deputy to the National People s Congress. Member of the Committee for the Basic Law of the Hong Kong SAR under the Standing Committee of the National People s Congress. Member of the Board of the Urban Renewal Authority. Former Member of the Executive Council and Legislative Council and former Chairman of the Transport Advisory Committee. Dr Peter Wong King-keung BBS JP >> 10 Aged 57. First appointed to the Board in December 1995 and was re-appointed in June 1999 and June Chairman of Newmark Company Limited. Member of the Tenth National Committee of Chinese People s Political Consultative Conference. Member of the Town Planning Board. Vice Chairman of the Hong Kong Arts Development Council. Former Member of the Airport Consultative Committee. Mr Hans Bakker Commercial Director Aged 54. Appointed in June Former Managing Director of Schiphol International, Amsterdam. Mr Willie W Chan Human Resources and Administration Director Aged 53. Appointed in October Former Regional Vice President - Human Resources, Asia Pacific Japan Australia, American Express International Inc. Mr Alex Derbie Legal Director Aged 54. Appointed in November A Solicitor. Former Senior Legal Adviser of MTR Corporation Limited. Mr Howard Eng Kiu-chor Airport Management Director Aged 50. Appointed in December Former Acting Airport Management Director. Former Vice President of Operations, Edmonton International Airport, Canada. Mr Raymond W C Lai Finance Director Aged 53. Appointed in August Former Senior Vice President, Head of Corporate Banking & Capital Markets of ABN AMRO Bank N.V., Hong Kong. Executive Directors * Member by virtue of being holder of the post Mrs Ivy Chan Poon Yuen-man KPMG Secretary to the Board Auditors ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 13

15 TURNOVER in HK$ millions 6,000 5,000 Financial and Operational Highlights 4,000 3,000 2,000 1, /99* 99/00 00/01 01/02 02/03 Financial Results (in HK$ millions) 2002/ /02 Turnover 5,417 5,274 PROFIT (LOSS) ATTRIBUTABLE TO SHAREHOLDER in HK$ millions TOTAL PASSENGERS in millions /99* 99/00 00/01 98/99* 99/00 00/01 01/02 02/03 01/02 02/03 Operating Profit before Depreciation 2,665 2,502 Depreciation of Fixed Assets 1,813 1,843 Finance Costs Profit Attributable to Shareholder Financial Position (in HK$ millions) 2002/ /02 Total Assets 48,934 48,858 Total Borrowings 7,801 8,450 Capital and Reserves 36,978 36,399 Capital Expenditure Return on Net Assets 1.4% 0.6% Debt / Equity Ratio 1 : : 4.3 CARGO TONNAGES in thousands 3,000 2,500 2,000 1,500 1,000 Operational Highlights (in thousands) 2002/ /02 Total Passengers 34,198 33,101 Cargo Tonnages 2,546 2, Aircraft Movements /99* 99/00 00/01 01/02 02/03 Note: Total passengers include originating, terminating, transfer and transit passengers. Transfer and transit passengers are counted twice. AIRCRAFT MOVEMENTS in thousands Credit Ratings 150 Standard & Poor s: 2002/ / Long-term local currency issuer credit rating AA- AA /99* 99/00 00/01 01/02 02/03 Long-term foreign currency issuer credit rating A+ A+ * 6 July 1998 to 31 March >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

16 BUSINESS REVIEW The health of our airport is nurtured by a keen attention to security, safety and efficiency and a dedication to global standards for frontline service. The growth of the airport is developed through the ten key projects in our Master Plan 2020 which will deliver rapid integration with the Pearl River Delta. And finally, our success is achieved by the creativity and innovation with which our people respond to the many challenges that face us. The pursuit of health and growth by the Authority and our people is made possible by our close partnerships with Government, airlines, regional airports, airport service providers and many other organisations. ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 15

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18 ORGANISED Safety, Security, Quality and Efficiency >> Business partners took >> Joint working with >> Independent monitoring >> Constant pressure on part with enthusiasm in many Government departments of HKIA has shown fast costs is making us an ever safety campaigns which, was key to further tightening progress in service quality. leaner organisation. Creative taken together, helped us of security and security was This owes much to the use of technology helped meet all our targets for also a major focus of the hundreds of airport improve our productivity and reductions in injuries. We work of the A5 Forum of organisations involved in develop more effective have put safety at the core of Pearl River Delta airports. customer service. We are relationships with our many all activities on the airport HKIA was rated best in class determined to maintain the airport partners. However, island and our final target is always zero injuries. by passengers for sense of security and yet delay upward momentum on service standards and keep we never seek savings that would impact adversely on RIGOROUS to travellers was kept to ahead of the competition. service to passengers. a minimum. INNOVATIVE

19 BUSINESS REVIEW Safety, Security, Quality and Efficiency Safety The safety of all persons at the airport remains a core value of our business and is fundamental to all our activities in operating HKIA. We aim to be the best airport in the world which also means becoming the safest airport. Simply put, our goal is zero accidents. During the year HKIA met all targets for reductions in injuries. Job-related injuries were recorded for two staff of the Authority itself (2001/02: 4 staff; and 2000/01: 10 staff). There were also reductions in terms of other safety parameters such as airport staff and passenger injuries and traffic accidents both inside the aircraft operation area and on the public roads. Improvements were achieved with the help of all our business partners at the airport. The Authority worked with them through a series of campaigns focusing particularly on Baggage Hall Safety, Ramp Safety, Road Safety and Lift and Escalator Safety. We have also reviewed their Safety Management Plans and conducted safety audits with them. A Baggage Hall Safety Campaign was conducted for a second year. The Campaign included a number of competitions to recognise best practice. Other activities included safety talks and sessions on defensive driving. We also installed a number of extra features to improve safety such as additional lighting, mirrors at blind spots and additional CCTV. With the help of all these measures, the average injury rate has dropped from 3.3 cases per month in 2000 to fewer than one case per month in Our ultimate target of course is zero injuries. To foster a culture of ramp safety, a Ramp Safety Campaign was conducted for a fourth year. Apart from the focus on aircraft ground services safety, the Campaign also put a particular emphasis on ramp personnel safety. Safety talks, a safety quiz and a staff occupational health suggestion scheme were conducted to increase the safety awareness of ramp staff. As ramp safety is a shared responsibility, the Authority, together with all 14 ramp handling franchisees, signed a Ramp Safety Commitment Charter. 88 Ramp Safety Ambassadors from all ramp handling franchisees were trained and appointed to participate in ramp safety drives. With all these measures, we achieved an OSHA ramp staff injury rate of 3.06 per 200,000 hours worked. The index is well below our target and equates to less than half of the injury rate of comparable US airports. The target for next year is for a 20% reduction in ramp injuries. 18 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

20 BUSINESS REVIEW To minimise the risk of lightning strike at the airport, an Airport Lightning Warning System (ALWS) was commissioned in May The System provides real time warnings to organisations at the airport to alert outdoor staff of the approach and the passage of lightning storms. A visual and audio warning system, which will help rapid dissemination of warnings, is being installed in the aircraft parking aprons. Security Security is fundamental to the airport business. There was a continued tightening and refinement of security procedures during the year in response to the threat of terrorism. The Authority and its subsidiary, Aviation Security Company Limited (AVSECO), worked in close partnership with the Police, other Government departments and the airport community to maintain a heightened level of vigilance. Despite additional security restrictions and procedures, inconvenience and delay to the travelling public was kept to an absolute minimum. This remained the case even at Chinese New Year when more than 1,000 extra flights were scheduled over a two week period. Indeed, AVSECO ended the year 2002 as best in class for security inspection in the IATA Global Airport Monitor survey. In the same survey, passengers rated HKIA best in class for sense of security. During the year we improved our security infrastructure by rebuilding our two mid-field screening facilities. The new facilities will provide a much better environment for the screening of vehicles and airport staff entering the enhanced security restricted area. These facilities have been designed to cater for forecast increases in vehicular and cargo movements and also to provide flexibility for security processes to adapt to changing operational and regulatory requirements. EQUIPMENT AND FACILITIES RELATED ACCIDENTS (Excluding aircraft flying related accidents) No. of accidents per 1,000 movements Hong Kong International Airport* 22 Asian Airports** 353 World Airports** 155 European Airports ** * Annual average for the year ended 31 March 2003 ** Airports Council International 2001 Survey AIRCRAFT RELATED GROUND INCIDENTS (Excluding aircraft flying related accidents) No. of accidents per 1,000 movements A rigorous programme of contingency training and drills for security threats, fires, typhoons and other emergencies was maintained through the year. A full scale emergency drill, involving a simulated air crash of an A320 jet carrying 160 passengers, was mounted in November to test the effectiveness and overall co-ordination of the various organisations response plans Hong Kong International Airport* 22 Asian Airports** 353 World Airports** 155 European Airports ** * Annual average for the year ended 31 March 2003 ** Airports Council International 2001 Survey ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 19

21 BUSINESS REVIEW NUMBER OF PASSENGER INJURIES IN TERMINAL* No. of injuries per million passengers A Safety and Security Taskforce was formed within the A5 Forum of Pearl River Delta airports and a number of meetings were held during the year. Members visited HKIA in December 2002 and showed particular interest in the Hold Baggage Security Screening System which is seen as the model for an integrated security and baggage handling solution. Looking ahead, we will continue a phased replacement and updating of systems and equipment to meet emerging needs of security at the airport. HKIA will also continue to build on the co-operation and sharing that has been established in the A5 Forum on safety, security and emergency support AA STAFF JOB RELATED INJURIES Staff injury (%) * /02 02/03 * A passenger injury in terminal is defined as an occurrence with personal injury in the passenger terminal area. Note: Passenger numbers include originating, terminating and transfer passengers. Transit passengers are excluded. 00/01 01/02 02/03 * Staff injury rate in percentage is defined as no. of staff injuries in the fiscal year over total no. of staff as at 31 March. Quality The measurement of quality of performance in our service to passengers is essential feedback to our efforts to create the best airport experience in the world. As reported in the IATA Global Airport Monitor Survey, passengers noted significant improvements in the quality of services at HKIA during the year. In the area of courtesy, helpfulness of airport staff, our improvement was particularly notable. This last achievement is an indicator of the success of the Airport Customer Service Excellence Programme that began at the start of A concerted programme of training and campaigns was conducted in partnership with all airport service organisations including Government departments. The objective has been to develop a consistently friendly approach to customer service. The programme culminated in the presentation of the Customer Service Champion Awards in December. Awards were made to frontline service staff with records of consistently exceeding customer service expectations through Our work with airline partners on improvements in service to customers has shown particularly impressive results. We are grateful to airlines for the enthusiastic co-operation that has resulted in these excellent improvements. The Passenger Care Team established in March 2002 continued to act as a guarantee of added care and support to stranded passengers in times of emergency such as typhoons. Regular drills were conducted through the year to ensure the operational readiness of the Team which is formed from the Authority s non-operational staff on a rotation basis. The value of this drill in honing the performance of the Team was apparent when it was activated in September 2002 during Tropical Storm Hagupit. 20 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

22 BUSINESS REVIEW Looking ahead, we are determined to maintain our quality standards and to develop longterm consistency in achieving international leadership. The big changes currently underway in our shopping and catering facilities will certainly help us to reach that goal. Only by offering the finest airport experience in the region on a consistent basis can we be successful in beating stiff competition to establish HKIA as the superhub for Asia. Efficiency The Authority has achieved a fifth consecutive year of reductions in operating expenditure. Constant pressure on costs has become part of our corporate culture. However, we never look to achieve savings through dilution in our service to customers. Cost reductions are being achieved through the repackaging of maintenance contracts as these come up for renewal. Specialised work that can be carried out by internal staff is being taken out of contracts. This means a reduction in the cost of the contract and also opens up contracts to less specialised contractors. The potentially high costs of meeting the challenge of technical obsolescence are being reduced in an innovative way. A leasing approach has been devised for tackling the server migration for the Airport Operational Database. This customised lease reduces our capital outlay and also provides flexibility for upgrading to a newer model. In recognition of our excellence in strategic enterprise IT deployment, the Authority has been admitted by the CIO Asia Magazine as CIO 100 Honouree As well as achieving efficiency in terms of cost savings, we are also undertaking reviews of major business and operational processes with a view to eliminating activities that add little value to service delivery at the airport and thus to increasing efficiency. In addition, the trend towards automation of workflows within our organisation is accelerating and simplifying the ways in which we do business, both internally and with outside partners. Maintaining health The sound health of the airport is a firm base for our future growth and success. We will continue to measure our health against ever higher standards for customer service, safety, security and efficiency. By meeting and exceeding those standards, we will also meet our responsibility as custodian of a facility that is so vital an element in Hong Kong s prosperity and future development. ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 21

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24 DELICIOUS... Customers and Retail >> We work closely with >> Meeters and greeters now >> Miniature gardens and art >> Speed of access between COOL! airlines, restaurants, enjoy a transformed Arrivals exhibitions in the terminal the airport and the Mainland retailers and other partners Hall. A major expansion of are together creating a of China is key to our to respond to changing the main East Hall shopping warmer and more relaxing success in building new customer needs. Arrivals area will soon be complete environment for customers. markets. Connecting duty free now allows last with a new food court and These visual elements are passengers to and from minute purchases whilst many new shops and other complemented by audio Mainland have been plugged a Boutique Boulevard will retail areas will then follow offerings with regular in closer with a new coach cater to demand for this programme of rebirth. performances of Chinese and station and direct ferry luxury brands. Western music and traditional connections into the Pearl songs at festival times. River Delta will commence operations in the summer of TRENDY...

25 BUSINESS REVIEW Customers and Retail AIRSIDE OPERATION PERFORMANCE Percentage (%) Serving our customers The refinement of the HKIA airport experience involved many new initiatives during the year in terms of facilities, processes and, in particular, customer service. In all these initiatives, we continue to be guided by our feedback on what the customer needs and wants. This feedback is gained from quality surveys, direct from customers to our staff and through regular liaison with our service partners at the airport including airlines, restaurants, retailers, Government departments such as Immigration, Customs & Excise and Police, and many more. 80 As a result of such feedback, we continue to work on key elements in the service package 75 such as speed and convenience of flow within and to and from the airport and information to orient passengers. We continue to exploit the latest technology to add comfort and 70 00/01 01/02 02/03 convenience to the passenger experience. Average percentage of aircraft allocated to frontal gate. Average percentage of aircraft departure on time*. * Departure on time is defined as the outgoing flights take off early or within 15 minutes of schedule. AVERAGE TIMES OF FIRST AND LAST BAGS INTO ARRIVALS HALL AFTER AIRCRAFT LANDED Average time (minutes) Speeding connections through technology New technology is being exploited in partnership with airlines in a pilot project to avoid bottlenecks at check-in. Wireless infrastructure established at HKIA now allows airline staff to perform some pre-check-in processes for passengers away from check-in desks thus easing pressure in peak periods. This facility is particularly helpful for transfer passengers where speed is often of the essence to catch the connecting flights. And for all passengers it helps increase the time available for enjoyment of airport facilities. In July 2002, HKIA joined the Simplifying Passenger Travel Interest Group, an international initiative managed by IATA. The vision behind the initiative is for airport partners to work together to simplify procedures involving passengers. Technology is to be introduced to replace or streamline repetitive checks of passengers and their documents. Procedures will also be streamlined to the benefit of frequent travellers who will be able to use a Frequent Visitor Express Channel that is currently being developed. 15 Our baggage handling system was made even more reliable during the year with a 10 design modification which has brought significant performance improvements. This 5 change has contributed to speeding passenger flow through the terminal. Passenger 0 First bag Last bag movement to and from the more distant departure and arrival gates has also been speeded up by reducing the platform dwell time of the APM intra-terminal train to only 30 seconds. 00/01 01/02 02/03 First bag performance pledge Last bag performance pledge Multi-modal transport connections Coach services for passengers connecting to and from the Pearl River Delta became even more convenient during the year with the opening of the Airport-Mainland Coach Station. Located on ground level at the northern end of the Arrivals Hall, the Coach Station features a waiting lounge and sheltered bays for 10 coaches. Five coach operators now offer up to 24 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

26 BUSINESS REVIEW 90 services a day to destinations throughout the Delta region and beyond. On average, 4,600 passengers travel on these coach services every day. The new facility means a seamless transition between air and road travel in our multi-modal transport hub. Information and orientation New wireless LAN technology is making it much easier for passengers to connect to the Internet whilst in the passenger terminal. Rather than connecting by cable, they are now able to use a wireless LAN card to connect Public Wireless LAN Internet Services for immediate Internet access. With such facilities, business travellers are able to make best use of time spent waiting for flights. Information provision to arriving passengers has also been improved through the 36 easyto-find commercial counters in the renovated Arrivals Hall. These counters offer hotel, tour and travel, transportation, visa processing and business services. Another addition to the Arrivals Hall is a giant LED board which provides a wide variety of useful transport information and local information for visitors to Hong Kong. Orientation for transfer passengers is now more readily available through Transfer Information Booths. These Booths provide location maps, touch screen multi-media information systems, video help phones and flight transfer information. All these facilities help in improving the flow of people within the terminal and beyond it. A more relaxing environment Work continued through the year to create a more relaxing environment within the terminal building. Two miniature gardens with water fountains and benches have been added to the Arrivals Hall. Planters have been added along the central concourse of the arrivals level, thereby creating a warmer welcome for visitors to Hong Kong. Landscaping is also being added to the main departures concourse in a three-phase programme due to be completed in Cultural activities have been contributing an extra dimension and colour to passengers experience of the airport. Every weekend there have been performances of Chinese and Western music whilst festival seasons have seen the terminal ring to the sounds of traditional festival songs. Visual arts were also featured with a major sculpture exhibition, featuring 28 works by local artists, mounted by the Leisure and Cultural Services Department of the Government in the departures level. Passengers have responded to these activities with enthusiasm and have particularly enjoyed the exposure to Chinese cultural traditions. The programmes have also reinforced fruitful relationships between HKIA and Hong Kong s artistic community, both professional and amateur. ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 25

27 BUSINESS REVIEW Entertainment options for departing passengers have been increased. For example, a virtual reality golf simulator has been installed in the Game Zone of the departures level. The system is the only one to have been installed at an airport and includes a comprehensive golf training programme. Relations with our retail partners Relations with our retail licensees have always involved a close partnership offering mutual advantage. Intensive information exchange with retailers and regular surveys of the passenger mix and buying behaviour help retailers adjust their product range. Meetings for information exchange have been well attended indicating the value of the market intelligence that the Authority is able to provide. The Authority has successfully identified opportunities to develop new retail areas and hence to increase income from this source. As a result of aggressive and effective marketing, as well as a strategic licensing approach, the outcome of recent tender exercises for catering and retail outlets has been encouraging. As we improve our performance in satisfying the changing needs of our customers, so we are moving closer to maximizing the potential contribution of retail to the overall performance and reputation of the airport. Relaunch of the Arrivals Hall A transformed Arrivals Hall was re-launched in September The aim of the changes was to turn the Arrivals Hall into an attractive place for meeters and greeters - as well as arriving passengers - to spend time. Most of the 1,380 sqm of new retail space has been taken up by four spacious restaurants which have opened on the east side of the Hall. They provide fast food options for a market which is generally not looking for more leisurely dining. The eating areas are open to the Hall allowing diners to watch what is going on and creating a boulevard feel for the area as a whole. In December, a number of new shops opened in the Arrivals Pre-Immigration Area. They included two duty free outlets, a perfume and cosmetics shop, a general merchandise store, money exchange and a coffee shop. This new shopping has proved popular for passengers needing to make last minute purchases of gifts on arrival and for transfer passengers spending time in this area. East Hall expansion The major extensions to the East Hall retail areas are well on schedule for completion of construction works in December Once internal work has finished towards the end of the year, the main shopping area of the airport will have undergone a complete reconfiguration that will include the addition of 6,800 sqm of lettable space. 26 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

28 BUSINESS REVIEW The new space has given HKIA the chance to largely reshape its retail and catering offering in this area in response to changes in passenger profiles and tastes. One trend is the strong demand for top branded goods from Mainland, Taiwan and Japan customers who make up 48% of our total passenger mix. Many of the world s leading brands showed a strong appetite for the 25 brand boutiques included in a tender exercise that concluded in February A glamorous Luxury Boutique Boulevard will be the result when it is opened in late PASSENGER BY MARKET Year ended 31 March 2003 % of passengers 25% 19% 20% The tender exercise for the new Food Hall was completed in February 2003 and has produced the attractive mix of East and West that the Authority had conceived as a result of extensive surveys of passengers needs. The selection of 23 catering licences will cater for tastes ranging from fast food to fine dining and for a range of budgets. Customers for the six fast food outlets will eat in a totally transformed food court operated by well-known caterers and managed by the Authority. Half of the new food court in the East Hall will open in May 2003 and the wings of the new extensions will open in August. Careful planning means that there will be minimum disruption to ongoing business as the middle of the East Hall is renewed through the remainder of the year, with tender procedures for the remaining retail outlets running in tandem. Passenger care Additional customer service has been provided at the airport since October by Airport Ambassadors who are meeting and assisting passengers under an innovative employment training scheme. Four groups of 26 Airport Ambassadors aged between 15 and 24 will be employed for six months at a time under a scheme conducted jointly by the Authority and the Hong Kong Federation of Youth Groups. In December, the scheme was extended to include 21 volunteer Ambassadors. This volunteer group included 11 senior citizens whose age and experience add an extra dimension to the welcome that Hong Kong extends to visitors as they pass through the airport. These Airport Ambassadors have been assisting around 2,000 passengers a day. Continuous improvement Once the new East Hall shopping area has been completed and relaunched, the next targets for improvement will be shopping and catering in the landside Departures Hall and in the West Hall airside. This represents a continuing cycle of change and improvement in response to changing tastes and customer demand. The Authority is committed to ensuring that the terminal, and all the services and facilities within it, will continue to set global standards. S E Asia Mainland China Taiwan Japan Europe USA & Canada Others TYPE OF TRAVELLER Year ended 31 March 2003 % of passengers Visitors Transfers Hong Kong residents 9% 8% 7% 12% 40% 33% 27% ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 27

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30 Planning and Growth >> HKIA works with 70 >> Our rapid integration with airlines in providing the Pearl River Delta is being >> Support to our fastgrowing cargo business is >> Government is a key partner in taking forward REGIONAL CENTRE passenger services to over driven through co-operation being expanded with an major initiatives such as the 130 destinations. We and partnership with the Express Cargo Terminal International Exhibition welcomed 10 new airline other airports of the Delta and Tradeport Hong Kong. Centre. The new Exhibition partners during the year. region. The integration is These facilities will reinforce Centre due to open in Our new partners bring more being built on intensive the position of HKIA as the 2005 will be a central frequent flights as well as development of multi-modal world s busiest airport for feature of the SkyCity new destinations, and both transport for both passengers international cargo and as commercial complex to be of these elements are key to and cargo. the air cargo and logistics developed at the airport. our development as an superhub for the region. international hub. INTEGRATION LOGISTIC HUB

31 BUSINESS REVIEW Planning and Growth TEN BUSIEST AIRPORTS IN YEAR INTERNATIONAL PASSENGER THROUGHPUT* in millions Seoul (ICN) Bangkok (BKK) Narita (NRT) Gatwick (LGW) Changi (SIN) Hong Kong Int l (HKG) Rheim/Main (FRA) Schiphol (AMS) Charles de Gaulle (CDG) Heathrow (LHR) * International passenger throughput includes originating, terminating and transfer (counted twice) passengers, travelling between the designated airport and an airport in another country. Transit passengers are not included. Source: Preliminary figures from Airports Council International TEN BUSIEST AIRPORTS IN YEAR INTERNATIONAL FREIGHT THROUGHPUT* in million tonnes Heathrow (LHR) Schiphol (AMS) Miami Int l (MIA) Taipei (TPE) Rheim/Main (FRA) Changi (SIN) Seoul (ICN) Anchorage (ANC) Narita (NRT) Hong Kong Int l (HKG) * International freight throughput includes imports, exports and transshipment (counted twice) freight carried between the designated airport and an airport in another country. Air mail is not included. Source: Preliminary figures from Airports Council International Planning for long, medium and short term We remain on track to achieve the ambitious growth targets laid out in our Master Plan 2020 with significant progress on the ten key growth projects identified in that Plan. We will continue to deliver those projects over the next few years just in time to meet growth over the medium term. In the short term, however, we have been watching very closely the serious impact of the SARS on air traffic in the region and are adjusting our plans and actions accordingly. Our network expands The new US/Hong Kong air services agreement signed in October 2002 is the welcome result of Government s commitment to liberalise air transport in the interests of Hong Kong. The agreement allows code sharing between US and Hong Kong airlines, enabling US carriers to reach more Asian destinations via Hong Kong, and also allows Hong Kong carriers to provide through services to more destinations within the US. On the other hand, US carriers are provided with rights to operate more 5th freedom services from Hong Kong, thus helping to consolidate the role of HKIA as a regional and international hub. Four new destinations were added to our network during the year. These were Istanbul, Lanzhou, Las Vegas and Jeddah. As a bridge between East and West, Istanbul gives good access to transfer destinations in Russia as well as the Middle East and Eastern Europe. At the eastern end of the Silk Road, Lanzhou complements last year s addition of Urumqi in providing direct access to the north west of China. During the year, we welcomed 6 new airline partners providing passenger services: Air Philippines; Australian Airlines; Mandarin Airlines; Mekong Airlines; President Airlines; and Turkish Airlines. There were four new providers of freighter service during the year: Kalitta Air; Pacific East Asia Cargo; Gemini Air Cargo; and Saudi Arabian Airlines. These new airline partners brought more frequencies as well as more destinations, with both factors being important to the development of HKIA as the international hub in our region. HKIA now offers services to more than 130 destinations including 41 in the Mainland of China. These services are provided by over 70 airlines. Cargo and logistics Strong growth of 20% in cargo was achieved during the year with throughput reaching 2.55 million tonnes. HKIA retained the position which it has held since 1996 as the world s busiest international cargo airport. This largely reflects the role of HKIA in the flow of manufactured goods from the fast growing industrial powerhouse of the Pearl River Delta. 30 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

32 BUSINESS REVIEW Express cargo growth was particularly strong at 24%, accounting for over 7% of total cargo throughput, and is expected to continue to grow at a faster pace than general cargo. Such growth provides a solid base for the future operation of the Express Cargo Terminal (ECT), the franchise for the development, construction and operation of which was awarded in October to DHL. Scheduled to commence operations in 2004, the ECT is the largest project of its kind in Asia (with an ultimate capacity of about 45,000 packages per hour) and will serve as DHL s Central Asia Hub. The facility will also entrench HKIA s position as the air cargo and logistics superhub of the region. AIR CARGO BY MARKET Year ended 31 March 2003 % of cargo 18% 7% 14% 12% During the year, both cargo terminal operators have continued to introduce innovative logistics support solutions to add cargo flow. The SuperLink China Direct service of Hong Kong Air Cargo Terminals Limited has increased the number of destinations it serves from 3 to 17. Asia Airfreight Terminals Limited has developed a purpose-built facility to handle prepackaged cargo. Support for the processing of time-critical air cargo was further developed during the year with the construction of Tradeport Hong Kong, the first logistics centre at HKIA, which started operation in March After two years of operation, the Marine Cargo Terminal is now well established and has exceeded the throughput target set in its business plan. S E Asia Mainland China Taiwan Japan Europe USA & Canada Others 18% 16% 15% Looking ahead, the Authority will continue to study capacity issues arising from the rapid growth of air cargo. In particular, it will be looking at further increasing the number of cargo stands which was already boosted from 13 to 21 in December Integration with the Pearl River Delta The quest for new markets remains one of our great opportunities and challenges. If we look at Hong Kong alone, our potential for growth is limited by a developed economy still in deflationary mode and undergoing economic restructuring. We also need to plan for impact on our transfer traffic between Taiwan and the Chinese Mainland, as and when direct flights are established. In the face of these challenges, we are clear that the dynamic growth of the Chinese economy continues to represent the main source of market growth for HKIA. This growth will be largely achieved through rapid integration with the Pearl River Delta, a process which is vital to our continued success. Such integration is being built through intensive development of multi-modal transport for both passengers and cargo. It is also now taking the form of increasing partnership and co-operation within the A5 group of airports in the Delta. The further development of such links has received a major boost with the passage of the Airport Authority (Permitted Airport-related Activities) Order by the Legislative Council in October The Order allows the Authority for the first time to undertake airport-related ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 31

33 BUSINESS REVIEW TOTAL PASSENGERS* in million trips For the year ended 31 March * Total Passengers include originating, terminating. transfer and transit passengers. Transfer and transit passengers are counted twice. Source: Civil Aviation Department of the Hong Kong SAR Government and the Airport Authority. COMMERCIAL CARGO TONNAGE* in thousands For the year ended 31 March 600 1,100 1,600 2,100 2,600 * Commercial Cargoes include originating, terminating and transshipment (counted twice) cargo. Air mail is excluded. Source: Civil Aviation Department of the Hong Kong SAR Government and the Airport Authority. activities, subject to certain restrictions, outside of HKIA. Such activities may now include the provision of non-air transport services to and from the airport, the provision of logistics services and the formation of partnerships for the operation of airports outside Hong Kong. This has enabled the Authority to initiate projects which may take place outside the airport island and help to maintain the competitive edge of the airport and to expand its market place. In November 2002, the members of the A5 Forum signed a Letter of Intent on flight diversions and emergency support during their semi-annual meeting in Macau. This was the first major agreement signed since the Forum was formed in There are many other areas in which we plan to work together with members of the A5 Forum in building an integrated airport system for the Delta region. Such an integrated system will bring major economic benefits for all participants. Dismantling the barriers Barriers for passengers using this airport system are already being dismantled through many initiatives on the transport front. These include the first phase of the Cross-Boundary Passenger Ferry Terminal which is due to open in summer 2003 with services operated by Chu Kong and Shun Tak for passengers transferring at HKIA. The Terminal is the centrepiece of a careful strategy to simplify access for Pearl River Delta passengers to flights from HKIA. Expressions of interest soliciting a Contractor were sought in early 2003 for the establishment of a consolidated ticketing information and service platform to handle international airline ticketing and travel planning in the Mainland of China and Hong Kong. The Internet ticketing platform will serve as a one-stop shop for Mainland passengers and travel agencies and so greatly improve their access to flights from HKIA. It is scheduled to start operations in early A feasibility study for a cargo consolidation centre in the Pearl River Delta was completed during the year. The objective of the centre would be to reach out to the market and the cargo catchment area to ensure that HKIA continues to be the preferred airport for air cargo from the region. As 70% of air cargo handled at HKIA has its origin in the Delta, so it is essential that the airport has fast and convenient access to this market. A decision on whether to proceed with this project is likely to be made in early Building more than an airport Tender procedures for an International Exhibition Centre at HKIA started in February 2003 following a vigorous international marketing campaign. The joint venture contract to build and operate this 100,000 sqm facility is due to be awarded by the second half of With access by air, land (including a new Airport Express Station) and sea, the new Centre will boost the ability of Hong Kong to host international trade exhibitions and events. It will also of course increase flows of people through the airport. The first phase of the project is expected to open in late >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

34 BUSINESS REVIEW The Exhibition Centre will be a key development in the first phase of SkyCity, a 57 hectare commercial complex being developed by the Authority in the north east part of the airport. Another element in this complex will be a multi-purpose development called SkyPlaza. SkyPlaza will provide a new passenger facility, a transport interchange, retail outlets and office accommodation primarily for the Authority s headquarters. Design and construction works will begin in late 2003 and early 2004 with completion expected in late Much work has been done during the year to plan for new or improved facilities to accommodate forecast growth in passengers, cargo and aircraft movements for the next five years. We are currently studying proposals for adding to capacity for passenger movement within the terminal on the Automated People Mover and on escalators between landside departures and arrivals levels. Proposals to construct additional cargo stands and to develop the capacity of the passenger apron are also being studied. Fuel supply and storage For the fiscal year, HKIA has recorded 4.37 billion litres of aviation fuel uplift, a record for the airport representing a 4% increase over uplift in the previous year. To meet the increasing demand for aviation fuel, the Authority is planning a permanent aviation fuel facility in Tuen Mun to be operational by early CIVIL INTERNATIONAL AIRCRAFT MOVEMENTS* in thousands For the year ended 31 March * Aircraft Movements include civil international passengers, cargo and non-revenue flights. Source: Civil Aviation Department of the Hong Kong SAR Government and the Airport Authority. To increase integration, the Authority has exercised an option to purchase the aviation fuel supply franchise in July It will continue to maintain the open access and the transparency of the operations. Challenges and opportunities ahead In planning for growth, we are mindful of the many challenges and keen competition that we face. The opportunities provided by the fast economic growth and development of aviation in the Chinese Mainland will not just fall into our lap. In addition, the impact of the SARS outbreak could not be fully quantified at the time of writing. Whatever that impact, it is still clear that HKIA will continue to consolidate its position as a regional and international hub by building its connections into the Pearl River Delta and working to develop the largest integrated airport system in Asia. 10 KEY GROWTH PROJECTS Arrivals Hall Reconfiguration East Hall Expansion Enhancement of Parking Stands & Concourse Express Cargo Terminal Proposed Logistic Park * Passenger and Cargo Flow Enhancement System SkyPlaza Exhibition Centre Cross Boundary Passenger Ferry Terminal HK/PRD Airport Integration System * Led and managed by the Hong Kong SAR Government ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 33

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36 ENTHUSIASTIC Corporate and Community FRIENDLY >> The dedication of our >> We are committed to high >> A sense of responsibility >> We will continue to staff and the enthusiasm standards of corporate to the wider community develop as a learning and commitment of our governance and strive to underpins our involvement organisation in the years colleagues in Government operate with a sense of public in environmental projects, to come. The Airport departments and partner accountability to many including initiatives for Management Academy which organisations are key to stakeholders, including recycling of waste and we established in early achieving our goals. We are passengers, business partners campaigns to reduce energy 2003 will synchronise our developing our people and and the people of Hong Kong, consumption. An organic corporate culture of learning organisation to achieve as well as to our sole garden project involving and sharing and assist our greater productivity, through shareholder, the Government. local students uses mission to set and share new measures such as pay for composted kitchen waste global standards for airport performance. from the airport. management. ASSERTIVE

37 BUSINESS REVIEW Corporate and Community STAFF NUMBERS IN THE LAST 5 YEARS* No. of staff Operation staff Project staff As at 31 March * Excluding subsidiaries STAFF TURNOVER RATE* percentage (%) Organisational transition Most of the elements in a comprehensive framework for development of the organisation and its people, and for the improvement of overall efficiency and productivity, are now in place and delivering benefits. Significant efficiency gain has been made since the introduction of the Business and Service Unit structure in late Solid results are being achieved through closer coordination between Units in managing the flows of passengers and cargo through the airport. Units and individuals have identified real benefits by aligning goals and by working in partnership to deliver higher performance results. Service and Business Units have agreed upon service pledges that clearly define how each can contribute to achieving common business goals. A newly introduced TQM (Total Quality Management) focus has taken continuing process improvement to a new height. Some 20 members of staff have already taken on the responsibility to act as quality leaders following sessions of process and assessment training. A Quality Council, established in late 2002, has taken on the role of planning and co-ordination of quality programmes. The assessment of requirements for talent and management depth is now an integral part of business planning. A systematic Management Development Review process was undertaken this year to identify top performing and high potential managers and to establish processes for their professional development. The professional growth of these individuals will strengthen the Authority s competitiveness and improve its readiness to take on new business opportunities /01 01/02 02/03 * Excluding subsidiaries The Authority introduced the concept of pay for performance about two years ago. Since then, the fixed and variable elements of staff pay have been radically repositioned. The variable element is now heavily linked to the performance of the overall organisation, the Business or Service Unit and the individual. Both eligibility for promotion and compensation are now assessed by performance against predetermined criteria within the framework of management by objectives. 36 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

38 BUSINESS REVIEW Corporate governance The Authority is committed to high standards of corporate governance and of disclosure and transparency in its dealings with external stakeholders. Whilst the Authority is owned by the Government, it operates with a sense of public accountability to its many stakeholders, including passengers, business partners, the community and many others. Our 2001/02 annual report was again awarded a Diamond Award by the Hong Kong Society of Accountants in its Best Corporate Governance Disclosure Awards, Public Sector/ Not-for-profit category. (This was the top and only award made in this category.) We have continued to refine our procurement procedures so as to become a business partner of choice. This matters particularly to the Authority as a facilitator and catalyst for much of what happens at the airport. We have made it possible for many more businesses to tender for contracts at the airport by extending the global cover of our wrap-up insurance policy to cover them. This also benefits us by widening our potential pool of external contractors. Air Cargo Forum In September 2002, the Authority hosted the largest ever Air Cargo Forum with more than 4,000 delegates (twice the number attending the last Forum) and 250 exhibitors. Organised by The International Air Cargo Association (TIACA), the Forum is the industry s largest trade convention and exhibition. The occasion was an opportunity for delegates to learn about the development of the Pearl River Delta and to understand the key role of HKIA in providing international air links for manufacturers in the Delta and for the Mainland of China as a whole. In February 2003, the Authority s Head of International Marketing was voted in as the first woman, the first Asian and the first airport representative to become president of TIACA. ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 37

39 BUSINESS REVIEW Communications services The communications team has leveraged a number of corporate initiatives to develop greater understanding of the airport s transformation into a service business. Such occasions during the year have included the announcement of Customer Service Excellence Awards and the introduction of Airport Ambassadors. Communications have also focused on new or redesigned facilities which add to the airport experience. HKIA s website was relaunched in October 2002 with a wealth of new information and improved help and search functions. Access to the popular realtime flight information service has been simplified. Virtual tours conduct arriving, departing and transfer passengers through the passenger terminal whilst shoppers can access online purchasing services. Communication within the airport community is also important. An Extranet has been developed for exchange of information between airport partners including emergency contacts and operational statistics. Safety campaigns have been a frequent focus for communication within the airport. This past year, attention has been focused on Ramp, Baggage Hall and Lift & Escalator Safety Campaigns and on a Safety Quiz Competition. Environmental care A community organic garden project launched in February 2003 is the latest in a number of environmental management initiatives led by the Authority. The project uses composted kitchen waste from restaurants in the passenger terminal. It involves primary and secondary school students from nearby Tung Chung in planting and tending a number of vegetable beds fertilised with this waste. Over the year, the composting will consume about 12 large lorry loads of waste that would otherwise be destined for landfill. The garden initiative culminates in a competition in June 2003 when the produce is judged in an inter-school competition. Other initiatives in this area include non-compostable waste recycling programmes and campaigns to reduce energy consumption. Taken together, such projects are helping to increase environmental and community awareness at the airport. 38 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

40 BUSINESS REVIEW Charitable and community Community projects are valuable in giving the wider community a greater sense of affiliation with the airport. More than HK$750,000 of charitable donations were processed during the year through the Donation Box Programme for the Community Chest and other charities. HKIA hosted flag selling by 11 charities during the year. The Authority reached out to the next generation through events for local schools including an environmental programme, Christmas activities and a mid-autumn festival celebration. The King of the Road race was again held on the airport island. Staff welfare Regular symposiums are organised to share information about employee well being. Staff activities are also funded through the very active Staff Club. Sporting events organised by the Club include hiking, dragon boat racing and an annual golf tournament. The Club arranges such activities as wine tasting, family days out and health talks and has developed a number of special interest groups such as the Christian Fellowship. Taken as a whole, these programmes of activities help to enrich the lives of our staff and their families outside the workplace and to increase their sense of belonging in our organisation. A maturing organisation After five years of airport operation, the Authority is now maturing as an organisation. Many systems are now in place and operating effectively to increase the impact of all parts of the whole in creating excellence in all areas of our work. We will continue to develop as a sharing, learning and caring organisation in the years to come, with innovative and proactive staff who are conscious of quality and always striving to set and exceed global standards. We will also continue to build on the strong links that we have built with the wider community of Hong Kong. ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 39

41 Financial Review FINANCIAL RESULTS in HK$ millions 6,000 5,000 4,000 3,000 2,000 1, ,000 98/99* 99/00 00/01 01/02 02/03 * 6 July 1998 to 31 March 1999 Turnover Operating profit before depreciation Profit (loss) attributable to shareholder In the context of a depressed Hong Kong economy and a downturn in the world aviation industry, the Authority delivered a record performance in 2002/03. Our success this year was largely built on the robust growth of the Mainland s economy and the increasing demand for international aviation links from the Pearl River Delta region. The Authority and its 51% owned subsidiary, Aviation Security Company Limited, reported a consolidated operating profit of HK$852 million for the year ending 31 March 2003 compared to HK$659 million last year. Profit attributable to shareholder was HK$502 million which represents an 113% increase over that of last year and the highest since airport opening. This more than double increase reflected our ability to increase our revenue while keeping a tight control on our operating expenses. The reduction in finance costs arising from lower borrowing and lower interest rates during the year contributed significantly to the higher net profit. Taxation for the year amounted to HK$125 million which includes a deferred tax of HK$123 million. The Authority maintained strong cashflows from its operations and this contributed to the reduction of our debt level to HK$7,801 million during the year. Our strong credit rating will ensure that financing is readily available for us to take on new growth initiatives in the years ahead and to ride out the temporary disruption to business caused by the outbreak of SARS in late March Turnover Passenger and air cargo throughput and air traffic movements exceeded last year s records. HKIA handled 34.2 million passengers in 2002/03, an increase of SUMMARY OF FINANCIAL PERFORMANCE in HK$ millions 2002/ /02 %change Turnover 5,417 5, % Operating expenses before depreciation 2,752 2, % Depreciation of fixed assets 1,813 1, % Operating profit % Finance costs % Taxation Profit attributable to shareholder % 40 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

42 FINANCIAL REVIEW 3.3% over the previous year. Air cargo increased by an impressive 20% to 2.55 million tonnes. Air traffic movements grew by 7% to 211,700. All these factors translated to a healthy increase in our turnover of 2.7%. Total turnover amounted to HK$5,417 million (2002: HK$5,274 million). Airport charges and terminal commercial revenue continued to be our key sources of revenue making up 45.2% and 31.9% of turnover, respectively. Airport charges grew by 5.2% to HK$2,446 million (2002: HK$2,325 million). This was fuelled by the increase in Mainland passenger traffic and strong cargo throughput as the Pearl River Delta region continued to experience fast growth. The Authority again decided to extend the 15% discount on landing and parking charges introduced in January 2000 for another year until December The reduction in revenue for the year in this respect was estimated to be HK$300 million, providing relief to airlines affected by the poor conditions in the industry over the last few years. The introduction of a Security Surcharge of HK$13 per passenger in May 2002 brought in extra revenue of HK$156 million for the year. This helped to cover the additional costs of the increased aviation security measures that were required after September 11 by regulatory bodies such as the International Civil Aviation Organisation (ICAO). Terminal commercial revenue recorded a decrease of 9.2% to HK$1,727 million (2002: HK$1,901 million) despite an increase in passenger throughput. The reduction was primarily due to the lower re-tender price in a deflationary environment for franchises which expired during the year. The renovation of the East Hall retail areas and Food Courts also resulted in the temporary closure of some retail shops and food outlets and consequential loss of revenue. The air cargo industry in the region rebounded with double digit growth after September 11. The extensive international flight network offered by HKIA exerts a powerful pull on cargo from the Pearl River Delta region and beyond. Growth in this cargo traffic was very fast as China s external trade grew by nearly 20% in 2002 following admission to the World Trade Organisation. Airside support services revenue registered a healthy increase of 4.2% to HK$727 million (2002: HK$698 million). REVENUE BY SOURCE Year ended 31 March 2003 Total turnover HK$5,417 million Airport charges Security surcharges Airside support services Terminal commercial revenue 45% 3% 13% 32% 3% 3% 1% Aviation security services Real estate revenue Others ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 41

43 FINANCIAL REVIEW OPERATING EXPENSES BY CATEGORIES Year ended 31 March 2003 Total operating expenses HK$4,565 million CAPITAL EXPENDITURE in HK$ millions 1,400 1,200 1, Depreciation Staff costs Repairs and maintenance 99/00 00/01 01/02 02/03 Year ended 31 March 39% 20% 8% 6% 16% 11% Operational contract services Government services Others Operating expenses The Authority continues to exercise stringent financial discipline to control its operating expenses. Total operating expenses for the year amounted to HK$4,565 million (2002: HK$4,615 million) which included a depreciation charge of HK$1,813 million (2002: HK$1,843 million). Operating expenses before depreciation at HK$2,752 million (2002: HK$2,772 million) were 0.7% lower than those of last year. A significant portion of operating expenses relate to depreciation, government services and rates and ground rent over which the Authority has little control. Nevertheless, the Authority is committed to reducing recurrent operating expenses through productivity gains and process improvements and much was achieved during the year in this regard. Significant savings were also achieved in maintenance and repair through the adoption of a new procurement strategy to restructure and renegotiate service contracts, leveraging on the current deflationary environment. Certain maintenance works have also been taken in house to save costs as well as to broaden the skill sets of our staff. Staff costs showed a small increase to HK$903 million (2002: HK$894 million). This is primarily the result of an increase in aviation security staff at AVSECO during the year and the creation of the China Business Unit. Additional staff were also hired to handle certain maintenance works in house. Depreciation decreased to HK$1,813 million (2002: HK$1,843 million) as more IT equipment is already fully depreciated. Balance sheet and capital expenditure The balance sheet of the Authority continued to be well capitalised, funded by shareholder s equity. Total assets increased by HK$76 million to HK$48,934 million. Fixed assets amounting to HK$46,282 million (2002: HK$47,579 million) made up the bulk of the Authority s assets. Capital expenditure for the year amounted to HK$577 million (2002: HK$426 million) of which HK$320 million is related to capital additions for the East Hall expansion. Debtors and prepayments balance decreased by HK$314 million to HK$760 million due primarily to the collection of receivables from retail licensees. The debt Airport project Alterations and improvement works Other operating fixed assets 42 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

44 FINANCIAL REVIEW balance reduced by HK$649 million to HK$7,801 million. Cash flow from operations for this year amounted to HK$2,958 million (2002: HK$2,089 million). A deferred tax liability of HK$125 million (2002: HK$ nil) was provided in the current year to account for timing difference between tax and accounting treatment of items arise on depreciation, deferred income and tax losses. Financing At 31 March 2003, the Authority held cash and deposits amounting to HK$1,689 million largely due to the proceeds of the retail notes issued in late March Facilities totalling HK$11,600 million are available, of which HK$7,801 million had been drawn down and remained outstanding as at 31 March These borrowings, in the form of committed club loan facilities, floating or fixed rate notes, retail bonds and uncommitted money market lines, are primarily used to fund working capital requirements. The Authority is rated AA- and A+ for local and foreign currency respectively by the international credit agency, Standard & Poor s. In October 2002, along with the affirmation of the Authority s rating, the outlook of the local currency rating for the Authority was revised from stable to negative as a result of Standard & Poor s revision of the outlook on Hong Kong. The foreign currency rating outlook is unaffected and remains as stable. Nevertheless, the Authority is one of the few institutions that enjoy the same ratings as the Hong Kong SAR Government and is still amongst the highest rated corporations in Hong Kong. This international credit rating will allow the Authority to borrow competitively overseas for long-term funds, if necessary. In March 2003, the Authority launched its second note issue targeted at retail investors. The issue was well received. Over 4,700 investors submitted applications through eleven placing banks. The Authority received a total of HK$1,800 million applications for the notes, representing 8 times over-subscription. Allocations were accordingly scaled back in line with the final issue size of HK$ 1,200 million. The notes consisted of a HK$304 million 3-year tranche, a HK$139 million 2-year tranche extendable for 2 years at the option LOAN MATURITY PROFILE As at 31 March 2003 Within 2 years Between 3 to 4 years Over 4 years LOAN MATURITY PROFILE As at 31 March 2002 Within 2 years Between 3 to 4 years Over 4 Years 41% 49% 10% 50% 32% 18% ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 43

45 FINANCIAL REVIEW LOAN FACILITIES AND PROGRAMMES As at 31 March % 13% of the Authority, a US$39 million 3-year tranche extendable for 2 years at the option of the Authority and a HK$453 million 7-year tranche and carry coupons at Techniques include, but are not limited to, natural hedge through spreading loans over different rollover and maturity dates. Financial instruments such as interest rate 2.30%, 2.70%, 2.95% and 4.30% swaps and forward rate agreements are also 32% respectively, payable semi-annually. Standard & Poor s assigned an AA- rating used as and when appropriate. to the three tranches of Hong Kong dollar With the substantial borrowings that we notes and an A+ for the US$ notes. have in place, we have adopted measures 29% to fix the rate of interest paid on a proportion Note issue programme Club loan Floating rate notes Retail bonds With the issue of this batch of retail bonds, the Authority further extended the maturity of the debt profile and at the same time locked in a competitive low cost of funding. of the total borrowings. The proportion of fixed rate payment and the instruments used are subject to approval of the Board. Both the US dollar tranche and the 7-year The Authority has minimal currency LOAN FACILITIES AND PROGRAMMES As at 31 March % HK dollar tranche were first of its kind issued by a public corporation in Hong Kong. Positive response by investors showed confidence in the Authority and the exposure because corporate policy requires all major contracts to be in Hong Kong dollars. The few exceptions to this have involved small value contracts or contracts overwhelming reception of the 7-year HK that were hedged at the outset. 29% dollar tranche has demonstrated that the Hong Kong dollar bond market can accommodate long-tenor debt issues. The Airport charges In setting airport charges, we have Authority is pleased to continue playing a complied with the provisions of the Airport role in broadening and deepening the local Authority Ordinance and the international debt capital market. obligations regarding civil aviation that 30% Financial risk management apply to Hong Kong. The Authority s costs and other revenues, and the need to Note issue programme Club loan Floating rate notes The Authority manages its exposure to financial risk on a prudent basis using a variety of techniques and instruments. generate sufficient revenues to cover expenditure and to provide a reasonable return on the total capital employed, have 44 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

46 FINANCIAL REVIEW TRL AIRPORT CHARGES INDEX Average = 41 Hong Kong Osaka Tokyo New Jersey-EWR New York-JFK Athens Moscow Sao Paulo Vienna Washington San Franciso Budapest Chicago Paris-CDG Dallas/Fort Worth Amsterdam Frankfurt Berlin Vancouver Sydney Zurich Miami Lisbon Munich Brussels Seoul Toronto Jeddah Stockholm Dusseldorf Milan-MXP Mexico City Oslo Copenhagen Bangkok London-LHR Orlando Taipei Singapore Helsinki Hong Kong Honolulu Madrid Bombay Rome Johannesburg Kuala Lumpur Dublin Los Angeles London-LGW Dubai Source: Review of Airport Charges 2002 by Transport Research Laboratory ( TRL ) been taken into account. Our aim is to develop a cost-effective operation that enables the airport to be competitive with other major international airports. To provide continuing support to airlines to survive the global economic slowdown and the aftermath of the September 11 incident, the discount in landing and parking charges for all aircraft which came into effect from 1 January 2000 was further extended to 31 December To further expand Hong Kong s air network and strengthen hubbing activities, the Authority introduced a new destination incentive arrangement, effective on 25 March Under this incentive scheme, airlines enjoy a rebate of 50% in the first year and 25% in the following year on landing charges for flights operating between Hong Kong and a new destination, provided that the first flight was launched on or before 24 March Since the scheme was introduced, 17 airlines have launched new routes to serve a total of 23 new destinations. A total of HK$30 million was rebated to airlines in the first year of the arrangement. ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 45

47 FINANCIAL REVIEW Future prospects At the time this report was prepared, the world economy was suffering from the lingering effects of the Iraq war and the World Health Organization (WHO) had just removed its travel advice recommending postponement of all but essential travel to Hong Kong and Guangdong. The SARS outbreak has had a major impact on Hong Kong in general and traffic throughput at HKIA in particular. Major airlines cut flights by about 50% in May 2003 and passenger throughput was down by 80% as travellers refrained from flying to and from Hong Kong and the region. In April 2003, the Authority introduced a relief package offering reductions on various charges to airlines, retailers and franchisees affected by SARS. At the end of May 2003, following the lifting of the WHO travel advice, a major revitalisation package was announced by the Authority to stimulate traffic and bring travellers back to Hong Kong. Financially, the outlook for the rest of 2003 at HKIA is not optimistic and hinges largely on the pace of the recovery following the SARS incident. Putting aside the temporary effect of the Iraq war and SARS, HKIA is expected to continue to benefit from the robust economic growth in the Pearl River Delta region and the rest of China. The Authority is mindful of the challenges and increasing competition from regional airports which are also seeking economic integration with China. However, we remain confident that the ten growth projects as laid down in our Master Plan 2020 will allow us to exploit the competitive edge we are still enjoying. Continuous success at HKIA is predicated on our ability to realise these growth initiatives while maintaining the business basis of safety, security, quality, efficiency and integrity. Much has been accomplished during the year for the ten growth projects and extra revenue generated from some of these growth initiatives will start to come through in late In a time of uncertainties, the Authority believes it is important to maintain tight financial disciplines. The Authority is well aware of the need to have sufficient capacity to meet future demand and growth. However, to manage our finance on a prudent base, we will first of all maximise utilisation of existing facilities and only invest in new facilities essential for future revenue growth. Similarly, we will seek private funding for most of the new growth initiatives and will only allocate internal resources to new initiatives with a convincing business case and an acceptable level of risk. It is our intention to keep operating expenditure for existing activities flat in the next five years through productivity improvements. Looking ahead, apart from the temporary setback caused by SARS, the Authority is confident that shareholder value will continue to increase at a steady pace as we continue to develop our health, growth and people at HKIA. With a good track record of safety, services and earning growth, the Authority is well positioned for privatisation if the Hong Kong SAR Government decides to pursue this option. 46 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

48 Report of the Members of the Board The Members of the Board have pleasure in submitting the Authority s annual report together with the audited financial statements for the year ended 31 March Principal Activities Under the terms of the Airport Authority Ordinance ( the Ordinance ), the Authority is responsible for providing, operating, developing and maintaining Hong Kong s airport situated at Chek Lap Kok, and is engaged in the planning, construction, operation and development of the airport. Pursuant to these responsibilities, the Authority also engages in airport-related activities in trade, commerce or industry at Chek Lap Kok. The Authority is required under the Ordinance to conduct its business according to prudent commercial principles. Pursuant to an Airport Authority (Permitted Airport-related Activities) Order made under section 5(3) of the Ordinance which was enacted on 18 October 2002, the Authority is allowed to engage in or carry out any airport-related activities at any place in or outside Hong Kong subject to conditions as stated. Five-Year Summary A summary of the financial results and the assets and liabilities of the group for the last five financial years is set out on page 80 of the annual report. Share Capital Under the terms of the Ordinance, the Authority may only issue shares to the Hong Kong SAR Government on behalf of which all shares are held by the Financial Secretary Incorporated. No shares were issued during the year. Transfer to Reserves Profit attributable to shareholder of HK$502 million (2002: HK$236 million) has been transferred to reserves. Dividend The Ordinance enables the Authority to declare a dividend and empowers the Financial Secretary, after taking into account the financial position of the Authority and its subsidiary, to direct the Authority to declare a dividend out of the profits of the Authority. The Authority s subsidiary, Aviation Security Company Limited, is engaged in the provision of aviation security services at the airport. Financial Statements The results of the group and the Authority for the year ended 31 March 2003 and the state of the group s and the Authority s affairs as at that date are set out in the financial statements on pages 54 to 79. Fixed Assets Movements in fixed assets during the year are set out in Note 9 on the financial statements. Bank Loans and Other Borrowings Particulars of bank loans and other borrowings of the group and the Authority as at 31 March 2003 are set out in Note 13 on the financial statements. No dividend has been declared or directed for the year ended 31 March (2002: HK$nil) Donations Donations made during the year amounted to HK$220,000. (2002: HK$220,000) Major Customers and Suppliers Less than 45% in value of the group s turnover during the year ended 31 March 2003 was attributable to the group s five largest customers combined by value. Less than 60% in value of supplies (which were not of a capital nature) purchased during the year ended 31 March 2003 was attributable to the group s five largest suppliers. Going Concern The financial statements on pages 54 to 79 have been prepared on a going concern basis. The Board has approved the Authority s budget for 2003/04 and the business plan and financial plan for 2003/04 to 2007/08, and is satisfied that the Authority has sufficient resources to continue as a going concern for the foreseeable future. ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 47

49 REPORT OF THE MEMBERS OF THE BOARD Retirement Schemes Details with regard to the Authority s retirement schemes are set out in Note 11 on the financial statements. The administration of the retirement schemes and the Authority s contributions thereto are reviewed by the Finance and Human Resources Committees, as appropriate, with reference to reports of the investment manager of the schemes and independent actuaries. Corporate Governance The Authority is committed to maintaining high standards of corporate governance. Although not required under the Ordinance, the Authority has complied throughout the years with the disclosure provision of the Hong Kong Companies Ordinance. It has also voluntarily complied, to the extent applicable, with the Code of Best Practice as set out by The Stock Exchange of Hong Kong Limited in Appendix 14 of the Listing Rules. To ensure its business activities are transparent, the Authority has adopted an open communication policy to its key stakeholders. The Authority s 2001/02 annual report was awarded a Diamond Award in the 2002 Best Corporate Governance Disclosure Awards - Public Sector and Not-for-profit Category by the Hong Kong Society of Accountants and an Honourable Mention in the Hong Kong Management Association s Best Annual Report Awards The Authority believes good corporate governance will lead to better corporate performance and is an essential building block for long term sustainable growth. The Authority aims to achieve good corporate governance through institutionalising a comprehensive framework of policies, procedures and guidelines, as well as fostering an ethical and responsible culture at all levels within the organisation. The following describes the fundamental structure by which the Authority is governed: Management Framework The Authority has put in place a framework which aims to maintain an appropriate balance of responsibility between the Board and the executive management. While the Ordinance provides that the affairs of the Authority shall be under the care and management of the Board, the executives are charged with the responsibility of managing and administering the Authority s day-to-day business and operation. To ensure Management can discharge its duties in an effective and efficient manner, the Board has set out certain clear delegated authorities. The Board The Ordinance provides that the Board shall comprise the Chairman (non-executive), Chief Executive Officer (ex-officio) and between eight and fifteen non-executive Members, provided that the number of Members who are public officers shall not exceed the number of Members who are not public officers. The appointment and remuneration of Board Members are determined by the Chief Executive of the Hong Kong SAR Government. In line with good corporate governance practice, the posts of Chairman and Chief Executive Officer are separate. With the management of the day-to-day affairs delegated to the executive management, the Board focuses its attention on high-level issues and decisions such as, inter alia, major corporate strategies and policies, significant investments and capital projects, material acquisitions and disposal of assets, key financial plans, senior executive appointments and human resources related matters, and award of major contracts. The proceedings of the Board adhere to stringent standards which are in accordance with current best practice in Hong Kong with regard to corporate governance. Board meetings are held regularly and as required. During the year under review there were 7 Board meetings and the average attendance rate was 91%. Board meetings are normally also attended by the Executive Directors. Committees of the Board The Board has established certain standing committees to consider matters relating to specialised areas and to advise the Board or, where appropriate, to decide on behalf of the Board on such matters. Meetings of these committees are normally attended by relevant Executive Directors and other senior staff of the Authority. Details of current committees of the Board and their principal terms of reference are as follows: 48 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

50 REPORT OF THE MEMBERS OF THE BOARD Audit Committee is established in accordance with the Ordinance. It meets to consider matters relating to internal and external audit, the annual financial statements and internal control. The Audit Committee may regulate its own procedures and business and consider any matter relating either to the financial affairs of the Authority or to audits. Members of the Committee, all of whom are non-executive, are The Honourable Mrs Selina Chow (Chairman), Dr Liu Jinbao, Mr John Strickland and Dr Peter Wong. The Committee met once during the year under review and dealt with the quarterly internal audit activities reports by circulation. The average attendance rate was 75%. Human Resources Committee meets to consider matters relating to salaries and terms and conditions of service of the Authority s employees and to make recommendations to the Board on such matters. The Committee also considers and advises the Board on other staffing issues including manpower planning, variable compensation and retirement schemes. The Committee is chaired by Miss Maria Tam and its members include Dr Victor Fung, the Chief Executive Officer and the Secretary for Economic Development and Labour. The Committee met 3 times during the year under review and the average attendance rate was above 80%. Business Development Committee is responsible for considering and advising the Board on all commercial and business matters with respect to the development of the airport and its associated lands. In particular, the Committee makes recommendations to the Board and, where appropriate, takes decisions on key business policy issues and on the award of franchises, licences, sub-leases and other commercial contracts. The Committee is chaired by Dr Victor Fung and its members include the Chief Executive Officer, the Secretary for Economic Development and Labour, the Secretary for Financial Services and the Treasury, the Director-General of Civil Aviation and The Honourable Mrs Selina Chow. The Committee met 8 times during the year under review and the average attendance rate was 90%. Finance Committee is responsible for considering and reviewing financial strategies, financial plans, capital and operating budgets, results of operations, proposed borrowings and financial risk management policy, and makes recommendations to the Board on such matters. The Committee is chaired by Mr John Strickland and its members include the Chief Executive Officer, the Secretary for Financial Services and the Treasury, the Director-General of Civil Aviation, Mr Daniel Fung and Dr Liu Jinbao. The Committee met 5 times during the year under review and the average attendance rate was above 75%. Works Committee is responsible for considering works, service and maintenance contracts and matters relating thereto. In particular, the Committee considers the award of tenders, the closing out of contracts and makes recommendations to the Board or, where appropriate, decides on the award of and variations to contracts. The Committee is chaired by Dr Peter Wong and its members include the Chief Executive Officer, the Secretary for Financial Services and the Treasury, The Honourable Mrs Selina Chow, Mr Daniel Fung, Mr John Strickland and Miss Maria Tam. The Committee met 5 times during the year under review and the average attendance rate was above 80%. Executive Management The Chief Executive Officer chairs an Executive Committee which comprises the Finance Director, Commercial Director, Airport Management Director, Legal Director, Human Resources and Administration Director, Chief Information Officer and Chief Communication Officer. The Committee provides the Chief Executive Officer with comments and views from diverse perspectives of the executive management to facilitate him in reaching balanced decisions within the authority delegated to him by the Board or in formulating recommendations to be put forward to the Board for consideration. The Executive Committee meets on a weekly basis. ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 49

51 REPORT OF THE MEMBERS OF THE BOARD Internal Control The Board is responsible for ensuring that the Authority has satisfactory systems of internal control. The Authority s internal controls have been designed to give reasonable assurance that the Authority s assets have been safeguarded, that maximum value for money is obtained from its expenditure and that its financial reporting is accurate, timely and complete. These controls include: Delegation of authority All decisions with regard to strategy and policy and all contractual commitments in excess of prescribed financial limits are made by the Board. The power to implement and administer existing contractual arrangements has been delegated to the Chief Executive Officer. The relevant Board committees and the Chief Executive Officer are delegated by the Board with respective levels of authorities which permit the efficient and effective execution of the Authority s business. The levels of delegated authorities are reviewed from time to time by the Board to ensure their adequacy. Budgetary discipline and reporting Budgets are prepared annually and are subject to the approval of the Board prior to being adopted. There are defined procedures for the appraisal, review and approval of major capital and recurrent expenditure. Proposed significant expenditure outside the scope or estimate of approved budgets is referred to the Board or the relevant Board committee for decision. Results of operations against budgets are reported regularly to the Board and the Finance Committee. The Authority has a long range planning horizon of 20 years and a review of operating revenues and expenditure is conducted annually. Each year the Authority submits a rolling five-year business plan and financial plan to the Financial Secretary. Disclosure of interest The Authority has in place a clear and comprehensive framework for disclosure of interest. Members of the Board and senior management staff are required to make a general declaration every year. A procedure is also in place requiring all staff to disclose any interest of theirs as occasions may require. Parties with perceived potential conflict of interest will normally be relieved from the relevant decision making process. A register of declarations of interest is maintained by the Corporate Secretary. Quality of staff The effectiveness of internal control relies, inter alia, upon the integrity and performance of staff. Maintaining an ethical work environment is a commitment of the Authority. In pursuance of that, a series of programmes have been organised throughout the year with a view to fostering an ethical culture at all levels within the organisation. The Authority also has in place a Performance Management System and a Management Development Review scheme which ensure that staff possess the right competencies and skills to assume the responsibilities of the posts. The Audit Committee and Internal Audit The Audit Committee receives reports from both the internal and external auditors and considers any control issues arising therefrom. The work of Internal Audit is directed, inter alia, to monitoring compliance with internal control procedures focusing on those areas of the Authority s activities with the greatest perceived risk. The annual internal audit programme is reviewed and endorsed by the Audit Committee. Code of conduct To promote a high ethical standard on the conduct of its business, the Authority has adopted a Code of Conduct to be observed by all its employees. The Code provides broad guidelines to help staff members make ethical decisions in the course of discharging their duties and to inform them of their legal and ethical obligations to the Authority, its stakeholders, customers, contractors, suppliers and associates. All employees are reminded at least once a year of their responsibility under the Code. 50 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

52 REPORT OF THE MEMBERS OF THE BOARD Employees As of 31 March 2003, the Authority, excluding its subsidiaries, has a staff force of 969 (2002: 941) which are all based in Hong Kong. The Authority has developed human resources policies that ensure that the pay level of its employees are competitive and are rewarded according to their performance within the framework of the Authority s salary and performance awards system. To further strengthen the underlying principle of pay-for-performance, a Variable Compensation Scheme, which is being implemented by phases, has been introduced in the year under review. The Scheme will be fully implemented by Members of the Board and Executive Directors Members of the Board and Executive Directors at the date of this report are set out on pages 12 to 13. Dr Dickson Poon and Mr Patrick Tsai retired from the Board on 31 May Dr Liu Jinbao retired from the Board on 28 May With the implementation of the Accountability System on 1 July 2002, the Secretary for Economic Development and Labour and the Secretary for Financial Services and the Treasury have been appointed by the Chief Executive of the Hong Kong SAR Government to replace the former Secretary for Economic Services and the former Secretary for the Treasury respectively. The following alternate members have been appointed by the Chief Executive of the Hong Kong SAR Government for the period 15 July 2002 to 31 May 2005: The Permanent Secretary for Economic Development and Labour (Economic Development) and Deputy Secretary for Economic Development and Labour (Economic Development) as alternates for the Secretary for Economic Development and Labour; The Permanent Secretary for Financial Services and the Treasury (Treasury) and Deputy Secretary for Financial Services and the Treasury (Treasury) as alternates for the Secretary for Financial Services and the Treasury; and The Deputy Director-General of Civil Aviation as alternate for the Director-General of Civil Aviation. Mr Willie Chan was appointed Human Resources and Administration Director on 21 October Interest in Contracts of Members of the Board and the Executive Directors No contracts of significance to which the Authority was a party and in which a Member of the Board or an Executive Director had a material interest subsisted at the end of the year or at any time during the year. At no time during the year was the Authority a party to any arrangements to enable any Member of the Board or Executive Director to acquire benefits by means of acquisition of shares of the Authority or of any body corporate. Connected Transactions Details of connected transactions entered into or were ongoing during the year are set out in Note 19 on the financial statements. Auditors In accordance with Section 32 of the Airport Authority Ordinance, the Chief Executive of the Hong Kong SAR Government approved the appointment of KPMG as auditors and they remain in office. By order of the Board Mrs Ivy Chan Poon Yuen-man Secretary to the Board Hong Kong, 30 May 2003 ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 51

53 Auditors Report TO THE AIRPORT AUTHORITY (INCORPORATED IN HONG KONG UNDER THE AIRPORT AUTHORITY ORDINANCE) We have audited the financial statements on pages 54 to 79 which have been prepared in accordance with accounting principles generally accepted in Hong Kong and so as to comply with the disclosure requirements of the Hong Kong Companies Ordinance. Respective responsibilities of the Members of the Board of the Airport Authority and auditors The Airport Authority Ordinance requires the Airport Authority to prepare financial statements and the Members of the Board are responsible for the preparation of financial statements which give a true and fair view. In preparing financial statements which give a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently, that judgements and estimates are made which are prudent and reasonable and that the reasons for any significant departure from applicable accounting standards are stated. It is our responsibility to form an independent opinion, based on our audit, on those financial statements and to report our opinion to you. Basis of opinion We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Society of Accountants. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the Members of the Board in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group s and the Airport Authority s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion. Opinion In our opinion, the financial statements give a true and fair view of the state of affairs of the Airport Authority and of the group as at 31 March 2003 and of their profit and the group s cash flows for the year then ended and have been properly prepared in accordance with accounting principles generally accepted in Hong Kong and so as to comply with the disclosure requirements of the Hong Kong Companies Ordinance. KPMG Certified Public Accountants Hong Kong, 30 May >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

54 Financial Statements Contents 54 Income Statement 55 Balance Sheet 56 Statement of Changes in Equity 57 Consolidated Cash Flow Statement 58 Notes on the Financial Statements 58 Establishment of the Authority 58 Principal Activities of the Authority 58 Significant Accounting Policies 64 Operating Profit before Interest and Finance Charges 64 Members of the Board and Executive Directors Remuneration 66 Staff Costs and Related Expenses 66 Finance Costs 67 Taxation 68 Fixed Assets 71 Interests in Subsidiaries 71 Employee Retirement Benefits 73 Debtors and Prepayments 74 Bank Loans and Notes Payable 76 Creditors and Accrued Charges 76 Deferred Income 76 Share Capital 77 Reserves 77 Outstanding Commitments 78 Material Related Party Transactions ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 53

55 Income Statement For the year ended 31 March 2003 (Expressed in Hong Kong dollars) The group The Authority Note $ million $ million $ million $ million Airport charges 2,446 2,325 2,446 2,325 Security surcharges Airside support services franchises Terminal commercial revenue 1,727 1,901 1,727 1,902 Aviation security services Real estate revenue Other income Turnover 5,417 5,274 5,267 5,127 Staff costs and related expenses 6 (903) (894) (507) (503) Repairs and maintenance (364) (395) (364) (394) Operational contracted services (266) (285) (546) (568) Government services 19 (715) (716) (715) (716) Other operating expenses (504) (482) (487) (464) Operating expenses before depreciation (2,752) (2,772) (2,619) (2,645) Operating profit before depreciation 2,665 2,502 2,648 2,482 Depreciation of fixed assets 9 (1,813) (1,843) (1,805) (1,835) Operating profit before interest and finance charges Interest and finance charges: Finance costs 7 (233) (428) (233) (428) Interest income (221) (416) (222) (417) Profit from ordinary activities before taxation Taxation 8 (125) (2) (123) Profit from ordinary activities after taxation Minority interests (4) (5) Profit attributable to shareholder The notes on pages 58 to 79 form part of these financial statements 54 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

56 Balance Sheet At 31 March 2003 (Expressed in Hong Kong dollars) The group The Authority Note $ million $ million $ million $ million Non-current assets Fixed assets 9 46,282 47,579 46,273 47,567 Interests in subsidiaries Defined benefit asset ,360 47,579 46,356 47,572 Current assets Stores and spares Debtors and prepayments , ,046 Cash and cash equivalents 1, , ,574 1,279 2,488 1,203 Current liabilities Bank loans and notes payable 13 (2,750) (1,500) (2,750) (1,500) Creditors and accrued charges 14 (1,141) (1,174) (1,099) (1,134) Deferred income 15 (83) (80) (83) (80) Tax payable 8 (2) (3,974) (2,756) (3,932) (2,714) Net current liabilities (1,400) (1,477) (1,444) (1,511) Total assets less current liabilities 44,960 46,102 44,912 46,061 Non-current liabilities Bank loans and notes payable 13 (5,051) (6,950) (5,051) (6,950) Creditors and accrued charges 14 (119) (63) (119) (62) Deferred income 15 (2,663) (2,668) (2,663) (2,668) Deferred taxation 8(c) (123) (123) (7,956) (9,681) (7,956) (9,680) Minority interests (26) (22) Net assets 36,978 36,399 36,956 36,381 Capital and reserves Share capital 16 36,648 36,648 36,648 36,648 Reserves (249) 308 (267) 36,978 36,399 36,956 36,381 Approved and authorised for issue on behalf of the Members of the Board on 30 May 2003 Dr Victor Fung Kwok-king Dr David J Pang Mr Raymond W C Lai Chairman Chief Executive Officer Finance Director The notes on pages 58 to 79 form part of these financial statements. ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 55

57 Statement of Changes in Equity For the year ended 31 March 2003 (Expressed in Hong Kong dollars) The group The Authority Note $ million $ million $ million $ million Shareholder s equity at 1 April As previously reported 36,399 36,163 36,381 36,151 Prior period adjustment from change in accounting policy for employee retirement benefits 3(m) As restated 36,476 36,163 36,458 36,151 Profit for the year Shareholder s equity at 31 March 36,978 36,399 36,956 36,381 The notes on pages 58 to 79 form part of these financial statements. 56 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

58 Consolidated Cash Flow Statement For the year ended 31 March 2003 (Expressed in Hong Kong dollars) $ million $ million Operating activities Profit from ordinary activities before taxation Adjustments for: Depreciation 1,813 1,843 Interest payable on bank loans Interest on notes issued Other borrowing costs Interest income (12) (12) Loss on disposal of fixed assets Amortisation of deferred income (87) (80) Operating profit before changes in working capital 2,637 2,454 Decrease in stores and spares 1 21 Decrease/(increase) in debtors and prepayments 252 (281) Increase/(decrease) in creditors and accrued charges 72 (103) Cash generated from operations 2,962 2,091 Hong Kong profits tax paid (4) (2) Net cash from operating activities 2,958 2,089 Investing activities Interest received Net proceeds on lease out lease back 90 Net payment in respect of fixed assets (525) (2,521) Receipts from disposal of fixed assets 2 1 Net cash outflow from investing activities (421) (2,507) Financing activities Interest paid on bank loans (38) (70) Interest paid on notes issued (196) (348) Other borrowing costs paid (21) (11) Proceeds from issue of notes 2,278 1,000 Drawdown of loans 3,750 Repayment of loans (1,450) (3,375) Repayment of notes (1,500) (500) Net cash (outflow)/inflow from financing activities (927) 446 Net increase in cash and cash equivalents 1, Cash and cash equivalents at 1 April Cash and cash equivalents at 31 March 1, ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 57

59 Notes on the Financial Statements (Expressed in Hong Kong dollars) 1 Establishment of the Authority The Airport Authority ( Authority ) is a statutory corporation wholly owned by the Government of the Hong Kong Special Administration Region ( the Government ). It was formally established on 1 December 1995 when the Airport Authority Ordinance ( the Ordinance ) was brought into effect as a continuation of the Provisional Airport Authority which had itself been set up in The Ordinance was amended in October The Authority s statutory purpose is to provide, operate, develop and maintain Hong Kong s airport at Chek Lap Kok, in order to maintain Hong Kong s status as a centre of international and regional aviation. Pursuant to these responsibilities, the Authority may also engage in airport-related activities in trade, commerce or industry at Chek Lap Kok and, subject to conditions stated under section 5(3) of the Ordinance, is allowed to engage in or carry out any airport-related activities at any place in or outside Hong Kong. The Authority is required under the Ordinance to conduct its business according to commercial principles. 2 Principal Activities of the Authority Under the Land Grant signed on 1 December 1995, the Government has granted to the Authority up to the year 2047 the legal rights to the entire airport site at Chek Lap Kok together with the rights necessary to develop such site for the purposes of its business. Since the opening of the airport at Chek Lap Kok on 6 July 1998, the Authority s principal activities have been the management, operation, planning and development of the Hong Kong International Airport at Chek Lap Kok. It also engages in airport-related commercial and industrial activities at Chek Lap Kok. 3 Significant Accounting Policies The Authority s subsidiary, Aviation Security Company Limited, is engaged in the provision of aviation security services at the airport. (a) Statement of compliance The financial statements have been prepared in accordance with all applicable Statements of Standard Accounting Practice and Interpretations issued by the Hong Kong Society of Accountants ( HKSA ) and accounting principles generally accepted in Hong Kong, so as to comply with the disclosure provisions of the Hong Kong Companies Ordinance. A summary of the significant accounting policies adopted is set out below. In the current year, the group adopted the following Statements of Standard Accounting Practice ( SSAPs ) issued by the HKSA which are effective for accounting periods commencing on or after 1 January 2002: SSAP 1 (revised) : Presentation of Financial Statements SSAP 15 (revised) : Cash Flow Statements SSAP 34 : Employee Benefits The effect of adopting these revised standards is set out in the accounting policies detailed below. 58 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

60 NOTES ON THE FINANCIAL STATEMENTS 3 Significant Accounting Policies (continued) (b) Basis of preparation The measurement basis used in the preparation of the financial statements is historical cost. The group s financial statements include the financial statements of the Authority and its subsidiaries made up to the balance sheet date. All material intercompany transactions and balances are eliminated on consolidation. (c) Fixed assets (i) Fixed assets are stated at cost less accumulated depreciation and impairment losses (note 3(e)). (ii) Subsequent expenditure relating to a fixed asset that has already been recognised is added to the carrying amount of the asset when it is probable that future economic benefits, in excess of the originally assessed standard of performance of the existing asset, will flow to the group. Repairs and maintenance expenditure to restore or maintain the originally assessed standard of performance of fixed assets is charged to the income statement as and when incurred. (iii) Gains or losses arising from the retirement or disposal of a fixed asset are determined as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised as income or expense in the income statement on the date of retirement or disposal. (iv) Leases of assets under which the group assumes substantially all the risks and benefits of ownership are classified as finance leases and treated as if the group owned the assets outright. Leases of assets under which the group has not transferred all the risk and benefits of ownership are classified as operating leases. When the group leases out assets under operating leases, the assets are included in the balance sheet according to their nature and, where applicable, are depreciated in accordance with the group s depreciation policies set out in note 3(d) below. Revenue arising from operating leases is recognised in accordance with the group s revenue recognition policies set out in note 3(g) below. ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 59

61 NOTES ON THE FINANCIAL STATEMENTS 3 Significant Accounting Policies (continued) (d) Depreciation Fixed assets are depreciated on a straight line basis so as to write off the cost of the assets over the following estimated useful lives: Leasehold land Airfields: Runways, taxiways, aprons and tunnels Lighting and other airfield facilities Terminal complexes: Building structure Building services and fit-outs Access, utilities, other buildings and support facilities: Roads and bridges Other building and support facilities Utility supply equipment Systems, installations, plant and equipment Furniture, fixtures and equipment 100 years 75 years years years 25 years 75 years 50 years 25 years 5 20 years 5 10 years The above useful lives assume that the Land Grant referred to in note 9(c) on the financial statements will be renewed upon its expiry on 30 June (e) Impairment of assets The carrying amount of fixed assets is reviewed annually in order to determine whether there is any indication of impairment. If any such indication exists, the recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount exceeds the recoverable amount. Impairment losses are recognised as an expense in the income statement. The recoverable amount of an asset is the greater of its net selling price and value in use. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. A reversal of impairment loss is limited to the assets carrying amount that would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to the income statement in the year in which the reversals are recognised. (f) Interests in subsidiaries A subsidiary is a company in which the Authority, directly or indirectly, holds more than half of the issued share capital, or controls more than half of the voting power, or controls the composition of the board of directors. Interests in subsidiaries in the Authority s balance sheet is stated at cost less any impairment loss. 60 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

62 NOTES ON THE FINANCIAL STATEMENTS 3 Significant Accounting Policies (continued) (g) Revenue recognition Provided it is probable that the economic benefits will flow to the group and the revenue and costs, if applicable, can be measured reliably, revenue is recognised in the income statement as follows: (i) Airport charges, representing landing charges, parking charges and terminal building charges are recognised when the airport facilities are utilised. (ii) Security surcharges in respect of aviation security services to passengers are recognised when the airport facilities are utilised. (iii) Franchise income from awarded airside support services and terminal commercial revenues including retail income from awarded retail licences, terminal office rental from leasing of check-in counters and airline offices, and other service income and recoveries, are recognised on an accruals basis in accordance with the related agreements. (iv) Real estate revenue arising from sub-leases of land or property on the airport site is recognised in the income statement on a straight-line basis over the periods of the leases. Amounts received in advance from developers in respect of sub-leases of land granted for airport related development are accounted for as deferred income and are recognised in the income statement on a straight line basis over the periods of the respective sub-leases. (v) Aviation security services revenue from the provision of security services to airlines, franchisees and licensees is recognised when the services are rendered. (vi) Interest income is recognised on a time-apportioned basis on the principal outstanding and at the rate applicable. (h) Defeasance of long-term lease payments Where commitments to make long-term lease payments have been defeased by the placement of security deposits, those commitments and deposits (and income and charges arising therefrom) have been netted off, in order to reflect the overall commercial substance of the arrangement. Such netting-off has been effected where the group has the ability to insist on net settlement of the commitments and the deposits. (i) Stores and spares Stores and spares are stated at lower of cost, computed on a weighted average basis, and net realisable value. When stores and spares are consumed, the carrying amount of these stores and spares is recognised as an expense in the year in which the consumption occurs. Any obsolete stores and spares are written off to the income statement. ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 61

63 NOTES ON THE FINANCIAL STATEMENTS 3 Significant Accounting Policies (continued) (j) Borrowing costs Borrowing costs are expensed in the income statement in the period in which they are incurred except to the extent that they are capitalised as being directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for its intended use. Borrowing costs include interest and finance charges on borrowing, amortisation of discounts net of premiums relating to borrowing and differences in amounts paid and received on interest rate swap agreements entered into for hedging purposes. (k) Translation of foreign currencies Foreign currency transactions during the year are translated into Hong Kong dollars at the exchange rates ruling at the transaction dates. Monetary assets and liabilities in foreign currencies are translated into Hong Kong dollars at the market rates of exchange ruling at the balance sheet date. Exchange gains and losses are dealt with in the income statement. (l) Provisions and contingent liabilities Provisions are recognised for liabilities of uncertain timing or amount when there is a legal or constructive obligation arising as result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligations and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation. Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. (m) Employee benefits The group has adopted SSAP 34 issued by the HKSA which became effective during 2002 to account for its employee benefits as follows: (i) Salaries, performance awards, paid annual leave and the cost to the group of nonmonetary benefits are accrued in the year in which the associated services are rendered by employees of the group. (ii) Contributions to defined contribution schemes, such as Mandatory Provident Funds as required under the Hong Kong Mandatory Provident Fund Schemes Ordinance, are recognised as an expense in the income statement as incurred. 62 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

64 NOTES ON THE FINANCIAL STATEMENTS 3 Significant Accounting Policies (continued) (m) Employee benefits (continued) (iii) The group s net obligation in respect of defined benefit retirement plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine the present value, and the fair value of any plan assets is deducted. The discount rate is the yield at the balance sheet date on high quality corporate bonds that have maturity dates approximating the terms of the group s obligations. If there is no deep market in such bonds, the market yield in government bonds would be used. The calculation is performed by a qualified actuary using the projected unit credit method. When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognised as an expense in the income statement on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognised immediately in the income statement. In calculating the group s obligation in respect of a plan, to the extent that any cumulative unrecognised actuarial gain or loss exceeds ten percent of the greater of the present value of the defined benefit obligation and the fair value of plan assets, that portion is recognised in the income statement over the expected average remaining working lives of the employees participating in the plan. Otherwise, the actuarial gain or loss is not recognised. Where the calculation of the group s net obligation results in a negative amount, the asset recognised is limited to the net total of any cumulative unrecognised net actuarial losses and past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan. As a result of the first time adoption of SSAP 34 and the transitional provisions prescribed therein, the Authority has a transitional defined benefit asset of $77 million. This amount is accounted for in the balance sheet as defined benefit asset and an adjustment to the opening reserves balance has been made (note 11). (n) Deferred taxation Deferred taxation is calculated under the liability method in respect of the taxation effect arising from all material timing differences which are expected with reasonable probability to crystallise in the foreseeable future. Future deferred tax benefits are not recognised unless their realisation is assured beyond reasonable doubt. ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 63

65 NOTES ON THE FINANCIAL STATEMENTS 3 Significant Accounting Policies (continued) (o) Related parties For the purposes of these financial statements, parties are considered to be related to the group if the group has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the group and the party are subject to common control or common significant influence. Related parties may be individuals or entities. 4 Operating Profit before Interest and Finance Charges (p) Cash equivalents Cash equivalents are short-term, highly liquid investments which are readily convertible into known amounts of cash without notice and which were within three months of maturity when acquired. For the purposes of the cash flow statement, cash equivalents also includes overdrafts and advances from banks which are repayable on demand and form an integral part of the group s cash management. Operating profit before interest and finance charges of the group and the Authority are after charging: The group The Authority $ million $ million $ million $ million Auditors remuneration Stores and spares expensed Loss on disposal of fixed assets Members of the Board and Executive Directors Remuneration (a) Remuneration of Members of the Board and Executive Directors $ million $ million Fees paid to non-executive Members of the Board 1 1 Remuneration of Chief Executive Officer and Executive Directors base salaries, allowances and other benefits in kind performance-related compensation 1 1 retirement scheme contributions 1 1 gratuities in lieu of retirement scheme contributions The fees disclosed include those payable in respect of Members who are public officers which are paid directly to the Government rather than to the individual concerned. 64 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

66 NOTES ON THE FINANCIAL STATEMENTS 5 Members of the Board and Executive Directors Remuneration (continued) (a) Remuneration of Members of the Board and Executive Directors (continued) For purposes of meaningful comparison, gratuities in lieu of retirement scheme contributions are disclosed on an accruals basis, notwithstanding the contractual entitlement and date of payment. Shown below is the number of Members of the Board and Executive Directors, which includes the five highest paid employees, whose remuneration falls within the bands stated: Number Number $0 $250, $250,001 $1,000,000 2 $1,000,001 $1,500,000 1 $1,500,001 $2,000,000 1 $2,500,001 $3,000, $3,000,001 $3,500,000 1 $3,500,001 $4,000, $5,500,001 $6,000,000 1 $6,500,001 $7,000, Remuneration paid to non-executive Members of the Board is included in the first remuneration band. The remuneration details of Chief Executive Officer and Executive Directors for the year are shown below: Base salaries, Retirement allowances Performance- contributions/ and benefits related gratuities 2003 in kind compensation in lieu Total $ million $ million $ million $ million Chief Executive Officer Commercial Director Finance Director Airport Management Director Legal Director Human Resources and Administration Director* * Appointed in October ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 65

67 NOTES ON THE FINANCIAL STATEMENTS 5 Members of the Board and Executive Directors Remuneration (continued) (b) Details of loan to Executive Director are as follows: Maximum amount Balance at Balance at outstanding Type of 31 March 31 March during loan the year $ 000 $ 000 $ 000 Mr Hans Bakker Relocation Staff Costs and Related Expenses Finance Costs The relocation loan was unsecured, interest free and repayable by 24 equal monthly instalments. The group The Authority $ million $ million $ million $ million Costs for defined contribution plan Costs for defined benefit plan (note 11(a)) Retirement costs Salaries, wages and other benefits The group The Authority $ million $ million $ million $ million Interest on bank loans repayable within five years (35) (71) (35) (71) Interest on notes issued (177) (346) (177) (346) Other borrowing costs (21) (11) (21) (11) (233) (428) (233) (428) 66 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

68 NOTES ON THE FINANCIAL STATEMENTS 8 Taxation (a) Taxation in the income statement represents: The group The Authority $ million $ million $ million $ million Provision for Hong Kong profits tax for the year 2 2 Deferred taxation (note 8(c)) (b) Taxation in the balance sheets represents: The group The Authority $ million $ million $ million $ million Provision for Hong Kong profits tax for the year 2 2 Provisional profits tax paid (2) 2 No provision for Hong Kong profits tax has been made in the financial statements in respect of the Authority as the Authority s assessable profit for the year was offset by losses brought forward. Provision for Hong Kong profits tax is in respect of a subsidiary calculated at 16% of its estimated assessable profits. (c) Deferred tax Major components of deferred tax of the Authority and the group are set out below: 2003 $ million Depreciation allowances in excess of related depreciation 2,796 Deferred income (463) Estimated tax losses (2,210) Net deferred tax liability 123 There is no significant deferred taxation not provided for at the balance sheet date (2002: unprovided deferred tax asset of $4 million). ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 67

69 NOTES ON THE FINANCIAL STATEMENTS 9 Fixed Assets (a) The group Access, Utilities, Other Systems, Buildings Installations, Furniture, Leasehold Terminal & Support Plant & Fixtures & Land Airfields Complexes Facilities Equipment Equipment Total $ million $ million $ million $ million $ million $ million $ million Cost At 1 April ,571 6,686 20,069 8,454 6,745 1,060 54,585 Additions Disposals (33) (32) (45) (14) (124) At 31 March ,571 6,700 20,334 8,454 6,914 1,065 55,038 Depreciation At 1 April ,858 1,238 2, ,006 Charge for the year ,813 Written back on disposal (6) (3) (42) (12) (63) At 31 March ,389 1,442 3, ,756 Net Book Value At 31 March ,955 6,187 17,945 7,012 3, ,282 At 31 March ,071 6,293 18,211 7,216 4, , >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

70 NOTES ON THE FINANCIAL STATEMENTS 9 Fixed Assets (continued) (b) The Authority Access, Utilities, Other Systems, Buildings Installations, Furniture, Leasehold Terminal & Support Plant & Fixtures & Land Airfields Complexes Facilities Equipment Equipment Total $ million $ million $ million $ million $ million $ million $ million Cost At 1 April ,571 6,686 20,069 8,447 6,732 1,048 54,553 Additions Disposals (33) (32) (40) (12) (117) At 31 March ,571 6,700 20,334 8,447 6,902 1,053 55,007 Depreciation At 1 April ,858 1,232 2, ,986 Charge for the year ,805 Written back on disposal (6) (3) (38) (10) (57) At 31 March ,389 1,436 3, ,734 Net Book Value At 31 March ,955 6,187 17,945 7,011 3, ,273 At 31 March ,071 6,293 18,211 7,215 4, ,567 (c) On 1 December 1995, the Authority was granted legal rights to the entire airport site at Chek Lap Kok for a nominal land premium and nominal annual rent under a Private Treaty Land Grant issued by the Government for the period from 1 December 1995 to 30 June It is assumed that the Land Grant will be renewed and that the operation of the airport will continue after (d) The cost less accumulated depreciation of the fixed assets held for use under operating leases at 31 March 2003 was $4,471 million (2002: $4,003 million) and depreciation for the year amounted to $120 million (2002: $102 million). ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 69

71 NOTES ON THE FINANCIAL STATEMENTS 9 Fixed Assets (continued) (e) The Authority leases out part of its terminal complexes under operating leases for periods ranging from two to five years. Generally, lease payments may be varied periodically to reflect prevailing market indices and passenger flow and contain fixed and contingent rental elements. The Authority has granted sub-leases of part of its land for airport related development. Generally, these are for periods ranging from 20 to 49 years and payments are made lump sum in advance. The Authority has entered into franchise agreements for the provision of airside support services. Generally, these are for periods ranging from five to 20 years. Under these agreements, the franchisees are granted sub-leases of land for the periods of the respective franchises. Lease payments contain fixed and variable elements. During the year $2,617 million (2002: $2,766 million), including contingent rentals of $485 million (2002: $436 million), was recognised as income in the income statement in respect of operating leases. (f) The Authority s total future minimum lease payments under non-cancellable operating leases are receivable as follows: $ million $ million Within one year 907 1,797 After one but within five years 2,338 2,157 After five years 3,681 3,549 6,926 7,503 (g) The Authority has entered into a lease out - lease back agreement for its baggage handling system and related security screening equipment with a total cost of $1,316 million (2002: $1,341 million) and net book value of $890 million (2002: $990 million). Since the Authority retains title to these assets and no restrictions are placed on its ability to utilise them, no adjustment is made to fixed assets. Under this lease arrangement, the Authority has received cash of $1,229 million and has committed to make long-term lease payments with a total estimated net present value of $1,120 million which are defeased by payments of deposits totalling $1,120 million. The net cash amount, less related transaction expenses, of $90 million in respect of this transaction has been recorded as deferred income, and is being amortised over the lease term. 70 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

72 NOTES ON THE FINANCIAL STATEMENTS 10 Interests in Subsidiaries $ million $ million Unlisted shares, at cost 5 5 Details of principal subsidiary are as follows: Place of Particulars of incorporation issued and paid Percentage of Name of company and operation up capital shareholding Principal activity Aviation Security Hong Kong 10,000,000 51% Provision of aviation Company Limited shares of security services ( AVSECO ) $1 each 11 Employee Retirement Benefits On 17 February 1998, the Authority signed a Financing Agreement with AVSECO under which the Authority agreed to provide a term facility of $50 million and a revolving credit facility of $80 million to AVSECO. These facilities expire in June 2006 and were not utilised at the balance sheet date. (a) Defined benefit retirement schemes The Authority makes contributions to a defined benefit retirement scheme which cover 20% of the group s employees. The scheme is administered by independent trustees with its assets held separately from those of the group. The scheme is funded by contributions from the group in accordance with an independent actuary s recommendation based on actuarial valuations. The latest independent actuarial valuation of the scheme was at 31 March 2003 and was prepared by qualified staff of Watson Wyatt (Hong Kong) Limited using the projected unit credit method. The actuarial valuation indicates that the group s obligations under this defined benefit retirement scheme are fully covered by the plan assets held by the trustees. (i) The amounts recognised in the Authority and group balance sheet are as follows: 2003 $ million Present value of wholly funded obligations (206) Fair value of plan assets 262 Net unrecognised actuarial loss 22 Net asset 78 ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 71

73 NOTES ON THE FINANCIAL STATEMENTS 11 Employee Retirement Benefits (continued) (a) Defined benefit retirement schemes (continued) A portion of the above asset is expected to be settled after more than one year. However, it is not practicable to segregate this amount from the amounts recoverable in the next twelve months, as future contributions will also relate to future services rendered and future changes in actuarial assumptions and market conditions. (ii) Movements in the net asset recognised in the Authority and group balance sheet are as follows: $ million At 1 April Contributions paid to scheme 32 Expense recognised in the income statement (31) At 31 March (iii) Expense recognised in the Authority and group income statement is as follows: 2003 $ million Current service cost 36 Interest cost 11 Expected return on plan assets (16) 31 The expense is recognised in the staff costs and related expenses in the income statement. The actual loss on plan assets is $10 million. (iv) The principal actuarial assumptions used (expressed as weighted averages) are as follows: Discount rate 5.5% 6.5% Expected rate of return on plan assets 6.0% 6.0% Future long term salary increases 4.0% 5.0% 72 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

74 NOTES ON THE FINANCIAL STATEMENTS Employee Retirement Benefits (continued) Debtors and Prepayments (b) Defined contribution retirement plan The group also operates Mandatory Provident Fund Schemes ( MPF ) under the Hong Kong Mandatory Provident Fund Schemes Ordinance for employees employed under the jurisdiction of the Hong Kong Employment Ordinance and not previously covered by the defined benefit retirement scheme. The MPF schemes are defined contribution retirement schemes administered by independent trustees. Under the MPF schemes, its employers are required to make contribution to the schemes at 5% of the employees relevant income, subject to a cap of monthly relevant income of $20,000. Contributions to the schemes by the group ranging from 5% to 15% of employees relevant income are charged to the income statement. The group The Authority $ million $ million $ million $ million Trade debtors Amounts recoverable Prepayments and other debtors Deposits and debentures , ,046 Amounts recoverable relate to entrustment works and recoveries of construction supervision, support and other costs from contractors, franchisees, licensees, Government (note 19) and MTR Corporation (note 19) in connection with the construction of the airport. Prepayments and other debtors included $15 million expected to be recovered after one year. ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 73

75 NOTES ON THE FINANCIAL STATEMENTS 13 Bank Loans and Notes Payable The group and the Authority $ million $ million (a) Bank loans Unsecured and repayable: after one year but not exceeding five years 1,000 2,450 1,000 2,450 (b) Notes payable Unsecured and repayable: within one year 2,750 1,500 after one year but not exceeding five years 1,750 4,500 4,500 6,000 (c) Retail notes payable Unsecured and repayable: after one year but not exceeding five years 1,848 after five years 453 2,301 Classified in the balance sheet as: Current liabilities 2,750 1,500 Long term liabilities 5,051 6,950 7,801 8,450 In August 2001, the Authority signed a credit agreement with certain banks for a $3,000 million unsecured club credit facility. The facility consists of a 3-year revolving credit tranche, a 3-year and a 5-year term credit tranche of $1,000 million each. This facility is for general corporate purposes and interest is payable on amounts drawn down at a rate relating to Hong Kong Interbank Offered Rate ( HIBOR ). The amount drawn down on this facility at 31 March 2003 was $1,000 million (2002: $2,450 million). The $1,000 million 3-year term tranche was voluntarily repaid and cancelled during the year. A further $450 million of the revolving facility was repaid during the year. 74 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

76 NOTES ON THE FINANCIAL STATEMENTS 13 Bank Loans and Notes Payable (continued) In March 2001, the Authority completed a $2,500 million floating rate notes issue comprising of a 3-year $1,250 million note and a 5-year $1,250 million note. Interest is payable on the principal amount at a rate relating to HIBOR. The above facilities are complemented by a note issuance programme arranged with the Hong Kong Monetary Authority. Notes of $1,500 million were repaid under this programme during the year. Interest is payable at the relevant coupon rate of each note. Total notes payable at 31 March 2003 of $2,000 million (2002: $3,500 million) are repayable on dates ranging from May 2003 to July In April 2002, the Authority made its first note issue targeted at retail investors, comprising a $475 million 2-year tranche and a $ 625 million 3-year tranche of Hong Kong dollar fixed rate notes. The two tranches carry coupons at 3.50% and 4.50% respectively and were issued at a price of and respectively. During the year, an additional $1 million 2-year tranche was issued to meet the demand of the secondary market at the prevailing market price. In March 2003, the Authority made its second note issue targeted at retail investors comprising three tranches of Hong Kong dollar fixed rate notes and one tranche of United States dollar fixed rate notes. The three tranches of Hong Kong dollar fixed rate notes are made up of a $304 million 3-year tranche, a $453 million 7-year tranche and a $139 million 2-year tranche extendable for two years at the option of the Authority. The three Hong Kong dollar tranches carry coupons at 2.30%, 4.30% and 2.70% respectively and were issued at a price of 99.62, and respectively. The United States dollar fixed rate notes represent a US$39 million (HK$304 million) 3-year tranche extendable for two years at the option of the Authority. This tranche carries coupon at 2.95% and was issued at a price of ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 75

77 NOTES ON THE FINANCIAL STATEMENTS 14 Creditors and Accrued Charges The group The Authority $ million $ million $ million $ million Creditors and accrued charges 1,074 1,070 1,032 1,029 Deposits received Contract retentions ,260 1,237 1,218 1,196 Classified in the balance sheet as: Current liabilities 1,141 1,174 1,099 1,134 Non-current liabilities ,260 1,237 1,218 1, Deferred Income Deferred income represents amounts received in advance from developers under agreements or sub-leases for development at the airport site. Under these agreements or sub-leases, the developers finance, design and construct the facilities concerned and occupy the premises granted or to be granted under the sub-leases for periods of between 20 and 49 years. The amounts received in advance are recognised in the income statement on a straight-line basis over the periods of the respective sub-leases. 16 Share Capital Also included in deferred income is unamortised income relating to the lease out lease back of the baggage handling system (note 9(g)) $ million $ million Authorised capital as prescribed in Section 23 of the Airport Authority Ordinance: 366,480 shares of $100,000 each 36,648 36,648 Issued, allotted and fully paid: 366,480 shares of $100,000 each 36,648 36, >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

78 NOTES ON THE FINANCIAL STATEMENTS 17 Reserves The group The Authority $ million $ million $ million $ million Retained losses at 1 April As previously reported (249) (485) (267) (497) Prior period adjustment from change in accounting policy for employee retirement benefits As restated (172) (485) (190) (497) Profit for the year Retained earnings/(losses) at 31 March 330 (249) 308 (267) 18 Outstanding Commitments Commitments outstanding for the group and $ million $ million the Authority in respect of capital expenditure not provided for in the accounts are as follows: Authorised and contracted for: Authorised but not contracted for: As at 31 March 2003, the Authority has invited expressions of interest for certain of its planned future commercial and property development projects. The Authority has no outstanding commitments in this regard as at 31 March Pursuant to a franchise agreement, the Authority has exercised an option to acquire the aviation fuel supply system from the franchisees in July 2003 at a price to be calculated according to the terms of the franchise agreement. ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 77

79 NOTES ON THE FINANCIAL STATEMENTS 19 Material Related Party Transactions The Authority is wholly-owned by the Hong Kong Government. Transactions between the Authority and Government departments, agencies or Government controlled entities, other than those transactions such as the payment of fees, taxes, leases and rates, etc. that arise in the normal dealings between the Government and the Authority, are considered to be related party transactions pursuant to SSAP 20 Related Party Disclosures and are identified separately in these financial statements. Members of the Board and the Executive Directors, and parties related to them, are also considered to be related parties of the Authority. Material transactions with these parties are separately disclosed in the financial statements. During the year, the Authority has had the following material related party transactions: (a) In connection with the construction of the airport, the Government and one of its related parties, MTR Corporation, entered into entrustment agreements with the Authority for the construction of various infrastructure works that are reimbursable according to actual costs certified. The amount charged as reimbursable from the Government and MTR Corporation in respect of the entrustment works amounted to $ nil (2002: $30 million) and $1 million (2002: $102 million) respectively for the year ended 31 March As at 31 March 2003, the amount due from the Government and MTR Corporation relating to the entrustment works amounted to $78 million (2002: $110 million) and $312 million (2002: $369 million) respectively. (b) The Authority has entered into service agreements with the Government under which the Government is to provide aviation meteorological and air traffic control services and aircraft rescue and fire fighting services at the airport. The amounts incurred for the year amounted to $715 million (2002: $716 million) and the amounts due to the Government as at 31 March 2003 with respect to the above services amounted to $ nil (2001: $0.6 million). With effect from 1 April 2000, the Authority is not required by the Government to pay the cost of providing aircraft rescue and fire fighting services at the airport. 78 >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

80 NOTES ON THE FINANCIAL STATEMENTS 19 Material Related Party Transactions (continued) (c) In addition, the Authority has also entered into agreements with the Government under which the Government provides electrical and mechanical maintenance services at the airport. The amounts incurred for these services for the year amounted to $85 million (2002: $140 million). As at 31 March 2003, the amount due to the Government with respect to the above services amounted to $32 million (2002: $82 million). (d) The Authority has entered into an agreement with AVSECO, a subsidiary in which the Government is the other shareholder, for the provision of airport related security services to the Authority on a cost reimbursement basis. The amount incurred by the Authority for these services for the year amounted to $280 million (2002: $283 million). (e) The Authority has entered into a memorandum of understanding ( MOU ) with the Government in respect of the development of an exhibition centre at Chek Lap Kok. Pursuant to the terms of the MOU, the Authority, the Government and a prospective developer will form a joint venture entity, 10% of which will be owned by the Authority. The Authority will provide the land on which the exhibition centre will be built. ANNUAL REPORT 2002/03 AIRPORT AUTHORITY HONG KONG >> 79

81 Five-Year Financial and Operational Summary Income Statement 98/99* 99/00 00/01 01/02 02/03 (in HK$ millions) Turnover 3,773 5,055 5,159 5,274 5,417 Operating profit before depreciation 1,491 1,998 2,358 2,502 2,665 Depreciation of fixed assets (1,639) (1,740 ) (1,781) (1,843) (1,813) Interest and finance charges (236 ) (421 ) (500) (416) (221) Profit / (loss) from ordinary activities before taxation (384 ) (163 ) Taxation 0 0 (3) (2) (125) Profit / (loss) from ordinary activities after taxation (384 ) (163 ) Minority interests (4) (5 ) (3) (5) (4) Profit / (loss) attributable to shareholder (388 ) (168 ) Balance Sheet (in HK$ millions) Non-current assets 50,737 50,242 49,029 47,579 46,360 Current assets 1,880 1, ,279 2,574 Current liabilities (8,351) (10,284 ) (4,978) (2,756) (3,974) Net current liabilities (6,471) (8,942 ) (4,017) (1,477) (1,400) Total assets less current liabilities 44,266 41,300 45,012 46,102 44,960 Non-current liabilities (7,998) (5,195 ) (8,832) (9,681) (7,956) Minority interests (8) (13 ) (17) (22) (26) Net assets 36,260 36,092 36,163 36,399 36,978 Share capital 36,648 36,648 36,648 36,648 36,648 Reserves (388 ) (556 ) (485) (249) ,260 36,092 36,163 36,399 36,978 Key Financial Data and Operational Statistics (in thousands) Return on net assets (1% ) (0.5% ) 0.2% 0.6% 1.4% Debt / Equit ratio 1:4.7 1:4.7 1:4.8 1:4.3 1:4.7 Total passengers 21,607 30,915 33,844 33,101 34,198 Cargo tonnages 1,199 2,061 2,230 2,121 2,546 Aircraft movements * Period from 6 July 1998 to 31 March >> AIRPORT AUTHORITY HONG KONG ANNUAL REPORT 2002/03

82 Airlines Operating at Hong Kong International Airport as at March 2003 Aeroflot Air Canada Air China Air France Air Hong Kong** Air India Air Mauritius Air New Zealand Air Phililppines Alitalia** All Nippon Airways Asiana Airlines Atlas Air** Australian Airlines Biman Bangladesh British Airways Cargolux** Cathay Pacific Cebu Pacific Air China Airlines China Eastern China Southern Continental Continental Mic Dragonair EL AL Israel Emirates Ethiopian EVA Air Evergreen** Federal Express** Finnair Garuda Indonesia Gemini Air Cargo** Gulf Air Japan Airlines Japan Asia Kalitta Air** KLM Korean Air Lufthansa Malaysia Airlines Mandarin Airlines Martinair** Mekong Airlines Nippon Cargro Airlines** Northwest Orient Thai Pacific Airlines Pacific East Asia Pakistan Int l Philippine Airlines Polar Air Cargo** President Airlines Qantas Royal Brunei Royal Nepal SAS Scandinavian** Saudi Arabian Airlines** Singapore Airlines Singapore A Lines Cargo** South African SriLankan Swiss Thai Airways Transmile Air Services** Turkish Airlines United Airlines UPS** Vietnam Airlines Virgin Atlantic Xiamen ** Freighter services only Scheduled destinations served at Hong Kong International Airport as at March 2003 North Asia Beihai Beijing Busan Changchun Changsha Chengdu Chongqing Dalian Fukuoka Fuzhou Guangzhou Guilin Guiyang Haikou Hangzhou Harbin Hefei Hiroshima Huangshan Jinan Kagoshima Kaohsiung Komatsu** Kunming Lanzhou Meixian Nagoya Nanchang Nanjing Nanning Ningbo Okinawa Osaka,Kansai Qingdao Sanya Sapporo Sendai Seoul,Incheon Shanghai Shantou Shenyang Shijiazhuang Taipei Taiyuan Tianjin Tokyo Wenzhou Wuhan Wuyishan Xiamen Xian Yantai Zhangjiajie Zhanjiang Zhengzhou South East Asia B S Begawan Bangkok Batam** Cebu Clark** Da Nang Denpasar Hanoi Ho Chi Minh Jakarta Kota Kinabalu Kuala Lumpur Kuching Laoag Manila Penang Phnom Penh Phuket Singapore Subic Bay** Surabaya Middle East / Indian-subcontinent / West Asia Abu Dhabi Almaty** Bahrain Chennai** Colombo Dammam** Delhi Dhaka Doha** Dubai Islamabad Jeddah** Karachi Kathmandu Kuwait** Mumbai Muscat Riyadh Sharjah** Tashkent** Tel Aviv Europe Amsterdam Brussels** Frankfurt Gothenburg** Helsinki Istanbul Khabarovsk** London Luxembourg** Manchester** Milan,Malpensa** Moscow Munich Paris Rome Zurich Australasia Adelaide Auckland Brisbane Cairns Guam Melbourne Perth Saipan Sydney Africa Addis Ababa Johannesburg Mauritius North America Anchorage Chicago,Ohare Las Vegas Los Angeles Louisville** Memphis** New York San Francisco Toronto Vancouver ** Freighter services only