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					Chairman’s Report


Dear Shareholders,

On behalf of the Board of Directors, I am very pleased to welcome you to the
22nd annual shareholders meeting and present the Company’s annual report for
the year ended 31 December 2003. The year has ended on an optimistic note
with the hope for much improved, though challenging, business environment in
2004.

The Company has reported operating profit of RO 0.586 million, compared to
operating loss of RO 0.257 million in the previous year. It would be appropriate
to highlight that this operating profit follows three successive years of operating
losses. In that sense, your Company has registered a turnaround. Net results
after concession fee and tax adjustment, however, is net loss of RO 1.138
million. This compares favourably with net loss of RO 1.755 million in the
previous year. Cash profit from operating activities, a crucial measure in airline
industry, was RO 3.279 million compared to RO 0.744 million in the previous
year.

Year in review

At the beginning of 2003, the air transport industry was still struggling to recover
from the aftermath of September 11 crisis and world-wide economic downturn.
When it seemed that the situation could not get any worse, the industry was
struck with another crisis in the form of the Iraq war which was closely followed
by the outbreak of Severe Acute Respiratory Syndrome (SARS). These
developments had their inevitable impact on passenger sentiment. Passenger
travel once again suffered, sending airlines into yet another financial crisis.
Fortunately, the world economy in general and the industry in particular
recovered much quicker than anticipated. Second half of the year showed
remarkable upturn in passenger and cargo travel, and the trend is likely to
continue into the near future. In the context of the crisis ridden first half of the
year, the Company’s results are more than satisfactory.


Important Developments

The Government announced in late 2003 that it will grant the Company a long
term soft loan of RO 10 million. This loan could be converted to capital if the
other shareholders agree to raise the paid up capital of the company. This
reflects the Government’s confidence in the future of the company.

Shareholders of the Company have adopted new Articles of Association in Extra
Ordinary General Meeting held during 2003.   As per the new articles, the
Company will now be governed by the Commercial Companies Law of Oman.
Amongst important changes, the Company’s Board will now comprise of 9
directors as against 10 before the change. While 4 directors, including the
Chairman, will be appointed by the Government, remaining 5 directors will be
elected from the private sector. This is in accordance with the national objective
of greater private sector participation in the affairs of public shareholding
companies. The Government, however, will continue to be an important
stakeholder with its 33.8% stake in the Company.

Shareholders have also agreed to change the Company’s name from ‘Oman
Aviation Services Co.’ to ‘Oman Air’. With the growth in airline business, which
contributes 70% of the Company’s revenues, it is natural and logical that the
Company’s corporate identity coincides with its airline’s brand name.

Recognitions

I am pleased to advise shareholders that the Company received several
recognitions during the year under review. These included fleet reliability
(99.7%) recognition from Boeing, renewal of JAR Operations Certificate
validating Oman Air’s maintenance capabilities, Service excellence award from
PDO, and the Government recognition for achievement in the field of
Omanisation. In airport services business too, the Company received several
recognitions for its service standards in ground handling and catering activities.

Our People

Our employees have stuck to their tasks and maintained our high standards of
service in the recent difficult past. With their collective commitment, the
Company could withstand these exceptional external pressures.

Employment of Omanis at all levels is an important goal that the Company has
set for itself. We have attained 76% Omanisation, and more importantly, the
percentage is much higher in managerial and high skilled jobs. We continue to
make investment in training of Omani nationals. Starting in 2003, we have
decided to recruit 15 Omani graduates as management trainees each year and
develop them for management positions across the Company.




Corporate Governance

Your Company is committed to high standard of corporate social responsibility.
We continue to work hard to improve our performance in this increasingly
important field. We believe that the Company’s integrity and ethics are as
important as its financial performance, its products and its services.

The Board takes its responsibilities for high standards of corporate governance
across the Company very seriously, and are in full compliance with the Code of
Corporate Governance. Separate report on Corporate Governance appears in
this Annual Report.

I would like to thank Management and all employees for their sincere
commitment to the Company’s goals and objectives. It is their resolve and focus
that has resulted in improved financial performance of your Company and its
various accomplishments. Their hard work has seen the Company come
through a testing period in a good shape to benefit from the upturn in the
industry’s fortunes in coming years.

I take this opportunity on behalf of the Board of Directors to express our sincere
gratitude and thanks to His Majesty Sultan Qaboos Bin Said and his
Government for their continued guidance and support without which we could
not have attained the growth and results witnessed during the year.




Said bin Hamdoon Al Harthy
Chairman




                               Corporate Governance Report




In accordance with the Capital Market Authority (“CMA”) circular # 11/2002 dated 3 June 2002, we
are pleased to present the second Corporate Governance Report of Oman Aviation Services Co
SAOG (“the Company”) for the year ended 31 December 2003.


The 2003 Corporate Governance Report is audited. In accordance with the circular number
1/2003 dated 11 January 2003, issued by CMA, the statutory auditors of the Company are
required to issue an “Auditors’ Report” on the Company’s compliance with the Corporate
Governance Code.



Company’s Philosophy


The Company is committed to comply with the Code of Corporate Governance issued by the
CMA. The Company has and will continue to uphold the highest standards of corporate
governance. The Board and the Management strive to accomplish this through very high levels
of transparency and accountability in its conduct of business.


The Company’s focus has been on best business practices that are ethical and fair while
achieving ultimate objective of enhancing long term shareholder value. Appropriate systems and
procedures are continuously developed to evaluate and monitor the Company’s processes and
performance to ensure they meet high standards of corporate governance. The Company
intends to formulate a comprehensive policy on corporate governance in very short term. Once
approved by the Board, this will be published.


Board of Directors


The Company’s Board comprises of Non-Executive Directors. All directors are Independent
Directors as defined in the Code of Corporate Governance. There are nine members on the
Board. Four members are nominated by the Government including the Chairman of the Board
and five are appointed from the private sector by election. The Government nominees hold
highly responsible offices in the Government while directors from private sector are
businessmen of high repute.


The Government nominated directors are not required to own any shares in the Company. All
private sector directors are required and hold minimum 2,000 shares.
                Functions of the Board


The Board is fully aware of its functions and responsibilities as defined by CMA Code of
Conduct. The Board appoints all members of the Executive Management and decides their
remuneration. The Board approves business plans and financial policies of the Company. The
Board reviews policies and regulations governing company activities and specifies authorities
and responsibilities of key management members. The Board reviews the Company’s long term
and yearly financial plans and key objectives. The Company’s performance is reported to the
Board on monthly basis and the same is reviewed and discussed in the Board meetings. The
Board appoints sub-committees including audit committee and evaluates their functions and
performance. The Disclosure policy of the Company, which will be in line with the Code of
Corporate Governance, is being prepared and the same will be approved by the Board.


The Board assesses the major risks faced by the Company and reviews options to mitigate
them. The Board ensures that processes are in place to maintain the integrity of the Company,
i.e. Integrity of the financial statements, compliance with law and internal control systems. The
Board approves the quarterly, half yearly and annual financial statements. The Board reports to
the shareholders, in the annual report, about the going concern status of the Company, with
supporting assumptions.


                Process of Nomination of the Directors


Four members are appointed by the Government including the Chairman of the Board and five
are appointed from the private sector by election once every three years.



Entity Represented by Non-Independent Directors


There are no Non-Independent directors in the Company.
Director’s Attendance Record and Directorships Held During the Financial Year 2003.


Name of Director         Position                 Board       Whether      Directorship in other SAOGs
                                                 meetings    attended
                                                 attended    last AGM
HE Said bin Hamdoon      Chairman                   3           Yes        None
Al Harthy
                         (Effective 19-05-
                         2003)
Dr. Hamad bin Hashim     Chairman                   6            No        Oman and Emirates Investment
Al Dhahab                (Till 18-05-2003)                                 Holdings (SAOG)
Mr Mohammed bin Ali      Deputy Chairman            7           Yes        National Bank of Oman (SAOG)
Al Barwani                                                                 (Director)
                                                                           Shell Oman Marketing Co.
                                                                           (SAOG) (Director)
                                                                           Transgulf Industrial Investments
                                                                           Holding Co. SAOG (Chairman)
Mr Nasser bin Khamis     Non-Executive              1            No        None
Al Jashmy                Director (Till
                         January 2003)
Khalifa bin Shamis bin   Non-Executive              1           Yes        None
Mohammed Al Subhi        Director (Effective
                         15-12-2003)
Mr Sultan Yarub Majid    Non-Executive              8           Yes        None
Al Saify                 Director
Mr Ahmed bin Saleh       Non-Executive              7           Yes        None
bin Ahmed Al Zadjali     Director (Till 15-12-
                         2003)
Engr. Hamood bin         Non-Executive              8           Yes        None
Nasser Juma Al Zeedi     Director
Mr. Sulaiman Ahmed       Non-executive              8           Yes        None
Saeed Al Hoqani          Director
Mr Murtadha bin          Non-Executive              8           Yes        United Power Co. (SAOG)
Ahmed bin Sultan         Director (Till 15-12-                             (Chairman)
                         2003)                                             National Bank of Oman (SAOG)
                                                                           (Director)
Mr Mohammed              Non-Executive              9           Yes        Raysut Cement Co. (SAOG)
Abdullah Said Al         Director                                          (Deputy Chairman)
Rawas                                                                      Dhofar Cattle Feed Co. (SAOG)
                                                                           (Director)
Mr Hussain bin Ali bin   Non-Executive              9           Yes        Oman Fisheries Co. (SAOG)
Hassan Al Raisy          Director (Till 15-12-                             (Director)
                         2003)

During the year Board Meetings were held on 12 January 2003, 13, 16, 18 and 31 March 2003,
3 May, 17 June 2003, 28 September 2003 and 14 December 2003.

There have been no material related party transactions between the Company and its directors.
Specific related party transactions are disclosed to the shareholders at the ordinary general
meeting.

Remuneration Matters
All directors including Chairman are non-Executive and do not draw any fixed salary from the
Company. The total remuneration paid to directors for financial year 2003 was RO 20,350.

Each employee of the Company draws salary based on ‘job group’ assigned to his job. Job
groups are assigned to different jobs based on the duties, responsibilities, skills and experience
relevant to such jobs.

Remuneration of Top Five Executives


(RO Per Annum)             Total


Salary                   216,192
Bonus                     13,000
Allowances                43,651
PASI                      14,597
Perquisites               13,415


Total                    300,855



Executive Committee


At present the Executive Committee carries out specific functions delegated by the Board of
Directors. These functions include, review of management budget proposals, review of
management proposals concerning new routes, fleet rationalisation and new ventures.


Objective of the Executive Committee is to conduct an in-depth review of specific issues before
the same are approved by the Board.
Attendance Record of the Executive Committee Members


                Name of Director                         No. of       Meetings
                                                       Meetings       Attended
 1.     Dr. Hamad bin Hashim Al Dhahab –                   1              1
        Chairman (Till 18-05-2003)

 2.     Mr Mohammed bin Ali Al Barwani                     1              -
        Deputy Chairman

 3.     Mr Sultan Yarub Majid Al Saify
                                                           1              1
        Non-Executive Director

 4.     Mr Murtadha bin Ahmed bin Sultan
        Non-Executive Director (Till 15-12-2003)           1              1


 5.     Mr Hussain bin Ali bin Hassan Al Raisy
        Non-Executive Director (Till 15-12-2003)           1              1


Audit Committee


During 2003 Audit Committee members consisted of three Non-Executive Directors of which all
were independent. The Audit Committee Chairman was Mr. Ahmed Saleh Ahmed Al Zadjali, who
was an Independent Director. Eleven meetings were held during 2003 to discuss issues
concerning Internal Control, Internal Audit plans and Internal / External Audit reports, quarterly
financial statements filed with Capital Market Authorities (CMA) and other related issues.


Attendance Record of the Audit Committee Members


                Name of Director                         No. of       Meetings
                                                       Meetings       Attended
 1.        Mr. Ahmed Saleh Ahmed Al Zadjali                11             8
               Chairman, Audit Committee


 2.       Engr. Hamoud Nasser Juma Al Zeedi                11            10
                Audit Committee Member


 3.          Mr. Hussain Ali Hassan Al Raisy               11            11
                Audit Committee Member
                Audit and Internal Control

The Audit Committee has reviewed, on behalf of the Board, the effectiveness of internal controls
by meeting the internal auditor, reviewing the internal audit reports and recommendations and
meeting the external auditor, reviewing the audit findings reports and the External Audit
management letter. The Audit Committee and the Board are pleased to inform the shareholders
that reasonable internal control systems are in place and that there are no significant concerns.

Means of Communication with the Shareholders and Investors

The Company publishes quarterly results in the leading Arabic and English newspapers. The
complete quarterly results, as submitted to CMA, are also mailed to any shareholder upon
written request, and are also available for inspection at the Company’s registered office. The
Company produces comprehensive annual report for its shareholders. Audited annual financial
statements with the Chairman’s report are sent by mail to each shareholder.

At the same time the Company gives press releases from time to time for all strategic issues,
such as opening of new routes, change in fleet, financing agreements, etc. The Company also
has its own web site where airline related information is available.



                Market Price Data


Monthly High / low share price data for financial year 2003.


            Month, 2003            High            Low           Volume
            January                0.690           0.620         72,773
            February               0.590           0.550         71,319
            March                  0.710           0.570         190,443
            April                  0.850           0.700         137,826
            May                    0.800           0.710         87,109
            June                   1.000           0.800         695,559
            July                   0.950           0.850         106,251
            August                 0.900           0.750         147,519
            September              0.940           0.800         106,291
            October                0.960           0.850         244,524
            November               0.890           0.850         31,472
            December               0.880           0.810         329,085
Performance in Comparison to Broad Based Index of MSM (Relevant Sector)


There is no other company listed on MSM in the same sector.


Distribution of Shareholding


The major shareholders of the Company are as follows, with the government of the Sultanate of
Oman being the major shareholder.




Major Shareholders


Shareholders with more than 2% shareholding are:


  Name of the shareholder                     No. of Shares held Shareholding %

  Government of Sultanate of Oman                  4,086,620            33.84

  Al Awal National Co.                              812,000              6.73

  Mr Suleiman Ahmed Saeed Al Hoqani                 476,000              3.94

  National Bank of Oman (SAOG)                      321,684              2.66

  Mohammed Al Barwani Company                       279,781              2.32

  Royal Oman Police Trust Fund                      254,440              2.11

  Total Shares held by Top 6 Shareholders          6,230,525             51.6


Specific Areas of Non-compliance with the Provisions of Corporate Governance


Disclosure policy of the Company is under preparation hence not yet approved by the Board.


Professional Profile of the Statutory Auditor


KPMG is an international accounting firm operating in 159 countries from 821 offices and having
more than 100,000 staff. KPMG in Oman has over 70 employees including 3 partners and 12
managers and trains the largest number of Omanis in the auditing and accounting profession.




Airline industry witnessed symptoms of recovery in the second half of 2003. Passenger and cargo
traffic has gathered momentum across the industry, and pace of recovery is even faster in the Middle
East and Asia. The first half was impeded by the Iraq war and the outbreak of Severe Acute
Respiratory Syndrome (SARS) virus, and had threatened to cripple the industry once again. Oman Air’s
decision to focus on existing network and consolidate on new routes commenced in mid 2002 enabled
the Company to withstand the impact of external forces and report much improved financial results.
Airport services business also showed impressive results with pick up in the flight and passenger
movement at Seeb International Airport, Muscat. Airlines, particularly Gulf Air, increased their
operations which resulted in higher handling and catering revenues.
Financial and Sector Performance

Net loss for the Year 2003 was RO 1.138 million, 35% lower compared to the reported loss of RO Formatted: Font: Not Italic, Font color: Auto
1.755 million in the previous year.


The Company’s operating performance showed a significant improvement, yielding a
profit of RO 0.587 million as compared to a loss of RO 0.257 million in the previous
year. The Company has reported operating profit after three years of continued losses.

                                                                         (RO ‘000)
     YEAR               NET PROFIT/(LOSS)                        OPERATING
                                                                PROFIT/(LOSS)
     2003                             (1,138)                                 586
     2002                             (1,755)                               (257)
     2001                             (2,610)                             (2,339)
     2000                             (2,553)                             (3,319)
     1999                               1,701                                 523


This achievement was partly the result of a remarkable turnaround in financial
performance of the Airline division. This is a mix of increase in revenue and reduction in
aircraft ownership costs. The revenue increased with 9% increase in passenger traffic.
The ownership cost was lower with the acquisition of an owned aircraft, which replaced
a wet leased aircraft. Aircraft utilization is more balanced and daily utilization, one of
the highest at 12.5 hours per day. Seat utilization was maintained at 2002 levels,
despite increase in frequencies and capacity. Further, consolidation of new routes
introduced in mid 2002, allowed the airline to benefit from economies of scale. Despite
the Iraq war, insurance costs held during the year. Fuel prices, on the other hand,
however have escalated right through the year and continue to be a major concern for
airline industry.

Airport Services, which includes Ground Handling, Cargo Handling and Catering
Services, witnessed enhanced profitability with increase in flight and passenger
movement at Seeb airport. Airport Services benefited from good economic growth in
the region, which has fueled good traffic and passenger growth. All major airlines led
by Gulf Air restored flights withdrawn in 2002. Notably, the growth in operations has
been more prominent for wide body aircraft. All these factors had a favourable impact
on handling and catering revenues. Duty Free business was operated as a joint venture
with Aer Rienta effective February 2003. This business generated positive results in its
first year of operations.

                Revenue

Revenue increased by RO 0.545 million over last year.
                                                              (RO ‘000)
        Year                                REVENUE

        2003                                60,568
        2002                                60,023
        2001                                52,238
        2000                                51,662
        1999                                47,513


GRAPH – 2003 – 2002 – Revenue Composition

                2003
                Scheduled services-      62% (RO 37.6 million)
                     International
                Scheduled services- 9% (RO 5.3 million)
                     Domestic
                Air Charter         10% (RO 6.2 million)
                Handling            13% (RO 7.8 million)
                Catering             6% (RO 3.5 million)

                2002
                Scheduled services- 57% (RO 34.4 million)
                    International
                Scheduled services- 9% (RO 5.7 million)
                    Domestic
                Air Charter         11% (RO 6.4 million)
                Handling            11% (RO 6.5 million)
                Catering            12% (RO 6.9 million)


Scheduled services

Scheduled services revenue was RO 42.897 million, higher by RO 2.841 million or 7% compared
to the previous year. Passenger traffic rose by 79,000 passengers or 9%. This was the combined
result of a full year operations on new routes that were added to the network in 2002, and
increased operations on other high yield routes. Despite the increasing competition from major
players, and resultant discounting of fares, Oman Air successfully increased its market share on
many routes. Oman Air also succeeded in attaining various other objectives in the form of
dominant market share on certain routes, development of Muscat as a strategic hub, greater
connectivity, and creation of flow traffic across Indian sub-continent, Middle East and East Africa.


   Passenger traffic rose significantly by 79,000 passengers or 9%                                    Formatted: Bullets and Numbering

   Overall capacity (ASK) increased by 18%
   Revenue traffic (RPK) kept pace with capacity, and increased by 18%
   Overall capacity utilization or seat factor maintained at 66%
   Average yield per passenger increased marginally from RO 38.8 to RO 38.9
   Net yield per RPK, however, declined from 27.7 to 25.7 with intense competition
   Average jet aircraft utilization improved further from 12.3 to 12.5 block hours per day


GRAPH – 2003 – 1999 – Passengers

                2003 – 927,000
                2002 – 848,000
                2001 – 730,000
                2000 – 729,000
                1999 – 626,000
GRAPH – 2003 – 1999 – Capacity (ASK), Utilisation (RPK) and Seat
Factor

          ASK           RPK          Seat factor
2003      2,117,000     1,405,000    66%
2002      1,787,000     1,187,000    66%
2001      1,442,000     949,000      66%
 2000     1,510,000     965,000      64%
1999      1,181,000     799,000      68%
Air charter services

Air Charter Services revenue was RO 6.181 million, a decrease of RO 0.243 million from the
previous year revenue of RO 6.424 million which included a one time mobilization fee of
RO 0.231 million.


The Charter Service contract with PDO is for a period of five years until June 2006. Under the
contract, Oman Air has provided three ATR 42-500 aircraft to PDO, out of which two aircraft are
exclusively used by PDO and the third one is shared between PDO and Oman Air.



Handling fees

Handling revenue for the year was RO 7.765 million, an increase of RO 1.255 or 19% from the
previous year’s revenue of RO 6.510 million.


Revenue increased as major airlines, mainly Gulf Air, have increased their operations. There was
also a noticeable shift from narrow-body to wide-body operations.


   Flight movement at Seeb Airport increased from 16,894 to 18,296 flights, up 8%                  Formatted: Bullets and Numbering

   Airlines, other than Oman Air, increased operations from 10,867 to 12,589 flights, up 16%
   Wide body flight movement increased from 4,277 to 6,063 flights, up 42%
   Passenger movement rose from 2.666 million to 3.130 million passengers, up 17%
   Cargo tonnage handled was 38,000 metric tonnes


GRAPH – 2003 – 1999 – Flights handled at Seeb Airport

                                No. of flights
                2003            18,296
                2002            16,894
                2001            17,684
                2000            18,296
                1999            18,594



Catering

Catering revenue was RO 3.546 million, a decline of RO 3.379 million or 49% compared to
RO 6.925 million reported in the previous year. Last year’s revenue included income of RO 0.544
million from duty free business and RO 0.054 million from terminal outlets at Seeb airport. While
the Company has handed over terminal catering business in view of poor profitability, duty free
business is now carried out as a joint venture business under a different entity with Aer Rianta
group.


In Aircraft catering business, the Company witnessed growth over last year with increased flight
movement and catering uplift by major carriers. Total meals uplifted rose from 2,090,000 to
2,271,000 meals, up 9%.



GRAPH – 2003 – 1999 – Meals uplifted at Seeb Airport
                                 No. of meals
                2003             2,271,000
                2002             2,090,000
                2001             2,425,000
                2000             2,439,000
                1999             2,518,000



Expenditure

Despite increase in revenue, Expenditure fell marginally by RO 0.298 million to RO 59.982 million.
This is mainly due to reduction in aircraft ownership costs. Oman Air purchased second B 737 NG
aircraft in July 2003 replacing a wet leased aircraft. Depreciation and finance cost of the
purchased aircraft is lower than rentals paid for the leased aircraft.


GRAPH – 2003– 1998 - Expenditure

                 2003 - RO 59.982 million
                 2002- RO 60.280 million
                 2001 - RO 54.577 million
                 2000 - RO 54.981 million
                 1999 - RO 46.990 million
GRAPH – 2003 – 2002 – Expenditure Composition

COMPOSITION OF EXPENDITURE - 2003

   Manpower cost                   32% (RO 19.2 million)                                              Formatted: Bullets and Numbering

   Aircraft operating expenses 30% (RO 17.7 million)
   Aircraft operating lease rentals            12% (RO 7.5 million)
   Catering materials consumed 3% (RO 1.8 million)
   insurance cost                   2% (RO 1.4 million)
   Passenger related cost          5% (RO 2.9 million)
   Depreciation                    5% (RO 2.9 million)
   Others                          11% (RO 6.5 million)


COMPOSITION OF EXPENDITURE - 2002

   Manpower cost                          30% (RO 18.1 million)                                       Formatted: Bullets and Numbering

   Aircraft operating expenses           27% (RO 16.4 million)
   Aircraft operating lease rentals      15% (RO 8.9 million)
   Catering materials consumed            6% (RO 3.7 million)
   insurance cost                  2% (RO 1.6 million)
   Passenger related cost          5% (RO 2.7 million)
   Depreciation                           4% (RO 2.2 million)
   Others                                 11% (RO 6.6 million)


Operating lease rentals

Aircraft lease costs amounted to RO 7.534 million, a reduction of RO 1.330 million or 15%. Airline
leased 2 B 737 700 aircraft, 1 B 737 800 aircraft, and 2 ATR 42 aircraft during the year. One B
737 800 aircraft was also wet leased for the first six months. A purchased aircraft replaced this
aircraft for the remaining six months, reducing lease costs in comparison to the previous year.


Aircraft operating expenses

These expenses comprise of aircraft fuel, maintenance, handling, landing and catering costs.
These costs were up RO 1.332 million or 8% compared to the previous year. This is due to
increase in operations, and significant increase in fuel prices. Fuel price at Muscat rose from US $
0.93 per USG in beginning of 2002 to US $ 1.03 USG towards end of 2003, an increase of 11%


Catering materials consumed

Cost of catering materials, items used in the Company’s catering business, decreased by
RO 1.942 million or 52%. This expense in the previous year included RO 2.079 million, being cost
of duty free items. As explained above, duty free business is now carried out as a joint venture
business.



Insurance cost

The Company’s insurance costs decreased by RO 0.198 million or 12%. These costs, after
reaching all time high post September 11 events, are now gradually declining with decrease in
aviation insurance premiums.

                                                                                                     Formatted: Font: Not Bold

Passenger related costs

Passenger related cost increased from RO 2.745 million to 2.920 million, an increase of RO 0.175
million or 6%. The increase was lower than 9% increase in passenger traffic, the result of greater
control on reservation and catering unit costs.
                                                                                                     Formatted: Font: Not Bold


Staff costs

Manpower costs increased by RO 1.074 million or 6% compared to last year. The Company’s
manpower strength increased marginally from 2,448 in 2002 to 2,526 in 2003, up 3%. Increase
in manpower was restricted to critical operational requirements and positions that would add
value in terms of enhanced customer service, productivity and profitability.


Depreciation

Depreciation cost was higher by RO 0.623 million or 28% over last year. The increase reflects
depreciation on second purchased aircraft which joined Oman Air fleet in July 2003, and full year
impact of first aircraft acquired in July 2002.


Concession fee

The Company pays concession fee to Oman Airport Management Company, the new airport
operator at Seeb and Salalah airports. The basis of concession fee has changed effective 2002
under the new concession agreement. From profit based concession fee levied in the past, the
Company now has to pay this fee as share of its revenue. The Company pays 7.5% of its
handling revenue and 5% of its catering revenue as concession fee. The impact of concession fee
in 2003 was RO 0.721 million. In 2002, this expense included RO 0.522 million, being the
concession fee paid on duty free business, and hence was higher at RO 0.132 million.


Capital Expenditure

The Company continued to make capital investment in assets during the year. Total capital
expenditure amounted to RO 11.405 million. This mainly comprised of investment of RO 10.309
million in aircraft, being the final payment for B 737 800 aircraft delivered in July 2003. Other
capital expenditure mainly included investment of RO 0.499 million in aircraft spares, and
RO 0.305 in ground equipment.




Our people

Company staff strength at 31 December 2003 was 2,526 employees. Omanis represent 76% of
the total staff strength.


GRAPH – 1999 – 2003– Manpower Strength and Omanisation


Financial position
At 31 December 2003, shareholders equity stood at RO 15.347 million, down RO 0.994 million
over the last year. The decline in the equity reflects net loss of RO 1.138 million in 2003, and
increase of RO 0.144 million in fair value of the Company’s investments


Net Assets per share amounted to RO 1.271, down 285 Baizas compared to the previous year.


The Company has opted for mix of purchased and leased aircraft for its fleet. Though this has
caused inevitable strain on the Company’s liquidity in the short term, the Company will be able to
build assets and strengthen its balance sheet in the long run. The Company’s asset block further
strengthened by RO 8.066 million with the investment in the second aircraft. In terms of
economics too, purchase of aircraft is more cost effective when compared to lease rentals from
the long term perspective. Investment in aircraft is financed with long term borrowings and partly
from internal resources. Loans were obtained for the two B 737 NG aircraft and aircraft spares on
very attractive terms. The borrowing for the second aircraft, acquired in July 2003, was
guaranteed by US EX-IM bank. With repayment of loan at much faster pace compared to
depreciation, with gradual repayment of these loans each year, the Company’s net assets
position will significantly improve in future.


The Company has generated positive cash flow from operations as shown in the Statement of
Cash Flow in audited financial statements. Cash flow from operations was RO 4.412 million in
2003 compared to RO 1.486 million in 2002, increase of RO 2.926 million. After repayment of
loans, available cash was higher at RO 3.232 million compared to RO 2.972 million in 2002.


Internal controls

The Company introduces internal controls from time to time to monitor strength and weakness in
its processes and procedures. Internal Audit department has enhanced the scope of its functions
with even greater focus on internal controls than in the past. Further, statutory audit, state audit
and the audit committee augments review of internal controls within the Company. During 2003,
no material lapse or weakness in controls has been identified.


Opportunities and threats

With sustained pursuit of the Company’s core plan to be a strong and quality niche regional
airline, Oman Air is well positioned to take advantage of opportunities in this business. Oman Air
is keen to capitalize on these opportunities through innovating marketing, product development,
value added service and expansion into routes that offer synergy with present network. In Airport
Services, opportunities exist with development of Seeb International Airport, expansion and
improvement of present terminal facilities, and anticipated economic growth in the region. Oman
Air will continue to invest in new technologies, state-of-the-art systems, and manpower training.
This combined with competitive pricing, it is hoped, will enable Oman Air to enhance its revenue
and profits in this business.


Significant increase in capacity by competing airlines poses a threat in terms of intense
competition for market share and resultant decline in yields. Rising fuel price is another factor
that threatens to increase operating costs significantly.


Outlook

Although, the region has witnessed build up of vast capacity and resultant competition from some
large carriers, we believe that the strong focus on customer care and innovative product development
can lead to increased market share, greater passenger traffic and revenue growth for Oman Air.
Sustained monitoring of costs combined with economies of scale through measured expansion on
profitable regional routes, on the other hand, can improve margins in the Company’s airline business.
In Airport Services business, the Company is working jointly with Oman Airport Management Company
to ensure Seeb International Airport strengthens its competitive edge with investment in human
resources, training and modern airport systems.



                                                                                                        Formatted: English (United States)




Chief Executive Officer’s Report


Review of 2003 Results

The airline industry witnessed signs of recovery from the middle of 2003 after
experiencing a sharp drop in demand during the first half of the year due to the war
in Iraq followed closely by the outbreak of the Severe Acute Respiratory Syndrome
(SARS).

For Oman Aviation Services Co., 2003 was the year of consolidation after
undertaking major network expansion in 2002.            Year-on-year there was
improvement on all fronts.        Oman Air carried 79,000 more passengers,
representing a growth of 9%. Capacity deployed and actual utilisation rose by
18%, maintaining a seat factor of 66%. The Airport Services Division benefited
from increased operations by other airlines at Seeb International Airport where
1,402 additional flights were operated during 2003 representing a growth rate of
8%. This translated into higher ground handling and catering revenues.

As pointed out in the Chairman’s Report, the Company achieved a major
turnaround in 2003 by reversing a three years trend of operating losses to achieve
an operating profit of RO 0.586 in 2003. Another significant improvement in the
financial results is the enhancement of the cash profit from operating activities from
RO 0.744 million in 2002 to RO 3.279 million in 2003. Through aircraft purchasing,
the long-term assets for the company were increased to RO 50.2 million, a growth
of 19%.

Major Factors Affecting 2003 Results

The company, like the rest of the industry, suffered from the sharp increase in fuel
prices which increased by 40% during 2003 adding RO 1.0 million to our operating
costs.
Although the Company succeeded in winning the duty free contract for Seeb Airport
under a joint venture with Aer Rianta, it meant a loss of RO 3.4 million in revenues
for the company in favor of the new joint venture company.

Major Achievements in 2003

The company was successful in securing financing for B 737-800 aircraft on very
attractive terms. Financing arrangement was supported by US Exim bank, and
hence the Company was able to negotiate extremely low interest rate. Further, the
Company took advantage of prevailing low long term interest rates and swapped
floating rate loan for an attractive fixed rate for the entire loan duration.

In its pursuit for improved efficiencies, the Company continued to invest in new
systems. Most notable is the Oracle based Enterprise Resource Planning System
for finance, purchasing and inventory functions. Moreover, the Company has
invested in automation of the departure control system at outstations further
improving the services rendered to our customers.

With the objective of controlling quality and lowering costs, the Company switched
to self line-maintenance handling at Dubai airport, the second busiest station after
Muscat. We also increased double catering for our flights from Muscat to reduce
catering costs overseas. Furthermore, we introduced our own ground training
centre for pilots which significantly reduced the pilot training cost and cost of travel
abroad.

New Threats

No doubt the creation of new airlines in the gulf region poses a possible threat for
the Company especially if such airlines are subsidised by their governments. The
Company is facing this threat by improving its product through increased flights on
key routes, diversifying into new markets, and forming alliances to protect the home
market and expand revenue opportunities through code sharing on new markets.
The recently announced code share with Gulf Air is an example of this strategy.

Outlook for 2004

The outlook for 2004 is quite positive. For the Airport Services activities we expect
healthy growth in revenues following the continued increase in operations by all
major carriers serving Seeb Airport.

For the Airline we expect improved results due to traffic growth, less competition on
some routes and anticipated decline in fuel prices from the second half of 2004.
The company will continue with its approach of cautious but steady growth with the
objective of achieving profitability in 2004 and beyond.

I would like to take this opportunity to express my appreciation to the Board of
Directors for their support and to thank the staff in the company for their dedication.
Abdulrahman bin Harith Al Busaidy
Chief Executive Officer




             OMAN AVIATION SERVICES CO. SAOG

             Financial statements

             31 December 2003
Registered office   Principal place of business:

P O Box 58          Near Seeb International Airport
Postal Code 111     Seeb
Sultanate of Oman   Sultanate of Oman
OMAN AVIATION SERVICES CO. SAOG

Financial statements
31 December 2003




Contents                          Page

Report of the Auditors               1

Balance sheet                        2

Income statement                     3

Statement of changes in equity       4

Cash flow statement                  5

Notes                             6-25
     REPORT OF THE AUDITORS TO THE SHAREHOLDERS OF
            OMAN AVIATION SERVICES CO. SAOG



We have audited the accompanying balance sheet of Oman Aviation Services Co. SAOG (“the Company”)
as of 31 December 2003, and the related statements of income, changes in equity and cash flows for the
year then ended as set out on pages 2 to 25.

Respective responsibilities of the Board of Directors and the Auditors

These financial statements are the responsibility of the Company’s Board of Directors. Our responsibility is
to express an opinion on these financial statements based on our audit.

Basis of Opinion

We conducted our audit in accordance with International Standards on Auditing as promulgated by the
International Federation of Accountants. Those Standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made
by the Board of Directors, as well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.

Opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position of the
Company as of 31 December 2003 and the results of its operations and its cash flows for the year then
ended in accordance with International Financial Reporting Standards as promulgated by the International
Accounting Standards Board and comply, in all material respects, with the Commercial Companies Law of
1974, as amended, and the disclosure requirements of Capital Market Authority.
                                                                                                                                                     Page 2
 Oman Aviation Services Co. SAOG


Balance sheet
as at 31 December 2003
                                                                                                      2003                                           2002
                                                                     Note                           RO’000                                         RO’000
ASSETS
Aircraft, property, plant and equipment                                  3                              50,196                                         42,130
Investment securities                                                    4                                     731                                        1,488
Investment in an associate company                                       5                                     147                                                 -
Long term receivables                                                    6                                     836                                           772
Deferred tax asset                                                      13                                     200                                           930
                                                                                          -----------------------------                 -----------------------------
Total non-current assets                                                                                52,110                                         45,320
                                                                                          -----------------------------                 -----------------------------

Inventories                                                              7                                 1,976                                          2,635
Accounts receivable and prepayments                                      8                              12,320                                         12,210
Term deposits                                                            9                                     534                                        2,925
Bank balances and cash                                                  10                                 2,839                                             654
                                                                                          -----------------------------                 -----------------------------
Total current assets                                                                                    17,669                                         18,424
                                                                                          -----------------------------                 -----------------------------
TOTAL ASSETS                                                                                            69,779                                         63,744
                                                                                           ===========                                   ===========
EQUITY AND LIABILITIES
Equity
Share capital                                                           14                              12,075                                         10,500
Legal reserve                                                           15                                 3,283                                          3,283
General reserve                                                         16                                           -                                    1,678
Development reserve                                                     17                                           -                                    1,000
Accumulated losses                                                                                              (35)                                               -
Cumulative changes in fair value                                        18                                        24                                        (120)
                                                                                          -----------------------------                 -----------------------------
Total equity                                                                                            15,347                                         16,341
                                                                                          -----------------------------                 -----------------------------
Liabilities
Provision for maintenance of aircraft, engine and rotables              12                                 1,863                                             998
Interest-bearing loans and borrowings                                   19                              32,094                                         27,568
Employees’ end of service benefits                                      21                                 1,725                                          1,694
                                                                                          -----------------------------                 -----------------------------
Total non-current liabilities                                                                           35,682                                         30,260
                                                                                          -----------------------------                 -----------------------------

Bank overdrafts                                                         10                                 141                                           607
Accounts payable and accruals                                           11                              14,919                                        14,919
Current portion of provision for maintenance of aircraft,
engine and rotables                                                     12                     141                                                           235
Current portion of interest-bearing loans and borrowings                19                 3,549                                                          1,382
                                                                          -----------------------------                                 -----------------------------
Total current liabilities                                                               18,750                                                         17,143
                                                                          -----------------------------                                 -----------------------------
Total liabilities                                                                       54,432                                                         47,403
                                                                          -----------------------------                                 -----------------------------
TOTAL EQUITY AND LIABILITIES                                                            69,779                                                         63,744
                                                                           ===========                                                   ===========
Net asset per share (RO)                                                                   1.271                                                          1.556
                                                                           ===========                                                   ===========
The notes on pages 6 to 25 form an integral part of these financial statements.

These financial statements were approved and authorised for issue by the Board of Directors on 16 March
2004 and signed on their behalf by:

-----------------------------------------------                                  --------------------------------------------------------------
Chairman                                                                         Director

The report of the Auditors is set forth on page 1.
                                                                                                                      Page 3
Oman Aviation Services Co. SAOG

Income statement
for the year ended 31 December 2003
                                                                                     2003                            2002
                                                           Note                    RO’000                          RO’000

Revenue                                                      22                       60,568                           60,023

Expenditure                                                  23                       (59,982)                        (60,280)
                                                                         -----------------------------   -----------------------------
Profit (loss) from operations                                                                 586                            (257)

Impairment of aircraft and spares                                                            113                           (883)

Net realised profit on sale of investment securities                                        266                                18

Interest and investment income                                4                                66                            168

Share of profits of an associate company                      5                                72                                 -

Increase in fair value of long term receivables               6                                64                              16

Finance cost                                                                                (890)                            (592)
                                                                         -----------------------------   -----------------------------
Profit (loss) before concession fee and tax                                                   277                        (1,530)

Concession fee                                               24                             (721)                       (1,112)
                                                                         -----------------------------   -----------------------------
Loss before tax                                                                             (444)                       (2,642)

Income tax                                                   13                             (694)                             887
                                                                         -----------------------------   -----------------------------
Net loss for the year                                                                   (1,138)                          (1,755)
                                                                          ===========                     ===========
Basic loss per share (baizas)                                26                                (94)                          (145)
                                                                          ===========                     ===========

The notes on pages 6 to 25 form an integral part of these financial statements.


The report of the Auditors is set forth on page 1.
                                                                                                                                                                Page 4
Oman Aviation Services Co. SAOG

Statement of changes in equity
for the year ended 31 December 2003

                                                                                                                                  Cumulative
                                                                                                     Develop                        changes
                                             Share    Legal                      General               -ment             Retained     in fair
                                            capital reserve                       reserve             reserve            earnings      value  Total
                                           RO’000 RO’000                         RO’000              RO’000              RO’000     RO’000 RO’000

Balance at 31 December 2001                  10,500               3,283               3,354               1,000                      79             (436) 17,780
Net loss for the year                                     -                 -                   -                   -       (1,755)                         -     (1,755)
Transfer from general reserve                             -                 -       (1,676)                         -         1,676                         -                 -
Cumulative changes in fair value                          -                 -                   -                   -                   -             316               316
                                           ----------------- -----------------   -----------------   -----------------   -----------------   ----------------- -----------------
Balance at 31 December 2002                  10,500               3,283               1,678               1,000                         -           (120) 16,341
Net loss for the year                                     -                 -                   -                   -       (1,138)                         -     (1,138)
Bonus issue
(refer notes 16 & 17)                1,575                       -                     (575)            (1,000)                       -                   -                  -
Transfer from general
reserve (refer note 16)                        -                 -                  (1,103)                       -           1,103                         -                 -
Cumulative changes in fair value               -                 -                              -                 -                     -             144               144
                                ----------------- -----------------              ----------------- -----------------     -----------------   ----------------- -----------------
Balance at 31 December 2003       12,075               3,283                                    -                 -                (35)                  24 15,347
                               ======= =======                                   ======= =======                         =======             ======= =======


The notes on pages 6 to 25 form an integral part of these financial statements.

The report of the Auditors is set forth on page 1.
                                                                                                                      Page 5
Oman Aviation Services Co. SAOG

Cash flow statement
for the year ended 31 December 2003

                                                                                     2003                             2002
                                                                 Note              RO’000                           RO’000
Operating activities
Loss before taxation                                                                       (444)                        (2,642)
Adjustments for:
Net gain on sale of investment                                                              (266)                              (18)
Increase in fair value of long term receivables                                                (64)                            (16)
Depreciation                                                                              2,871                            2,248
Accrual for employees’ end of service benefits                                                310                             253
Interest and investment income                                                                 (66)                          (168)
Finance cost                                                                                  890                             592
Loss on sale of aircraft, property, plant and equipment                                          46                              42
Impairment of aircraft and spares                                                            (113)                            602
                                                                         -----------------------------   -----------------------------
Operating profit before working capital changes                                           3,164                               893
Decrease (increase) in inventories                                                            659                            (462)
(Increase) decrease in receivables                                                          (182)                             336
Increase in payables                                                                                -                         410
Increase in aircraft maintenance provision                                                    771                             309
                                                                         -----------------------------   -----------------------------
Net cash from operations                                                                  4,412                            1,486
Finance cost                                                                                (890)                            (592)
Employees’ end of service benefits paid                                                     (279)                            (150)
Income tax refund                                                                                36                                 -
                                                                         -----------------------------   -----------------------------
Net cash from operating activities                                                        3,279                               744
                                                                         -----------------------------   -----------------------------
Investing activities
Purchase of aircraft, property, plant and equipment                                   (11,405)                        (18,408)
Investment in an associate company                                                             (75)                                 -
Decrease in term deposits                                                                           -                      1,000
Investment and interest income                                                                   66                           168
Proceeds from sale of aircraft, property, plant and equipment                                 532                                63
Proceeds from sale or maturity of investments                                             1,170                                  79
                                                                         -----------------------------   -----------------------------
Net cash from investing activities                                                      (9,712)                       (17,098)
                                                                         -----------------------------   -----------------------------
Financing activities
Interest-bearing loans and borrowings obtained                                            7,870                         22,560
Repayment of interest-bearing loans and borrowings                                      (1,177)                          (1,183)
Repayment of short term loan                                                                        -                    (3,881)
                                                                         -----------------------------   -----------------------------
Cash from financing activities                                                            6,693                         17,496
                                                                         -----------------------------   -----------------------------

Net change in cash and cash equivalents                                                      260                          1,142

Cash and cash equivalents at the beginning of the year                                    2,972                            1,830
                                                                         -----------------------------   -----------------------------
Cash and cash equivalents at the end of the year                10                        3,232                            2,972
                                                                          ===========                     ===========

The notes on pages 6 to 25 form an integral part of these financial statements.

The report of the Auditors is set forth on page 1.
                                                                                                         Page 6
Oman Aviation Services Co. SAOG

Notes
(forming part of the financial statements)

1        Legal status and principal activities

          Oman Aviation Services Co. SAOG (“the Company”) is an Omani joint stock company registered
         under the Commercial Companies Law of the Sultanate of Oman. The principal activity of the
         Company is to transport passengers and freight on a scheduled and charter basis and to provide
         ground handling, catering and other airline related services. In an Extra-ordinary General Meeting
         held on 15 December 2003, the shareholders of the Company approved the change of name of the
         Company from Oman Aviation Services Company SAOG to Oman Air SAOG. The change of
         name is in the process of being registered with the Ministry of Commerce & Industry.

         The Company was formed under Royal Decree 52/81 dated 24 May 1981 and commenced
         operations on 1 October 1981. Initial duration of the Company was for a period of 20 years from
         the date of commercial registration to 31 January 2002. Prior to expiry, the Company’s
         shareholders passed a resolution in an Extra-ordinary General Meeting on 27 January 2002
         extending the Company’s duration for an indefinite period.

2        Principal accounting policies

a)      Statement of compliance

         These financial statements have been prepared in accordance with International Financial
         Reporting Standards as promulgated by the International Accounting Standards Board (“IASB”),
         interpretations used by the Standing Interpretations Committee of the IASB and the requirements
         of the Commercial Companies Law of 1974, as amended and the Capital Market Authority.

b)      Basis of preparation

         These financials statements are presented in Rials Omani (“RO”). They are prepared on a fair
         value basis for financial assets and liabilities held for trading, and available for sale assets, except
         those for which a reliable measure of fair value is not available. Other financial assets and
         liabilities and non-financial assets and liabilities are stated at amortised cost or historical cost
         basis.

         The accounting policies have been consistently applied and are consistent with those used in the
         previous year.

c)      Aircraft, property, plant and equipment and depreciation

        Owned assets

         Items of aircraft, property, plant and equipment are stated at cost less accumulated depreciation
         and impairment losses.

         Depreciation is charged to the income statement on a straight-line basis on all aircraft, property,
         plant and equipment, with the exception of capital work in progress. The estimated useful lives are
         as follows:
                                                                                                       Years
         Aircraft, engines and rotables                                                             12 to 25
         Tools                                                                                              5
         Buildings                                                                                   5 to 25
         Plant and equipment                                                                     5 to 7&1/2
         Vehicle and furniture                                                                         3 to 5
                                                                                                       Page 7
Oman Aviation Services Co. SAOG

Notes
(forming part of the financial statements)

2        Principal accounting policies (continued)

c)      Aircraft, property, plant and equipment and depreciation (continued)

        Leased assets

        Leases in terms of which the Company assumes substantially all the risks and rewards of
        ownership are classified as finance leases. Aircraft, property, plant and equipment acquired by
        way of finance lease is stated at an amount equal to the lower of its fair value and the present
        value of the minimum lease payments at the inception of the lease, less accumulated depreciation
        and impairment losses. Lease payments are accounted for as described in accounting policy 2(r)
        below.

d)      Investment securities

         All investments are initially recorded at cost being the fair value of the consideration given,
         including acquisition charges associated with the investments.

         After initial recognition, investments are classified as being “available for sale” and are stated at
         fair value, with unrealised gains and losses reported as a separate component of equity until the
         investment is sold, collected or otherwise disposed off, or the investment is determined to be
         impaired, at which time the cumulative gain or loss previously reported in equity is included in the
         statement of income for the period in which they arise.

         For investments actively traded in organised financial markets fair value is determined by
         reference to the market price. For investments where the market price is not available, fair value
         is estimated based on discounted cash flow and other valuation techniques. Where discounted cash
         flow techniques are used, estimated future cash flows are based on management’s best estimates
         and then discount rate is a market related rate for a similar instrument at the balance sheet date.

e)       Investment in associates

         An associate is an enterprise in which the Company has significant influence, but not control, over
         the financial and operating policies. The financial statements include the Company’s share of the
         profits and losses of the associate on an equity accounting basis, from the date that significant
         influence commences until the date that significant influence ceases. When the Company’s share
         of the losses exceed the carrying amount of investment in the associate, the carrying amount is
         reduced to nil and recognition of further losses is discontinued except to the extent that the
         Company has incurred obligations in respect of the associate.

f)      Long term receivables

         Long-term receivables are carried in the balance sheet at their principal amount less any
         impairment for time value of money.

g)      Inventories

         Inventories are stated at the lower of cost or net realisable value. Net realisable value is based on
         estimated selling prices less any further costs expected to be incurred on completion and disposal.

         The cost of inventories is determined using the weighted average method and includes expenditure
         incurred in acquiring the inventories and bringing these to their present location and condition.
                                                                                                       Page 8
Oman Aviation Services Co. SAOG

Notes
(forming part of the financial statements)

2        Principal accounting policies (continued)

h)      Accounts receivable

         Accounts receivable are stated at their cost less impairment losses.

i)      Impairment

         The carrying amount of the Company’s assets, other than inventories (accounting policy 2(g)) and
         deferred tax assets (accounting policy 2(m)) are reviewed at each balance sheet date to determine
         whether there is any indication of impairment. If any such indication exists, the assets recoverable
         amount is estimated. An impairment loss is recognised in the Income Statement wherever the
         carrying amount of an asset other than investment (accounting policy 2(d)) exceeds its recoverable
         amount.

         The recoverable amount of the Company’s receivable is calculated as the present value of
         expected future cash flows, discounted at the original effective interest rate inherent in the asset.
         The recoverable amount of other assets is the greater of their net selling price and value in use. In
         assessing value in use, the estimated future cash flows are discounted to their present value using a
         pre-tax discount rate that reflects current market assessments of the time value of money and the
         risks specific to the asset. For an asset that does not generate largely dependent cash flows, the
         recoverable amount is determined for the cash generating unit to which the asset belongs.

         An impairment loss in respect of receivable is reversed if the subsequent increase in recoverable
         amount can be related objectively to an event occurring after the impairment loss was recognised.
         In respect of other assets, an impairment loss is reversed if there has been a change in the
         estimates used to determine the recoverable amount.

         An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed
         the carrying amount that would have been determined, net of depreciation or amortisation, if no
         impairment loss had been recognised.

j)      Cash and cash equivalents

         For the purpose of statement of cash flows, cash and cash equivalents consist of cash on hand,
         balances with banks and deposits maturing within three months of the value date of the deposits
         net of outstanding bank overdrafts.

k)      Accounts payable and accruals

         Accounts payable are stated at their cost. Liabilities are recognised for amounts to be paid in the
         future for goods or services received, whether or not billed to the Company.

l)      Interest-bearing borrowings

         Interest-bearing borrowings are recognised initially at cost, less attributable transaction costs.
         Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any
         difference between cost and redemption value being recognised in the income statement over the
         period of the borrowings on an effective interest basis. Instalments due within one year are shown
         as a current liability. Interest is charged as an expense as it accrues, with unpaid amounts included
         in “accounts payable and accruals”.
                                                                                                        Page 9
Oman Aviation Services Co. SAOG

Notes
(forming part of the financial statements)

2        Principal accounting policies (continued)

m)      Taxation

         Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is
         recognised in the income statement except to the extent that it relates to items recognised directly
         in equity, in which case it is recognised in equity.

         Current tax is the expected tax payable on the taxable income for the current year, using tax rates
         enacted or substantially enacted at the balance sheet date, and any adjustments to tax payable in
         respect of previous years.

         Deferred tax is provided using the balance sheet liability method, providing for temporary
         differences between the carrying amounts of assets and liabilities for financial reporting purposes
         and the amounts used for taxation purposes. The amount of deferred tax provided is based on the
         expected manner of realisation or settlement of the carrying amount of assets and liabilities, using
         tax rates enacted or substantially enacted at the balance sheet date.

         A deferred tax asset is recognised only to the extent that it is probable that future taxable profits
         will be available against which the unused tax losses and credits can be utilized. Deferred tax
         assets are reduced to the extent that it is no longer probable that the related tax benefit will be
         realised.

n)      Employees' end of service benefits

         Contributions to a defined retirement plan for Omani employees are recognised as an expense in
         the income statement as incurred.

         Accruals for unfunded defined benefit retirement plan for non-Omani employees are based on the
         liability that would arise if the employment of employees were terminated at the balance sheet
         date.

o)      Provisions

         A provision is recognised in the balance sheet when the Company has a legal or constructive
         obligation as a result of a past event and it is probable that an outflow of economic benefits will be
         required to settle the obligation. If the effect is material, provisions are determined by discounting
         the expected future cash flows at a pre-tax rate that reflects current market assessments of the time
         value of money and where appropriate, the risks specific to the liability.
                                                                                                   Page 10
Oman Aviation Services Co. SAOG

Notes
(forming part of the financial statements)

2        Principal accounting policies (continued)

p)      Revenue

         Passenger ticket and cargo airway bills sales, net of commission, are recognised as current
         liabilities in an unearned revenue account until recognised as revenue when the transportation
         service is provided. Revenue in respect of unused tickets is recognised after two years from the
         date of sale.

         Other revenue is recognised at the time the service is provided, net of rebate.

         Interest income is recognised as the interest is accrued. Dividend income is recognised when the
         Company’s right to receive payment is established.

q)      Operating lease payments

         Payments made under operating leases are recognised in the income statement on a straight line
         basis over the term of lease. Lease incentives received are recognised in the income statement as
         an integral part of the total lease expense.

r)      Finance expenses

         All interest costs incurred in connection with borrowings are expensed.

         The interest expense component of finance lease payments is recognised in the income statement
         using the effective interest rate method.

s)      Foreign currencies

         Transactions in foreign currencies are translated into Rials Omani at the foreign exchange rate
         ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign
         currencies are retranslated into Rials Omani at the rate of exchange ruling at the balance sheet
         date. Foreign exchange differences arising on translations are recognised in the income statement.

t)       Segment reporting

         A segment is a distinguishable component of a company that is engaged in either providing
         services (business segment) or in providing services within a particular environment (geographical
         segment), which is subject to risks and rewards that are different from those of other segments.
                                                                                                                                                  Page 11
Oman Aviation Services Co. SAOG

Notes
(forming part of the financial statements)

3        Aircraft, property, plant and equipment

                                   Aircraft,                                Plant                           Furniture           Capital
                                engines and                                  and                                 and            work in
                                    rotables           Tools Buildings equipment                             vehicles          progress             Total
                                   RO’000             RO’000 RO’000      RO’000                              RO’000            RO’000             RO’000
         Cost
         1 January 2003              37,092                  722          6,830              9,429              3,957              6,498           64,528
         Acquisitions                       499                   2              12              239                344         10,309             11,405
         Transfers                   16,544                        -                -               20                    -    (16,589)                    (25)
         Disposals/write offs         (7,264)                 (30)          (146)              (192)                 (45)               (64)        (7,741)
                                    ---------------- ---------------- ----------------   ----------------   ----------------   ----------------   ----------------
         31 December 2003            46,871                  694          6,696              9,496              4,256                  154         68,167
                                    ---------------- ---------------- ----------------   ----------------   ----------------   ----------------   ----------------
         Depreciation and
         Impairment losses
         1 January 2003                 9,762                590          2,482              6,635              2,929                        -     22,398
         Charge for the year            1,680                   17            338                530                306                      -        2,871
         Disposals                    (6,978)                 (27)          (117)              (153)                 (23)                    -      (7,298)
                                    ---------------- ---------------- ----------------   ----------------   ----------------   ----------------   ----------------
         31 December 2003               4,464                580          2,703              7,012              3,212                        -     17,971
                                    ---------------- ---------------- ----------------   ----------------   ----------------   ----------------   ----------------
         Carrying amount

         31 December 2003            42,407              114             3,993            2,484               1,044                154            50,196
                                     ======           ======            ======           ======              ======             ======            ======
         31 December 2002            27,330              132             4,348            2,794               1,028              6,498            42,130
                                     ======           ======            ======           ======              ======             ======            ======

         The Company owns one Boeing 737-700 and two ATR 42-500 aircraft and has obtained one
         Boeing 737-800 under finance lease arrangements. The Company disposed three Fokker 27
         aircraft during the year at a net loss of approximately RO 516,000. The loss was set-off against an
         impairment of RO 603,000 established in the previous year. A financing agreement was signed
         with lead arrangers on 4th February 2003 for the purchase of one Boeing 737-700 (delivered in
         June 2002) and aircraft spares. The loan is secured by aircraft mortgage and commercial mortgage
         in respect of spares (note 19).

         During the year ended 31 December 2003, the Company entered into lease agreement with Wings
         of Oman Limited, a company registered in the Cayman Islands, for the lease of one Boeing 737-
         800 (delivered in July 2003); the net carrying amount of the leased aircraft was in the amount of
         approximately RO 16,104,000. The leased aircraft secures lease obligation (note 20).

         The two ATR 42-500 aircrafts are subject to a mortgage in favour of a bank to secure a term loan
         (note 19).
                                                                                                                               Page 12
Oman Aviation Services Co. SAOG

Notes
(forming part of the financial statements)

3        Aircraft, property, plant and equipment (continued)

         Land on which buildings have been constructed by the Company is owned by the Directorate
         General of Civil Aviation and Meteorology. In accordance with the combined term sheet
         agreement with the DGCAM, dated June 2001, the Company was granted the continuing right to
         occupy and use the premises for the provision of ground handling, cargo handling and catering
         services at the Seeb and Salalah airports (note 24). On expiry of the term sheet agreement, the
         assets in existence, purchased prior to 1 January 2002, will be purchased by the Airport Operator
         at their open market value, as determined by an independent valuer except for the catering
         premises building which will be purchased at its net book value.

         Additions to assets subsequent to 1 January 2002 approved by the Airport Operator during the
         validity of the term sheet agreement will be purchased by the Airport Operator at an agreed
         residual value on expiry of the agreement.

4        Investment securities                                                                 2003                             2002
                                                                                             RO’000                           RO’000
         Available for sale investments

         Quoted local equity investments                                                             606                          1,363
         Unquoted local equity investments                                                           125                              125
                                                                                             ----------------                 ----------------
                                                                                                     731                          1,488
                                                                                              ======                           ======
         Available for sale investments are analysed as follows:

                                                    Fair value             At cost                   Fair value                At cost
                                                          2003               2003                         2002                  2002
                                                      RO’000              RO’000                       RO’000                 RO’000
         Quoted local equity investments:
         Investments                                           428            1,020                                997             1,410
         Banking                                                     -                  -                          198                202
         Services                                              178                   46                            150                   46
         Industrial                                                  -                  -                             18                 11
                                                       ----------------   ----------------                 ----------------   ----------------
                                                               606            1,066                             1,363              1,669
                                                        ======             ======                           ======             ======
         Unquoted local equity investments:
         Services                                          125                125                             125                135
                                                        ======             ======                          ======             ======
                                                                                                                                      Page 13
Oman Aviation Services Co. SAOG
Notes
(forming part of the financial statements)

4        Investment securities (continued)

         Details of the Company’s investment holding exceeding 10% of the market value of the Company’s
         total portfolio as of 31 December 2003 are as follows:

                                                        Portfolio       Number of                            Market
                                                         holding         securities                           value                     Cost
                                                               %                                            RO ‘000                  RO ‘000
         MSM quoted securities:
         Oman & Emirates Investment Holding
         Company SAOG                                         68 1,000,000                                          410                 1,010
         National Finance Company SAOG                        27    65,204                                          162                    36
                                                           ----------   ----------------------           ----------------------    --------------------
                                                                95       1,065,204                                     572                 1,046
                                                           ====         =========                          ========                ========
         Interest and investment income are as follows:
                                                                                                   2003                                 2002
                                                                                                 RO’000                               RO’000

         Interest on term deposits                                                                          33                                 130
         Dividends                                                                                          33                                    38
                                                                                                 ----------------                      ----------------
                                                                                                            66                                 168
                                                                                                  ======                                ======
5        Investment in an associate company

         During the year, the Company acquired 50% ownership in Oman Sales and Services LLC, a limited
         liability company registered in the Sultanate of Oman, at a cost of RO 75,000. The Company’s
         share of post-acquisition net profit of the associate company for the year ended 31 December 2003
         was RO 72,000 (2002 – Nil).

6        Long term receivables

         Long-term receivables represent interest free deposits placed with International Leasing Finance
         Corporation (ILFC) and Cimber Air for the lease of three Boeing 737 NG aircraft and two ATR 42-
         500 aircraft respectively, in accordance with the terms of the related lease agreement. The deposits
         are receivable at the termination of the lease agreements. The Boeing 737 NG lease agreements
         expire in April 2007, May 2007 and September 2007 and the Cimber Air ATR 42-500 lease
         agreements expire in December 2006.

7        Inventories

         Aircraft consumables                                                                        1,405                                  1,822
         Catering stock                                                                                  271                                1,058
         Passenger consumables                                                                           227                                    267
         General                                                                                         780                                    599
                                                                                           ----------------------                 ----------------------
                                                                                                     2,683                                  3,746
         Provision for obsolete and slow moving items                                                  (707)                              (1,111)
                                                                                           ----------------------                 ----------------------
                                                                                                     1,976                                  2,635
                                                                                             ========                               ========
                                                                                                                   Page 14
Oman Aviation Services Co. SAOG

Notes
(forming part of the financial statements)

7        Inventories (continued)
                                                                                         2003                      2002
                                                                                       RO’000                    RO’000

         Reconciliation of provision for obsolete and slow moving inventory:
         1 January                                                                   1,111                                 617
         Additional provision made during the year                                          40                             241
         Impairment of aircraft spares                                                         -                           281
         Reversals during the year                                                        (27)                                   -
         Amounts utilised during the year                                              (417)                                (28)
                                                                           ----------------------            ----------------------
         31 December                                                                     707                           1,111
                                                                             ========                          ========
8        Accounts receivable and prepayments

         Airlines and charterers                                                              2,467                    2,600
         Travel agents                                                                        3,053                    4,027
         Ministries                                                                               572                      834
         Others                                                                               1,835                    1,259
         Provision for impairment                                                               (426)                    (488)
                                                                                    ----------------------   ----------------------
         Trade accounts receivable                                                            7,501                    8,232
         Other receivables                                                                    4,311                    3,569
         Amounts due from a related party                                                         176                           -
         Prepaid expenses                                                                         253                      330
         Aircraft purchase options                                                                   79                       79
                                                                                    ----------------------   ----------------------
                                                                                           12,320                   12,210
                                                                                      ========                 ========
         Reconciliation of provision for impairment:
         1 January                                                                                488                      590
         Additional provision made during the year                                                   25                          -
         Reversals during the year                                                                 (87)                  (102)
                                                                                    ----------------------   ----------------------
         31 December                                                                              426                      488
                                                                                      ========                 ========

         Owing to the nature of the Company’s operations, it undertakes transactions with a large number
         of customers in various countries. Five customers account for 56% of outstanding receivables at
         31 December 2003 (2002 - five customers accounted for 42%). Trade accounts receivable includes
         amounts totalling RO 814,549 (2002 - RO 1,238,141) due in US Dollars.
                                                                                                          Page 15
Oman Aviation Services Co. SAOG

Notes
(forming part of the financial statements)

9        Term deposits

         Term deposits represent deposits with commercial banks in Oman. All term deposits are
         denominated in Rials Omani with effective interest rates in the range of 0.75% to 1.63% (2002 –
         1.63% to 9%).

10       Cash and cash equivalents

         Cash and cash equivalents included in the statement of cash flows comprise the following
         amounts:
                                                                         2003               2002
                                                                      RO’000             RO’000

         Bank balances and cash                                                     2,839                        654
         Term deposit with a maturity of three months or less
         from the date of acquisition                                                    534                   2,925
         Bank overdrafts                                                               (141)                     (607)
                                                                           ----------------------   ----------------------
                                                                                     3,232                     2,972
                                                                             ========                 ========

         Bank balances and cash include amounts aggregating RO 673,985 (2002 - RO 241,901) held with
         banks in India, Egypt and Tanzania in local currencies. Prior approval from regulatory authorities
         of the respective countries is required for the transfer of these funds.

         Bank overdrafts carry effective annual interest rates at 8% (2002 – 8% to 8.5%).

11       Accounts payable and accruals

         Trade accounts payable                                                      2,613                    2,636
         Advances from customers                                                     6,389                    5,907
         Other payables                                                              3,645                    4,026
         Accrued expenses                                                            2,272                    2,350
                                                                           ----------------------   ----------------------
                                                                                  14,919                   14,919
                                                                             ========                 ========

         Trade accounts payable include aggregate amounts of RO 111,000 (2002: RO 129,000) due in
         foreign currencies, mainly US Dollars.
                                                                                                                      Page 16
Oman Aviation Services Co. SAOG


Notes
(forming part of the financial statements)

12       Provision for maintenance of aircraft, engines and rotables                      2003                        2002
                                                                                        RO’000                      RO’000

         Provision for maintenance of aircraft, engines and rotables                     2,004                      1,233
                                                                                      ========                   ========
         Reconciliation of provision:
         1 January                                                                        1,233                    924
         Additional provisions in the year                                                1,006                1,233
         Utilised during the year                                                           (235)                (924)
                                                                                  -------------------- --------------------
         31 December                                                                      2,004                1,233
                                                                                  ========             ========
         Provision for maintenance of aircraft, engines and rotables is recognised only when the Company
         has a present obligation (legal or constructive) arising from a past event, and the costs to settle the
         obligation are both probable and can to be measured reliably. All other expenditure on maintenance
         of aircraft, engines and rotables is expensed in the year in which it is incurred.

13       Taxation

         The Company is liable to income tax at the rate of 12% on taxable profits in excess of RO 30,000
         in accordance with the taxation law of the Sultanate of Oman. The Secretariat General for
         Taxation at the Ministry of Finance has not completed the Company’s tax assessments for the
         years 2000 to 2002. The Company’s Board of Directors believe that additional taxes, if any, in
         respect of the open tax years would not be significant to the financial position of the Company at
         31 December 2003.

         Deferred tax asset
         At 1 January                                                                              930                        180
         Movement for the year                                                                   (730)                        750
                                                                                     ----------------------     ----------------------
         At 31 December                                                                            200                        930
                                                                                       ========                   ========
         The deferred tax asset comprises the following types of
         temporary differences:

         Taxation losses available for set off                                                1,064                      1,349
         Aircraft, property, plant and equipment qualifying for accelerated
         tax relief                                                                          (1,240)                        (777)
         Provisions                                                                                376                        358
                                                                                     ----------------------     ----------------------
                                                                                                   200                        930
                                                                                       ========                   ========
         Recognised in the income statement
         Current tax – refund/ over provision in respect of prior year                           (36)                      (137)
         Deferred tax – current year                                                             730                       (311)
                       – prior year                                                                -                       (439)
                                                                                    -----------------         --------------------
         Total income tax expense in income statement                                       694                        (887)
                                                                                        =======                     ========
                                                                                                             Page 17
Oman Aviation Services Co. SAOG

Notes
(forming part of the financial statements)

13       Taxation (continued)

         The Company has tax losses available for offset against future taxable profits as follows:

                                                                                   2003                      2002
                                                                                 RO’000                    RO’000

         Available to 31 December 2005 (declared)                                       3,947                    3,947
         Available to 31 December 2006 (declared)                                       3,612                     3,612
         Available to 31 December 2007 (declared)                                       3,685                    3,685
         Available to 31 December 2008 (estimated)                                      5,357                              -
                                                                              ----------------------   ----------------------
                                                                                     16,601                   11,244
                                                                                ========                 ========

14       Share capital

         The authorised, issued and paid up capital of the Company is as follows:

         Shares of RO 1 each                                                     12,075                   10,500
                                                                               ========                 ========

         A bonus issue of 1,575,000 shares proposed by the Board of Directors in 2000, was approved at
         the Company’s Annual General Meeting held in April 2001. A Royal Decree was promulgated
         and bonus shares in the amount of RO 1,575,000 were issued on 23 January 2003.

         Shareholders who own 10% or more of the Company’s shares, whether in their name, or through
         a nominee account, and the number of shares they hold are as follows:

                                                               % of
                                                             holding                    2003                     2002

         Government of the Sultanate of Oman                      34          4,086,620                3,553,583
                                                                ====          ========                 ========

15       Legal reserve

         As required by Article 106 of the Commercial Companies Law of the Sultanate of Oman, the
         company transfers 10% of its net profit for the year to this reserve until such time as the legal
         reserve equals at least one third of the company’s capital. The reserve is not available for
         distribution. There was no transfer to the reserve during the year as the Company incurred a loss.
                                                                                                         Page 18
Oman Aviation Services Co. SAOG

Notes
(forming part of the financial statements)

16       General reserve

         This is a voluntary reserve created by appropriations equivalent to 10% of net profit after
         transfers to legal reserve. No transfer has been made during the current year due to the loss
         incurred. During the current year, RO 575,000 of this reserve was used for the issue of bonus
         shares.

17       Development reserve

         This represents a distributable reserve set aside by the Company for future investment in capital
         assets. During the year, this reserve was used for the issue of bonus shares.

18       Cumulative changes in fair value

         The movement in the cumulative changes in the fair value of available for sale investments is as
         follows:
                                                                              2003                 2002
                                                                           RO’000               RO’000

         1 January                                                                    (120)                    (436)
         Net unrealised gain during the year                                            144                      316
                                                                          ----------------------   ----------------------
         31 December                                                                       24                  (120)
                                                                            ========                 ========

19       Interest-bearing loans and borrowings

         Term loans                                                              22,583                   28,950
         Finance lease liabilities (note 20)                                     13,060                                -
                                                                          ----------------------   ----------------------
                                                                                 35,643                   28,950
                                                                          ----------------------   ----------------------
         Less: current portion classified under current liabilities:
         Term loans                                                               (2,637)                  (1,382)
         Finance lease liabilities (note 20)                                          (912)                            -
                                                                          ----------------------   ----------------------
                                                                                  (3,549)                  (1,382)
                                                                          ----------------------   ----------------------
         Non-current liabilities                                                 32,094                   27,568
                                                                            ========                 ========
                                                                                                                                              Page 19
Oman Aviation Services Co. SAOG

Notes
(forming part of the financial statements)

19       Interest-bearing loans and borrowings (continued)

         As at 31 December 2003, the Company has three term loans. The first term loan in the amount of
         RO 5,676,711 denominated in US Dollars was obtained for the purchase of two ATR 42-500
         aircraft. The loan bears an effective rate of interest of LIBOR + 1% and is repayable in 32 equal
         quarterly instalments commencing from December 2001. The Company has the option to repay
         the loan in part or full on any of the repayment dates. The loan is secured by a mortgage on two
         aircraft (note 3).

         The second term loan in the amount of RO 11,114,868 denominated in US Dollars is for the
         purchase of one Boeing 737-700 aircraft. The loan bears an effective rate of interest of
         LIBOR+1.25% subject to conditions, and is repayable in 40 equal quarterly instalments
         commencing from February 2004. The Company has the option to repay the loan in part or full
         on any of the repayment dates. The loan is secured by a mortgage on the aircraft (note 3).

         The third term loan in the amount of RO 5,790,898 denominated in US Dollars is for the
         purchase of spares for the Boeing aircraft. The loan bears an effective rate of interest of
         LIBOR+1.25% subject to conditions, and is repayable in 40 equal quarterly instalments
         commencing from February 2004. The Company has the option to repay the loan in part or full
         on any of the repayment dates. The loan is secured by a mortgage on aircraft spares.

20       Finance lease liabilities

         The Company obtained a finance lease for one Boeing 737-800. Finance lease liabilities are
         payable as follows:

                                                 2003                                                                   2002
                                     Payments Interest Principal                                Payments             Interest            Principal
                                      RO’000 RO’000 RO’000                                       RO’000              RO’000               RO’000

         Less than one year                  1,364               452                912                        -                   -                    -
         Between one year
         and five years                      5,457 1,466                         3,991                          -                   -                    -
         More than five years                9,209 1,052                         8,157                          -                   -                    -
                                        ----------------- ---------------   -----------------    -----------------   -----------------    -----------------
         Total                            16,030 2,970                        13,060                            -                   -                    -
                                        ----------------- ---------------   -----------------    -----------------   -----------------    -----------------

         Under the terms of the lease agreement no contingent rents are payable.
                                                                                                       Page 20
Oman Aviation Services Co. SAOG

Notes
(forming part of the financial statements)

21       Employees end of service benefits

         In accordance with Oman labour law the company accrues for an end of service benefit for its non
         Omani employees. The amounts recognised in the balance sheet in respect of end of service
         benefits are as follows:
                                                                             2003                   2002
                                                                         RO’000                 RO’000

         End of service liability                                             1,725                    1,694
                                                                           ========                 ========
         Movements in the liability recognised in the balance sheet
         are as follows :
         1 January                                                                  1,694                    1,591
         Expense for the year                                                           310                      253
         End of service benefit paid                                                  (279)                    (150)
                                                                          ----------------------   ----------------------
         31 December                                                                1,725                    1,694
                                                                            ========                 ========
22       Revenue

         Scheduled services - international                                      37,615                   34,403
         Scheduled services - domestic                                              5,282                    5,653
         Handling fees                                                              7,765                    6,510
         Catering                                                                   3,546                    6,925
         Air charter services                                                       6,181                    6,424
                                                                          ----------------------   ----------------------
                                                                                 60,389                   59,915
         Others                                                                         179                      108
                                                                          ----------------------   ----------------------
                                                                                 60,568                   60,023
                                                                            ========                 ========
23       Expenditure

         Employee costs                                                          19,204                   18,130
         Aircraft operating expenses                                             17,738                   16,406
         Operating lease rentals on aircraft                                        7,534                    8,864
         Cost of catering materials consumed                                        1,771                    3,713
         Insurance cost                                                             1,407                    1,605
         Passenger related costs                                                    2,920                    2,745
         Depreciation                                                               2,871                    2,248
         Omani training and development costs                                           163                         68
         Other                                                                      6,374                    6,501
                                                                          ----------------------   ----------------------
                                                                                 59,982                   60,280
                                                                            ========                 ========
                                                                                                              Page 21
Oman Aviation Services Co. SAOG

Notes
(forming part of the financial statements)

23       Expenditure (continued)

         Employee cost includes the following:
                                                                                   2003                      2002
                                                                                 RO’000                    RO’000

         Staff costs:
         Wages and salaries                                                          16,566                   15,768
         Other benefits                                                                 1,786                    1,616
         Increase in liability for unfunded defined benefit retirement plan                 310                      253
         Contribution to a defined contribution retirement plan                             542                      493
                                                                              ----------------------   ----------------------
                                                                                     19,204                   18,130
                                                                                ========                 ========

         The number of employees at 31 December 2003 was 2,526 (2002: 2,448).

24       Aviation services agreement and combined term sheet agreement

         In accordance with the aviation services agreement between the Company and the Ministry of
         Communications, Government of the Sultanate of Oman (the “Government”), the Company has
         been granted the right to operate domestic and international airline services and to provide aircraft
         passenger and cargo handling facilities and airline catering and other services in Oman. The
         Company has the sole right to use the utilities and facilities provided by the Government for such
         purposes. The agreement was for a period of twenty years up to 24 May 2001.

         In June 2001 through a combined term sheet agreement, the Director General of Civil Aviation and
         Meteorology (DGCAM), acting in accordance with a Cabinet Decision of 4 April 2000 and a
         decision issued by the Committee of Ministers dated 13 June 2000, extended the Company’s
         ground handling and cargo handling services concessions, for periods of five years, and its catering
         services concession for a period of ten years, all effective from 1 January 2002. The Company’s
         rights to operate its scheduled and charter airline services were extended for an indefinite period.

         The following charges set out in the aviation services agreement are included in the financial
         statements:

         Rent                                                                               200                      200
         Concession fee                                                                     721                  1,112
                                                                              ----------------------   ----------------------
         Total                                                                              921                  1,312
                                                                                ========                 ========
                                                                                                    Page 22
Oman Aviation Services Co. SAOG

Notes
(forming part of the financial statements)

24       Aviation services agreement and combined term sheet agreement (continued)

         Under the combined term sheet agreement, effective 1 January 2002, the Company will pay to the
         Airport Operating Company the following concession fees:

         Ground handling fee:       7.5% of the monthly turnover received from ground handling services
                                    provided to third parties.

         Cargo handling fee:        7.5% of the monthly turnover received from cargo handling services
                                    provided to third parties.

         Catering fees:             5% of the monthly turnover received from catering services provided
                                    for use on Airport for third parties.

                                    3% of monthly turnover for off-airport catering services.

         Duty Free Shops:           20% on revenues up to RO 750,000 and thereafter at the rate of 15% for
                                    sales up to 31 January 2003.

                                    During the year ended 31 December 2003, the operations of duty free
                                    shops have been transferred to a newly formed company, Oman Sales
                                    and Services LLC (“OSS”), owned equally by the Company and Aer
                                    Rianta International (Middle East) WLL, a limited liability company
                                    registered in the Kingdom of Bahrain. OSS has been awarded the duty
                                    free contract for nine and a half years effective from 1 February 2003.
                                    The duty free concession fee effective from 1 February 2003 is paid by
                                    OSS.

25       Related party transactions

         The Company, in the ordinary course of business, purchases goods from certain related parties,
         i.e. shareholders and senior management and companies of which they are the principal owners.
         The Board of Directors believes that the terms of purchases are comparable with those that could
         be obtained from third parties. During the year, the Company transferred inventories pertaining to
         Duty Free shops to OSS, an associate company at book value.

         Transactions with related parties, or holders of 10% or more of the Company’s shares or their
         family members, included in the statement of income are as follows:

                                                                                2003                2002
                                                                              RO’000              RO’000

         Transfer of Duty Free shop inventories to OSS                            491                   -
         Purchases                                                                897                 110
                                                                             ========            ========
         Director’s sitting fees                                                   20                  21
                                                                             ========            ========
                                                                                                                                                  Page 23
Oman Aviation Services Co. SAOG
Notes
(forming part of the financial statements)

26       Basic loss per share

         Basic loss per share are calculated by dividing the net loss for the year by the weighted average
         number of shares outstanding during the year as follows:
                                                                                 2003                2002
                                                                              RO’000              RO’000

         Net loss for the year                                                        (1,138)                 (1,755)
                                                                              ---------------------- ----------------------
         Weighted average number of shares outstanding during the year               12,075                 12,075
                                                                              ---------------------- ----------------------
         Basic loss per share (baizas)                                                       (94)                (145)
                                                                                ========               ========
         Since the bonus issue of 1,575,000 shares during the year is an issue without consideration, the issue
         is treated as if it had occurred prior to the beginning of 2002.

27       Business and geographical segments

         Operating segment

         The Company is organised into four major operating divisions - airline, catering, cargo and ground
         handling. The airline division provides passenger and cargo services on a scheduled and charter
         basis. The catering division provides in-flight and airport retail catering services. The cargo division
         provides cargo handling services. The ground handling division provides airline support services.

         The Company reports its primary segments information separately for its airline and catering
         divisions and by combining its cargo and ground handling divisions. This information is presented
         as follows:
                                                                      Ground and
                                                                             cargo
                                  Airline             Catering           handling                Total
                                   2003             2002            2003            2002           2003            2002            2003             2002
                                         RO’000                             RO’000                           RO’000                         RO’000
         Revenue
         Total revenue          50,495          47,728             5,355           8,381          8,082           6,870        63,932           62,979
         Inter division revenue      -               -            (1,809)         (1,456)        (1,681)         (1,568)       (3,490)          (3,024)
         Other income                -               -                 -               -              -               -           126               68
                               --------------   --------------   -------------- -------------- -------------- --------------   --------------   --------------
         External revenue        50,495         47,728             3,546           6,925           6,401          5,302        60,568           60,023
                              ======            ======           ====== ====== ====== ======                                   ======           ======
         Financial Performance
         Segment profit (loss)
         including inter-division
         profit                  1,394                544             913          1,698           1,532             612          3,839            2,854
                              ======            ======           ====== ====== ====== ======                                   ======           ======
         Common costs                                                                                                           (3,253)          (3,111)
                                                                                                                               ======           ======
         Operating profit (loss)                                                                                                    586             (257)
         Finance cost                                                                                                              (890)            (592)
         Interest and investment income                                                                                              66              168
         Share of profit of an associate company                                                                                     72                -
         Increase in fair value of long term
          receivables                                                                                                                64              16
         Profit on sale of investment                                                                                               266              18
         Impairment of aircraft and spares                                                                                          113            (883)
         Concession fee                                                                                                            (721)         (1,112)
                                                                                                                               --------------   --------------
         Loss before tax                                                                                                           (444)         (2,642)
                                                                                                                               ======           ======
                                                                                                               Page 24
Oman Aviation Services Co. SAOG

Notes
(forming part of the financial statements)

27       Business and geographical segments (continued)

         Operating segment (continued)

         As each of the Company’s divisions operate within the airline industry, the Company’s reporting
         structure encompasses the assets and liabilities for all the divisions and hence segmental analysis
         of assets and liabilities is not provided.

         Geographic segment

         Although the Company’s geographic business segments are managed centrally they operate in
         two principal geographical markets, the domestic market in the Sultanate of Oman and the
         overseas markets. The following table shows the distribution of the Company’s revenues,
         inclusive of inter division revenues, by geographical market:

                                  Sultanate of Oman                   Overseas                                 Total
                                     2003            2002         2003         2002                    2003         2002
                                  RO’000           RO’000       RO’000     RO’000                    RO’000       RO’000

         Revenue                   26,443           28,644       37,615      34,403                   64,058        63,047
                                  ======           ======       ======      ======                   ======       ======

28       Expenditure commitments

a)       Capital expenditure commitments
                                                                                  2003                              2002
                                                                                RO’000                            RO’000

         Capital expenditure commitments at balance sheet date                      396                             9,396
                                                                               ========                          ========

b)       Operating lease commitments

         The Company has entered into operating lease agreements for the lease of following aircraft:

            One Boeing 737-800 aircraft, effective from December 2001, for a period of 64 months                                      Formatted: Bullets and Numbering
            Two Boeing 737-700 aircraft, effective from January 2002 and May 2002 respectively, for
             periods of 64 months
            Two ATR aircraft, effective from December 2001 for periods of 60 months

         The operating lease commitments as of 31 December 2003 are as follows:

         Future minimum lease payments:
         Not later than one year                                                      5,580                             7,398
         Later than one year and not later than five years                         13,298                            18,828
                                                                               -------------------               -------------------
         Aggregate operating lease expenditure contracted for
         at 31 December 2003                                                       18,878                              26,226
                                                                                                     Page 47 of 49
========           ========




           Page 48 of 49
                                                                                                    Page 25
Oman Aviation Services Co. SAOG

Notes
(forming part of the financial statements)

29       Contingent liability

         Outstanding letters of guarantee and letters of credit at the balance sheet date were approximately
         RO 1,614,000 (2002: RO 1,956,000).

30       Financial instruments

         Exposure to credit, interest rate and foreign currency risks arises in the normal course of the
         Company’s business.

         Credit risk

         Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation
         and cause the other party to incur a financial loss. The Company attempts to control credit risk by
         monitoring credit exposures, limiting transactions to specific counter parties and continually
         assessing the credit worthiness of counter parties.

         Currency risk

         The Company’s term loans are denominated in US Dollars. No forward exchange contract cover
         on the loans was in place at the balance sheet date, as the Board of Directors believe that the
         related currency risk is minimal.

         Interest rate risk

         The Company’s exposure to market risk for changes in interest rates relates primarily to the
         Company’s long-term debt obligations. The Company does not use derivative financial
         instruments to hedge its interest rate risk on long term debt obligations as the Board of Directors
         believe that the related interest rate risk is minimal.

         Fair value of financial assets and liabilities

         The Board of Directors believe that the fair value of financial assets and liabilities are not
         materially different from their carrying values at the balance sheet date.

31       Comparative figures

         Certain comparative figures have been reclassified to conform to the presentation adopted in
         these financial statements.




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