Untitled - Cyprus Airways

ContentsContentsOfficers & Professional Advisers 2Financial Review 4Operating Environment 8Commercial Developments 9Fleet 13Personnel 14Press & Public Affairs 16Information Technology 17Airport Operations 18Zenon NDC Ltd 20Report on Corporate Governance 22Notice of Annual General Meeting 27Notice of General Meeting of the Private Shareholders 27REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 28Glossary of Terms 711

Officers & Professional AdvisorsOfficers & Professional AdvisorsBOARD OF DIRECTORSKikis N. LazaridesChairman and Managing DirectorCharalambos AlexandrouGeorghios GeorghiouKikis LefkaritisChristos PatsalidesMichalis AntoniouGeorge KallisMarios Xenophontos2

Takis FekkosAndreas PhilippouPavlos PhotiadesGENERAL MANAGERChristos KyriakidesSENIOR MANAGEMENTGeorge SpyrouCorporate Secretary/Head of Legal ServicesEleni KaloyirouChief Financial OfficerCharalambos CharalambousHead of Human Resources & AdministrationGeorge MavrocostasHead of OperationsDemetris PerdikisCommercial ManagerLEGAL ADVISERSChryssafinis & PolyviouAUDITORSKPMG3

Financial ReviewFinancial ReviewThe Group made a consolidated loss after taxation of £4,3 million in 2006 compared to a consolidated loss after taxationof £22,6 million in 2005.CYPRUS AIRWAYS PUBLIC LIMITEDCyprus Airways recorded a loss before taxation of í5,2million in 2006 compared to a loss before taxation ofí25,2 million in 2005.The results of 2006 show a marked improvement becauseof the implementation of the Restructuring Plan. It isworth noting that the loss of 2006 includes an amount ofí10,5 million, being the compensation paid to staff maderedundant, an amount of í3,0 million being the finalwrite-off of amounts due from Hellas Jet as well as theprofit on the sale of Eurocypria’s shares of í13,4 million.RevenueTotal revenue increased by 10,6% to í156,0 million in2006 from í141,1 million in 2005.Net revenue from the carriage of passengers on scheduledand charter services increased by í14,4 million to í127,8million in 2006 from í113,4 million in 2005. This increaseof 12,7% is due to an increase of 2,5% in revenuepassenger kilometres as well as the improvement in theyield per revenue passenger kilometre.Net freight and mail revenue increased by 6,0% to í12,4million in 2006 from í11,7 million in 2005. The increaseis mainly attributed to the rise in the freight fuel surchargeas well as the improvement in the net average yield perkilo mitigated by the decrease in the number of freighttonnes carried.Other revenue decreased by 0,6% to í15,9 million in 2006from í16,0 million in 2005. This marginal decrease isattributed to a combination of many factors such as areduction in leasing income and an increase inengineering handling revenue.4

Operating ExpenditureOperating expenditure (excluding the redundancycompensation) increased by 0,8% to í161,8 million in2006 from í160,6 million in 2005. In particular cost ofsales increased by 2,0% to í154,7 million in 2006 fromí151,7 million in 2005. Administration expenses fell by20,2% to í7,1 million in 2006 from í8,9 million in 2005.This increase in operating expenditure, which was mainlythe result of the significant rise in the cost of fuel, wasmitigated by the reduction in staff costs resulting from theimplementation of the restructuring plan by the Companyand is mainly attributed to the following:•Staff Costs, representing 26,0% of total operating costs,remained the highest single expense for the Company,even though they dropped by 15,6% to í42,1 million in2006 from í49,9 million in 2005, registering a decreaseof í7,8 million. This decrease is due to the reduction ofstaff numbers following the redundancy scheme as wellas to the reduction of salaries and other benefits asprovided for in the Restructuring Plan.•Aircraft Maintenance costs increased by 16,1% to í19,5million in 2006 from í16,8 million in 2005. Thisincrease can mainly be attributed to the revision ofannual ‘C’ checks costs, to the increase in aircraft flyinghours as well as to the increased charges for enginemaintenance.•Operating lease charges remained virtually the same atí7,3 million in 2006 compared to í7,4 million in 2005.•Ad hoc hire of aircraft costs increased to í0,4 million in2006 from í0,3 million in 2005.•Fuel costs increased by 21,5% to í37,9 million in 2006from í31,2 million in 2005 due to the significantincrease in jet fuel prices, mitigated to a certain extentby the strengthening of the Cyprus Pound against theUS Dollar.•En route charges, landing and handling fees, increasedby 1,6% to í24,9 million in 2006 from í24,5 million in2005. This increase can mainly be attributed to theincreased cost of traffic handling at outstations.•Aircraft catering and duty free sales costs decreased by2,9%, to í3,4 million in 2006 from í3,5 million in 2005.The decrease in costs was mainly attributed to thereduction in catering uplift costs from outstations, aswell as a drop in the cost of bar issues due to thereduction in in-flight sales.5

•Depreciation charges decreased by 21,0% to í9,4million in 2006 from í11,9 million in 2005. Thedecrease is due to the fact that another A320 aircrafthas been fully depreciated during the year.•Insurance costs decreased by 21,1% to í1,5 million in2006 from í1,9 million in 2005. The decrease isattributed to the drop in aircraft insurance rates.•Selling and Promotional costs increased by 9,8% to í4,5million in 2006 from í4,1 million in 2005 as a result ofan increase in the number of passengers carried andincreased charges from reservation systems.•Other expenses which include accommodation andcommunication costs, legal and professional fees,general and administration expenses and exchangegains or losses from operating transactions increasedby 18,7% to í10,8 million in 2006 from í9,1 million in2005. This increase is mainly attributed to the write-offof an amount of í3,0 million due to the Company fromHellas Jet mitigated to a certain extent by certainreleases of provisions no longer required and anincreased profit on exchange on normal transactions.Redundancy CompensationThe amount of í10,5 million represents compensationpaid to staff which left the Company’s employment havingbeen made redundant during the year (2005: í3,0million).Other Operating IncomeOther operating income in 2006, which amounts to í13,4million, is the profit made on the sale of 100% ofEurocypria’s shares to the Government of the Republic ofCyprus. In 2005 other operating income was í4,1 millionand included the profit on disposal of one A320 aircraftand one A320 spare engine, mitigated by the loss ondisposal of A310 spare parts.Operating LossThe operating loss for the year decreased to í2,9 millionin 2006 from í24,5 million in 2005 for the reasons set outabove.Net Financing CostNet financing cost for 2006 amounted to í2,3 million incomparison to a í0,6 million in 2005.Net interest payable amounted to í2,3 million in 2006 incomparison to í1,7 million in 2005. This is mainlyattributed to the decrease in interest receivable due tolower available bank balances and to the full year effect ofinterest payable on the Rescue Aid loan entered intoduring 2005.During 2006 the Company recorded an exchange loss ofí0,06 million in comparison to an exchange gain of í0,7million in 2005.Financing income in 2006 also includes dividend incomeof í15 thousand. In 2005 it included í0,4 million ofdividends receivable mainly from subsidiary companies.EUROCYPRIA AIRLINES LIMITEDEurocypria recorded a loss after tax of í0,9 million for theperiod between 1 January 2006 and 15 November 2006,the latter being the date on which its shares were sold tothe Government of the Republic of Cyprus. For the yearended 31 December 2005 Eurocypria recorded a loss aftertax of í72 thousand.CYPRAIR TOURS LIMITEDCyprair Tours, a wholly owned subsidiary of CyprusAirways Ltd, effectively did not operate during 2006.CYPRUS AIRWAYS (DUTY-FREE SHOPS)LIMITEDCyprus Airways (Duty-Free Shops) Ltd, which is whollyowned by Cyprus Airways Ltd, ceased operating on 30June 2006 when the strategic investor, Hermes AirportsLtd, took over the operation of the Duty Free Shops atLarnaca and Paphos airports.ZENON NDC LIMITEDZenon NDC is a wholly owned subsidiary of CyprusAirways Ltd which provides and distributes electronicinformation for the travel industry through SABRE, aglobal distribution system.The turnover of the company in 2006 was í1,1 millioncompared to í1,2 million in 2005. The company recordeda loss before taxation of í2 thousand in 2006 compared toa profit before taxation of í54 thousand in 2005.6

Operating EnvironmentOperating EnvironmentINTERNATIONAL TRAFFICDEVELOPMENTSAccording to IATA, by the end of 2006, world internationalair traffic in revenue passenger kilometres, increased by5,9% over the previous year. Cargo growth rate was up4,6% in 2006, and average passenger load factors reached76,0%, reflecting a stronger control over capacity growthin all regions except the Middle East and Africa. In thearea of the Company’s operations, i.e. Europe and theMiddle East, revenue passenger kilometres increased by5,3% and 15,4% respectively.Association of European Airlines (AEA) members – moredirectly relevant to Cyprus Airways – boarded 343,6million passengers during the course of the year, anincrease of 14,8 million over 2005. This translated into agrowth rate of 4,5%. The more conventional measure oftraffic volume, i.e. passenger kilometres, grew by slightlymore at 5,2%, indicating a small increase in the averagejourney length. This traffic growth was accommodatedwithin a capacity increase of 4,4%, so the load factorreached the level of 76,5%.The particular geographical areas of intra-Europe andEurope-Middle East, posted 6,2% and 4,1% increases inpassenger numbers respectively. The corresponding loadfactors were 69,3% and 70,9%.CYPRUS AEROPOLITICALDEVELOPMENTSAlthough 2006 marked the second full year since thecreation of the common internal market determined byCyprus’ accession to the European Union, commercial airtransport in Cyprus has not, as yet, experienced any majorchanges.This was not the case with other sectors of civil aviationand general aviation in Cyprus, whereby radical changesand developments have taken place, both in terms ofregulatory and general aero-political legislation.Within the framework of this new dynamic, Cyprus saw itstwo international airports at Larnaca and Paphos,transferred under a BOT agreement from Governmentownership to the private sector (Hermes Airports).Existing policies and regulations regarding all aspects ofaviation safety and security were revised and harmonizedto be in compliance with respective EU legislation. Newregulations were issued focusing on consumer protectionand competition. Simultaneously, a regulatory frameworkwas developed, allowing airline industry participants tocompete on equal terms with their global rivals.8

Commercial DevelopmentsCommercial DevelopmentsCYPRUS TRAFFIC DEVELOPMENTSCyprus Air Traffic ended the year at 1,5% lower than theprevious year, from 6,77 million passengers in 2005 to6,67 million in 2006.The conflict in nearby Lebanon, which closed Beirutairport and blocked Lebanese ports, also had an impact onCyprus air traffic. Losses in traffic were spread betweenother scheduled and charter operators.Overall, the Middle East area registered major losses of15,5%, from 412.400 passengers in 2005, to 348.426passengers in 2006.The overall European markets registered a combinedmarginal drop of 0,4% while the European markets coveredby the Company’s network registered a decrease of 4,8%.The Gulf Area recorded an increase of 14,6%.The largest increase in absolute numbers was recorded onthe Russian routes, which produced about 30.100 morepassengers, marking an 11% increase. The largest drop inabsolute numbers was recorded on the German routes,with 61.100 passengers, marking a 14,4% decrease.CYPRUS AIRWAYS PERFORMANCE,NETWORK AND COMPETITIVE POSITIONDuring, the year under review, the Company has operatedwith a reduced fleet of ten aircraft. As a result, the seatkilometre production again recorded a marginal drop, i.e.0,1% from 4.484 million available seat kilometres in 2005,to 4.480 million available seat kilometres in 2006.With 1,60 million revenue passengers using its services,versus 1,59 million in the previous year, the Companycarried almost 1 in 4 passengers travelling to/fromCyprus, indicating a 24,0% market share.The 3,1% reduction on Eurocypria’s passenger numberson services to/from Cyprus was marginally smaller thanthat of other charter operators´ carryings. This, incombination with the Company’s positive growth rate,gave the Group an overall market share of 32,1%, ascompared to 31,6% in 2005.During the summer of 2006, Kiev was introduced onto theCompany’s network, followed by Rhodes and Sofia at theend of the year, building the network up to 28 destinationsin 20 countries. Of these, 19 were in Europe and 9 in theMiddle East and Gulf.9

The liberalized market created by Cyprus’ EU accession wasinstrumental in further expanding the Company’scommercial network plans. At the end of the year, a newdimension was given to the operations to/from Paris andThessaloniki, whereby twice-weekly combinations of the twodestinations were introduced providing service for thecarriage of traffic between the two points. The advantage ofthe 5th freedom operation was similarly applied on the routesof Heraklion and Rhodes for the twice-weekly carriage ofpassengers between these two Greek domestic points.This new network produced 3.270 million passengerkilometres, 2,5% higher than 2005, and achieved apassenger load factor of 73,0% versus the 71,2% of theprevious year. This is ranked as the second highest loadfactor achieved by the AEA’s members on thegeographical Europe routes.Traffic on the European routes saw a 2,5% increasespread amongst all the European markets with theexception of Austria, Milan and the Netherlands, whichrecorded negative growth rates.More specifically:Despite strong competitive pressure on the Greek routes,the largest market accounting for 33,9% of its total traffic,the Company managed to increase its total traffic by 2,3%,albeit with some redistribution between routes, therebymaintaining a positive passengers-to-capacity share gap.The UK routes, the Company’s second most importantmarket in passenger numbers accounting for 28,6% of itstotal, registered a 3,6% increase or 15.800 passengers inabsolute numbers.Traffic on the Continental Europe routes registered amodest increase of 1,6% over the previous year. This wasmainly due to the introduction of Kiev and Sofia as well asthe healthy performance of the Zurich and Brussels routes,which were more than enough to offset the negativevariations recorded on the Continental Europe routes.The impact of the conflict in Lebanon was directlyreflected on the negative performance of the Company’sMiddle East operations. With the exception of Damascuswhere, despite a drop of 15,5% on the total traffic to/fromCyprus, the Company recorded an increase of 3,9% on itscarryings. The rest of the Middle East points recordeddeclines, with Beirut and Amman being the most severelyaffected routes in absolute numbers of passengers carried.The Saudi Arabia routes recorded a 7,9% increaseaccounting for 1.275 passengers.Both points served by the combined Bahrain/Dubaioperation remained more or less at the 2005 level, failingto follow the upward trends of both markets.Same-day connecting traffic was down by 11,5% on theprevious year and accounted for 5,9% of the total Companytraffic. Reductions in connectivity as a result of the safetymeasures relating to the situation in the Lebanon were themain reason this traffic segment was affected.10

AVAILABLE SEAT KILOMETRES& REVENUE PASSENGERKILOMETRESMillions20022003200420053.3073.3533.4273.1914.5224.7384.7724.484SALES & MARKETINGThe commercial turnaround project has continued andwas completed with the appointment of the newCommercial Manager and with quite a fewrearrangements in the Sales and Marketing Departments.The competitive and intense setting continues at the samepace, giving the company no other option but to stay alertto the crucial price readjustment. Sales practices,incentive schemes and other motives were revisited andre-launched to address new market realities, which nowcompose part of the pricing procedure at low-demandtime. The Sales Department in close cooperation withPricing and Revenue Management, guarantee a moreefficient and profitable procedure.Advertising and publicity, in line with other activities, wasdriven by a streamline budget. The focus was mostly withparticipating in trade fairs and exhibitions both in Cyprusand abroad, advertising specific Company campaigns ofpricing nature and new destinations along withpromotions through various sponsorships.CARGO AND MAILThe total freight carried in and out of Cyprus by allcarriers increased by 12,7% from 38.193 tonnes in 2005 to43.030 tonnes in 2006. The small reduction of 1% on theCompany’s cargo loads, from 17.998 tonnes in 2005 to17.815 tonnes in 2006, indicated a decrease of the marketshare by 5,7 percentage points, from 47,1% in 2005 to41,4% in 2006.Mail carryings recorded a significant drop of 15,4% on theprevious year. A total of 1.168 mail tonnes were carried asopposed to 1.381 in 2005.200620022003200420052006200220032004200520063.2704.480Available Seat KilometresRevenue Passenger KilometresPassenger ServicesFREIGHT CARRIED16.37417.09018.77017.99817.8141.655TonnesPASSENGER TRAFFICPassengers Thousands1.6951.7111.5891.605PASSENGERLOAD FACTOR (%)200273,1200370,8200471,8200571,2200673,011

CO-OPERATION AGREEMENTSCo-operation agreements with other airlines were, asalways, an integral part of the Company’s strategy.During the year under review, a new Code-ShareAgreement was concluded with Saudi Arabian Airlines,which added its code on Cyprus Airways to/from the SaudiArabian cities of Jeddah and Riyadh. The other elevenCode-Share Agreements signed progressively throughprevious years, continued to provide significantlyenhanced travel opportunities to passengers, both fromCyprus and abroad. The Code-Share partnerships at theend of the year consist of:•OLYMPIC AIRLINES on the Athens and Thessaloniki –reciprocal code-share.•KLM on Amsterdam – KLM code on Cyprus Airwaysservices.•ALITALIA on Rome and Milan – Alitalia code onCyprus Airways services.•AEROFLOT on Moscow – reciprocal code-share.•EL-AL on Tel Aviv – reciprocal code-share.•LOT to Warsaw - Cyprus Airways code-share on LOT.•SN BRUSSELS AIRLINES on Brussels – SN BrusselsAirlines code on Cyprus Airways.•AEROSVIT AIRLINES - Code-sharing/Block SpaceAgreement, providing seat allocation to/from Kiev andOdessa.•GULF AIR on Bahrain - reciprocal code-share.•ROYAL JORDANIAN on Amman and Colombo –reciprocal code-share on Amman with Cyprus Airwayscode on selected Royal Jordanian flights to Colombo.•SYRIANAIR on Damascus - reciprocal code-share.During the year, the Company also extended itscommercial links with other airlines, thereby furtherdeveloping its network of special Prorate Agreementsaimed at offering passengers a comprehensive travelsolution on a world-wide basis.CYPRUS AIRWAYS SHARE OFTOTAL TRAFFIC TO AND FROMCYPRUS % 2006Foreign Charter Operators 34,5%Cyprus Airways 24,0%Eurocypria 8,1%Other Scheduled Operators 33,4%12

FleetFleetUp until the end of October 2006, the Company wasoperating with the same all-Airbus fleet of aircraft as in2005, i.e., two A330-200, six A320-200 and two A319-100.With the commencement of the winter period, andfollowing a detailed study of the Company’s strategicobjectives, the seventh A320, previously leased toEurocypria for its summer flights, was re-incorporatedinto the Cyprus Airways fleet.By the end of 2006, the average aircraft age in both CyprusAirways and Eurocypria fleets was 9.5 years.FLEET PERFORMANCE INDICATORSFOR 2006The fleet performance indicators, specifically in terms oftotal flying and production, more or less reflect the samefleet composition and size, as in 2005.•Total flights operated increased by the modestpercentage of 0,24% from 6.539 in 2005 to 6.555 in2006. The higher A320 utilization meant thatproduction in tonne kilometres increased by 1,9% from557,7 million tonne kilometres in 2005, to 560,5 milliontonne kilometres in 2006.•The average daily utilization of the A330-200 aircraftwas 11,92 hours, 0,39 hours less than in 2005. Itsaverage stage length, was 2.683 kilometres and itsaverage flight duration, 3,91 hours.•Each A320-200 aircraft had a daily utilization of 9,54hours (0,65 hours more than 2005), an average stagelength of 1.496 kilometres and an average flightduration of 2,47 hours.•The A319-100 aircraft achieved a daily utilization of10,35 hours as opposed to 10,16 in 2005, an averagestage length of 1.485 kilometres and an average flightduration of 2,44 hours.2002200320042005200620022003200420052006ANNUAL HOURS FLOWNPassenger Services38.75741.00041.91237.91738.723AVAILABLE & REVENUETONNE KILOMETRESPassenger Services341348359338344Available Tonne KilometresRevenue Tonne KilometresMillions53657058155856113

PersonnelPersonnelAt the end of 2006 Cyprus Airways permanent employees,comprised 1.131 personnel compared to 1.538 at the endof 2005. Additionally, during 2006 the employment statusof 88 temporary employees changed from fixed term toindefinite period, in accordance with the relevantlegislation of 2003.The decrease in the number of staff was mainly due to thedeparture of 388 personnel as a result of redundancy aswell as retirements and/or resignations.The number of personnel employed at the Company’soffices overseas was 136 compared to 150 at the end of2005. This decrease was mainly due to the practice of notreplacing departing or retired staff that left during theyear, as well as to the general effort for staff reductions, asoutlined in the Company’s action plan.As of the 1st of January 2006, following intensivenegotiations with all Unions, Cyprus Airwaysimplemented a Restructuring Plan, which included salaryand benefit cuts, and major changes in work practices,such as minimum crew levels, outsourcing of services, etc.At the same time the organisational structures of allDepartments were placed under scrutiny, to ensure noproblems were created because of the staff redundanciesand to identify ways of improving performance andfunctionality.Meetings with all Unions will continue in order to reach afinal Agreement regarding the affects of the RestructuringPlan.STAFF TRAINING ANDDEVELOPMENTThe educational programmes for theCompany’s staff both in Cyprus andabroad, continued throughout theyear 2006.Several programmes were designedand applied internally with theobjective to continue to improve thehuman factor resulting into anincrease in the overall performanceand productivity of their services.Various programmes were organized and implementedsuccessfully on specialized subject areas such as theintroduction of the new Revenue Accounting system,handling of the reservation system and customer service,issuing of electronic ticketing, identification and transferof dangerous goods and many more.In the Engineering and Maintenance Department thetraining and development of Technical staff continuedsystematically and successfully in subjects such as safetyof Flights and maintenance of aircrafts with theirparticipation in specialized educational programmes bothin Cyprus and abroad.Both in Cyprus and abroad, specialized trainingprogrammes on A319/A320/A330 aircraft types werecarried out for Pilots.In order to comply with the legal requirements,supplementary refresher courses were also carried out forPilots, Engineers and Cabin Crew.Additionally, educational programmes were carried outfor new Instructors.Moreover, several educational programmes and seminarsbased on the various Departments’ training requirementswere organized in Cyprus and abroad in order to covergeneral and specialized subject areas.14

Press and Public AffairsPress and Public AffairsAs in previous years, the activities of Press and PublicAffairs Department focused, on publicising CyprusAirways' views and services, dealing with internalcommunications and continuing its promotion of theCompany abroad. This was achieved mainly through pressreleases, interviews, statements and press conferences.Throughout the year, Cyprus Airways sponsored severalhigh level cultural events, thus achieving publicity andcontributing to the cultural life in Cyprus.The Public Relations activities of the Company abroadcontinued throughout 2006.The Department also handled and answered passengercomplaints.16

Information TechnologyInformation TechnologyDuring 2006 the Information Technology Departmentcarried out an extensive and thorough study for a neworganisational structure. The objectives, functionalhierarchy and mode of operation of the Department, wereall redefined with a view to providing quality services in allareas of technology and telecommunications to all theCompanies of the Cyprus Airways Group.In addition, the Department continued with its successfulintroduction of new I.T. systems and with the provision ofsupport services for existing systems, in order to maintainand enable the smooth operation of the variousDepartments and companies.A major milestone was the renewal of the contract withSABRE which supports the company’s ComputerReservation System, Departure Control System, on-lineauthorization of credit cards, and E-services including e-ticketing, as well as the Global Distribution System of thesubsidiary company ZENON. The new SABREenvironment will offer an advanced platform for customerdata delivery and a graphical user interface for all CyprusAirways users.The Department also concluded the deployment of thenew corporate desktop and office automation tools as wellas an advanced network infrastructure in all offices andcompanies of the Group worldwide. The major objective isto provide for a superior level of services to the CyprusAirways user community.During 2006, the Department also began its preparationsfor the Company’s successful roll-over on 1st January2008, when the Euro will be adopted as the island’s officialcurrency.Furthermore, the IT Department continued with itspreparations for the introduction of:•A Human Resource Management System for allcompanies of the Group.•A new system for the two loyalty schemes, FrequentFlyer and Sunjet Executive Club.•A new Route Profitability System for the Finance andAirline Planning & International Affairs Department.•A new safety control system (IOSA – IATA OperationalSafety Audits).CALL & WEB CENTREAimed at providing timely and quality customer services,the Call and Web Center continued its successful operationin 2006, establishing its position as the Company’s largestsingle point of service and sales worldwide. Overall, theCentre managed over 540.000 customer contacts, both viaphone and e-mail, maintaining almost the same levels asin 2005.Cyprus Airways web sales expanded significantlythroughout the network, registering a marked increase of40% over the previous year. Online ticket sales in 2006exceeded 43.000 tickets, while sales of ancillary onlineproducts (Hotel & Car Hire) continued to grow.ELECTRONIC TICKET SERVICESAiming at 100% e-ticketing by the end of 2007, incompliance with the IATA mandate, Cyprus Airwayscontinued to expand its e-ticketing services in 2006,rolling out the service in 14 destinations. The new e-ticketing services are currently offered both from CyprusAirways Offices and from Travel Agents in Cyprus, Europe,the Middle East and the Gulf. The services will graduallybe expanded until the end of 2007, when e-ticketing willbe deployed over the Company’s entire network and willbe available on a global basis.17

Airport OperationsAirport OperationsTERMINAL SERVICESDuring 2006, the Terminal Services Department at bothLarnaca and Paphos Airports serviced a total of 9.604flights as compared to 9.875 flights in 2005. Of these 6.555were Cyprus Airways flights, compared to 6.539 in 2005,and 3.049 were other operators’ flights, compared to 3.336in 2005.As in previous years, the Cyprus Airways Executive Loungeat Larnaca Airport was reserved for the exclusive use ofmembers of the Sunjet Executive Club, Cyprus AirwaysBusiness Class passengers and the First and Business Classpassengers of other airlines. The total number ofpassengers using the lounge in 2006 was 110.396representing a 15% increase over the previous year.Revenue obtained from the First/Business Classpassengers of other airlines recorded an increase of 20%over the 2005 figure.Throughout the year, Cyprus Airways continuedrendering wheelchair services to passengers requiringspecial attention.ENGINEERING AND MAINTENANCEDuring 2006 Cyprus Airways Engineering Department,continued its efforts to meet the improved efficiencytargets set in 2005. The Department also commenced withrestructuring, in order to bring it in-line with the newEASA regulations.Apart from its services to Cyprus Airways, the EngineeringDepartment continued to provide services to Eurocypriaaircraft operating out of Heraklion. It also increased theengineering services it provides to other airlines operatingat Larnaca and Paphos airports, which brought in anassociated increase in revenue.During the year a number of licensed mechanicscompleted their Type Training on A319/A320 and B737aircraft. The A330 Type Training will be completedduring 2007.In 2007 all necessary changes in the procedures will becarried out in accordance with the requirements of thenewly formed IATA Operation Safety Audit (IOSA).INFLIGHT SERVICESThe restructuring plan, concerning the Inflight ServicesDepartment was successfully completed during June2006. Its goal, to decrease labour costs and at the sametime maintain the high standard of services given toCyprus Airways’ passengers, was achieved.The plan, which included the reduction of cabin crewmanpower, resulted in increased staff productivity andimprovements to the department’s functionality,procedures and staff training.CATERING SERVICESDuring 2006, Cyprus Airways’ Catering Services continuedto provide high quality products and services.Several changes were made in order for the department tooperate successfully in a highly competitive environment,yet still maintain its profitability and satisfy customerneeds by producing quality meals.Staff reductions continued throughout the Company’srestructuring plan. More specifically, the department’smanpower was reduced from 206 to 130 permanentemployees. Despite this, production volume increasedabove the 2005 levels.This was primarily achieved by increasing productivity by20% and applying measures for cost reductions andgreater efficiency, including the development andimplementation of new processes, the purchase andstorage of ready-to-use raw materials, investment ininformation technology, out-sourcing of services, menusimplification and department restructuring.During the year, the Catering department received theBritish Airways ‘Partners in Excellence 2005/2006’ Award,and retained its food safety certificate (HACCP) fromELOT Greece and the Cyprus Certification Company.Furthermore, the Department acquired certification forthe production of Halal meals, necessary for the service ofairlines from the Arab countries as well as the Middle Eastdestinations of other airlines.18

FLIGHT OPERATIONSWet leasesDuring summer 2006, Cyprus Airways operated flightsbetween Heraklion and several European destinations onbehalf of Eurocypria Airlines.Third party trainingThe training department was involved in the aircrafttraining of pilots for A320 type rating on behalf of IAGOand Storm Aviation (UK based Type Rating TrainingOrganisations), thus creating an additional source ofincome for Cyprus Airways. The training was carried outby Cyprus Airways Training Captains at Larnaca andPaphos airports on Cyprus Airways aircraft. A total of 68pilots have been trained and demand is increasing.Communication with AircrewFlight Operations introduced its own web page for bettercommunication with flight crews. The informationpublished on the web page pertains to operational, safetyand training issues. The aim is to minimize and/oreliminate hard copies of circulated information such asFSIs, Memos, Flight Operations DepartmentCommunications, etc. In addition, all pilots have beenprovided with a Cyprus Airways e-mail address.Less Paper Cockpit (LPC)A study has been undertaken aimed at the introduction of a‘Less Paper Cockpit’ environment on Cyprus Airways’aircraft. Members of the administration and flying staffhave participated in the Airbus LPC user’s conference andare presently undergoing LPC administrator’s training inToulouse. This summer LPC will be introduced on anumber of flights on an experimental basis, with fullimplementation anticipated sometime during the comingyear. LPC will improve efficiency and result in cost-cutting.IATA Operations Safety Audit (IOSA)Operating Manuals are currently undergoing amendmentso as to conform to IOSA recommended standards. In viewof the forthcoming audit, Flight Operations is makingarrangements for the necessary personnel training.Dual Rating / Mixed Fleet FlyingAll Training Captains are in the process of acquiring aDual Rating qualification for the purpose of gainingnecessary experience and identifying and resolvingpossible practical problems in the implementation of‘Mixed Fleet Flying’.Even at this early stage the exercise has proved beneficialin terms of roster flexibility and training standardisation.When fully implemented, ‘Mixed Fleet Flying’ will resultin better utilisation of human resources.19

Zenon NDC LtdZenon NDC LtdZenon NDC Ltd is a wholly-owned subsidiary of CyprusAirways Ltd that provides quality services to Cypriot TravelAgents.Specifically, Zenon provides and distributes electronicinformation which allows Travel Agents to make air seatreservations and ticketing, hotel and car reservations andmuch more through Sabre Travel Network, the world'slargest electronic network for Travel Buyers and Sellers,designed to effectively facilitate the operations of TravelAgents.Through our IP Managed Network ‘Sabre TravelNetwork’, connected Agencies have continuous and fastaccess to the Sabre Travel Network, Internet and email.It also offers a broad range of products and services thatenhance travel agency operations and their ability to servethe traveller.MySabre is a Web-based agent booking portal thatintegrates all the travel information needed, including theSabre Travel Network Global Distribution System-rightdirectly the agent’s desktop. Its intelligent technologydelivers relevant content within the agency’s workflow,and generates additional-revenue and new salesopportunities through interactive offers.Agency eServices provides convenient, online access toSabre Travel Network customer support services, such asonline training, tracking and online diagnostics. SabreTravel Network-connected agencies also have onlineaccess to their invoicing, booking reports and ScanReports. Agency eServices online training options includea broad choice of Web-based, self-paced trainingmodules, quick reference guides and live instructor-ledworkshops via the online learning and conference centre.20

A Sabre exclusive, Virtually There provides any SabreTravel Network customer the ability to access theirbooking information on the internet, in a graphicalformat complete with the Travel Agency information.Virtually There reads the itinerary and providesinformation about current weather, and destinationinformation.Sabre Web Reservations offer bookings over the internetwith a range of options that allow the Travel Agents tobook, and have the PNR queued to the agency forprocessing. Sabre Web Reservations can be customizedwith the Agency branding, and referenced from home.ePackages help the Tour Operator to design, monitor, anddistribute on-line to other Travel Agents (Retailers) andtheir customers a complete package of services for theincoming and outgoing tourist market. The system canhandle five different types of services, HotelAccommodation, Packaged Tours, Cruises, Other Servicesand transfers.BackOffice is very user-friendly accounting software. Itprocesses the data from PNR, and automatically issues aninvoice or receipt, updates the customers and suppliersbalance, the stock of tickets, the sales report, issues BSPreports, updates the year-end statement of invoices andmuch more.The aim of the company is to constantly strive forinnovation, with a vision to maintaining its position aspremier provider of quality products and services toTravel Agents, bringing the right Information Technologysolutions to the travel market.21

Report on Corporate GovernanceReport on Corporate GovernancePART AAdoption of Corporate Governance CodeThe Board of Directors (the "Board") at its meeting heldon 27 November 2006, decided to adopt the 2nd edition ofthe Corporate Governance Code issued by the Cyprus StockExchange in March 2006, which came into force on 1stMay 2006.In the light of the provisions of the new Code, the Boardhereby submits to the Shareholders this Report on CorporateGovernance for the year ending 31st December 2006.PART BObservance of the provisions of the CodeAt the present stage, the new Corporate Governance Code(the "Code") is not fully implemented. There are specificprovisions of the Code which cannot be adopted since theyare contrary to and/or do not accord with the provisionsof the Articles of Association of the Company, based onwhich, the Government of the Republic, as the mainshareholder, enjoys special rights and privileges. Thesespecial rights of the Government relate mainly to theappointment of Directors by the Government and thelength of their period of office.There are of course some other deviations from the Codeand the Board of Directors will be dealing with this issueas a matter of priority so that any such deviations may berectified as soon as possible in the circumstances and oncethe Company is back to its normal pace of operation.CHAPTER A: DIRECTORSA.1 Board of DirectorsThe Company is governed by the Board, which iscomposed of eleven (11) persons and which meets atfrequent intervals. Therefore, the number of annual Boardmeetings greatly exceeds the minimum of six (6)meetings specified by the Code.Even though the Board has not yet officially adopted a listof issues regarding which decisions must be made only bythe Board (Articles A.1.2. and A.1.3.), procedures withrespect to this matter have already been set into motion. Inany event, according to current Company practice, and inview of the specialized and complicated nature of thebusiness and operations of an airline company such asCyprus Airways, as well as the situation in which theCompany is in and the efforts being made for itsrestructuring, not only the matters mentioned in articleA.1.2., but a large number of other important mattersconcerning the operation of the Company are discussed ordecided upon at Board level.The Board recognises the need for the provision ofadequate information to its members on issues requiringspecialised knowledge, which frequently arise in the fieldsof the diverse activities of an airline such as CyprusAirways. Therefore, in addition to the Company'sprofessional consultants in Cyprus, the Board, as acollective body, consults and/or invites experts fromabroad, with a view to providing to the members the fullestpossible information and independent advice for the bestpossible performance of their duties. (Article A.1.4.)A.2 Balance of the Board of DirectorsOf the maximum number of eleven (11) Directors, eight (8),including the Chairman, are appointed by the Government.The remaining three (3) are elected by the PrivateShareholders at a separate General Meeting, for a one-year(1) period of office, and may stand for re-election. TheDirectors possess the qualifications and experience to beable to participate actively/effectively in the Board'sdecision-making process. During the year in question noneof the members of the Board had any executive powers. Also,there is no provision in the Company’s Articles of Associationfor the appointment of Executive Directors. However, theArticles do provide for the appointment of one or moredirectors as Managing Director.It should be noted, in this regard, that the Board has, at itsmeeting held on 3 April 2007, appointed as ManagingDirector Mr Kikis Lazarides, whom the Government ofCyprus, in the exercise of its rights as shareholder under22

the Articles of Association, has designated as Chairman ofthe Board on 30 March 2007. It has also replaced somemembers of the Board.Under the Company’s Articles of Association, the Board ofDirectors has the power to appoint and does in factappoint, be it on a continuous or an ad hoc basis,committees consisting of board members with suchpowers and terms of reference as the Board maydesignate, for the review and handling of various matters.During the year under review the composition of theBoard was as follows:Members that had been appointed by the GovernmentDr Lazaros Savvides, Chairman(non-independent, non-executive)Frixos Savvides, Deputy Chairman(independent, non-executive)Andreas Philippou(independent, non-executive)Charalambos Alexandrou(independent, non-executive)Michalis Antoniou(independent, non-executive)George Georgiou(non-independent, non-executive)Takis Fekkos(independent, non-executive)Andreas Trokkos(non-independent, non-executive)As at the date of issuance of this Report the membersappointed by the Government are the following:Kikis N. Lazarides, Chairman and Managing Director(independent, executive)Andreas Philippou(independent, non-executive)Charalambos Alexandrou(independent, non-executive)Michalis Antoniou(independent, non-executive)George Georgiou(non-independent, non-executive)Takis Fekkos(independent, non-executive)Christos Patsalides(non-independent, non-executive)Marios Xenophontos(independent, non-executive)Members elected by the Private ShareholdersGeorge Kallis (independent, non-executive)Pavlos Photiades (independent, non-executive)Kikis Lefkaritis (independent, non-executive)Prior to the separate general meetings of the PrivateShareholders for the purpose of electing Directors, thecandidates' C.V.s are distributed among the votingshareholders.General ManagerThe Company's General Manager is Mr. ChristosKyriakides.A.3 Supply of InformationThe Company recognises the need for timely and fullinformation to the members of the Board with regard tomatters coming within the scope of their powers, in orderto ensure that they are able to perform their duties in aneffective way. The Management therefore makes everypossible effort to see that comprehensive briefs aredispatched in good time to the members regarding thebusiness to be discussed by the Board in a forthcomingmeeting or regarding serious matters that haveunexpectedly arisen and of which the Board must beinformed, and, in certain cases, upon which decisionsmust be taken immediately.23

A.4 Appointments to the Board of DirectorsPursuant to the Articles of Association of Cyprus Airways,the Board does not appoint new Directors, and thereforeno Nominations Committee has been set up. Based on thecurrent rates of participation of the Government andPrivate Shareholders in the Company's share capital, ofthe maximum number of eleven (11) Directors, eight (8)are appointed by the Government, while the remainingthree (3) members of the Board are elected by the PrivateShareholders at a separate General Meeting, for a oneyear(1) period of office, and may stand for re-election.A.5 Re-electionAccording to the Company's Articles of Association, apartfrom the three (3) Directors who are elected by the PrivateShareholders for a period of one (1) year and are eligiblefor re-election, the remaining eight (8) who areappointed by the Government are appointed for anindefinite period. The Government may at any time revokethe appointment or replace any one of the Directors it hasappointed. In consequence of these statutory provisionsthere can be no compliance with the provisions of ArticleA.5 of the Code.CHAPTER B: DIRECTORS’ REMUNERATIONAs mentioned above, there were no Executive Directorsduring 2006 and consequently no RemunerationsCommittee had been set up. Following the appointment ofan Executive Chairman a Remunerations Committee hasbeen set up, which shall submit its recommendation to theBoard for the determination of the Executive Chairman’sremuneration. The composition of the RemunerationsCommittee is as follows:Andreas PhilippouChristos PatsalidesGeorge KallisIn other respects the Directors’ remuneration is fixed onan annual basis by the Company at the General Meetingand is presented in the Consolidated Financial Statementsin the Company's Annual Report.CHAPTER C: ACCOUNTABILITY AND AUDITC.1 Financial ReportsThe Company has proceeded to a large extent with theimplementation of the Restructuring Plan as submitted tothe European Commission for the approval of therestructuring aid. The implementation of the said Planaims at securing the Company’s long term viability. Theeffectiveness of the measures already taken has beenreflected in the improved results of 2006. Yet, because ofthe gradual implementation of the planned measuresstipulated in the Plan the results of 2006 have not enjoyedthe full benefit from cost reductions, something that isexpected to occur in 2007 with further improvement of theresults as a consequence.In 2007 the Company will continue with the next phasesenvisaged in the Restructuring Plan which are essential inorder to cut its costs further whilst improving at the sametime its product and customer appeal.For the purpose of securing the Company’s cash flow, therescue aid loan had been renewed with a Governmentguarantee until May 2007, following the necessaryapproval from the European Commission. The sale ofEurocypria Airlines Limited to the Government hasfurther improved the Company’s cash flow.The European Commission’s approval for therestructuring aid was given on 7 March 2007 and theCompany will now proceed with the necessaryarrangements for its more permanent financing througha long-term Government guaranteed loan as well as ashort-term, unsecured loan. The proceeds of theGovernment guaranteed loan will also be used for the fullrepayment of the rescue aid loan. As part of theRestructuring Plan the Company is also planning tostrengthen its capital base during the year.24

Naturally the dangers that might ensue as a result ofunexpected external factors such as competition, fuelprices, and the increased charges arising from the changeof status of Larnaca and Paphos airports as well as thepolitical instability in the Middle East cannot be ignored.However, the Board, having regard to the progress thathas been achieved with the implementation of theRestructuring Plan as well as the projected cash flows forthe year 2007, expects the Company to continue to operateas a going concern.C.2 Internal AuditThe Board is generally responsible for maintaining asound internal audit system, which will secure, amongother things, the Company's assets, the reliability of thefinancial data and compliance with current legislation.To this end, the Management of each business unit ischarged with the introduction and operation of an auditsystem, which accords with the nature and scope of theCompany's operations and which must include at least thefollowing:•A clear organisational structure and allocation ofresponsibilities including supervision•Written procedures for the main areas of activity•Preparation of regular financial and statisticalperformance data•Adequate support of operations by reliable and safecomputer systems•Approval of transactions by duly authorised persons•Adequate insurance coverA Risk Management Committee has also been set up withregard to Currency and Fuel Hedging.The effectiveness and adequacy of the Company's internalaudit system, including its financial and operatingsystems, are inspected regularly by the Internal AuditDepartment. The Department's findings/conclusions arecommunicated to the Audit Committee, which notifies theBoard of any important issues that might arise andsubmits the Internal Auditor's Annual Report to the Board.The Board certifies that these systems, as well as theprocedures to verify the correctness, completeness andvalidity of the information provided to investors operatesuccessfully with a view to avoiding errors and/oromissions to the greatest possible extent.The Board also certifies that no infringement of theSecurities and Cyprus Stock Exchange Laws andRegulations has come to its attention, which is not alreadyknown to the competent stock exchange authorities.Directors' Borrowing PowersAt Cyprus Airways and its subsidiaries no loans are grantedto the members of the Boards. Consequently, there is nopolicy or procedure for the granting of such loans.C.3 Audit Committee, Auditors andCompliance with the CodeThe Board has set up an Audit Committee as provided bythe Code. The Audit Committee is composed entirely ofindependent, non-Executive Directors, with written termsof reference which accord with the provisions of the Code.The Committee is composed of Messrs. Andreas Philippou(Chairman), Charalambos Alexandrou and MichalisAntoniou.During the year under review the Audit Committee hadfourteen (14) meetings, as against the minimum of two(2) provided by the Code. At these meetings, the mattersdiscussed have included the financial reports of theCompany, reports prepared by the Internal AuditDepartment on various issues and reports concerning theinternal audit systems and their effectiveness. Minutes ofthese meetings were taken by the Company's InternalAuditor, and were ratified by the Chairman and theMembers of the Committee.In order to be in a position to perform its duties, theCommittee has full access to all information and technicalknow-how from the competent Departments of theCompany, as well as from the Auditors and may takeindependent professional advice on the matters of itscompetence.25

The Committee's competencies include, inter alia, thefollowing:1. To oversee and monitor the work of the Internal AuditDepartment and to approve its work schedule.2. To oversee the choice of accounting methods for theCompany's financial reports.3. To inspect all substantial transactions with personsassociated with the Company and to ensure that theseare conducted within the framework of the Company'susual commercial practice and Regulations.4. To see to the drawing up of an Annual Report by theBoard on Corporate Governance, in association with theInternal Auditor and the Code Compliance Officer.5. To inspect the internal audit systems and theprocedures verifying the correctness, completeness andvalidity of the information provided to investors.6. To examine and evaluate periodically Company policyin the area of risk management and its effect on theCompany.Starting from the financial year 2006, the AuditCommittee has submitted to the Board suggestions withregard to the appointment or dismissal of the Auditors,and the Auditors' fees for auditing and consultationservices. It also examines the extent and effectiveness ofthe Auditors' auditing services and their objectivity andindependence. Lastly, it monitors the nature and extent ofany services provided by the Auditors that are not relatedto auditing.Officer for Compliance with theCorporate Governance CodeThe Board of Directors has appointed Mr. George Spyrou,Corporate Secretary/Head of Legal Services of the Groupas the Officer for Compliance with the CorporateGovernance Code.CHAPTER D: RELATIONS WITHSHAREHOLDERSD.1 Constructive use of Annual GeneralMeetingThe Company's Annual General Meetings are conductedin accordance with the provisions of the law, theCompany's Articles of Association and the provisions ofthe Code.D.2 Equal Treatment of ShareholdersAll Company shareholders enjoy equal treatment and inthe course of the Annual General Meeting they are givenan opportunity to ask questions to the Board.There is no express provision in the Articles of Associationof Cyprus Airways granting the right to shareholders whosecombined shares amount to at least 5% of the share capital,to enter matters to be discussed at the general meetings, asrequired by Article D.2.1 (e) of the Code. It is noted,however, that Regulation 46 of the Articles of Associationgrants to shareholders the right to convene anextraordinary general meeting, as also provided by section126 of the Companies Law. Moreover, the Board iscompelled to convene an extraordinary general meeting ofthe Company following a request by shareholders who, atthe time of submission of the request, hold a combined totalof at least 10% of the Company's shares with a voting right.The Board has appointed Ms Natasa Christou as InvestorLiaison Officer.Information concerning the Company is provided in goodtime and at no charge of any kind to all shareholders.The Chairman of the Board grants to the Shareholders theopportunity for free discussion on the items included inthe agenda of the General Meetings.Reporting to the shareholders for own material interest orconflict of interests of the members of the Board and formergers and/or acquisitionsThe Board informs the shareholders of the Company thatno own material interest has arisen from transactions ofthe Company or any other conflict of own interests withthose of the Company.26

NOTICE OF ANNUAL GENERAL MEETINGNotice is hereby given that the SIXTIETH ANNUALGENERAL MEETING of Cyprus Airways Public Limitedwill be held at Hilton Cyprus Hotel in Nicosia, on Monday,the 11th day of June 2007, at 5.00 p.m., at which thefollowing business will be transacted:•to receive and consider the report of the Directors andfinancial statements for the year 2006 and the Auditors’report thereon.•to fix the remuneration of the Directors.•to fix the remuneration of the Auditors.Directors will be elected at a separate meeting of thePrivate Shareholders of the Company in accordance withthe Articles of Association.A member entitled to attend and vote at the AnnualGeneral Meeting is entitled to appoint a proxy to attendand vote instead of him and such proxy need not be amember of the Company. The instrument appointing aproxy must be deposited at the Head Office of theCompany in Nicosia, at least 48 hours prior to the timefixed for the meeting.By Order of the BoardGeorge Spyrou, SecretaryNicosia, 4 April 2007NOTICE OF GENERAL MEETING OF THEPRIVATE SHAREHOLDERSNotice is hereby given that a General Meeting of thePrivate Shareholders of the Company will be held atHilton Cyprus Hotel in Nicosia, on Monday, the 11th dayof June 2007, at 5.00 p.m., to elect directors to fill three (3)vacancies in the Board of the Company.Messrs George Kallis, Kikis Lefkaritis and PavlosPhotiades who were elected as Directors at the GeneralMeeting of the Private Shareholders on 25 October 2006retire on 11 June 2007.A Private Shareholder entitled to attend and vote at themeeting is entitled to appoint a proxy to attend and voteinstead of him and such proxy need not be a member ofthe Company. The instrument appointing a proxy must bedeposited at the Head Office of the Company at least 48hours prior to the time fixed for the meeting.Eligible to be nominated for election, will be any person orpersons in respect of whom a notice to that effect shallhave been delivered to the Head Office of the Company inNicosia, at least three (3) days and not more than twentyone(21) days before the date fixed for the generalmeeting. (For more information on this subject, interestedparties may contact the Company’s Secretariat -Telephone No. 22396275.)By Order of the BoardGeorge Spyrou, SecretaryNicosia, 4 April 200727

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